5202 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

1 15 U.S.C. 78k–1(a)(1)(C)(i). See also supra 

Section II.G (discussing the Commission’s authority 

to conduct the Pilot). 2See Securities Exchange Act Release No. 82873 

(March 14, 2018), 83 FR 13008 (March 26, 2018) 

(‘‘Proposing Release’’ or ‘‘Proposal’’). 3See Cboe BYX U.S. Equities Exchange Fee 

Schedule (as of December 2018), available at 

https://markets.cboe.com/us/equities/membership/ 

fee_schedule/byx/; Cboe EDGA U.S. Equities 

Exchange Fee Schedule (as of December 2018), 

available at https://markets.cboe.com/us/equities/ 

membership/fee_schedule/edga/; Nasdaq BX Fee 

Schedule (as of December 2018), available at 

https://www.nasdaqtrader.com/Trader.aspx?id=bx_

pricing; NYSE National Schedule of Fees and 

Rebates (as of December 2018), available at https:// 

www.nyse.com/publicdocs/nyse/regulation/nyse/ 

NYSE_National_Schedule_of_Fees.pdf. EDGA 

adopted a taker-maker fee schedule in July 2018. 

See Securities Exchange Act Release No. 83643 

(July 16, 2018), 83 FR 34643 (July 20, 2018) (SR– 

CboeEDGA–2018–012). 

4See Investors Exchange Fee Schedule (as of 

December 2018), available at https://

iextrading.com/trading/fees/; NYSE American 

Equities Trading Fees and Price List (as of 

December 2018), available at https://

www.nyse.com/publicdocs/nyse/markets/nyseamerican/NYSE_America_Equities_Price_List.pdf. 

NYSE American offers rebates to eDMMs in their 

assigned NYSE American-listed securities. 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Parts 200 and 242 

[Release No. 34–84875; File No. S7–05–18] 

RIN 3235–0761 

Transaction Fee Pilot for NMS Stocks 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Final rule. 

SUMMARY: The Securities and Exchange 

Commission (‘‘Commission’’ or ‘‘SEC’’) 

is adopting a new rule of Regulation 

National Market System (‘‘Regulation 

NMS’’) under the Securities and 

Exchange Act of 1934 (‘‘Exchange Act’’) 

to conduct a Transaction Fee Pilot 

(‘‘Pilot’’) for National Market System 

(‘‘NMS’’) stocks to study the effects that 

exchange transaction fee-and-rebate 

pricing models may have on order 

routing behavior, execution quality, and 

market quality. We expect the data 

generated by the pilot, combined with 

data from existing sources, will facilitate 

an empirical evaluation of whether the 

existing exchange transaction-based fee 

and rebate structure is operating 

effectively to further statutory goals. 

DATES:

Effective date: April 22, 2019 through 

December 29, 2023. 

Compliance date: As designated by 

Notice pursuant to 17 CFR 

242.610T(c)(2). 

FOR FURTHER INFORMATION CONTACT: 

Richard Holley III, Assistant Director; 

Johnna Dumler, Special Counsel; Erika 

Berg, Special Counsel; or Benjamin 

Bernstein, Special Counsel, each with 

the Division of Trading and Markets, 

Securities and Exchange Commission, 

100 F Street NE, Washington, DC 20549, 

or at (202) 551–5777. 

SUPPLEMENTARY INFORMATION: The 

Commission is adopting new 17 CFR 

242.610T (Rule 610T) to conduct a 

Transaction Fee Pilot for NMS stocks. 

Table of Contents 

I. Executive Summary of Rule 610T 

II. Discussion of Rule 610T 

A. Focus on Exchange Pricing Models and 

the Distortions They Can Cause 

1. Exchange Fee Models and Regulatory 

Framework 

2. Impact of Exchange Fee Models 

3. Focus on Exchange Fee Models 

4. Non-Exchange Trading Centers 

5. Options Exchanges 

B. Securities 

1. The Share Price Threshold of Pilot 

Securities 

2. The Duration of Pilot Securities 

3. Selecting Pilot Securities From All NMS 

Stocks 

4. The Ability of Issuers to Opt Out of the 

Pilot 

C. Pilot Design 

1. Need for a Pilot 

2. Pilot Design 

3. No Overlap With Tick Size Pilot 

4. Stratified Selection of Pilot Securities 

5. Number of NMS Stocks Included in Each 

Test Group 

6. Reduction to the Pilot Size 

7. Fee Cap Test Groups 

8. Control Group 

9. Alternative Designs 

10. Metrics To Assess the Pilot 

D. Timing and Duration 

1. Disclosure Initiatives and the Pilot 

2. Automatic Sunset at Year One 

3. Pre- and Post-Pilot Periods 

4. Early Termination 

5. Inclusion of a Phase-In Period 

E. Data 

1. Pilot Securities Exchange Lists and Pilot 

Securities Change Lists 

2. Exchange Transaction Fee Summary 

3. Order Routing Data 

F. Implementation 

G. The Commission’s Authority To 

Conduct the Pilot 

III. Paperwork Reduction Act 

A. Summary of Collection of Information 

B. Proposed Use of Information 

C. Respondents 

D. Total Initial and Annual Reporting and 

Recordkeeping Burdens 

1. Pilot Securities Exchange Lists and Pilot 

Securities Change Lists 

2. Exchange Transaction Fee Summaries 

3. Order Routing Datasets 

E. Collection of Information Is Mandatory 

F. Confidentiality of Responses to 

Collection of Information 

G. Retention Period for Recordkeeping 

Requirements 

IV. Economic Analysis 

A. Background and Market Failures 

1. Market Failure at the Broker-Dealer 

Level 

2. Market Failure at the Exchange Level 

B. Baseline 

1. Current Information Baseline 

2. Current Market Environment 

C. Analysis of Benefits and Costs of 

Transaction Fee Pilot 

1. Benefits of Transaction Fee Pilot 

2. Costs of the Pilot 

D. Impact on Efficiency, Competition, and 

Capital Formation 

1. Efficiency 

2. Competition 

3. Capital Formation 

E. Alternatives 

1. Propose Rulemaking Without 

Conducting a Pilot 

2. Expand Transaction Fee Pilot To Include 

Non-Exchange Trading Centers 

3. Trade-At Test Group 

4. Alternative Pilot 

5. Adjustments to the Transaction Fee Pilot 

Structure 

V. Regulatory Flexibility Analysis 

VI. Statutory Authority and Text of the Rule 

Amendments 

I. Executive Summary of Rule 610T 

Congress directed the Commission, 

through Section 11A of the Exchange 

Act, to facilitate the establishment of a 

national market system and use its 

broad authority to carry out the 

objectives of Section 11A, including, 

among others, to assure the 

economically efficient execution of 

securities transactions.1 In furtherance 

of these goals, and as part of its 

oversight of registered national 

securities exchanges, the Commission 

periodically undertakes reviews of 

various aspects of market structure and 

current regulations to evaluate whether, 

in light of changes in technology and 

business practices, the current 

regulatory framework continues to 

fairly, effectively, and efficiently 

promote fair and orderly markets, serve 

the public interest and the protection of 

investors, and promote capital 

formation. 

As discussed below, one aspect of the 

current regulatory framework focuses on 

the current pricing and fee structure for 

transactions in securities. As the 

Commission discussed in its Pilot 

proposal, the predominant transaction 

pricing structure that developed among 

equities exchanges to attract order flow 

is the ‘‘maker-taker’’ fee model.2

Specifically, out of thirteen equities 

exchanges, seven utilize the ‘‘makertaker’’ fee model, in which they pay a 

rebate to a provider of liquidity and 

charge a fee to a taker of liquidity. 

Among the remaining exchanges, four 

utilize a ‘‘taker-maker’’ pricing model 

(also called an inverted model) where 

they charge a fee to a provider of 

liquidity and pay a rebate to a taker of 

liquidity,3 and two have a ‘‘flat fee’’ 

model.4 In recent years this area has 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5203 

5See Proposing Release, supra note 2. 6The Proposal was developed, in part, by 

reference to a recommendation for an access fee 

pilot submitted to the Commission by the Equity 

Market Structure Advisory Committee (the 

‘‘EMSAC’’). See Proposing Release, supra note 2, at 

13009, 13012–14. 

7Under the Exchange Act, exchange fee changes 

are effective on the day that the exchange files them 

with the Commission, and neither advance notice 

nor Commission action is required before an 

exchange may implement a fee change. See 15 

U.S.C. 78s(b)(3)(A)(ii). The Commission may, 

within 60 days after an exchange filed its fee change 

with the Commission, summarily suspend the new 

fee and institute proceedings to determine whether 

to disapprove it. See 15 U.S.C. 78s(b)(3)(C). 

8See 15 U.S.C. 78f(b)(4)–(5). 

attracted considerable attention and 

generated significant debate, focusing 

on the effects, both positive and 

negative, that exchange transactionbased pricing models may have on 

market quality and execution quality, 

with some commenters advocating 

action by the Commission. 

The Commission is uniquely situated 

and vested with the responsibility under 

Section 11A of the Exchange Act to 

examine the impact that this aspect of 

our market structure has on our national 

market system. And, in light of the 

questions raised about the impact of 

these fee models and the amount of 

attention garnered, we believe this is an 

area ripe for Commission review. But, 

the Commission currently lacks the data 

necessary to meaningfully analyze the 

impact that exchange transaction feeand-rebate pricing models have on order 

routing behavior, market and execution 

quality, and our market structure 

generally. To address this information 

gap, the Commission has designed the 

Pilot to produce data that will facilitate 

a more thorough understanding of the 

potential issues associated with 

exchange transaction-based pricing 

models. In particular, the Commission 

has designed the Pilot to gather data on 

the effect both current regulatory fee 

caps and rebates have on market quality 

and execution quality. The data 

gathered will assist the Commission in 

determining whether any changes in the 

current regulatory framework are 

appropriate and enable the Commission 

to make more informed and effective 

policy decisions. This, in turn, enables 

the Commission to carry out the 

objectives of the national market system 

and oversee the national securities 

exchanges. 

As discussed fully in the proposing 

release, the Commission proposed a 

pilot to test the effect of exchange 

transaction fees and rebates.5 The 

following chart summarizes the terms of 

the Pilot as adopted, which are 

discussed in more detail below: 

TRANSACTION FEE PILOT FOR NMS STOCKS

Duration ................. 2 years with an automatic sunset at 1 year unless, no later than 30 days prior to that time, the Commission publishes a 

notice that the pilot shall continue for up to 1 additional year; plus a 6-month pre-Pilot Period and 6-month post-Pilot 

Period. 

Applicable trading 

centers.

Equities exchanges (including maker-taker & taker-maker) but not ATSs or other non-exchange trading centers. 

Pilot securities ....... NMS stocks with average daily trading volumes ≥30,000 shares with a share price ≥$2 per share that do not close below 

$1 per share during the Pilot and that have an unlimited duration or a duration beyond the end of the post-Pilot Period. 

Group Number of NMS 

stocks 

Fee cap Rebates permitted? 

Pilot design ........... Test Group 1 ..... 730 ........................ $0.0010 fee cap for removing and providing displayed liquidity (no cap on 

rebates).

Yes. 

Test Group 2 ..... 730 (plus appended Canadian interlisted 

stocks).

The 17 CFR 242.610(c) (Rule 610(c)) 

$0.0030 cap continues to apply to 

fees for removing displayed liquidity.

No. Rebates and Linked Pricing Prohibited for removing and providing 

displayed and undisplayed liquidity 

(except for specified market maker 

activity). 

Control Group .... Pilot Securities not 

in Test Groups 1 

or 2.

The Rule 610(c) cap continues to 

apply to fees for removing displayed 

liquidity (no cap on rebates).

Yes. 

Pilot data ............... 1. Pilot Securities Exchange Lists and Pilot Securities Change Lists. 

2. Exchange Transaction Fee Summary. 

3. Order Routing Datasets. 

II. Discussion of Rule 610T 

In response to its proposal to conduct 

a Transaction Fee Pilot in NMS stocks 

(the ‘‘Pilot’’), the Commission received 

a number of comment letters from a 

diverse group of commenters, including 

exchanges, investment managers, 

broker-dealers, and other market 

participants, as well as academics, listed 

issuers, analytics firms, market 

observers, and industry associations.6

As discussed below, after review and 

consideration of the comments received, 

the Commission is adopting Rule 610T 

with certain modifications from that in 

the proposal. 

A. Focus on Exchange Pricing Models 

and the Effects They Can Cause 

1. Exchange Fee Models and Regulatory 

Framework 

Regardless of the fee model, all fees of 

a registered national securities exchange 

‘‘exchange’’) are subject to the standards 

and process requirements set forth in 

the federal securities laws.7 In 

particular, Section 6 of the Exchange 

Act requires, among other things, that 

the rules of an exchange provide for the 

‘‘equitable allocation’’ of ‘‘reasonable’’ 

fees and that they not be ‘‘designed to 

permit unfair discrimination.’’ 8 Section 

11A of the Exchange Act directs the 

Commission to use its authority to 

facilitate the establishment of a national 

market system for securities that assures 

economically efficient execution of 

securities transactions, fair competition, 

availability of information with respect 

5204 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

9See 15 U.S.C. 78k–1(a)(1). 

10 17 CFR 242.610(c); Securities Exchange Act 

Release No. 51808 (June 9, 2005), 70 FR 37496, 

37543–46 (June 29, 2005) (‘‘NMS Adopting 

Release’’). See also 17 CFR 242.600(b)(58) (defining 

‘‘protected quotation’’); 17 CFR 242.600(b)(57) 

(defining ‘‘protected bid or protected offer’’); 17 

CFR 242.600(b)(3) (defining ‘‘automated 

quotation’’). 

11NMS Adopting Release, supra note 10, at 

37545. 

12At the time of its adoption in 2005, the fee cap 

codified the then-prevailing fee level set through 

competition among the various trading centers. See 

NMS Adopting Release, supra note 10, at 37545 

(stating that ‘‘the $0.003 fee limitation is consistent 

with current business practices, as very few trading 

centers currently charge fees that exceed this 

amount’’). 

13The potential distortions mentioned by the 

commenters (and discussed in this section) include, 

among others: (1) Conflicts of interest faced by 

routing broker-dealers; (2) excess intermediation 

and potential adverse selection; (3) market 

fragmentation; (4) exchange fee avoidance; (5) 

complexity; (6) transparency; and (7) elevated fees 

to subsidize rebates. 

14Capital Group Letter, at 2. See also, e.g., ICI 

Letter I, at 2; Vanguard Letter, at 2; Invesco Letter, 

at 2; CFA Letter, at 2; Oppenheimer Letter, at 2; 

Spatt Letter, at 4; AJO Letter, at 1; Larry Harris 

Letter, at 3. 

15Healthy Markets Letter I, at 5. See also, e.g., 

Copeland Letter, at 1; Wellington Letter, at 1; 

Norges Letter, at 2. 

16Babelfish Letter, at 1–3 (also referencing a 

Clearpool Group study that found that a ‘‘fee 

sensitive VWAP algorithm executed during volatile 

times incurred seven times as much cost as a fee 

agnostic algorithm’’). See also T. Rowe Price Letter, 

at 2 (stating that ‘‘[r]etail orders . . . are generally 

placed on the exchange that offers the highest 

rebate to the broker, but show[s] lower execution 

quality in terms of reduced probability of 

execution’’); Capital Group Letter, at 2 (‘‘Our 

internal trade analysis suggests that execution 

quality may be negatively impacted when brokerdealers’ routing decisions are made to minimize 

access fees.’’). 

17 IEX Letter I, at 6, A–1–A–2; IEX Letter II, at 7; 

IEX Letter IV (appending research to support these 

views). See also, e.g., Babelfish Letter, at 2 (stating 

that a ‘‘frequently realized scenario is that flow sent 

solely to a high rebate destination waits in queue, 

often winds up canceled because price moves away, 

and then receives an inferior price upon the 

eventual execution’’); Larry Harris Letter, at 1, 3; 

Brandes Letter, at 1–2. But see Grasso Letter, at 3 

(‘‘waiting for a rebate[ ] may be fine’’ if ‘‘you have 

low confidence about future prices for a large order 

and don’t mind if the order trades slowly while you 

accumulate shares’’). 

18See, e.g., ICI Letter I, at 2. 

19Credit Suisse Commentary, at 2. See also, e.g., 

Larry Harris Letter, at 3 (noting that ‘‘orders 

standing at inverted exchanges usually execute 

before orders standing at the same price at makertaker exchanges’’). 

20Capital Group Letter, at 2. See also, e.g., IEX 

Letter I, at 3 (‘‘Excessive take fees . . . have been 

criticized as leading to the migration of some order 

flow to less-regulated non-exchange venues in 

search of reduced transaction costs, resulting in 

increased market fragmentation and market 

complexity.’’). 

21 ICI Letter I, at 2. See also, e.g., Vanguard Letter, 

at 2 (indicating that the ‘‘desire to maximize rebate 

revenue and avoid fees created order complexity 

within the equity markets as traders sought 

profitable trading strategies’’). 

22 ICI Letter I, at 2. See also, e.g., Goldman Sachs 

Letter, at 3; Invesco Letter, at 2; State Street Letter, 

to quotations for and transactions in 

securities, and the practicability of 

brokers executing investors’ orders in 

the best market.9 In addition, Rule 

610(c) of Regulation NMS imposes upon 

exchanges a fee cap of $0.0030 per share 

for the execution of an order against its 

‘‘protected quotation.’’ 10

In 2005, when it adopted the fee 

limitation in Rule 610(c), the 

Commission noted, in part: 

The adopted fee limitation set forth in Rule 

610(c) of Regulation NMS is designed to 

preclude individual trading centers from 

raising their fees substantially in an attempt 

to take improper advantage of strengthened 

protection against trade-throughs and the 

adoption of a private linkage regime. In 

particular, the fee limitation is necessary to 

address ‘outlier’ trading centers that 

otherwise might charge high fees to other 

market participants required to access their 

quotations by the Order Protection Rule. It 

also precludes a trading center from charging 

high fees selectively to competitors, practices 

that have occurred in the market for Nasdaq 

stocks. In the absence of a fee limitation, the 

adoption of the Order Protection Rule and 

private linkages could significantly boost the 

viability of the outlier business model. 

Outlier markets might well try to take 

advantage of intermarket price protection by 

acting essentially as a toll booth between 

price levels. The high fee market likely will 

be the last market to which orders would be 

routed, but prices could not move to the next 

level until someone routed an order to take 

out the displayed price at the outlier 

market.11

In light of the considerable debate 

surrounding exchange fee models that 

pay rebates, which is well documented 

in the comment letters submitted on the 

proposed Pilot, and the passage of time 

since the Commission first adopted the 

Rule 610(c) fee cap as part of Regulation 

NMS in 2005, the Commission now 

seeks to gather data to facilitate an 

empirical assessment of the effect of 

exchange transaction fees and rebates 

broadly—including the impact and 

continued appropriateness of the Rule 

610(c) fee cap 12—by testing the effects 

of changes to exchange fees and rebates 

on the markets and market participant 

behavior. 

2. Impact of Exchange Fee Models 

In response to the Proposing Release, 

the Commission received a number of 

comment letters criticizing existing feeand-rebate pricing models, but also a 

number of comment letters expressing 

support for those same pricing 

regimes.13

Many commenters focused on one 

potential distortion—whether current 

pricing models ‘‘present broker-dealers 

with a potential conflict of interest,’’ 

because their ‘‘duty to pursue best 

execution could be compromised when 

their trading venue decision is driven by 

the economic incentive to minimize 

access fees paid and maximize rebates 

received.’’ 14 As another commenter 

explained, ‘‘a broker is incentivized to 

route an order to the venue that pays it 

the most (or costs the least), instead of 

the venue that has the highest 

likelihood of offering the best execution 

for its customers, such as the one that 

offers a higher probability of execution 

or meaningful price improvement.’’ 15

As evidence of the potential harm that 

can result from the conflicts presented 

by exchange rebates, one commenter 

noted that institutional investors ‘‘that 

specifically instruct brokers to remove 

rebate-driven trading behaviors from 

their algorithms achieve significantly 

lower trading costs that result in higher 

returns to their investors.’’ 16 One 

commenter attributed this harm to the 

tendency of rebates to ‘‘affect the length 

of the order queue of passive limit 

orders on the major maker-taker 

exchanges, while high take fees on these 

markets make them less attractive for 

marketable orders that cross the 

spread.’’ The commenter argued that the 

‘‘net result of this perverse pricing 

dynamic is a lower likelihood of 

execution and a higher likelihood of 

adverse selection for orders in the 

maker-taker queues,’’ because orders at 

the ‘‘middle or back of the queue . . . 

are less likely to trade at their desired 

price, and when they do trade, the 

overall market price as reflected by the 

[National Best Bid and Offer (‘‘NBBO’’)] 

is more likely to move against them, 

than when trading on venues that do not 

pay rebates.’’ 17

A number of commenters discussed 

other potential effects of exchange 

pricing models. Some commenters 

believed that transaction fees and 

rebates contribute to market 

fragmentation 18 because they encourage 

investors to ‘‘turn to inverted markets to 

improve queue priority’’ 19 or to ‘‘route 

orders to non-exchange trading centers 

to avoid the higher access fees that 

exchanges charge to subsidize the 

rebates they offer.’’ 20 Likewise, one 

commenter thought that ‘‘transaction 

fees and rebates contribute to market 

complexity through the proliferation of 

new order types . . . designed to exploit 

different transaction pricing models.’’ 21

Other commenters believed that 

‘‘[t]ransaction fees and rebates . . . 

undermine market transparency because 

the prices displayed by exchanges—and 

provided on trade reports—do not 

include fee or rebate information and 

therefore do not fully reflect net trade 

prices.’’ 22 Finally, some commenters 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5205 

at 2; Wellington Letter, at 1; Oppenheimer Letter, 

at 2; Capital Group Letter, at 3. 23See, e.g., Clearpool Letter, at 3 (stating that 

‘‘exchanges chase order flow and provide rebates 

and other pricing incentives to the largest trading 

firms at the expense of smaller market participants 

who cannot take advantage of such rebates and, in 

effect, end up subsidizing the trading of larger 

firms’’); IEX Letter I, at 3 (stating that transaction 

fees are ‘‘used in effect to subsidize the payment of 

rebates,’’ which ‘‘results in a substantial penalty on 

investors and other participants who . . . have a 

need for immediate liquidity’’). 

24See, e.g., T. Rowe Price Letter, at 2 (stating that 

rebates lead to ‘‘excessive intermediation . . . 

benefiting short-term intermediaries at the expense 

of long-term investors’’); ModernIR Letter, at 3 

(stating that rebates ‘‘promote[ ] arbitrage, and pricesetting as its own end,’’ leading to a ‘‘paucity of real 

orders’’); Larry Harris Letter, at 1, 5–6 (stating that 

current pricing models facilitate ‘‘the execution of 

various parasitic trading strategies by proprietary 

traders to the detriment of public investors’’); 

Capital Group Letter, at 3. 

25State Street Letter, at 2. See also, e.g., Virtu 

Letter, at 3; Fidelity Letter, at 3; Nasdaq Letter I, at 

9; Cboe Letter I, at 15–16. See also Nasdaq Letter 

III, at Exhibit A (providing graphs using data from 

September 2018 on average quoted spread across 

exchanges in S&P 500 stocks and time at the best 

quote across those stocks). But cf. Larry Harris 

Letter, at 6–9 (acknowledging that ‘‘quoted spreads 

are narrower under maker-taker pricing,’’ but 

opining that ‘‘the narrower quoted spreads do not 

benefit the public’’). 

26Magma Letter, at 3. See also, e.g., NYSE Letter 

IV, at 2 (arguing that ‘‘pricing incentives enhance 

the quality and reliability of display markets’’); FIA 

Letter, at 4. 27FIA Letter, at 3–4. See also NYSE Letter I, at 

6 (stating that rebates ‘‘allow liquidity providers to 

quote narrower spreads by providing another source 

of revenue’’); Grasso Letter, at 4 (‘‘the main outcome 

of exchange pricing seems to be that it forces 

exchanges to compete for customers,’’ because it 

‘‘keeps their margins tight and gives them 

incentives to improve the quality of their 

offerings’’). 

28See, e.g., Joint Asset Managers Letter, at 2; 

Brandes Letter, at 2; Themis Trading Letter I, at 3; 

AJO Letter, at 1–2; OMERS Letter, at 2; Copeland 

Letter, at 2; Virtu Letter, at 6; Nuveen Letter, at 2; 

BlackRock Letter, at 1; RBC Letter I, at 3; Vanguard 

Letter, at 2; CFA Letter, at 4; Wellington Letter, at 

2; Joint Pension Plan Letter, at 2; Oppenheimer 

Letter, at 2; Clearpool Letter, at 5 n.8; TD 

Ameritrade Letter, at 4; Capital Group Letter, at 3; 

Healthy Markets Letter I, at 10; Morgan Stanley 

Letter, at 3 n.5; AGF Letter, at 1. 

29AJO Letter, at 1–2. 

30See RBC Letter I, at 3–4. 

31Capital Group Letter, at 3. See also, e.g., 

Clearpool Letter, at 5 n.8; Oppenheimer Letter, at 

2; Brandes Letter, at 2; Copeland Letter, at 2. 

32See, e.g., Cboe Letter I, at 28. 

33See Proposing Release, supra note 2, at 13014. 

As discussed in the Proposing Release, the term 

‘‘trading center’’ as used there and throughout this 

release is a collective term that refers broadly to the 

venues that trade NMS stocks. See id. at 13009 n.7. 

For purposes of this release, the term ‘‘trading 

center’’ includes national securities exchanges that 

are registered with the Commission and that trade 

NMS stocks (referred to herein as ‘‘equities 

exchanges’’ or ‘‘exchanges’’), as well as other types 

of ‘‘non-exchange venues’’ that trade NMS stocks, 

including ATSs and broker dealers that internalize 

orders by matching them off-exchange with 

reference to the national best bid and offer. 

34See, e.g., Brandes Letter, at 2; AJO Letter, at 2; 

MFA Letter, at 2; BIDS Letter, at 1–2; BlackRock 

Letter, at 1; SIFMA Letter, at 5; Virtu Letter, at 6; 

Fidelity Letter, at 10; Citi Letter, at 2; Clearpool 

Letter, at 4–5; Luminex Letter, at 1; Morgan Stanley 

Letter, at 3 n.5. 

35 Virtu Letter, at 6. See also, e.g., SIFMA Letter, 

at 5; Clearpool Letter, at 5. 

asserted that current pricing models 

unfairly subsidize rebates 23 or benefit 

sophisticated market participants like 

market-makers and proprietary traders 

at the expense of other market 

participants.24

Other commenters expressed support 

for current exchange pricing models. 

For example, one commenter believed 

that maker-taker pricing ‘‘provides 

important benefits to issuers and 

investors,’’ because exchanges ‘‘use 

rebates as a tool to promote displayed 

liquidity and price discovery, which 

results in competitive bid-ask spreads, 

saving transaction costs that investors 

may otherwise incur.’’ 25 Another 

commenter argued that rebates can 

promote displayed liquidity by 

providing ‘‘a payment in exchange for 

posters of liquidity giving up several 

valuable options,’’ including ‘‘the power 

to decide the time of the trade’’ and the 

ability to conceal trading intentions 

until the point of execution.26 Building 

on this idea, one commenter 

characterized ‘‘[a]ccess fee caps and 

related rebates’’ as features that ‘‘enable 

exchanges to compete with nonexchange trading venues by essentially 

subsidizing the posted prices . . . and 

narrow[ing] the NBBO, making it 

slightly more expensive to either match 

or improve upon those prices offexchange.’’ 27

As commenters fundamentally 

disagreed about the effect of exchange 

transaction fee models and whether they 

have a positive or a negative impact on 

the U.S. equities markets, commenters 

also held conflicting views regarding 

whether and how the Commission 

should conduct the Pilot. 

3. Focus on Exchange Fee Models 

Recognizing the unique regulatory 

framework applicable to exchange fees, 

and the disagreement over the impact of 

exchange fees and rebates on the 

markets and market participants, the 

Commission focused its proposed Pilot 

on studying the effect of exchange 

transaction fees and rebates on order 

routing behavior, execution quality, and 

market quality. Accordingly, the 

Commission proposed to include within 

the Pilot all equities exchanges 

regardless of fee model. 

A large number of commenters 

supported applying the Pilot to all 

equities exchanges.28 For example, one 

commenter believed that the Pilot 

‘‘should include all equities exchanges 

. . . because rebates of any kind provide 

inducements to trade and distort 

markets.’’ 29 A different commenter 

thought that including taker-maker 

exchanges was ‘‘both logical and 

feasible, given that all equities 

exchanges assess fees that are subject to 

the Exchange Act and its rule filing 

requirements.’’ 30 Other commenters 

‘‘agree[d] with the Commission’s 

assessment that the Pilot should apply 

to all equity exchanges . . . thus 

treating all similarly situated exchanges 

equally,’’ because this would be 

‘‘critically important in determining 

what impact the reduction of access fees 

or the elimination of rebates will have 

on order routing practices.’’ 31 Some 

other commenters, however, opposed 

including taker-maker exchanges in the 

Pilot, noting that Rule 610(c) does not 

apply to taker-maker exchanges.32

After considering the comments on 

this issue, the Commission continues to 

believe that focusing the Pilot on 

equities exchanges regardless of fee 

model is appropriate because it treats 

alike similarly situated entities that all 

are subject to the same regulatory 

framework and thereby will allow the 

Commission to evaluate the effect of 

exchange fee-and-rebate pricing models 

and the continued appropriateness of 

the Rule 610(c) fee cap. Further, it 

would be incongruous to study rebates 

and fees offered by one type of equities 

exchange (maker-taker), but not another 

type of equities exchange (taker-maker) 

where the fees of both types of entities 

are subject to the same legal 

requirements and can introduce the 

same types of distortions that the Pilot 

seeks to study. 

4. Non-Exchange Trading Centers 

As proposed, the Pilot would exclude 

non-exchange trading centers such as 

alternative trading systems (‘‘ATSs’’).33

Several commenters opined on this 

aspect of the proposal. A number of 

commenters agreed with the 

Commission’s proposal to exclude nonexchange trading centers from the 

Pilot.34 Some of those commenters 

noted that exchanges are subject to 

various fee-related regulatory provisions 

that are entirely inapplicable to nonexchange trading centers. For example, 

one commenter noted that nonexchange trading centers are not 

currently subject to any access fee caps, 

and including such trading venues in 

the Pilot ‘‘would have the unintended 

and harmful effect of unnecessarily 

changing ATS business models 

. . . .’’ 35

In addition, several commenters 

emphasized the fundamental ways in 

which the fee structures employed by 

5206 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

36See, e.g., Morgan Stanley Letter, at 3 n.5 

(stating that ‘‘many broker-dealer[ ] operators of 

ATSs generally charge clients an overall 

commission rate (rather than an access fee) for a 

bundle of services, including access to their 

ATSs’’); BIDS Letter, at 1–2, AJO Letter, at 2; 

Healthy Markets Letter I, at 10. 37AJO Letter, at 2. 

38Citi Letter, at 2. See also, e.g., Fidelity Letter, 

at 10 (stating that ‘‘ATS’ fee structures are already 

subject to competitive market forces and have more 

complex pricing models than exchanges[,] making 

their participation in the Proposed Pilot less 

useful’’); SIFMA Letter, at 5 (opining that 

‘‘competitive forces already push access fees [at 

ATSs] to an appropriate level . . . lower than the 

access fees charged by exchanges,’’ because ATS 

access fees ‘‘are included in the total cost 

consideration of trading’’). 

39Luminex Letter, at 1. 

40See, e.g., Nasdaq Letter I, at 2, 5–7; Cboe Letter 

I, at 12–13; MFS Letter, at 2; RBC Letter I, at 4; ASA 

Letter, at 3; ViableMkts Letter, at 2; Angel Letter II, 

at 2. 

41See Wellington Letter, at 2 (acknowledging, 

however, that it is ‘‘impractical for the Commission 

to include off-exchange venues’’). See also, e.g., 

RBC Letter I, at 4; ProAssurance Letter, at 2. 

42Nasdaq Letter I, at 2, 5–7. See also, e.g., NYSE 

Letter I, at 2. 

43See Nasdaq Letter I, at 7. 

44See, e.g., Cboe Letter I, at 13. 

45See NYSE Letter I, at 7–8. 

46See, e.g., Better Markets Letter, at 8. 

47As noted by several commenters, equities 

exchanges and non-exchange trading centers 

currently employ different fee models. While 

equities exchanges charge transaction-based fees, 

non-exchange trading centers may not charge 

separate transaction-based fees, but instead may use 

bundled pricing such that a particular order is not 

necessarily associated with a particular fee. See, 

e.g., Morgan Stanley Letter, at 3 n.5 (stating that 

‘‘many broker-dealer[ ] operators of ATSs generally 

charge clients an overall commission rate (rather 

than an access fee) for a bundle of services, 

including access to their ATSs’’); BIDS Letter, at 1– 

2, AJO Letter, at 2. See also Proposing Release, 

supra note 2, at 13016. The Commission is not 

aware of any ATSs that currently pay transactionbased rebates. 

48See supra notes 310–312 and accompanying 

text (discussing recent amendments to Regulation 

ATS and their relevance to the proposed Pilot). 49See, e.g., ASA Letter, at 3; Cboe Letter I, at 12, 

26–27; Nasdaq Letter I, at 5–7; NYSE Letter I, at 3– 

8. 50See Cboe Letter I, at 12. See also Nasdaq Letter 

I, at 6; NYSE Letter I, at 3–5; NYSE Letter II, at 12. 51See, e.g., Wellington Letter, at 2; Oppenheimer 

Letter, at 3; Angel Letter II, at 2; Nasdaq Letter I, 

at 6–7; Cboe Letter I, at 12; NYSE Letter I, at 3–5; 

Curtiss-Wright Letter, at 1; ASA Letter, at 3. 

non-exchange trading centers are 

different from the fee models utilized by 

the equities exchanges and, as a result, 

concluded that excluding non-exchange 

trading centers was appropriate.36 For 

example, one such commenter 

explained that ‘‘inducements (low fees, 

no fees, rebates) offered by ATSs and 

other off-exchange venues are not 

universal across all broker-dealers or 

market participants. Instead, the fees 

paid (or not paid) by market participants 

to ATSs and other off-exchange venues 

are negotiated between each market 

participant and the trading venue,’’ such 

that ‘‘the number of fee permutations 

and inconsistencies across brokers for 

any single ATS could be substantial.’’ 37

Still other commenters believed that 

excluding non-exchange trading centers 

from the Pilot was appropriate because 

‘‘ATSs are not protected venues, and 

thus free market competition among 

them constrains their pricing power.’’ 38

One commenter supported excluding 

ATSs because ‘‘there is nothing to be 

gained by including venues that don’t 

have the same underlying issues that 

exchanges present with their rebate and 

‘maker-taker’ pricing models.’’ 39

On the other hand, other commenters 

expressed concerns with omitting nonexchange venues from the Pilot.40 One 

concern was that by excluding nonexchange venues, the Pilot data would 

be incomplete. For example, one 

commenter believed that excluding nonexchange venues ‘‘could create an 

imperfect picture of the overall impact 

of the transaction fees put in place 

under the Pilot program’’ and could 

compromise the value and utility of the 

data collected during the Pilot. 41

Another commenter argued that by 

excluding non-exchange venues, the 

Pilot will not return ‘‘meaningful data 

upon which to make informed analysis 

and conclusions’’ because it would 

‘‘ignore off-exchange trading 

representing approximately 39 percent 

of total U.S. equities market trading.’’ 42

This commenter further believed that 

the Pilot would be unable to properly 

assess the potential conflicts of interest 

because it will not know ‘‘the baseline 

for remuneration occurring offexchange, or know what impact the 

Proposal has on that baseline[.]’’ 43 One 

commenter objected to excluding ATSs 

‘‘based on the fact that the proposed 

Pilot is a ‘new regulatory regime’ for 

ATSs . . . .’’ 44 While one commenter 

recognized the complexity involved 

with subjecting non-exchange trading 

centers to the access fee cap under Rule 

610(c), it argued that such complexity 

did not provide a sufficient basis to treat 

exchanges and non-exchange trading 

centers disparately.45 A few 

commenters recommended excluding 

ATSs, but requiring them to submit the 

required order routing data.46

The Commission believes that 

excluding non-exchange venues from 

the Pilot should not negatively impact 

the Pilot’s data or impact its results. As 

noted above, the Pilot is designed, 

among other things, to assess the effects 

of exchange fee models. Because 

exchange fee models are materially 

different both in their structure and 

regulatory treatment, the potential 

effects that may be associated with 

exchange fee models are not applicable 

in the same manner to ATSs. Similarly, 

the question of whether rebates narrow 

the quoted spread is inapplicable to 

ATSs, which do not publicly display an 

automated quotation. Further, ATS 

activity is not being overlooked as 

increases or decreases in ATS volume 

during the Pilot will be reflected in 

other existing data sources. 

Accordingly, Commission researchers 

(hereinafter ‘‘researchers’’) will be able 

to assess market-wide changes in order 

flow during the Pilot. 

Further, even if non-exchange venues 

provided order routing data pursuant to 

the Pilot, researchers would be unable 

to meaningfully correlate changes in an 

ATS’s order flow with the fees of that 

ATS because those fees are bespoke, 

typically bundled, and are not as 

transparent as exchange fees.47

Exchange fees are not only fully 

transparent in published fee schedules, 

but exchange fee changes must be filed 

with the Commission and thus they 

have a precise effective date attached to 

each filing. This level of transparency 

for exchange fees and rebates, which is 

not present for ATSs,48 is an important 

component facilitating researchers’ 

ability to draw causal connections with 

the Pilot’s results. While obtaining order 

routing data from ATSs might provide 

interesting insight into their business, it 

could not be meaningfully correlated 

with ATS fees and fee changes and is 

not necessary to study the Pilot’s 

results. Rather, existing sources of data 

on ATS activity, including data 

published by the Financial Industry 

Regulatory Authority (‘‘FINRA’’), will 

permit researchers to observe changes in 

ATS activity during the Pilot. 

Among commenters critical of 

excluding non-exchange venues, some 

believed it could raise competitive 

issues to apply the Pilot’s pricing 

limitations to the equities exchanges, 

but not impose the same pricing 

limitations on non-exchange trading 

centers that trade the same equities 

securities.49 One exchange commenter 

found it ‘‘inexplicabl[e]’’ that the Pilot 

‘‘focuses only on exchanges and entirely 

ignores off-exchange venues, which are 

the venues that are most likely to benefit 

from a pilot that pointedly decreases the 

incentive (i.e., rebates) to post protected 

quotes on-exchange.’’ 50

Several commenters suggested that 

the exclusion of non-exchange trading 

centers from the Pilot could ‘‘create 

incentives for market participants to 

move more order flow to off-exchange 

platforms,’’ thereby putting the national 

securities exchanges at a competitive 

disadvantage as compared to offexchange trading centers.51 However, a 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5207 

52See, e.g., Citi Letter, at 2; Decimus Letter, at 5– 

6. 

53See, e.g., Citi Letter, at 2; Decimus Letter, at 5– 

6. See also, infra Section IV.D ‘‘Impact on 

Efficiency, Competition and Capital Formation’’ 

and note 782 infra and accompanying text. 

54See Rule 610T(a)(2). 

55See infra Section IV.A.2. and C.1.a.i. 

56See 15 U.S.C. 78f(b)(4)–(5). 

57All exchange fee changes are published for 

public comment and required to be publicly posted 

on the internet, whereas fees of non-exchange 

trading centers are typically bespoke. Fee changes 

of non-exchange trading centers are not subject to 

the provisions of the federal securities laws 

requiring that fees be an ‘‘equitable allocation’’ of 

‘‘reasonable’’ fees and not ‘‘unfairly 

discriminatory.’’ 

58See 15 U.S.C. 78f(b)(4)–(5) (requiring, among 

other things, that an exchange’s fees be an 

‘‘equitable allocation’’ of ‘‘reasonable’’ fees and that 

they not be ‘‘designed to permit unfair 

discrimination.’’). In addition, only exchange fees 

are subject to the rule filing requirements under 

Section 19(b) of the Exchange Act and 17 CFR 

240.19b–4 (Rule 19b–4) thereunder. See also 

Proposing Release, supra note 2, at 13016. 

59While exchange fees are filed with the 

Commission on Form 19b–4 and the Commission 

publishes notice of them for public comment and 

has an opportunity to summarily suspend them 

within 60 days, the Commission’s non-action on a 

fee filing within that period does not constitute an 

endorsement or approval of an exchange fee. Issues 

with fees and how they impact market participants 

and market structure may or may not be obvious at 

first and adverse effects may take time to manifest 

as the market adjusts to a new fee. The Commission, 

and the exchanges as self-regulatory organizations, 

must enforce their rules and the federal securities 

laws with the goal of protecting investors and the 

public interest. 

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

61See, e.g., MFA Letter, at 2; SIFMA Letter, at 5; 

Fidelity Letter, at 10. 

62See Proposing Release, supra note 2, at 13015. 

63See 17 CFR 242.600(b)(47) (defining ‘‘NMS 

stock’’). 

64See Proposing Release, supra note 2, at 13017. 

See also Proposed Rule 610T(b)(1)(ii). 

65See Proposing Release, supra note 2, at 13017; 

Proposed Rule 610T(b)(1)(ii). The Commission 

notes that the proposed language in Rule 

610T(b)(1)(ii) has been modified slightly. As 

proposed, Rule 610T(b)(1)(ii) contained the phrase 

Continued 

commenter suggested the opposite 

could happen and that the Pilot might 

actually ‘‘encourage more order flow to 

gravitate to the exchanges’’ because the 

Pilot would reduce the access fee cap on 

the equities exchanges thereby making it 

less expensive to transact on an 

exchange.52

The Commission does not believe that 

the Pilot necessarily will put the 

equities exchanges at a competitive 

disadvantage or disproportionally harm 

them when competing with nonexchange trading centers for investors’ 

orders. Currently, only exchanges are 

subject to the Rule 610(c) fee cap, and 

Test Group 1 is designed to test a lower 

cap. The Commission does not believe 

that exchanges charging lower fees will 

necessarily make them less competitive 

with other venues for natural order 

flow, for example order flow that 

removes liquidity. Rather, it is possible 

that lower fees in Test Group 1 across 

all exchanges may actually improve 

their competitive position in attracting 

that order flow,53 particularly with 

respect to fee sensitive routing 

algorithms because, all else being equal, 

fee sensitive algorithms generally seek 

to minimize trading costs and would 

likely rank exchanges more favorably in 

their routing tables when exchanges 

reduce their fees to remove liquidity. 

In addition to testing a lower fee cap 

level, the Pilot also will test a 

prohibition on rebates and ‘‘Linked 

Pricing,’’ which, as discussed further 

below, is defined as a discount or 

incentive on transaction fee pricing 

applicable to removing (or providing) 

liquidity that is linked to providing (or 

removing) liquidity.54 The intent of this 

is to gather data to assess, among other 

things, the effect of exchange rebates. 

Potential distortions, which may be 

caused or exacerbated by exchange 

rebates, may themselves be placing 

exchanges at a competitive 

disadvantage, in which case the 

elimination of rebates could improve 

the competitive position of exchanges, 

for example if taker fees are set at levels 

independent of the need to subsidize 

maker rebates. Once again, data is 

needed to empirically assess this issue, 

and the Commission believes that the 

Pilot is the best way to obtain that 

data.55

Further, while exchanges may 

compete with non-exchange trading 

centers for order flow, exchange fees 

and the fees of non-exchange trading 

centers are treated very differently 

under the federal securities laws. 

Indeed, one of the distinguishing 

features of registered national securities 

exchanges is that—unlike non-exchange 

trading centers—their fees are subject to 

the principles-based standards set forth 

in the Exchange Act, as well as the rule 

filing requirements thereunder. In 

particular, the federal securities laws 

require the entirety of each and every 

fee, due, and charge assessed by an 

exchange to be transparent and publicly 

posted for all to see, and must be an 

equitable allocation of reasonable dues, 

fees and other charges and not be 

unfairly discriminatory.56 On the other 

hand, similar requirements do not apply 

to the fees of non-exchange trading 

centers that do not provide public 

transparency into their full itemized fee 

schedules and typically are individually 

negotiated on a customer-by-customer 

basis.57 By including all equities 

exchanges regardless of fee model, and 

excluding other types of trading centers, 

the Pilot is designed to include all 

trading centers whose fees are subject to 

the principles-based standards set forth 

in the Exchange Act as well as the rule 

filing requirements thereunder.58 Thus, 

the Pilot will produce data to 

empirically evaluate the effects that 

transaction-based fees and rebates may 

have on, and the effects that changes to 

those fees and rebates may have on, 

order routing behavior, execution 

quality, and market quality more 

generally. 

The Commission believes that 

subjecting non-exchange trading centers 

to the Pilot would go beyond the scope 

of the current regulatory framework that 

applies only to exchanges and would 

not further the Commission’s evaluation 

of the impact of the existing regulatory 

regime, including, but not limited to, 

the Regulation NMS fee cap, which 

applies exclusively to exchange fees and 

rebates. In effect, the Pilot will help the 

Commission carry out its statutory 

responsibility to assess the effect of 

exchange fees and rebates, which do not 

apply to non-exchange trading 

centers.59

5. Options Exchanges 

Finally, the Commission proposed to 

exclude options exchanges from the 

Pilot, because options and equities are 

materially different types of securities. 

In addition, the access fee cap under 

Rule 610(c) does not currently apply to 

the options exchanges.60

Several commenters agreed with the 

Commission’s exclusion of the options 

exchanges.61 No commenters suggested 

that the Commission include options 

markets in the Pilot. For the reasons 

noted above and discussed in the 

Proposing Release, the Commission is 

not including options markets within 

the scope of the Pilot.62

B. Securities 

As proposed, all NMS stocks 63 that 

meet specified initial and continuing 

minimum standards would be eligible 

for inclusion in the Pilot (collectively, 

‘‘Pilot Securities’’).64 The Commission 

received a number of comments 

regarding the scope of Pilot Securities to 

be included in the Pilot. 

1. The Share Price Threshold of Pilot 

Securities 

The Commission proposed that an 

NMS stock must have a minimum initial 

share price of $2 at the time the prePilot Period commences to be included 

in the Pilot and that any Pilot Securities 

that close below $1 at the end of a 

trading day during the proposed Pilot 

would be removed from the Pilot.65

5208 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

‘‘minimum initial share price of at least $2 . . . .’’ 

As adopted, the clause ‘‘minimum initial share 

price of $2’’ is being substituted for the phrase 

‘‘minimum initial share price of at least $2’’ to 

delete redundant text. In addition, as proposed, 

Rule 610T(b)(1)(ii) explained that a Pilot Security 

that closes below $1 would be ‘‘removed from the 

Test Group or the Control Group and will no longer 

be subject to the pricing restrictions set forth in 

(a)(1)–(3). . . .’’ As adopted, this language is being 

modified slightly to make it more concise. 

Accordingly, as adopted, this language provides 

that if the share price of a Pilot Security closes 

below $1 at the end of a trading day ‘‘it will be 

removed from the Pilot.’’ 

66See Angel Letter I, at 2. 

67RBC Letter I, at 5. See also, e.g., Better Markets 

Letter, at 6; Healthy Markets Letter I, at 11–12. 

68RBC Letter I, at 5. 

69Healthy Markets Letter I, at 12. 

70See Proposing Release, supra note 2, at 13017. 

71See id. at 13017 n.102 (noting that only 4.3% 

of publicly traded common stocks and ETPs with 

a share price above $2 during 2012–2016 dropped 

below $1 in that period). 

72See Proposing Release, supra note 2, at 13017; 

Proposed Rule 610T(b)(1)(ii). 

73See Proposing Release, supra note 2, at 13018 

n.103. 

74See id. at 13018. The EMSAC’s 

recommendation was to limit a pilot to stocks above 

$3 billion in market capitalization in order to avoid 

overlap with the Tick Size Pilot. See id. The 

Commission notes, however, that the Tick Size Pilot 

ended on September 28, 2018 and the Pilot Period 

for the Transaction Fee Pilot will not start before 

the post-pilot period for the Tick Size Pilot ends on 

April 2, 2019. See Section II.C.3. infra. 

75RBC Letter I, at 6. See also, e.g., Harris Letter, 

at 1; T. Rowe Price Letter, at 4. 

76Cboe Letter I, at 28. 

77 Id. See also, e.g., Morgan Stanley Letter, at 4; 

Leaf Letter, at 1. 

78Cboe Letter I, at 19. See also, e.g., Proposing 

Release, supra note 2, at 13069. 

79Nasdaq Letter I, at 8–9. 

80 Id. at 3, 9 (alleging that the Pilot was ‘‘arbitrary 

and capricious and not in accordance with law,’’ 

because it gave ‘‘short shrift’’ to these concerns). 

See also Virtu Letter, at 7 (expressing concern that 

the Pilot would ‘‘harm investors in . . . less liquid 

ETPs, which will be faced with less liquidity and 

wider spreads when they seek to sell their 

holdings’’). 

One commenter opposed the $2 initial 

minimum share price threshold as 

overly restrictive.66 Other commenters, 

however, agreed that the securities in 

the Pilot should have an initial 

minimum $2 per share price threshold 

at the time of the initial stock selection, 

because this threshold ‘‘will capture 

virtually all NMS stocks while 

minimizing the risk that securities will 

drop out of the Pilot . . . .’’ 67 One of 

these commenters believed the 

proposed thresholds would ‘‘help 

ensure consistency among the Test 

Groups and limit the risk of data 

anomalies due to changes in the 

composition of those groups.’’ 68

Another commenter noted that the 

choice of ‘‘$2 and $1 thresholds . . . 

follows the reasonable parameters 

established during [the] . . . Tick Size 

Pilot’’ and asserted that the 

‘‘determination to pull out securities 

that close at under $1 during the pilot 

seems appropriate, especially given the 

fundamentally different fee structures 

applicable to stocks with prices less 

than $1.00.’’ 69

The Commission continues to believe 

that the proposed share price thresholds 

for Pilot Securities are appropriate. The 

Commission notes that no commenters 

opposed the proposed $1 minimum 

continuing price threshold, which will 

exclude such stocks from the Pilot 

because stocks with quotations of less 

than $1 are subject to different 

regulatory and fee treatment.70 The 

Commission continues to believe that an 

initial $2 share price threshold will best 

balance the need to include a broad set 

of NMS stocks in the Pilot with the 

desire to ensure that substantially all of 

the securities selected at the outset of 

the Pilot remain part of their respective 

Test Groups throughout the duration of 

the Pilot, including during the pre- and 

post-Pilot periods. The Commission 

does not believe that the $2 threshold is 

overly restrictive because, as discussed 

in the Proposal, it is uncommon for 

securities priced at $2 or more to fall 

below $1.71 Lowering the initial stock 

selection threshold below $2 could 

increase the likelihood that securities 

selected for the Pilot get dropped from 

the Pilot if their share price closed 

below $1 during the Pilot. Such a result 

would change the composition of the 

Test Groups during the Pilot, which 

might adversely impact the quality of 

the data produced by the Pilot. For these 

reasons and the reasons discussed in the 

Proposing Release, the Commission 

adopts as proposed the share price 

thresholds set forth in Rule 

610T(b)(1)(ii). 

2. The Duration of Pilot Securities 

The Commission proposed that, in 

order to be included in the Pilot, an 

NMS stock must have an unlimited 

duration or a duration beyond the end 

of the post-Pilot period in order to be 

included in the Pilot.72 No comments 

were received regarding this condition. 

For the reasons outlined in the 

Proposing Release, the Commission 

adopts this aspect of the Pilot as 

proposed.73

3. Selecting Pilot Securities From All 

NMS Stocks 

The Commission proposed to select 

Pilot Securities from among the entire 

universe of NMS stocks, subject to the 

minimum share price threshold and 

duration requirements. As proposed, the 

Pilot would include a broad and diverse 

cross-section of securities, including, for 

example, stocks of all market 

capitalizations as well as ETPs. 

The Commission received comments 

on the universe of Pilot Securities that 

generally fell into four categories: (1) 

The inclusion of stocks with market 

capitalizations below $3 billion, (2) the 

inclusion of ETPs, (3) the inclusion of 

Canadian interlisted stocks, and (4) the 

inclusion of NMS stocks other than 

stocks of operating companies and 

ETPs. Each of these points is discussed 

below. 

a. Market Capitalization and Liquidity 

The Commission proposed to select 

Pilot Securities from among NMS stocks 

of all market capitalizations.74 A few 

commenters recommended that the Pilot 

exclude securities with smaller market 

capitalizations and/or thinly-traded 

securities. One commenter suggested 

that the ‘‘majority of securities within 

the Test Groups should be more liquid’’ 

and that thinly-traded securities, if 

included, ‘‘should be a minority of all 

securities in the Test Groups.’’ 75

Similarly, one exchange commenter 

stated that the Pilot ‘‘should exclude 

less active stocks as the liquidity in 

such stocks will likely be severely and 

negatively impacted by this Pilot.’’ 76

This commenter asserted that ‘‘[l]ess 

active stocks are highly dependent on 

professional liquidity providers to post 

liquidity’’ and speculated that 

‘‘[d]ecreasing incentives for liquidity 

providers to post liquidity in less active 

stocks will have a pronounced impact 

on liquidity . . . manifest[ing] in 

significantly wider spreads and 

significantly less depth in these 

securities.’’ 77 Noting that ‘‘many 

industry participants appear to advocate 

for increased incentives for liquidity 

provision in thinly-traded stocks,’’ the 

commenter did not believe that the 

Pilot’s goals were ‘‘worth the risk to 

liquidity and capital formation that the 

Commission itself identifie[d.]’’ 78

Another commenter was similarly 

concerned that the Pilot would ‘‘have a 

significant impact on small to medium 

issuers since exchanges will not be able 

to provide incentives to market makers 

to support trading in those companies’ 

securities.’’ 79 This commenter stated 

that ‘‘[l]iquidity rebates can be critical 

for such securities to motivate market 

makers to support the stock with 

aggressive and actionable quotations.’’ 80

Further, the commenter opined that the 

Pilot would ‘‘risk damaging companies’ 

ability to efficiently raise capital,’’ 

which it believed would ‘‘particularly 

harm small and medium sized 

companies, for which the current 

market structure is already not 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5209 

81Nasdaq Letter I, at 2. See also ASA Letter, at 

5. 

82Nasdaq Letter III, at 1. The commenter 

provided a chart showing how the exchanges 

compare to each other with respect to maintaining 

a two-sided quote at least 50% of the day. In the 

chart, some of the exchanges with a higher percent 

of two-sided markets more than 50% of the day 

have taker-maker pricing, in which they incentivize 

the removal of liquidity and charge fees to the 

provider of liquidity. Id. at Exhibit A. But cf. NYSE 

Letter II, at 9–10 (arguing that rebates are necessary 

to promote display of liquidity). 

83 Joint Asset Managers Letter, at 2. See also, e.g., 

Spatt Letter, at 1–2 (stating that the Pilot was a 

‘‘very significant improvement over the EMSAC 

proposal’’ and that one of the ‘‘major 

improvements’’ was ‘‘the inclusion of lower market 

value stocks’’); Healthy Markets Letter I, at 11–12; 

Wellington Letter, at 2; MFA Letter, at 2; Nuveen 

Letter, at 2; Lipson Letter, at 1; BlackRock Letter, 

at 1; Vanguard Letter, at 2; CFA Letter, at 4; CIEBA 

Letter, at 2; Joint Pension Plan Letter, at 2; 

Oppenheimer Letter, at 2. 

84AJO Letter, at 2. 

85Babelfish Letter, at 3. 

86Healthy Markets Letter I, at 13. 

87Better Markets Letter, at 6. See also, e.g., 

Vanguard Letter, at 2 (‘‘By including all NMS 

stocks, the SEC will receive data to analyze the 

impacts of transaction fees on market quality across 

various types of securities.’’); TD Ameritrade Letter, 

at 6–7 n.11 (‘‘including securities of small, mid and 

large cap companies . . . will include some data on 

the impact that varying transaction fees will have 

[on] thinly traded securities’’). 

88 IEX Letter II, at 7. See also Credit Suisse 

Commentary, at 1, 3 (stating that the Pilot ‘‘is likely 

to affect stocks differently depending on their 

liquidity profile,’’ but expecting stocks ‘‘with wider 

spreads’’ in Test Groups 2 and 3 ‘‘to continue to 

behave similarly given that their liquidity may be 

less driven by rebate-incentivized trading strategies 

to begin with’’). But cf. NYSE Letter II, at 11 

(asserting that it was ‘‘untrue’’ that ‘‘spreads for 

less-liquid securities are not sensitive to rebate 

levels’’ and referring to chart showing that NYSE 

American-listed securities, ‘‘which are generally 

less-liquid securities’’ spent less average time at the 

NBBO compared to maker-taker venues). 

89 IEX Letter II, at 7. 

90 Decimus Letter, at 4–5 (citing Marios Panayides 

et al., Trading Fees and Intermarket Competition 26 

(Charles A. Dice Ctr. for Research in Fin. Econ., 

Ohio State Univ., Working Paper No. 2017–3, 2017, 

available at, https://ssrn.com/abstract=2910438). 

91 Id. at 5. 

92 Id. 

93 Id. 

94See, e.g., Proposing Release, supra note 2, at 

13065–66, and 13069. 

95See, e.g., notes 88–92 supra and accompanying 

text. 

96See supra Section II.C.6 (discussing the 

exclusion of securities that trade fewer than 30,000 

shares per day on average from Test Groups 1 and 

2). See also supra notes 88–92 and accompanying 

text. Accordingly, the Commission notes that many 

thinly-traded securities will be excluded from the 

Pilot, which should assuage commenters’ concerns 

regarding the impact of the Pilot on less liquid or 

thinly-traded securities. 

optimized.’’ 81 The commenter further 

argued that ‘‘incentives (rebates) are 

important to creating two-sided markets 

across all stocks, especially thinly 

traded stocks.’’ 82

Many other commenters supported 

including a broad scope of Pilot 

Securities. For example, a group of 

twenty-one asset managers submitting a 

joint letter stated that ‘‘[a]s many NMS 

stocks as possible should be in scope, 

including those with market 

capitalizations below $3bln,’’ in order to 

create a ‘‘meaningful’’ dataset.83

Another commenter agreed that the 

Pilot ‘‘should encompass the broadest 

universe of securities, as is feasible, in 

order to maximize the sample size and 

provide the most robust dataset 

possible,’’ further arguing that 

‘‘[o]mitting securities of a specific 

market cap seems arbitrary, would 

provide an incomplete view of the 

overall market, and runs the risk of 

excluding meaningful data and biasing 

the study.’’ 84

Building on these arguments, other 

commenters believed it was important 

to specifically ‘‘test the argument that 

rebates are required to promote liquidity 

provision in illiquid stocks.’’ 85 One 

commenter noted that this debate ‘‘has 

raged for years,’’ which is ‘‘the point of 

the pilot: To provide market 

participants and the Commission with 

the data needed to make those 

analyses.’’ 86 Another commenter 

similarly asserted that the Pilot should 

include a broad set of NMS stocks to 

‘‘help settle academic debates on the 

relative impact of rebates on liquid vs. 

less-liquid stocks and other supposedly 

beneficial aspects of rebates.’’ 87

Notably, some of these commenters 

directly challenged the argument, set 

forth by a number of other commenters, 

that thinly-traded or smallercapitalization NMS stocks would be 

harmed by the Pilot’s pricing 

restrictions. One commenter explained 

that, ‘‘for less liquid stocks, spreads 

tend to be wider, and as a result rebates 

become less relevant as a matter of 

simple mathematics.’’ 88 To illustrate 

the point, the commenter referred to a 

‘‘stock that typically trades at a five-cent 

quoted spread,’’ noting that a ‘‘typical 

.0025 per share rebate would equal onetwentieth of the quoted spread, so in 

these instances a market maker’s 

revenue from capturing the spread 

would far outweigh the contribution of 

the rebate’’ 89 (emphasis in original). 

Another commenter also questioned the 

‘‘significance of liquidity rebates for 

making markets in less liquid/smallercap stocks,’’ because it believed this 

‘‘marginal incentive to provide liquidity 

. . . is likely to be weak in the smallercap space typically characterized by 

wide bid-ask spreads . . . .’’ 90 To 

support this argument, the commenter 

referred to ‘‘an empirical study of 

changes in maker-taker arrangements on 

two European trading venues owned by 

BATS,’’ now owned by Cboe Global 

Markets, which suggested that ‘‘ ‘an 

elimination of the make fee and a 

reduced take fee cap would result in 

worse market quality for large 

capitalization stocks but better market 

quality for small capitalization stocks’ ’’ 

(emphasis in original).91 For this reason, 

the commenter asserted that the ‘‘link 

articulated by the opponents of the 

proposed pilot is at best uncertain and 

that the pilot may in fact result in 

improved liquidity for smaller-cap 

stocks’’ (emphasis in original).92 The 

commenter therefore contended that it 

was ‘‘imperative to include a set of 

smaller-cap stocks in the pilot, as the 

opponents’ claims on the existence of 

unambiguous harm to liquidity appear 

to be exaggerated and driven by 

preconceived notions.’’ 93

The Commission believes that the 

many commenters have, through their 

analysis and ultimate disagreement on 

this issue, emphasized the need for the 

Pilot to test the effect of transaction fees 

and rebates on NMS stocks of all market 

capitalizations. It is unclear whether or 

not changes to fees and rebates would 

harm smaller capitalization or thinlytraded NMS stocks.94 As some 

commenters have noted, it also is 

possible that the Pilot may have little 

effect on smaller-capitalization or 

thinly-traded NMS stocks or that the 

Pilot may even improve the liquidity of 

such stocks.95 The Commission also 

notes that a pilot focused solely on large 

capitalization stocks may not produce 

sufficient data to investigate how 

changes to transaction fees and rebates 

will affect liquidity or capital formation 

across the market. Because including 

smaller-capitalization NMS stocks in the 

Pilot will produce a more meaningful 

dataset to support a broad investigation 

into the effect of transaction fees and 

rebates on the full spectrum of NMS 

stocks and among different segments of 

the securities market, the Commission 

adopts this aspect of the rule as 

proposed. 

As discussed further below, 

notwithstanding the decision to include 

all NMS stocks regardless of market 

capitalization, the Commission believes 

it is appropriate to exclude certain 

thinly-traded securities (e.g., securities 

that trade fewer than 30,000 shares per 

day), in part because rebates at that level 

of trading would be low enough to be 

unlikely to impact order routing 

behavior and researchers would be 

unlikely to get sufficient statistical 

power to analyze them in isolation at 

those volume levels.96

5210 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

97BlackRock Letter, at 1. See also, e.g., Fidelity 

Letter, at 9. 

98 Vanguard Letter, at 2. 

99Cboe Letter I, at 17–18. 

100 Id. 

101State Street Letter, at 3. 

102See, e.g., id. 

103See, e.g., Securities Exchange Act Release No. 

75165 (June 12, 2015), 80 FR 34729, 34732 (June 17, 

2015) (Request for Comment on Exchange-Traded 

Products) (discussing the create-and-redeem 

process for ETPs); Transcript of the Division of 

Trading and Markets’ Roundtable on Market 

Structure for Thinly-Traded Securities (April 23, 

2018), available at https://www.sec.gov/spotlight/ 

equity-market-structure-roundtables/thinly-tradedsecurities-rountable-042318-transcript.txt (Panel 

Three discussing ETPs). In particular, large volumes 

in ETPs can be transacted directly with the ETP 

issuer in creation units, making the trading center 

volume in ETPs less relevant to institutional traders 

that transact in large size orders. 

104Morgan Stanley Letter, at 3–4. See also Nasdaq 

Letter I, at 8–9 (stating that the Pilot was ‘‘arbitrary 

and capricious and not in accordance with law,’’ in 

part because the Commission had ‘‘fail[ed] to 

consider’’ the competitive effects of placing ‘‘ETPs 

tracking similar indexes . . . in different test 

groups’’); Cboe Letter I, at 17. 

105 ICI Letter I, at 4 n.8. 

106 Id. at 4. See also, e.g., NYSE Letter I, at 7; 

Nasdaq Letter I, at 8. 

107See, e.g., Credit Suisse Commentary, at 6 

(stating that the Pilot could ‘‘unintentionally 

advantage ETFs in the lower fee group’’). But cf. 

Nasdaq Letter I, at 8 (stating that ETPs ‘‘in the lower 

rebate groups would find themselves at a 

competitive disadvantage to their competitors and 

may lose market share during the pilot as a result’’). 

108See, e.g., SIFMA Letter, at 4–5; Invesco Letter, 

at 2–3; Morgan Stanley Letter, at 3–4. 

109See, e.g., Cboe Letter I, at 28; Invesco Letter, 

at 2–3; State Street Letter, at 3; STA Letter, at 4. 

110See, e.g., ICI Letter I, at 4–5, 5 n.10 (suggesting 

that the Commission rotate securities every three to 

six months); Oppenheimer Letter, at 3; Angel Letter 

II, at 3 (suggesting a quarterly rotation). These 

commenters did not believe that rotation would 

‘‘adversely affect the validity of pilot data’’ or 

‘‘impose more than a de minimis implementation 

burden or other costs on market participants.’’ ICI 

Letter I, at 4. See also Angel Letter II, at 3. These 

commenters suggested that ‘‘[a]nalysis of individual 

security characteristics before and after a rotation to 

a new group[ ] could yield relevant and important 

results.’’ Oppenheimer Letter, at 3. See also Angel 

Letter II, at 3. 

111See, e.g., SIFMA Letter, at 5; State Street 

Letter, at 4; Healthy Markets Letter II, at 8. 

112SIFMA Letter, at 4. See also, e.g., Nuveen 

Letter, at 2; BlackRock Letter, at 2; FIA Letter, at 4; 

Fidelity Letter, at 9; State Street Letter, at 4; STANY 

Letter, at 4; Healthy Markets Letter II, at 8. But cf. 

Angel Letter II, at 3 (stating that ‘‘similar ETFs are 

probably the best natural controls for each other, as 

their underlying portfolios are virtually identical,’’ 

such that ‘‘similar ETFs should definitely be in 

different treatment groups to increase the power of 

the pilot’’). 

113Schwab Letter, at 3. 

114 Invesco Letter I, at 2–3. See also, e.g., Healthy 

Markets Letter II, at 8 (noting that it may be 

‘‘difficult to clearly and consistently define ‘similar’ 

ETPs’’). 

b. The Inclusion of ETPs 

The Commission proposed to select 

Pilot Securities from among all NMS 

stocks, including ETPs. A number of 

commenters supported including ETPs 

in the Pilot. Several commenters noted, 

for example, that including ETPs 

‘‘would produce a more inclusive 

analysis of rebates and fees across all 

segments of NMS stocks.’’ 97 One such 

commenter believed that ‘‘the benefits 

from collecting data that informs longterm market structure improvements 

will outweigh any potential temporary 

disadvantage.’’ 98

On the other hand, a number of 

commenters expressed concern with 

including ETPs in the Pilot. For 

example, one commenter stated that 

‘‘[m]any ETP issuers are . . . strongly 

opposed to the inclusion of ETPs in the 

Pilot’’ and suggested that the 

Commission had not ‘‘sufficiently 

explained why it is appropriate to 

include ETPs in any Pilot.’’ 99 This 

commenter noted that ‘‘exchanges have 

implemented numerous incentive 

structures designed to promote liquidity 

and narrow spreads in ETPs’’ that could 

be disrupted by the Pilot, ‘‘negatively 

impact[ing] liquidity and spreads in 

ETPs to the detriment of both new and 

existing investors.’’ 100 Similarly, 

another commenter expected the Pilot to 

‘‘result in spreads widening for ETPs 

holding pilot stocks, even if ETPs are 

not included in the pilot, given that fair 

value calculations rely on underlying 

constituent pricing,’’ and therefore 

cautioned that ‘‘any negative effects of 

the pilot on transaction costs could be 

intensified for ETP investors.’’ 101 A few 

commenters ‘‘believe[d] that the goals of 

the pilot can be achieved without 

having to include ETPs in the pilot,’’ 

because ‘‘[t]he effects of the pilot on 

stocks will be sufficient to draw 

conclusions about potential changes to 

access fee rules.’’ 102

The Commission continues to believe 

that it is important to include ETPs in 

the Pilot, because excluding them 

would hamper the Commission’s ability 

to gather key data that could be used to 

inform future regulatory action in this 

area. The Commission does not believe 

it will be able to draw meaningful 

conclusions about the impact of changes 

to transaction fees and rebates on ETPs 

by observing the effects of the Pilot on 

other securities, in part because ETPs 

have a unique create-and-redeem 

process that does not apply to other 

NMS stocks.103 Nevertheless, ETPs are 

subject to the same rules and fees that 

apply to all NMS stocks. To the extent 

that the Pilot results may inform future 

policymaking, Pilot data that includes 

all types of NMS stocks that would be 

impacted, including ETPs, will be more 

useful. 

Further, some commenters expressed 

concern regarding the potential for 

competitive effects among certain ETP 

issuers. As one commenter noted, ‘‘if 

two ETPs with similar underliers or that 

track the same index are placed in the 

two different [T]est [G]roups, the Pilot 

would inevitably determine winners 

and losers.’’ 104 Another commenter 

explained that ‘‘ETPs with similar 

investment strategies are more 

substitutable than stocks of operating 

companies,’’ such that ‘‘market quality 

metrics likely play a greater role in 

driving flows to ETPs.’’ 105 For that 

reason, ‘‘[i]f competing ETPs are in 

different test groups—and market 

quality varies among the test groups,’’ 

the commenter believed that ‘‘investors 

might migrate toward products in the 

test groups with better market quality,’’ 

thereby ‘‘tilt[ing] the playing field in 

favor of ETPs that happen to be 

assigned—at random—to test groups 

that perform better at the expense of 

other products.’’ 106

While a few commenters discussed 

which treatment group would be most 

problematic,107 many of the commenters 

took no position on the direction of the 

presumed competitive impact and did 

not speculate about how (or whether) 

inclusion in specific Pilot Groups would 

help or harm ETPs.108

To address the potential competitive 

harm, a few of these commenters 

recommended that the Commission 

exclude ETPs from the Pilot 

altogether,109 while most recommended 

that the Commission select ETPs in a 

manner that may avoid any potential 

competitive effects among similar ETPs, 

by: (1) Rotating all of the Pilot Securities 

through the various treatment groups,110

(2) rotating only ETPs through the 

various treatment groups,111 or (3) 

placing in the same Test Group ETPs 

tracking similar indexes or holding 

similar investments.112

Other commenters criticized these 

proposed alternatives for selecting ETPs. 

One commenter, for example, 

questioned ‘‘whether any of the 

proposed remedies would address these 

concerns effectively or fairly.’’ 113

Another commenter expressed concern 

that the suggestions to place ‘‘similar’’ 

ETPs in the same Test Group might be 

too complex to implement, as 

determining whether ETPs are ‘‘similar’’ 

to one another for purposes of Pilot 

rotation can be extremely nuanced.114

This commenter explained that an 

‘‘effective classification should take into 

account an ETP’s underlying index, 

portfolio constituents and asset class to 

provide an appropriate ‘apples to 

apples’ analysis,’’ in addition to ‘‘factors 

such as assets under management, 

spread size and daily trading volume,’’ 

which the commenter believed ‘‘would 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5211 

115 Invesco Letter, at 2–3. 

116The Commission also considered comments 

providing suggestions relevant to the 

implementation of these three alternatives. As 

discussed above, the Commission is not adopting 

the alternatives. 

117See Section II.D.2 (discussing the duration of 

the Pilot) and Section II.C.5. through 6. (discussing 

the number of stocks to be included in the Pilot) 

infra. 

118See Proposing Release, supra note 2, at 13019 

(Questions #5 and 8). See also id. at 13013 n.46 

(noting the receipt of a letter from the Canadian 

Security Traders Association proposing a crossborder study on the effect of rebates on market 

quality in conjunction with the Canadian Securities 

Administrators). 

119See, e.g., Fidelity Letter, at 8; OMERS Letter, 

at 1; FIA Letter, at 4; Healthy Markets Letter I, at 

35; STA Letter, at 5. Canadian interlisted stocks are 

stocks of Canada-based companies that are 

primarily listed on a Canadian exchange (generally 

the Toronto Stock Exchange), but that choose to 

also dually-list on a U.S. exchange. See https://

www.tsx.com/trading/toronto-stock-exchange/feeschedule/ni-23-101 (for a quarterly list of 

approximately 187 interlisted securities published 

by the Toronto Stock Exchange featuring stocks that 

are listed on the Toronto Stock Exchange or the 

TSX Venture Exchange). 

120FIA Letter, at 4. See also Fidelity Letter, at 8. 

121See, e.g., STA Letter, at 5. 

122See CSA Letter. The preliminary details of the 

pilot contemplated by the CSA, as reflected in the 

CSA Letter, were not publicly available prior to the 

Proposing Release. 

123 Id. at 1. 

124 Id. at 2. 

125 Id. at 1–2. 

introduce unnecessary complexity into 

the Proposal.’’ 115

The Commission recognizes the 

concern that securities placed in one 

treatment group could be impacted 

differently than similar securities placed 

in a different treatment group. While 

that effect could occur for any security 

(e.g., stocks of different operating 

companies in the same industry), it 

could potentially be more prominent for 

ETPs that may be substantially similar. 

Nevertheless, the Commission notes that 

similar ETPs are not necessarily 

identical and many other factors 

influence investor demand and trading, 

including expense ratios, trading 

commissions, and existing holdings. 

The Commission has carefully 

considered the three alternatives 

suggested by the commenters 116 and 

declines to adopt them. Rotating either 

(1) all Pilot Securities or (2) only ETPs 

would increase complexity and could 

increase the costs of the Pilot as the 

Commission, exchanges, and market 

participants would need to manage a 

pilot whose securities change treatment 

groups every several months. In 

particular, a rotation design would be 

considerably more complex than the 

proposed design by, for example, adding 

more treatment subgroups and requiring 

frequent rotation of those subgroups. 

Given the choice between a simple Pilot 

design with a short duration, on one 

hand, and a considerably more complex 

design with a longer duration, on the 

other hand, the Commission prefers to 

adopt this aspect of the rule as 

proposed. Compared to the alternative 

designs suggested by some commenters, 

the proposal results in a short narrowly 

drawn pilot with fewer complexities 

and burdens, which is an outcome 

supported by many commenters.117

The Commission also considered the 

suggestion to group ETPs with similar 

underlying holdings into the same 

treatment group. While this suggestion 

involves slightly less ongoing 

complexity than rotating securities 

during the Pilot, the Commission 

declines to adopt this suggestion 

because it introduces its own 

complexity in that categorizing ETPs 

according to their underlying holdings 

(and potentially other characteristics) 

involves the exercise of subjective 

judgment. In addition, grouping similar 

ETPs can negatively impact the 

representativeness of the different 

treatment groups, particularly if all of 

the similar ETPs are similar in volume, 

price, and market capitalization. The 

Commission believes it may learn more 

from a study that compares how 

different pricing regimes affect 

similarly-situated ETPs, whereas 

keeping similar ETPs in the same 

treatment groups could reduce the 

quality and usefulness of Pilot’s results 

by inhibiting the ability of researchers to 

compare treatment groups. While the 

potential exists that similar ETPs in 

different Pilot treatment groups might 

trade differently during the Pilot, it is 

not certain—and commenters held 

divergent views concerning—whether 

and to what extent the Pilot would be 

a contributing factor. Whether the 

absence of rebates or lower fees help or 

hurt trading in similar ETPs is far from 

certain, and whether investors would 

base trading decisions on those 

distinctions is unclear. Excluding ETPs 

to avoid speculative harm would, 

however, decidedly reduce the utility of 

the Pilot’s results to inform future 

policy making. Therefore, the 

Commission has determined not to 

adopt a requirement to rotate securities 

or to group like ETPs. For these reasons, 

the Commission adopts the rule as 

proposed to include ETPs in the Pilot. 

c. The Inclusion of Canadian Interlisted 

Stocks 

In the Proposal, the Commission 

requested comment on the selection 

criteria and whether the Commission 

should consider inclusion or exclusion 

of certain stocks from the Pilot sample 

set.118 In response, several commenters 

discussed the inclusion of Canadian 

interlisted stocks in the Pilot and 

recommended that the Commission 

coordinate with Canadian securities 

regulators to avoid altering the trading 

dynamics between Canada and the U.S. 

in those securities.119 For example, one 

commenter was ‘‘concerned that the 

inclusion of Canadian interlisted stocks 

in either one of the reduced access fee 

or no rebate test groups may materially 

impact order flow by encouraging 

transactions to move away from U.S. 

exchanges and on to Canadian 

exchanges.’’ 120 Other commenters 

suggested that the Commission 

coordinate with the Canadian Securities 

Administrators to avoid ‘‘dramatic 

differences in the trading economics on 

inter-listed stocks between Canadian 

and U.S. markets.’’ 121

The Commission also received a 

comment letter from the academics 

retained by the Canadian Securities 

Administrators (‘‘CSA’’) to assist with 

planning, conducting, and analyzing a 

Canadian transaction fee pilot 

(‘‘Canadian Pilot’’).122 According to the 

CSA researchers, the Canadian Pilot 

likely will propose that, for 

approximately 180 interlisted stocks, 90 

of them would be included in a norebate test group with the remaining 90 

placed in a control group.123 In their 

letter, the CSA researchers requested 

that the Commission’s Pilot treat 

interlisted stocks similarly to their 

Canadian Pilot proposal—i.e., that both 

pilots place the same 90 interlisted 

stocks into their respective no-rebate 

group and place the other 90 stocks into 

their respective control group.124 By 

doing so, the CSA researchers believe 

that both pilots will avoid confounding 

the analysis for each respective pilot 

with respect to interlisted stocks 

because differences in fees and rebates 

otherwise could incentivize shifts in 

cross-border routing.125

The Commission agrees with the CSA 

researchers and believes that it is 

appropriate to coordinate with the CSA 

on a transaction fee pilot in order to 

avoid the potential for distortionary 

effects between U.S. and Canadian 

markets if rebates in the ‘‘no-rebate’’ 

interlisted stocks continue to be allowed 

on one country’s exchanges but not the 

other. 

Accordingly, in the event that the 

CSA proceeds with the Canadian Pilot 

concurrently with the Commission’s 

Pilot, the Commission will append to 

the no-rebate Test Group the same 

Canadian interlisted stocks that the CSA 

selects for its no-rebate treatment group, 

and the remaining interlisted stocks will 

5212 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

126 In the event that the Canadian pilot does not 

go forward or does not commence simultaneously 

with the Commission’s Pilot, interlisted stocks will 

be placed at the Pilot’s outset into the Control 

Group. Placing interlisted stocks in the Control 

Group will preserve the status quo for interlisted 

stocks and avoid altering the trading dynamics in 

them between U.S. and Canadian exchanges, which 

will avoid adversely impacting Test Groups 1 and 

2 with respect to those stocks. If the Canadian pilot 

does go forward, but the interlisted stocks that will 

be included in its no-rebate test group are not 

known by the Commission at the time the 

Commission issues the initial List of Pilot 

Securities, the Commission may separately issue a 

subsequent list identifying the interlisted stocks 

that will be appended to Test Group 2 or the 

Control Group for the remainder of the Pilot. 

127See, e.g., Proposing Release, supra note 2, at 

13024 (discussing the design of proposed Test 

Group 3 and the prohibition in Linked Pricing to 

support the integrity of a no-rebate test group). See 

also CSA Letter, at 1 (expressing concern that ‘‘the 

results of the Canadian Pilot may be statistically 

and economically inconclusive’’ without 

coordination with the Pilot). 

128See CSA Letter, at 1. 

129Oppenheimer Letter, at 3. 

130TD Ameritrade Letter, at 4. 

131See, e.g., Vanguard Letter, at 2; Joint Pension 

Plan Letter, at 2; Oppenheimer Letter, at 2. 

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

133 Issuer Network Letter I, at 2 (emphasis 

omitted) and Issuer Network Letter II. See also Cboe 

Letter I, at 14–15 (criticizing the Pilot as ‘‘based on 

recommendations made by a committee that, 

however well-meaning, was flawed in its 

construction’’ because it lacked ‘‘exchange or issuer 

representation’’); Home Depot Letter, at 2 (stating 

that the EMSAC ‘‘did not include any input from 

issuers or issuer advocates . . . like NYSE and 

Nasdaq’’ and that it was ‘‘difficult’’ for ‘‘issuers . . . 

to understand how this Pilot could be implemented 

without input from the issuers . . . it will directly 

impact’’); ModernIR Email, at 1 (stating that a 

‘‘study . . . crafted without input or choice for 

issuers . . . would be an inexcusable travesty’’). 

134 Issuer Network Letter I, at 2, 7 (emphasis 

omitted). 

135ModernIR Email, at 1. See also Issuer Network 

Letter I, at 7 (suggesting that the Commission 

‘‘[p]lace the Access Fee Pilot on hold for 90 days 

while [it] gathers a Blue Ribbon Panel . . . of a 

dozen or so NYSE and Nasdaq listed company 

financial executives so that we might conduct a 

comprehensive review’’ of the Pilot (emphasis 

omitted)). 

136The EMSAC held meetings open to the public, 

which were publicly webcast, as it was developing 

its recommendations. To promote awareness of 

those meetings, the Commission issued press 

releases to announce those meetings, which 

included the agenda for those meetings. See, e.g., 

SEC Press Release 2015–216 (announcing the 

agenda for an October 27, 2015 EMSAC meeting, 

highlighting the discussion of fees and rebates, and 

soliciting comments from the public thereon), 

available at https://www.sec.gov/news/pressrelease/ 

2015-216.html. The Commission also published 

meeting minutes and transcripts of the full EMSAC 

meetings. Finally, the Commission provided a 

mechanism for the public to submit comments to 

the EMSAC for its consideration, and a number of 

people did submit comments. See https://

www.sec.gov/comments/265-29/265-29.shtml 

(comment file for File No. 265–29). 

137See, e.g., P&G Letter, at 1; McDermott Letter, 

at 1; Level Brands Letter, at 1; ACCO Letter, at 1; 

NorthWestern Letter, at 1–2; Ethan Allen Letter, at 

1; Unitil Letter, at 1; Johnson Letter, at 2; Sensient 

Letter, at 2; Hawaii Letter, at 1; Cott Letter, at 1; Leaf 

Letter, at 1–2; First Majestic Letter, at 1; SIFCO 

Letter, at 2; Weingarten Letter, at 1; Ennis Letter, at 

2; Trex Letter, at 1; Genesis Letter, at 1; Tredegar 

Letter, at 1; Energizer Letter, at 1; ProAssurance 

be placed into the Control Group.126

Placing the same interlisted stocks into 

the Pilot’s no-rebate test group that the 

Canadian Pilot places into its no-rebate 

test group will avoid the potential to 

alter the trading dynamics between 

Canadian exchanges and U.S. exchanges 

in those stocks that otherwise could 

result if not all exchanges were subject 

to the same conditions, which should 

support the integrity of the no-rebate 

test groups in both pilots.127

Coordination also will avoid the 

potential for the Commission’s Pilot to 

interfere with the ability of Canadian 

securities regulators to conduct a pilot 

of their own on Canadian-listed stocks 

which could be adversely impacted in 

the absence of coordination.128 The 

Commission appreciates the interest 

expressed by the CSA researchers in 

coordinating on a pilot with respect to 

interlisted stocks, and looks forward to 

cooperating with the CSA on this 

important data-gathering initiative in a 

manner that benefits both nations’ 

securities markets. 

d. The Inclusion of Other Types of NMS 

Stocks 

A few commenters addressed the 

inclusion of other types of NMS stocks, 

such as American Depositary Receipts 

(‘‘ADRs’’), rights, and warrants. One 

commenter supported the proposed 

broad scope of Pilot Securities and 

believed that ‘‘analysis of . . . ADRs 

could provide additional insight into 

the effect rebates and fees have on 

liquidity, spreads and the overall trade 

experience.’’ 129 Another commenter 

objected to the Commission’s proposal 

to include rights and warrants in the 

Pilot, but did not explain the basis for 

its objection.130 As noted above, 

however, most commenters expressed 

general support for a Pilot that includes 

all NMS stocks.131

The Commission continues to believe 

that it is appropriate to select Pilot 

Securities from among the overall 

universe of NMS stocks. Accordingly, 

the Commission will include all types of 

NMS stocks in the Pilot, subject to the 

selection criteria described below. The 

Commission believes this is appropriate 

because exchange fees and rebates apply 

to all NMS stocks, as does the fee cap 

under Rule 610(c). Aligning the scope of 

the Pilot with the scope of equities fees 

and the equities fee cap will best 

facilitate analysis of the impact of 

changes to transaction fees and rebates 

on different segments of the securities 

market. Excluding from its scope any 

categories of NMS stocks would deprive 

the Commission of data to inform future 

regulatory action regarding this segment 

of the market. For those reasons, the 

Commission adopts this aspect of the 

Pilot as proposed, subject to the 

selection methodology described below 

in Section II.C. 

4. The Ability of Issuers To Opt Out of 

the Pilot 

The Commission solicited comment 

as to whether issuers should be allowed 

to request that their securities not be 

included in one of the Pilot’s Test 

Groups (i.e., ‘‘opt out’’) and the potential 

impact that such an approach might 

have on the extent and quality of the 

data collected by the Pilot.132

Several commenters argued that 

issuers should be permitted to opt out 

of participation in the Pilot based on 

process concerns. For example, one 

commenter’s ‘‘largest concern [was] that 

the genesis of the proposal . . . 

deliberately excluded issuer 

representation’’ by ‘‘excluding the NYSE 

and Nasdaq from participation on the 

[EMSAC].’’ 133 This commenter asserted 

that the ‘‘exclusion . . . from 

participation in the pre-proposal 

discussions renders the ‘Opt Out’ option 

absolutely essential.’’ 134 Another 

commenter suggested that the 

Commission could address such 

concerns by ‘‘conven[ing] a summit for 

issuers and perhaps [creating] a series of 

webcasts . . . to explain the purpose of 

the test,’’ as well as by ‘‘form[ing] an 

Issuer Advisory Committee that can 

weigh data and let companies opt into 

or out of a test.’’ 135

The Commission’s proposal was 

subject to a full notice-and-comment 

rulemaking process during which the 

Commission received a large number of 

comments from the public, including 

issuers and their listing exchanges. 

While the EMSAC recommendation was 

one of many inputs that informed the 

Commission’s development of the Pilot, 

the Commission’s Pilot differs 

substantially from EMSAC’s 

recommendation as numerous 

commenters have recognized.136

Accordingly, the Commission believes 

that issuers, as well as other market 

participants, have had ample 

opportunity to participate in the 

consideration of the Commission’s 

proposal for the Pilot. 

Other commenters supported opt out 

based on specific concerns surrounding 

the potential impact of the Pilot. A 

number of these commenters were listed 

company issuers that expressed concern 

about how the Pilot would affect trading 

in their securities.137 Commenters 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5213 

Letter, at 1; Home Depot Letter, at 1; SMP Letter, 

at 2; Halliburton Letter, at 1; Era Letter, at 2; Natural 

Grocers Letter, at 2; Newpark Letter, at 2; KnightSwift Letter, at 2; Farmer Mac Letter, at 1; 

BancorpSouth Letter, at 1–2; Haverty Letter, at 1; 

Ampco-Pittsburgh Letter, at 2; Anixter Letter, at 2; 

Avangrid Letter, at 2; NHC Letter, at 1; HP Letter, 

at 2; Curtiss-Wright Letter, at 2; Murphy Letter, at 

1. 

138See, e.g., Cboe Letter I, at 29; ASA Letter, at 

4–5. 139See Addendum to Healthy Markets Letter II, 

at 11 (attaching an email from NYSE to its listed 

companies). See also note 137 supra. 140See NYSE Letter I, at 4. In its letter, the 

commenter mentioned analysis it performed on 

NYSE-listed issuer secondary offerings in 2017 that 

suggested that issuers ‘‘with average spreads under 

20 basis points paid an average discount to market 

price of 2.6%’’ and that ‘‘companies with spreads 

above 20 basis points had to discount their offerings 

nearly twice as much, to 4.9%.’’ NYSE Letter I, at 

14 n.51. It is unclear, however, whether wider 

spreads cause larger offering discounts or whether 

they are simply correlated with them. For example, 

smaller companies that are less well capitalized 

may have a wider spread compared to a larger, 

better capitalized company, which could result in 

spreads being correlated with a company’s cost of 

capital (i.e., wider spreads could be a reflection of 

a company’s relative credit risk and cost of capital, 

not a driver of it). 

141See, e.g., Joint Asset Managers Letter, at 2; Citi 

Letter, at 5; AJO Letter, at 2; Lipson Letter, at 1. 

142See supra notes 138–140 and accompanying 

text. 

143Themis Trading Letter II, at 3. 

144 Id. at 2–3. 

145 IEX Letter II, at 3. See also, e.g., Joint Pension 

Plan Letter, at 2 (stating that the ‘‘asset manager/ 

asset owner community is heavily supportive of 

such a pilot,’’ which should ‘‘provide the necessary 

confidence to all public companies to be 

included’’); ICI Letter II, at 2 (‘‘market structure is 

not a primary consideration guiding the investment 

decisions of long-term investors’’); Joint Asset 

Managers Letter, at 2; Healthy Markets Letter II, at 

2. But cf. NYSE Letter II, at 4 (stating that ‘‘many 

buy-side institutions’’ supporting the Pilot ‘‘are 

willing to experiment with real-world public 

companies and end investors to ‘get the data,’ even 

if the expected impact of limiting or eliminating 

rebates will be a deterioration of the public quote’’). 

146 IEX Letter II, at 3–4. 

147RBC Letter I, at 6. See also, e.g., LATEC Letter, 

at 2; Joint Pension Plan Letter, at 2; MFS Letter, at 

3; Clearpool Letter, at 8. 

148Spatt Letter, at 3. See also, e.g., Healthy 

Markets Letter I, at 12; CII Letter, at 4. 

149T. Rowe Price Letter, at 4. The issuer 

explained that its stock, ‘‘on average, trades about 

1.5 million shares daily, with an average displayed 

size of 200 shares and a spread of nearly $0.07,’’ 

with ‘‘40% of [its] average daily volume occur[ring] 

as displayed on exchange volume.’’ Id. at 4–5. 

150 Id. at 5. 

151Better Markets Letter, at 7. 

152MFS Letter, at 3. 

153See, e.g., Short Sale Position and Transaction 

Reporting, Study by the Staff of the Division of 

Economic and Risk Analysis, June 5, 2014, at 66– 

67 (discussing selection bias in the context of an 

‘‘opt in’’ voluntary pilot design). 

supporting opt out emphasized the 

importance of giving issuers the ability 

to avoid potential costs and uncertainty 

resulting from the Pilot.138 For example, 

one commenter believed that the Pilot 

could ‘‘caus[e] spreads to widen in 

securities selected for the test groups,’’ 

such that ‘‘companies conducting a 

repurchase program or secondary 

offering would incur higher costs,’’ and 

the Commission received a number of 

comment letters from listed issuers 

specifically referencing that point and 

echoing the same concerns.139 This 

commenter further argued that ‘‘the 

Proposal would also harm the ability of 

issuers whose securities are subject to 

access fee caps to compete’’ with issuers 

not subject to the Pilot’s exchange fee 

restrictions.140

Many other commenters opposed opt 

out.141 Some of these commenters 

dismissed the concerns described above 

regarding the potential costs on issuers 

whose stock is included in the Pilot.142

For example, one commenter disagreed 

with the notion that ‘‘rebates are needed 

to incentivize market makers to quote 

tight spreads’’ in the stocks of certain 

issuers who had submitted comment 

letters.143 This commenter explained 

that the ‘‘fifth of a cent rebate is not 

incentivizing a tight bid-ask spread in 

these issuers’ stocks,’’ because that 

rebate represents an insignificant 

portion of their average spread.144

Another commenter disagreed with the 

suggestion that the Pilot would have a 

negative impact on issuers, arguing that 

such position ‘‘directly contradicts the 

public support by investors for the 

Pilot.’’ 145 This commenter opined that 

the ‘‘fundamental forces of supply and 

demand that affect . . . the relative 

attractiveness of individual public 

company stocks will be in no way 

impaired if . . . exchanges are 

precluded from paying a rebate, or 

required to accept a lower access 

fee.’’ 146

Other commenters asserted that opt 

out would ‘‘adversely affect the quality 

of the data and the credibility of the 

Pilot,’’ which could weaken the findings 

that could be drawn from it.147 One 

commenter explained that opt out 

‘‘would undercut the ability of 

economists to draw sharp inferences 

based upon performance differences 

between the treated and control stocks’’ 

and that the ‘‘non-random character of 

‘opt outs’ ’’ could ‘‘disproportionately 

reflect firms that were especially 

responsive to feedback from the listing 

exchange or could disproportionately 

reflect less liquid stocks, which would 

be especially important for the access 

fee pilot.’’ 148

One listed issuer, which is a large 

investment manager, ‘‘welcome[d] the 

opportunity for [its] stock to be included 

in the Pilot, with the ultimate goal of 

improving the overall market to be one 

where prices can be set by long-term 

investors without distortion from 

speculative market participants.’’ 149

This issuer did not ‘‘expect that a 

reduction or outright removal of rebates 

will have any significant or harmful 

effects on the quality of prices displayed 

in the public lit market, interfere with 

genuine liquidity and price formation, 

or negatively impact [its] stock’s trading 

volume, spread or displayed size.’’ 150

Finally, two commenters further 

argued that opt out would be 

inconsistent with the existing market 

structure. One of these commenters 

observed that ‘‘[i]ssuers currently have 

no say over exchanges’ policies’’ and 

that ‘‘exchanges that modify their access 

fees dozens of times a year do not 

survey issuers or permit them to opt-out 

of these fee changes or creation of order 

types.’’ 151 The other commenter opined 

that opt out ‘‘may set an unfortunate 

precedent that would allow an issuer to 

pick and choose among those aspects of 

the National Market System that it likes 

while rejecting other aspects that it may 

find less attractive to it, but [which] are 

necessary to the smooth functioning of 

[the] United States public equity 

markets.’’ 152

After careful consideration, the 

Commission does not believe that 

issuers should be permitted to opt out 

of participation in the Pilot. While the 

Commission understands issuers’ 

concerns, allowing issuers to opt out 

could undermine the representativeness 

of the Pilot’s treatment groups and 

potentially bias the Pilot’s results, 

depending on the number and 

characteristics of issuers that opt out. In 

turn, researchers would be less able to 

rely on the data to perform analyses and 

draw specific conclusions about the 

impact of the Pilot, thereby limiting the 

usefulness of the Pilot’s data to the 

Commission and future regulatory 

initiatives.153 Although some 

commenters believe that issuers may 

incur potential costs or endure 

competitive harms depending on which 

of the Pilot’s treatment groups their 

stock is in, other commenters have 

argued that such effects are unlikely to 

manifest. The Commission does not 

believe it is appropriate to implement 

an opt out provision that could frustrate 

the collection of useful and 

representative data based solely on 

concerns expressed by some 

commenters regarding uncertain harms. 

It is precisely because of this 

uncertainty that the Commission 

believes it is necessary to conduct the 

Pilot to study these contested issues 

through an objective empirical review of 

exchange transaction fees and rebates. 

For those reasons, the Commission 

5214 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

154Cboe Letter I, at 5. See also, e.g., Virtu Letter, 

at 1–2; Nasdaq Letter I, at 12–13. But cf. MFA 

Letter, at 2 (stating that ‘‘regulators should 

periodically assess market practices and regulations 

to ensure that U.S. equity markets continue to 

remain efficient, liquid, fair, resilient and 

transparent for all market participants’’). 

155See Larry Harris Letter, at 9–10. 

156See, e.g., Decimus Letter, at 4 (stating that the 

Pilot ‘‘would be valuable in generating concrete 

information and more preferable to back-of-theenvelope calculations based on questionable 

assumptions’’); Wellington Letter, at 1 (stating that 

the Commission could only ‘‘draw[ ] definitive 

conclusions on the impact of existing pricing 

models . . . through an actual implementation’’ of 

the Pilot); Verret Letter I, at 4 (stating that the 

Commission ‘‘appears to have considered adoption 

of a mandatory rule to reshape market structure, 

and determined instead to take the more 

deliberative and less costly approach of an initial 

pilot program to generate more data from which it 

can determine a path forward on market structure 

reform’’); IAC Recommendation, at 2; MFA Letter, 

at 2; ICI Letter I, at 1–2; RBC Letter I, at 2; Joint 

Asset Managers Letter, at 2; Clark-Joseph Letter, at 

1; Babelfish Letter, at 3; State Street Letter, at 2; 

Themis Trading Letter II, at 3; IEX Letter I, at 

2–3. 

157Fidelity Letter, at 2. See also, e.g., Brandes 

Letter, at 1 (expressing support for the Pilot and the 

‘‘Commission’s effort to shed light into a subject of 

heated debate among market participants’’); Barnard 

Letter, at 1 (stating that the Pilot was ‘‘important, 

as historically there are many views on this topic, 

but a paucity of credible data from which to draw 

conclusions’’); Angel Letter II, at 1 (stating that 

‘‘various commenters have wildly differing 

perspectives on what will happen under the pilot,’’ 

which is ‘‘strong evidence as to why the pilot is 

necessary’’). 

158See, e.g., T. Rowe Price Letter, at 3; Clearpool 

Letter, at 2. The Commission notes that Nasdaq 

conducted an independent access fee experiment in 

2015, but the limited nature of that experiment 

makes it difficult to draw conclusions from the data 

gathered by Nasdaq. See Proposing Release, supra 

note 2, at 13011–12. See also, e.g., IEX Letter III, 

at 6 (‘‘Nasdaq’s experiment and its outcomes aren’t 

a perfect proxy for what is likely to happen in the 

Transaction Fee Pilot. That experiment was done 

unilaterally and only in highly-liquid securities.’’); 

Larry Harris Letter, at 9 (noting that Nasdaq’s 

‘‘experimental fee reduction did not occur at all 

trading venues that traded the subject securities,’’ 

demonstrating that ‘‘regulatory action is necessary 

to establish a common pricing standard because 

market forces alone will not do it’’). 

159See Section II.A.2 for a discussion of these 

comments. 

160See also Section II.A.2 for a discussion of 

these impacts. 

161See Proposing Release, supra note 2, at 13019. 

The Commission notes that the proposed language 

in Rule 610T(b)(2)(ii)(E) has been modified slightly. 

As proposed, Rule 610T(b)(2)(ii)(E) was labeled as 

‘‘Test Group.’’ As adopted, the label ‘‘Pilot Group’’ 

is being substituted for the phrase ‘‘Test Group’’ to 

provide additional clarity. 

162See id. 

adopts this aspect of the Pilot as 

proposed. 

C. Pilot Design 

1. Need for a Pilot 

As a threshold issue, commenters 

disagreed about whether the 

Commission should conduct any kind of 

pilot study of transaction fees and 

rebates. One commenter, for example, 

characterized the proposed Pilot as ‘‘a 

solution in search of problem’’ and 

claimed that the Commission ‘‘has 

provided no evidence that existing fee 

practices are harming investors or 

interfering with fair competition.’’ 154

Another commenter believed that the 

Pilot was unnecessary, but for the 

opposite reason—namely, that there is 

ample evidence of the negative effects of 

exchange rebate pricing models, such 

that the Commission should instead 

take immediate action to ban them.155

Most commenters, however, thought a 

Commission-led pilot was necessary 

and supported the Commission’s 

proposal to conduct one.156 These 

supportive commenters observed that 

‘‘market participants have heavily 

debated the effects that transactionbased fees, particularly access fees, and 

rebates may have on the equity markets’’ 

and ‘‘commend[ed] the SEC for 

advancing this discussion through a 

time-limited, empirical study.’’ 157 Some 

of those commenters thought a 

Commission-led pilot was necessary 

because competitive pressures among 

exchanges may serve as a barrier to 

market-led reforms in this area.158 The 

Commission agrees with the 

commenters that stated that the Pilot is 

necessary because, as reflected in the 

comments discussed above,159 there is 

strong disagreement about the impact of 

exchange fee-and-rebate pricing models 

but a lack of data to study the issue. The 

Commission believes it is important to 

further investigate these impacts.160

2. Pilot Design 

For each NMS stock that meets the 

initial criteria to be a Pilot Security, 

discussed above, the Commission 

proposed to assign it to one of three Test 

Groups, with 1,000 NMS stocks each, or 

the Control Group.161 The composition 

of each Test Group would remain 

constant for the duration of the Pilot, 

except, as described below, to reflect 

changes to the composition of the 

groups caused by mergers, delistings, or 

removal from a Test Group due to the 

share price of a stock closing below 

$1.162

The Commission received a number 

of comments on the proposed Pilot 

design, discussed below, focusing 

mainly on the number of securities 

included in each Test Group. After 

consideration of all the comments 

received and for the reasons discussed 

below, the Commission is adopting two 

Test Groups that each contain 730 NMS 

stocks, functionally combining 

proposed Test Groups 1 and 2 into a 

new Test Group 1 with a blended fee 

cap of $0.0010. Accordingly, for the 

duration of the Pilot, the following 

pricing restrictions will apply to Test 

Groups 1 and 2, while the Control 

Group will remain subject to the current 

access fee cap in Rule 610(c): 

Proposed Adopted 

Fee Cap Test Group 1 .......... 1,000 NMS stocks .......................................................... 730 NMS stocks. 

$0.0015 fee cap for removing & providing displayed liquidity.$0.0010 fee cap for removing & providing displayed liquidity. 

Fee Cap Test Group 2 .......... 1,000 NMS stocks .......................................................... Not adopted. 

$0.0005 fee cap for removing & providing displayed liquidity.

No Rebate Test Group .......... 1,000 NMS stocks .......................................................... 730 NMS stocks (plus appended Canadian interlisted 

stocks). 

Rebates and Linked Pricing Prohibited for removing & 

providing displayed & undisplayed liquidity (except 

for specified market maker activity).

No change. 

Rule 610(c) cap applies ................................................. No change. 

Control Group ........................ Pilot Securities not in a Test Group ............................... No change. 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5215 

163See Proposing Release, supra note 2, at 13019– 

13020 n.117, 13020 (describing the proposed 

composition of the Tick Size Pilot overlap 

subgroups). In the Proposal, the Commission 

specifically solicited comment on whether the Pilot 

should overlap with the Tick Size Pilot. See id. at 

13025. 

164Cf., e.g., Clark-Joseph Letter, at 2 (noting that 

overlap ‘‘certainly would not be a serious 

impediment’’); SIFMA Letter, at 3 (arguing against 

an overlap). 

165See Cboe Letter I, at 30. 

166See Healthy Markets Letter I, at 14. 

167See Cboe Letter I, at 29; Nasdaq Letter I, at 4. 168See Proposing Release, supra note 2, at 13019. 169See Spatt Letter, at 3. 170See, e.g., Mastercard Letter, at 2; Avangrid 

Letter, at 2; Energizer Letter, at 1. 171See supra Section III.C.4. 172See supra Section III.C.3.b. 

173See Proposing Release, supra note 2, at 13019– 

20. 

174See Brandes Letter, at 2; Themis Trading 

Letter I, at 3; Oppenheimer Letter, at 2; Spatt Letter, 

at 2; IEX Letter I, at 5; Verret Letter I, at 4; AGF 

Letter, at 2; MFA Letter, at 3. 

3. No Overlap With Tick Size Pilot 

While the Commission’s proposed 

Pilot design took into consideration the 

possibility that the Pilot could have 

been adopted before the end of the Tick 

Size Pilot Program, the Commission also 

noted that the overlap design would not 

be necessary if that were not the case.163

A few commenters opined on the 

potential overlap between the proposed 

Pilot and the Tick Size Pilot, disagreeing 

on whether overlap would be 

appropriate.164 However, because the 

Tick Size Pilot ended on September 28, 

2018, there no longer is any need for the 

Transaction Fee Pilot to control for 

potential data distortions that could 

have otherwise resulted from the 

simultaneous operation of the two pilot 

programs. Accordingly, the Commission 

is not adopting the proposed Tick Size 

Pilot overlap design. 

Relatedly, some commenters 

discussed whether there should be a 

delay between the end of the Tick Size 

Pilot and the start of the proposed 

Transaction Fee Pilot, with commenters 

disagreeing on that point. For example, 

one commenter thought a delay would 

be appropriate to allow markets to 

normalize before conducting a 

subsequent pilot 165 while another 

commenter thought markets would 

revert to their baseline state extremely 

quickly after the Tick Size Pilot ends.166

The Tick Size Pilot concluded, but 

post-pilot data continues to be collected 

until April 2, 2019. However, the 

Transaction Fee Pilot is subject to a onemonth implementation period followed 

by a six-month pre-Pilot Period. 

Accordingly, the core of the Transaction 

Fee Pilot will not commence until after 

the post-pilot period for the Tick Size 

Pilot ends. By then, the Commission 

believes that the markets will have had 

sufficient time to normalize and any 

overlap between the Transaction Fee 

Pilot’s pre-Pilot Period and the Tick 

Size Pilot’s post-pilot period will be 

minimal. In both cases, the respective 

pre- and post-pilot periods are 

collecting benchmark data on the status 

quo. As such, the overlap between them 

should not compromise either dataset. 

Finally, two commenters 

recommended that the Commission 

analyze the Tick Size Pilot data prior to 

proceeding with the Transaction Fee 

Pilot.167 While preliminary results from 

the Tick Size Pilot have been made 

public, the two pilots are sufficiently 

dissimilar that the Commission sees no 

reason for delay. The Tick Size Pilot 

tested a wider minimum increment 

(from one cent to five cents) for smallercapitalization stocks, whereas the 

Transaction Fee Pilot will test a lower 

rate for the Rule 610(c) fee cap and a 

prohibition on exchange rebates (which 

typically are less than one-third of a 

penny) for stocks of all market 

capitalizations. Accordingly, findings 

from the Tick Size Pilot are not relevant 

to the design of the Transaction Fee 

Pilot. 

4. Stratified Selection of Pilot Securities 

The Commission proposed to select 

the stocks to be included in each of the 

Test Groups and the Control Group 

through stratified sampling in a manner 

that permits comparisons between each 

Test Group and the Control Group.168

One commenter expressed support for 

the proposed approach to stratification 

and noted that it was ‘‘fundamental to 

the ability to undertake causal inference 

in this setting . . . .’’ 169 In contrast, a 

number of public company commenters 

expressed concern that stratified 

sampling could result in their stocks 

being placed in a different Test Group 

from other similar stocks in their ‘‘peer 

group,’’ which could complicate 

comparisons of their stock’s 

performance against peer-group 

metrics.170 As discussed above, those 

commenters supported allowing 

companies to ‘‘opt out’’ of the Pilot, 

which could impact the stratification.171

Further, as discussed above, some 

commenters recommended that the 

Commission select ETPs for the Pilot in 

a manner that may avoid any potential 

competitive effects among similar ETPs, 

either by: (1) Rotating all of the Pilot 

Securities through the various treatment 

groups, (2) rotating only ETPs through 

the various treatment groups, or (3) 

grouping ETPs with similar underlying 

holdings into the same treatment 

group.172

While the Commission understands 

the concerns of these commenters, as 

discussed above in Section II.B, 

allowing issuers to opt out of the Pilot 

could undermine the representativeness 

of the Pilot’s treatment groups and bias 

the Pilot’s results. Further, also as 

discussed above in Section II.B, rotating 

ETPs would require the Commission to 

implement a more complex and lengthy 

design in order to maintain sufficient 

statistical power, both of which would 

increase the costs and complexity of the 

Pilot—a result viewed unfavorably by 

most commenters. Finally, grouping 

similar ETPs also could negatively 

impact the stratification of the different 

treatment groups, particularly if all of 

the similar ETPs are similar in volume, 

price, and market capitalization. In turn, 

this could reduce the quality and 

usefulness of Pilot’s results by 

inhibiting the ability of researchers to 

compare treatment groups. In order to 

ensure that the Pilot Securities are 

selected in a way that permits 

researchers to investigate causal 

connections, it is imperative to stratify 

the Test Groups so that researchers can 

study the effects of changes in fees and 

rebates within each Test Group, 

between Test Groups, and between a 

Test Group and the Control Group. In 

permitting this type of analysis, the 

Pilot should be better able to inform 

future policy considerations to improve 

the operation of the national market 

system to the benefit of investors and 

issuers alike. Accordingly, the 

Commission is adopting the stratified 

sampling construct as proposed. 

5. Number of NMS Stocks Included in 

Each Test Group 

The Commission proposed to include 

1,000 Pilot Securities in each Test 

Group (i.e., 3,000 total across three Test 

Groups) with the remainder to be 

included in the Control Group in order 

to be representative of the overall 

population of NMS stocks and provide 

sufficient statistical power to identify 

differences between the Test Groups 

with respect to common stocks and 

ETPs.173

Several commenters supported 

including 1,000 stocks in each Test 

Group, believing that including 1,000 

stocks in each Test Group would 

facilitate analysis of transaction fees and 

rebates on a broad cross section of 

different types of NMS stocks and 

generate statistically significant 

conclusions.174

Many commenters, however, thought 

that the Pilot should include fewer 

5216 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

175See Magma Letter, at 3; FIA Letter, at 4; 

SIFMA Letter, at 4; Schwab Letter, at 2; Fidelity 

Letter, at 8–9; Citadel Letter, at 2; State Street Letter, 

at 3; Citi Letter, at 5; Clearpool Letter, at 7; TD 

Ameritrade Letter, at 1; STA Letter, at 3–4; STANY 

Letter, at 3; Nasdaq Letter I, at 10; Cboe Letter I, at 

27; T. Rowe Price Letter, at 4; Mastercard Letter, at 

2; NorthWestern Letter, at 1; Energizer Letter, at 1; 

Era Letter, at 1; Knight-Swift Letter, at 2; ASA 

Letter, at 4–5. 

176See Magma Letter, at 3; Schwab Letter, at 2; 

Fidelity Letter, at 8–9; Clearpool Letter, at 7; STA 

Letter, at 3–4; Cboe Letter I, at 27. 

177See SIFMA Letter, at 4; Schwab Letter, at 2; 

Citadel Letter, at 6; Citi Letter, at 5. 

178See Magma Letter, at 3; FIA Letter, at 4; Citi 

Letter, at 5; Clearpool Letter, at 7; Nasdaq Letter I, 

at 10. 

179See Citadel Letter, at 6. See also SIFMA Letter, 

at 4; Citi Letter, at 5. 

180See STA Letter, at 3; STANY Letter, at 3; State 

Street Letter, at 3; TD Ameritrade Letter, at 1, 3; 

Mastercard Letter, at 2. 

181See FIA Letter, at 4; Schwab Letter, at 2; State 

Street Letter, at 3; STANY Letter, at 3; Era Letter, 

at 1; Cboe Letter I, at 27. 

182See SIFMA Letter, at 4; Citi Letter, at 5; STA 

Letter, at 3. 

183See T. Rowe Price Letter, at 4. 

184See supra notes 175–183 and accompanying 

text. 

185See, e.g., supra notes 75–93 and 

accompanying text. 

186A confidence level of 95% is a standard 

accepted confidence level in statistical analyses. 

See, e.g., William H. Greene, Econometric Analysis 

1033 (Appendix C.6) (6th ed. 2007) (discussing 

standard confidence levels in academic research). 

187See also note 695 infra. 

188See, e.g., Citadel Letter, at 6; TD Ameritrade 

Letter, at 2; Cboe Letter I, at 27. See also Securities 

Exchange Act Release No. 74892 (May 6, 2015), 80 

FR 27514, 27517 (May 13, 2015) (File No. 4–657) 

(order approving the National Market System Plan 

to Implement a Tick Size Pilot Program). 

securities in each Test Group.175 Several 

of these commenters believed the Pilot 

could obtain statistically significant data 

even with fewer stocks in each Test 

Group.176 Other commenters urged the 

Commission to reduce the number of 

securities included in the Test Groups 

in order to reduce costs associated with 

the Pilot.177 Several commenters argued 

that the Pilot was effectively a large 

scale change to the current equity 

market structure and that it would be 

more appropriate for a pilot program to 

apply to a smaller percentage of the 

universe of NMS stocks.178 Further to 

this point, several commenters believed 

that a large Pilot may be difficult to 

unwind, with one commenter stating 

that an immediate return to current 

transaction fee and rebate dynamics for 

stocks included in the Test Groups 

‘‘could prove to be more disruptive to 

market participants and overall market 

quality than the actual implementation 

of the Pilot.’’ 179 Some commenters also 

believed the Pilot would negatively 

impact trading in the stocks placed in 

certain Test Groups, such as by 

adversely impacting spreads, and 

accordingly recommended including 

fewer stocks so as to limit potential 

negative consequences.180 Of the 

commenters that advocated for reducing 

the number of Pilot Securities in each 

Test Group, some suggested alternative 

amounts to be included. Several 

commenters recommended including 

100 stocks in each Test Group.181 A few 

others suggested that each Test Group 

include 500 stocks.182 One commenter 

recommended ‘‘a more tailored Pilot 

that includes the 225 most heavily 

traded names, 225 mid-cap stocks, 225 

small caps and 225 ETFs would provide 

statistically significant data without 

burdening a material portion of the 

market.’’ 183 The Commission has 

carefully considered the concerns 

expressed by commenters regarding the 

size of the Pilot’s Test Groups.184 As 

previously discussed, the Commission 

cannot know in advance the full effects 

of the Pilot, whether they be positive or 

negative. Indeed, commenters expressed 

a variety of contradicting viewpoints 

and estimations about the potential 

impacts of the Pilot on the execution 

quality and market quality of NMS 

stocks that would be included in the 

Test Groups.185

Given this uncertainty, it is crucial 

that the Pilot be able to produce results 

that are capable of facilitating an 

empirical review of the effect of the 

prevailing fee structures on the equities 

markets. To achieve this purpose, the 

Pilot needs to generate a sufficient 

number of observations over its one-year 

duration to obtain sufficient statistical 

power to identify differences among the 

Test Groups with respect to common 

stocks and ETPs, thereby permitting 

researchers to investigate causal 

connections using economic analysis 

capable of finding statistical 

significance. Statistical power refers to 

the ability for statistical tests to identify 

differences across samples when those 

differences are indeed significant and 

broadly is derived from the number of 

observations during a study. In other 

words, statistical power can be present 

when observing a limited number of 

subjects over a long period of time or a 

large number of subjects over a shorter 

period of time. Because the Commission 

desires a shorter duration for the Pilot, 

it therefore needs to have sufficient 

observable data points over the shorter 

pilot duration. Accordingly, if the Pilot 

does not contain enough securities, it 

may be incapable of producing 

statistically sound results and will not 

allow researchers to analyze differences 

in securities. 

With statistical power and a 

sufficiently large sample size, 

researchers can conduct analysis of 

what impact (1) reductions in fees and 

(2) reductions in or prohibitions on 

rebates might have, if any, on stocks 

depending on their trading volume or 

market capitalization. A pilot design 

that would not provide this meaningful 

data about the impact that billions of 

dollars of exchange fees and rebates may 

have on the markets and market 

structure, would not achieve the 

Commission’s goal of conducting a pilot 

capable of facilitating an objective 

empirical view to advance that debate. 

To achieve these aims, using 

econometric methods designed to allow 

researchers to detect a 10% change with 

a standard confidence level of 95%, the 

Commission has determined that 730 

securities in each Test Group are needed 

to enable the Pilot to produce 

statistically meaningful results capable 

of informing the Commission’s future 

policymaking efforts. The Commission 

believes that a 10% change in behavior 

represents an economically meaningful 

change that will facilitate analysis of the 

Pilot’s results, and therefore is an 

appropriate standard for the Pilot.186

The determination to include 730 

securities in each Test Group accounted 

for the need to obtain statistically 

significant results among stocks of 

various liquidity profiles as well as 

ETPs. While the number of NMS stocks 

that will be included in each Test Group 

will be larger than what was 

recommended by some commenters, the 

Commission believes that a smaller 

number of stocks may not have 

sufficient statistical power given the 

Pilot’s proposed duration.187

Furthermore, in response to 

comments questioning why the Pilot 

included more securities than did the 

Tick Size Pilot, the Commission notes 

that the Tick Size Pilot featured 400 

corporate stocks for each of its Test 

Groups.188 Importantly, the Tick Size 

Pilot did not contain ETPs or large-cap 

stocks. In comparison, the Transaction 

Fee Pilot will contain ETPs and largecap stocks. Accordingly, in light of the 

significantly higher number of securities 

eligible for inclusion, the Transaction 

Fee Pilot needs to include considerably 

more Pilot Securities than did the Tick 

Size Pilot, while continuing to achieve 

the same statistical power for each of 

those groups of securities. 

Moreover, while several commenters 

either implicitly or explicitly referenced 

the EMSAC recommendation to include 

100 stocks in each Test Group, EMSAC’s 

recommendation differs substantially 

from the Commission’s proposal. 

Notably, the EMSAC recommendation 

was limited to common stocks with a 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5217 

189See supra notes 175–180 and accompanying 

text. 

190See Proposing Release, supra note 2, at n. 102. 

191See Proposed Rule 610T(a)(1). See also 

Proposing Release, supra note 2, at 13021–22. 

192See Proposed Rule 610T(a)(2). See also 

Proposing Release, supra note 2, at 13022. 

193See Cboe Letter I, at 16 (stating that the 

Proposing Release ‘‘does nothing to justify how the 

$0.0015 and $0.0005 fee cap levels are appropriate’’ 

and that lowering the current fee cap ‘‘without 

meaningful discussion or justification is concerning 

and inappropriate’’); Morgan Stanley Letter, at 1. 

But cf. Healthy Markets Letter I, at 15–16 (stating 

that the fee caps for Test Groups 1 and 2 ‘‘appear 

to be well-justified’’). 

194See Cboe Letter I, at 16–17. 

195See Credit Suisse Commentary, at 3. 

196See T. Rowe Price Letter, at 2. 

197See Healthy Markets Letter I, at 15–16. 

198 IAC Recommendation, at 1. 

199See id. For other commenters suggesting a 

$0.0010 fee cap, see Goldman Sachs Letter and 

NYSE Letter III. 

market capitalization above $3 billion 

and did not include ETPs, mid- and 

small-cap stocks, or other types of NMS 

stocks. In order for the Pilot to permit 

a broader empirical review of the impact 

of transaction fees and rebates on order 

routing, execution quality, and market 

quality, it is critical that the sample size 

be representative of the population of 

NMS stocks for which exchange 

transaction fees and rebates are 

economically meaningful. The Pilot 

must contain enough securities to 

achieve the statistical power necessary 

to permit closer analysis of the Pilot’s 

results in order to identify differences in 

order routing behavior, market quality, 

and execution quality among subgroups 

of NMS stocks (e.g., ETPs, or tiers of 

common stock). 

6. Reduction to the Pilot Size 

To respond to commenters’ concerns 

with the size of the Pilot, including a 

recommendation from the SEC’s 

Investor Advisory Committee, the 

Commission has determined to 

eliminate one Test Group and reduce 

the number of stocks in each Test Group 

to 730. 

In order to materially reduce the size 

of the Pilot without sacrificing statistical 

power, the Commission has determined 

to: (1) Only place Pilot Securities in a 

Test Group if, at the time of selection, 

they trade 30,000 shares or more per day 

on average and (2) eliminate a Test 

Group. 

With respect to securities that trade 

fewer than 30,000 shares per day, 

assuming, at an extreme, that such 

security trades 100% of its volume on 

a maker-taker exchange paying a 

$0.0030 rebate, then it would generate 

$100 in rebates per day. In addition, for 

thinly-traded stocks with wider spreads, 

the rebate would be less impactful as it 

would represent a smaller percentage of 

the quoted spread. This amount of 

rebates would be economically 

insignificant and would be unlikely to 

impact order routing behaviors of 

broker-dealers. In addition, this level of 

trade volume makes it unlikely to 

produce sufficient statistical power to 

analyze the securities in isolation 

because the variability in their quoting 

and trading characteristics renders it 

unlikely the Pilot would generate a 

sufficient number of observations given 

the Pilot’s proposed duration. In 

addition, for commenters that believe 

that thinly-traded stocks need rebates to 

narrow their quoted spreads, excluding 

these securities from the Pilot will allow 

exchanges to continue to apply their 

current fee schedules to them, which 

will provide another point of reference 

to analyze when comparing these 

securities to those with slightly higher 

trading volumes. 

Finally, the Commission believes that 

eliminating one Test Group and 

functionally combining proposed Test 

Group 1 and Test Group 2 into a new 

Test Group with a $0.0010 cap will 

result in decreasing the number of NMS 

stocks included in a Test Group in the 

Pilot by one-third, which is integral in 

reducing the overall size of the Pilot by 

more than one-half. The Commission 

believes this material reduction directly 

responds to commenters’ concerns, 

while still providing the Pilot with a 

meaningful group in which to test a 

reduced fee cap and a prohibition on 

rebates and Linked Pricing. 

Accordingly, the Commission believes 

that the Pilot’s design of 730 NMS 

stocks per Test Group strikes an 

appropriate balance by reducing the 

number of stocks in each Test Group 

and thus mitigating the concerns of 

commenters about potential detrimental 

impacts that could be caused by the 

proposed larger size of the Pilot,189

without undermining the ability to 

obtain useful data to study the impact 

of changes to transaction fees and 

rebates on order routing behavior, 

execution quality, and market quality 

for a broad spectrum of stocks. It also is 

large enough to accommodate drop offs 

among Pilot Securities (e.g., due to 

mergers, bankruptcies, or stocks closing 

below $1).190

7. Fee Cap Test Groups 

The Commission proposed that for 

Pilot Securities in Test Group 1, equities 

exchanges could neither impose, nor 

permit to be imposed, any fee or fees for 

the display of, or execution against, the 

displayed best bid or offer of such 

market in NMS stocks that exceeds or 

accumulates to more than $0.0015 per 

share.191 The level proposed for Test 

Group 2 was $0.0005 per share.192

After careful consideration of the 

comments received, which are 

discussed below, the Commission is 

eliminating Test Group 2 and adopting 

a revised Test Group 1 with a $0.0010 

cap. 

a. Fee Cap Level 

Commenters disagreed about the 

appropriateness or justification for the 

proposed fee cap levels.193 For example, 

one commenter stated that ‘‘exchanges 

currently compete on fees by offering a 

range of access fees and rebates within 

the confines of the current $0.0030 

access fee cap’’ but the fee caps in Test 

Groups 1 and 2 ‘‘will reduce the 

exchanges’ ability to compete on fees by 

50% in Test Group 1’’ and ‘‘83% in Test 

Group 2’’ which could be ‘‘to the 

detriment of investors and the public 

interest.’’ 194 In contrast, regarding 

proposed Test Group 1, another 

commenter stated that ‘‘[a]t 15 mils, 

there is still room for significant fee 

differentiation and rebates remain 

sizeable.’’ 195

With respect to Test Group 2, one 

commenter stated that ‘‘[i]f the ultimate 

intent of the proposal is to determine 

whether or not reducing access fees will 

have an effect on how brokers route 

their customers’ orders, then we fully 

support the notion of Test Group 2 to 

see if the incentive to avoid access fees 

is eliminated with a 5 cents per 100 

share cap.’’ 196 Another commenter 

further stated that ‘‘to the extent that 

rebates have been traditionally funded 

by exchanges by the fees collected,’’ 

then Test Group 2 ‘‘may lead to rebate 

reductions’’ and obtaining data on this 

point is ‘‘part of the reason why a study 

is needed.’’ 197

Finally, the Investor Advisory 

Committee recommended that the 

Commission structure the Pilot’s Test 

Groups ‘‘as simply as possible,’’ and 

was not persuaded that, in addition to 

having the no-rebate Test Group, having 

two additional Test Groups with 

separate fee caps ‘‘will generate enough 

additional information to justify the 

additional effort.’’ 198 Accordingly, the 

Investor Advisory Committee 

recommended that the Commission 

consider having, in addition to the norebate Test Group, only one Test Group 

with a fee cap and suggested a cap of 

$0.0010.199

The Commission appreciates the 

recommendation of the Investor 

Advisory Committee and agrees with it. 

As noted above and further discussed 

below, eliminating Test Group 2 will 

decrease the size of the Pilot by oneVerDate Sep<11>2014 18:36 Feb 19, 2019 Jkt 247001 PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 E:\FR\FM\20FER2.SGM 20FER2
5218 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

200See Citi Letter, at 1–2; Goldman Sachs Letter, 

at 2. 

201See Proposing Release, supra note 2, at 13025. 

202See Clearpool Letter, at 3 n.6. 

203See Proposing Release, supra note 2, at 13023 

n.136–37 and accompanying text. 

204 In the Proposing Release, the Commission 

acknowledged that there were three exchanges that 

charged different fees for displayed and nondisplayed liquidity. See id. Currently, there are two, 

IEX and NYSE American. The Commission notes 

that the differences in fees are minimal and because 

a small portion of exchanges have chosen to adopt 

this fee structure to date, it is unlikely a significant 

portion will choose to do so. 

205See Proposing Release, supra note 2, at 13022– 

23. 

206See Section II.C.6.d. infra. See also Proposing 

Release, supra note 2, at 13021–24. 

207See CFA Letter, at 6; Clearpool Letter, at 2– 

3; Healthy Markets Letter I at 27–29. 

208See Healthy Markets Letter I, at 28. 

209See id. at 16. 

210See supra Section II.C.5 discussing the need 

to generate a sufficient number of observations over 

the Pilot’s duration to permit researchers to 

investigate causal connections using economic 

analysis capable of finding statistical significance. 

third. New Test Group 1 will have a cap 

of $0.0010, which adopts the Investor 

Advisory Committee’s recommendation 

and represents a blended average of the 

two fee caps the Commission originally 

proposed. 

The Commission believes that new 

Test Group 1 retains the equities 

exchanges’ ability to compete through 

differing fees and rebates, as a fee cap 

of $0.0010 provides exchanges with an 

opportunity to utilize various fee and 

rebate structures to compete for order 

flow. As some commenters noted, the 

current access fee cap was set thirteen 

years ago and may represent an outsized 

portion of transaction costs in light of 

the technological efficiencies achieved 

by the equities markets in the last 

decade.200

As revised, new Test Group 1 will 

facilitate an analysis of the extent to 

which exchanges reduce rebates from 

their current levels as a result of a 

materially reduced cap on the fees used 

to subsidize those rebates, and the 

impact of a reduced fee and rebate level 

on order routing behavior, execution 

quality, and market quality. In addition, 

by materially reducing the fee cap, the 

Commission believes that new Test 

Group 1 will provide useful data on the 

extent to which current exchange fee 

levels (bounded by the current access 

fee cap) serve as a disincentive to take 

liquidity on an exchange. Obtaining 

useful information to better understand 

the potential impact of a significantly 

reduced access fee cap will ultimately 

be beneficial to investors and the public 

interest, as it may help illuminate the 

extent to which the current fees and 

rebates effect the market and the extent 

to which those effects have a 

detrimental impact on investor 

transaction costs. 

b. Applicability to Depth-of-Book and 

Non-Displayed Liquidity 

As proposed, Test Groups 1 and 2 

were designed to isolate and test a 

reduction in the Rule 610(c) fee cap, 

with all else remaining unchanged. In 

the Proposing Release, the Commission 

asked whether commenters thought the 

fee caps in Test Groups 1 and 2 also 

should apply to depth-of-book and 

undisplayed liquidity.201 One 

commenter recommended that it 

should.202

In the Proposing Release, the 

Commission stated that it preliminarily 

believed it was unnecessary for the fee 

cap Test Groups to apply to depth-ofbook and undisplayed liquidity because 

it would be highly unlikely for an 

exchange to begin charging more to 

access non-displayed interest or depthof-book quotes (compared to displayed 

interest), as it would lead to uncertainty 

for market participants that remove 

liquidity because they typically would 

not be able to know in advance or 

control with absolute certainty whether 

they interact with non-displayed 

interest or depth-of-book quotes.203 The 

Commission continues to believe it 

would be unlikely that either makertaker or taker-maker exchanges would 

begin charging differing fees in such a 

manner.204 Furthermore, the 

Commission notes that the Rule 610(c) 

access fee cap does not currently apply 

to non-displayed interest or depth-ofbook quotes. Introducing a new variable 

into the fee cap Test Groups would 

make it more difficult to isolate the 

effects of a particular change and 

uncover causal connections. 

Accordingly, for the reasons noted 

above and discussed in the Proposing 

Release, the Commission is not adopting 

this suggestion.205

c. Prohibiting Rebates and Linked 

Pricing in Test Groups 1 and 2 

In Test Groups 1 and 2 the 

Commission did not propose to cap the 

level of rebates, prohibit rebates, or 

prohibit Linked Pricing, the latter two of 

which it proposed to do in the no-rebate 

Test Group as discussed below.206 In 

response, several commenters advocated 

for applying restrictions on rebates to 

the fee cap Test Groups, primarily in 

reaction to the potential for exchanges 

to subsidize their rebates at or near 

current levels from sources other than 

transaction fee revenue.207 For example, 

one commenter stated that ‘‘[t]here is 

already ample evidence to suggest that 

some exchanges currently use revenues 

from other sources to subsidize their 

order routing incentives, including 

rebates,’’ such that the proposed fee 

caps may have no impact on the level 

of rebates paid for Pilot Securities in the 

fee cap Test Groups.208 This commenter 

therefore suggested that the fee cap Test 

Groups include two subgroups, one as 

proposed, and a second that would 

prohibit rebates and Linked Pricing (and 

also apply to depth-of-book and nondisplayed liquidity).209

The Commission has carefully 

considered these comments and has 

determined not to adopt these 

additional restrictions. While adding 

more variables or more Test Groups to 

the Pilot could produce informative 

results, it would directly complicate the 

Pilot’s design thus raising the Pilot’s 

costs and burdens. For example, if the 

Commission were to add subgroups to 

new Test Group 1 to prohibit rebates, it 

likely would have to expand the number 

of stocks included in the treatment 

groups or expand the duration of the 

Pilot in order to achieve statistical 

power.210 It also would further 

complicate exchange fee schedules and 

could lead to more variability in 

exchange fees if exchanges customized 

their pricing differently for each Test 

Group and subgroup. Rather, the Pilot’s 

design represents a comparatively 

simple construct that is easier to 

implement and manage and yet should 

still facilitate the Commission’s ability 

to analyze the impact of fees and rebates 

on order routing behavior, execution 

quality, and market quality. Achieving 

these goals, while minimizing 

complexity and burdens, will also assist 

the Commission as it considers potential 

future policy initiatives informed by the 

results of the Pilot. 

In addition, the fee cap Test Groups 

were specifically selected to provide the 

exchanges with the continued ability to 

offer rebates, should they so choose, 

albeit at lower levels, without impacting 

an exchange’s ability to maintain its net 

profit on a per transaction basis. The 

Commission declines to prohibit rebates 

in new Test Group 1 as doing so would 

go beyond the construct and application 

of the Rule 610(c) fee cap by introducing 

additional variables, and thus would 

distinctly alter the status quo in that 

Test Group, thereby complicating the 

analysis in that treatment group. 

Lastly, the Commission continues to 

believe that it is unlikely that exchanges 

will offer rebates at their current levels 

for Pilot Securities in new Test Group 

1 because exchanges will need to charge 

lower offsetting transaction fees in that 

group in order to maintain a profitable 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5219 

211See Proposed Rule 610T(a)(3); Proposing 

Release, supra note 2, at 13022–24. 

212 ‘‘Top-of-book’’ means the aggregated best bid 

and best offer resting on an exchange; in other 

words, aggregate interest that represents the highest 

bid (to buy) and the lowest offer (to sell). See 17 

CFR 242.600(b)(7) (defining ‘‘best bid’’ and ‘‘best 

offer’’). 

213 ‘‘Depth-of-book’’ refers to all resting bids and 

offers other than the best bid and best offer; in other 

words, all orders to buy at all price levels less 

aggressive than the highest priced bid (to buy) or 

all offers to sell at all price levels less aggressive 

than the lowest priced offer (to sell). See 17 CFR 

242.600(b)(8) (defining ‘‘bid’’ and ‘‘offer’’). 

214 ‘‘Undisplayed’’ refers to resting orders that are 

‘‘hidden’’ and not displayed publicly in the 

consolidated market data. See 17 CFR 

242.600(b)(13) (defining ‘‘consolidated display’’) 

and (b)(60) (defining ‘‘published bid and published 

offer’’). 

215See, e.g., Joint Asset Managers Letter, at 1; 

Clark-Joseph Letter, at 2; Brandes Letter, at 1; CII 

Letter, at 3; Themis Trading Letter I, at 3; AJO 

Letter, at 3; OMERS Letter, at 2; Copeland Letter, 

at 2; ICI Letter I, at 3; Nuveen Letter, at 2; SIFMA 

Letter, at 3–4; Better Markets Letter, at 2, 5; RBC 

Letter I, at 3; Vanguard Letter, at 2–3; Fidelity 

Letter, at 9; Invesco Letter, at 2; CFA Letter, at 4; 

MFS Letter, at 2; Wellington Letter, at 2; Joint 

Pension Plan Letter, at 2; Citi Letter, at 2; 

Oppenheimer Letter, at 2; Clearpool Letter, at 2; 

Spatt Letter, at 2; Capital Group Letter, at 3; Healthy 

Markets Letter I, at 17; IEX Letter I, at 5; Verret 

Letter I, at 4; Norges Letter, at 2; AGF Letter, at 1; 

Decimus Letter, at 3; JPMorgan Letter, at 3. 

216See Cboe Letter I, at 7, 15–16; NYSE Letter I, 

at 3–6; Nasdaq Letter I, at 7–8. See also, e.g., 

Mastercard Letter, at 1–2; Capital Group Letter, at 

3; Magma Letter, at 2; FIA Letter, at 4. 

217See, e.g., Cboe Letter I, at 7; Nasdaq Letter I, 

at 9; NYSE Letter I, at 6; Magma Letter, at 2; State 

Street Letter, at 3; Morgan Stanley Letter, at 4; Cboe 

Letter II, at 4–7. See also Nasdaq Letter III, at 

Exhibit A (providing graphs using data from 

September 2018 on average quoted spread across 

exchanges in S&P 500 stocks and time at the best 

quote across those stocks). But cf. Larry Harris 

Letter, at 6–9 (acknowledging that ‘‘quoted spreads 

are narrower under maker-taker pricing,’’ but 

opining that ‘‘the narrower quoted spreads do not 

benefit the public’’). 

218See, e.g., Nasdaq Letter I, at 9; NYSE Letter II, 

at 11; RBC Letter I, at 5; Nasdaq Letter III. 

219See, e.g., Virtu Letter, at 7; Schwab Letter, at 

3; State Street Letter, at 2. 

220See, e.g., Decimus Letter, at 5 (observing that 

‘‘claims on the existence of unambiguous harm to 

liquidity appear to be exaggerated and driven by 

preconceived notions’’). See also Section IV infra 

(discussing the uncertainty of the Pilot’s outcomes). 

221 IEX Letter II, at 7. 

222See NYSE Letter II, at 2. One commenter 

questioned NYSE’s analysis in this regard, noting 

that in general EDGA’s volume is limited to ‘‘the 

most liquid names.’’ This commenter stated that 

NYSE ‘‘distorts the real likely impact of the [P]ilot’’ 

by including spreads on less liquid securities. See 

Mulson Letter II, at 2. 

pricing model. However, the 

Commission also recognizes, as did 

commenters, that it is possible that the 

exchanges may choose to subsidize 

rebates in Test Group 1 from other 

sources of revenue, which could result 

in rebates exceeding the fee cap in that 

group. Whether and to what extent that 

would occur in practice would be an 

important result in new Test Group 1, 

and so the Commission believes the 

Pilot should be structured so as not to 

preclude that possible result. The 

Commission will closely monitor the 

fees charged by the exchanges for nontransaction services during the Pilot and 

will consider the Pilot’s impact on such 

fees. 

d. No-Rebate Test Group 

The Commission proposed that for 

Pilot Securities in Test Group 3, equities 

exchanges generally would be 

prohibited from offering rebates, either 

for removing or posting liquidity, and 

from offering Linked Pricing, which, as 

discussed further below, is defined as a 

discount or incentive on transaction fee 

pricing applicable to removing (or 

providing) liquidity that is linked to 

providing (or removing) liquidity.211 In 

addition, Test Group 3 would be unique 

in that its restrictions would apply not 

only to displayed top-of-book 212

liquidity, but also would apply to 

depth-of-book 213 and undisplayed 

liquidity.214 Transaction fees for 

securities in Test Group 3 would remain 

subject to the current $0.0030 access fee 

cap in Rule 610(c) for accessing a 

protected quotation. 

After careful consideration of the 

comments received on Test Group 3, 

discussed below, the Commission is 

adopting Rule 610T(a)(3) as proposed, 

though it is being renamed as ‘‘Test 

Group 2’’ since the Commission has 

reduced the number of Test Groups 

from three to two. 

e. Prohibiting Rebates 

While there was significant 

disagreement among commenters on 

this aspect of the Pilot, most 

commenters supported a ‘‘no rebate’’ 

group as they believed it was critical to 

fully examine the effect that transaction 

fees and rebates have on order routing 

behavior, execution quality, and market 

quality.215

In contrast, several commenters 

opposed prohibiting equities exchanges 

from paying rebates. Specifically, three 

of the four exchange commenters 

asserted that it would inhibit the ability 

of exchanges to compete with offexchange trading venues.216 In addition, 

these three commenters, together with 

other commenters, expressed concerns 

that prohibiting exchanges from paying 

rebates to liquidity providers would 

widen the quoted bid-ask spread on 

exchanges, which could raise costs on 

investors.217 Several of these 

commenters believed that eliminating 

rebates for ‘‘less-liquid’’ or ‘‘small and 

medium sized companies’’ would 

disproportionately impact the quoted 

spreads for such stocks as they believed 

that rebates are a more significant 

incentive to provide liquidity for less 

actively traded securities.218 Other 

commenters also expressed concerns 

that spreads would widen for ETPs, 

specifically less liquid ETPs, if rebates 

were prohibited or significantly 

reduced.219

The Commission is aware of the 

potential for adversely impacting 

smaller capitalization securities, 

however, the Commission does not 

agree with the commenters that believe 

that the Pilot necessarily will result in 

such harm, or if there are adverse effects 

in the trading of all or some portion of 

smaller capitalization securities, that the 

net effect across securities will be 

negative. Rather, the Commission agrees 

with the many commenters who 

believed that it is unclear what the 

ultimate net impact of a no-rebate Test 

Group will be on quoted spreads and 

trading costs for NMS stocks of different 

market capitalizations and trading 

characteristics.220 The purpose of the 

Pilot is to generate results that can offer 

data-driven insight on these questions 

as a basis for possible future policy 

making in this area. As discussed 

elsewhere, the revised Pilot has 

excluded securities that trade fewer 

than 30,000 shares per day, as they are 

less likely to provide actionable data. 

This lack of empirical clarity is 

reflected in the divergent views of 

commenters who offered conflicting 

predictions of the outcome of a norebate Test Group. For example, one 

commenter questioned whether rebates 

were necessary to attract displayed 

liquidity, opining that ‘‘[p]ublic data 

shows that inverted and flat-fee 

exchanges often have quotes on both 

sides of the NBBO, which shows that 

market participants are willing to pay 

these exchanges to post quotes at the 

NBBO based on their intrinsic desire to 

trade and not just in response to an 

exchange rebate’’ 221 (emphasis in 

original). In response, one exchange 

commenter suggested that Cboe EDGA 

Exchange, which does not pay rebates, 

has wider spreads for displayed 

liquidity as compared to Cboe EDGX 

Exchange, which does pay rebates for 

posting liquidity.222 A different 

commenter did not ‘‘anticipate a 

material widening for the most liquid 

names (where rebates aren’t necessary to 

incentivize liquidity providers) or the 

most illiquid names (where rebates 

aren’t sizable enough to incentivize 

liquidity providers),’’ and instead 

anticipated ‘‘a likely outcome of 

increased spreads for the middle tier of 

5220 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

223Citi Letter, at 3–4. See also Credit Suisse 

Commentary, at 3. 

224See Mulson Letter I, at 1. See also IEX Letter 

II, at 6. 

225NYSE Letter II, at 11. 

226See T. Rowe Price Letter, at 5. 

227See Proposing Release, supra note 2, at 13022– 

23. 

228See, e.g., T. Rowe Price Letter, at 2; Brandes 

Letter, at 1–2; Babelfish Letter, at 2. 

229See Cboe Letter I, at 12–13. See also Section 

II.G (responding to comments regarding the 

Commission’s legal authority to conduct the Pilot). 

230For example, if take fees are set at levels to 

subsidize maker rebates, and if those rebates have 

little or no impact on quoted spreads of certain 

NMS stocks, then the take fees on trades in those 

stocks may constitute a tax on takers of liquidity 

without a corresponding benefit to the market. 

231See, e.g., Clark-Joseph Letter, at 2; Clearpool 

Letter, at 3 n.6; Healthy Markets Letter I, at 18; IEX 

Letter I, at 7. 

232NYSE Letter I, at 12. 

233Nasdaq Letter I, at 6. 

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

securities, where rebates have perhaps 

kept spreads artificially narrow.’’ 223

Another commenter believed that 

quoted prices are ‘‘almost always set by 

natural investors’’ and therefore, 

‘‘[r]emoving rebates will not disrupt the 

desire of natural investors to post 

liquidity and tighten spreads.’’ 224 In 

response, one commenter was 

‘‘skeptical’’ about this and stated that ‘‘it 

is not realistic for the buy-side to be 

continuously active on both sides of the 

market across all stocks impacted by the 

Transaction Fee Pilot.’’ 225 That said, 

another commenter, which also is a 

listed issuer, stated that it did not 

‘‘expect that a reduction or outright 

removal of rebates will have any 

significant or harmful effects on the 

quality of prices displayed in the public 

lit market, interfere with genuine 

liquidity and price formation, or 

negatively impact [its] stock’s trading 

volume, spread or displayed size.’’ 226

The Commission believes that the 

significant disagreement among 

commenters on the potential impacts of 

prohibiting rebates demonstrates the 

need to include a no-rebate bucket in 

the Pilot. For example, it is unclear 

what effect—if any—the payment of a 

rebate has on a stock that trades over 10 

million shares per day with an average 

natural quoted spread width 

constrained by the minimum trading 

increment of $0.01. Likewise, it is 

unclear what effect—if any—the 

payment of a rebate has on a stock that 

trades less than 100,000 shares per day 

with an average quoted spread of $0.10 

or more. In either case, the absence of 

rebates may have little or no effect on 

quotes or competition for natural order 

flow in such securities. Data is needed 

to empirically evaluate commenters’ 

diverging views of the effect of rebates. 

The Pilot is designed to produce this 

and other data. 

By prohibiting rebates in one Test 

Group the Pilot should produce results 

that facilitate a direct study of the effect 

of rebates, including on fees, order 

routing, execution quality, and market 

quality.227 The Commission believes 

that the no-rebate Test Group will 

provide useful information on trading in 

the absence of rebates that will facilitate 

a data-driven approach to better 

understand the role and effect of rebates 

in our current market structure. The 

results generated by this Test Group will 

allow researchers to study the 

relationship between rebates and quoted 

spreads for stocks of varying liquidity 

profiles and market capitalizations. It 

also will allow market participants to 

directly test with their own order flow 

whether, in the absence of rebates in the 

most actively traded stocks, they are 

better able to compete for queue priority 

and thereby capture the quoted spread 

when posting liquidity.228 Therefore, 

the Commission continues to believe 

that the Pilot will be substantially more 

informative with a no-rebate bucket and 

the value of generating that information 

to inform the Commission’s 

consideration of the effect of exchange 

transaction fee models justifies 

proceeding with the Pilot to better 

inform both sides of the rebate debate 

with data to test their hypotheses. 

In summary, the Commission has 

carefully considered commenters’ 

suggested alternatives and whether to 

include the no-rebate feature in the 

Pilot, and in light of the important 

regulatory purpose the Pilot is designed 

to achieve, the Commission has 

determined that, for the reasons 

discussed throughout, it is important to 

have a Test Group that specifically 

focuses on the removal of rebates and 

the corresponding impact on conflicts of 

interest, execution quality, and market 

quality. 

Finally, one commenter asserted that 

banning rebates ‘‘presents [a] 

misapplication of Rule 610(c)’’ because 

the Commission has never before 

banned rebates.229 While neither Rule 

610(c), nor any other Commission rule, 

currently prohibits a national securities 

exchange from paying a rebate to 

provide or remove liquidity, the 

Commission does not believe that the 

no-rebate Test Group misapplies Rule 

610(c), or any other rule. The no-rebate 

Test Group is not based on or related to 

Rule 610(c). Rule 610(c) caps fees for 

removing a protected quotation, 

whereas the no-rebate Test Group does 

not further limit fees and instead 

prohibits rebates, among other things. 

Indeed, the Rule 610(c) fee cap 

continues to apply—unchanged and in 

its entirety—to the no-rebate Test 

Group. 

The data generated by the Pilot will 

help empirically assess, in light of 

changing market conditions, whether 

the existing transaction-based fee and 

rebate structure continues to further the 

statutory goals.230 Importantly, while 

exchanges would retain the ability to 

charge transaction fees as high as the 

current $0.0030 cap in the no-rebate 

Test Group, they would no longer need 

to charge transaction fees at levels 

priced to offset the rebates they formerly 

paid. Accordingly, the no-rebate Test 

Group is intended to test, within the 

current Regulation NMS regulatory 

structure, natural equilibrium pricing 

for transaction fees. 

f. Application to Depth-of-Book and 

Non-Displayed Liquidity 

Several commenters supported 

applying the prohibition on rebates in 

the no-rebate Test Group to depth-ofbook and non-displayed liquidity as 

they believed it would avoid the risk 

that the Pilot’s results could be subject 

to distortions if exchanges continue to 

offer rebates for depth-of-book and nondisplayed liquidity.231 In contrast, two 

exchange commenters opposed this 

aspect of the proposal. One 

characterized this aspect of the proposal 

as an ‘‘unjustified pricing restriction[ ]’’ 

that was part of a ‘‘new regulatory 

scheme . . . .’’ 232 The other argued that 

‘‘[t]he Proposal lacks internal 

coherence’’ in that it excludes ATSs 

‘‘because they do not have protected 

quotes, but then includ[es] unlit 

exchange orders that also are 

unprotected.’’ 233

For the reasons stated in the 

Proposing Release, the Commission 

continues to believe that allowing 

exchanges to continue to offer rebates in 

the no-rebate Test Group for depth-ofbook and non-displayed orders could 

substantially distort the Pilot results.234

The no-rebate Test Group is designed to 

test the absence of exchange transaction 

rebates. It would weaken the Pilot’s 

results to prohibit rebates on displayed 

orders but allow them on non-displayed 

orders, as the Pilot would not be able to 

collect data on what would happen in 

the absence of rebates. Only by 

prohibiting the payment of all rebates in 

one Test Group will the Commission be 

able to gather data on a pure ‘‘no rebate’’ 

environment, thereby facilitating a 

direct observation of the impact of 

rebates on order routing behavior, 

execution quality, and market quality 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5221 

235See supra note 215. 

236Cf. supra note 233. 

237Price-time priority (where orders are 

prioritized for execution based on ranking by price 

and, when two orders are at the same price, by time 

of entry), generally does provide the ability for an 

incoming order to bypass non-displayed liquidity. 

238See Healthy Markets Letter I, at 18; CFA 

Letter, at 6–7. 

239See Proposing Release, supra note 2, at 13023. 

240See supra notes 217–218 and accompanying 

text. 

241See Citadel Letter, at 5. 

242See id. 

243See Fidelity Letter, at 9; Citadel Letter, at 5. 

244Credit Suisse Commentary, at 4. 

245See Proposing Release, supra note 2, at 13023. 

The Commission notes that most exchanges also 

utilize tiering in their pricing models in which they 

offer lower fees or larger credits in return for 

additional volume. See, e.g., Spatt Letter, at 4; RBC 

Letter II, at 4. 

246See, e.g., Capital Group Letter, at 3; IEX Letter 

I, at 7. 

247See NYSE Letter I, at 12; Cboe Letter I, at 10. 

when compared to the other Test Group 

and Control Group. 

As noted above, the Commission 

received a significant number of 

comments in support of directly 

studying the effects of prohibiting 

rebates.235 In order to avoid the 

potential distortion from a too-narrowlytailored Test Group that focuses only on 

one type of rebate but ignores another, 

the Commission believes that 

prohibiting rebates on all exchange 

volume—including depth-of-book and 

non-displayed liquidity—is necessary to 

generate the most useful Pilot results on 

the effect of exchange transaction 

rebates broadly. 

In addition, the Commission believes 

that the no-rebate Test Group’s 

application to depth-of-book and nondisplayed orders is consistent with the 

Commission’s decision to exclude 

ATSs, which do not have protected 

quotes.236 As discussed above, ATSs are 

excluded from the Pilot based on a 

number of reasons, including the 

materially different treatment of 

exchange fees under the current federal 

securities laws and their lack of a 

protected quotation. With respect to the 

no-rebate Test Group, it would be 

incoherent for the Commission to 

purport to test a prohibition on 

exchange transaction-based rebates but 

do so only for some rebates (i.e., on 

displayed interest) while ignoring the 

potential for exchanges to pay rebates 

on non-displayed liquidity and depthof-book interest.237 The possibility that 

an exchange could offer rebates for nondisplayed and depth-of-book quotes, 

while eliminating them on displayed 

interest, could present a loophole with 

the potential to undermine the design of 

the no-rebate Test Group and distort the 

Pilot results for the no-rebate Test 

Group, rendering the results of the 

Pilot’s ‘‘no-rebate’’ Test Group incapable 

of speaking to the impact of rebates. 

g. Maintaining Rule 610(c) Access Fee 

Cap 

Two commenters recommended that, 

unlike Rule 610(c), the no-rebate Test 

Group go beyond Rule 610(c) to also 

prohibit exchanges from charging fees in 

excess of $0.0030 to provide displayed 

liquidity.238 As noted in the Proposing 

Release, the no-rebate Test Group is 

designed specifically to test, within the 

current regulatory structure, natural 

equilibrium pricing for transaction fees 

in an environment where exchange 

transaction-based rebates are 

prohibited.239 While this would 

theoretically allow an exchange to 

charge fees in excess of $0.0030 to 

provide liquidity, the Commission notes 

that several exchanges stated that one of 

the perceived benefits in providing 

rebates to liquidity providers is that it 

facilitates narrower spreads and 

therefore believes it is unlikely 

exchanges would charge such higher 

fees during the Pilot.240

One commenter expressed concerns 

that the no-rebate Test Group would 

‘‘provide exchanges with the flexibility 

to propose a variety of new fee 

structures for liquidity-taking orders,’’ 

which could create new conflicts for 

brokers routing customer orders.241

Accordingly, this commenter believed 

that the no-rebate Test Group should 

instead impose a fee cap of $0.0002, 

where the expectation would be that 

rebates would be lowered to a de 

minimis amount and the Pilot would be 

more symmetrical and thereby more 

effective in analyzing broker order 

routing practices.242 The Commission 

continues to believe that in light of the 

current debate surrounding the potential 

conflict of interest posed by the 

payment of rebates and potential effects 

they may have on the markets, 

including the many comments received 

in response to the Proposal, the Pilot 

will be substantially more informative 

with a no-rebate bucket than a bucket 

that dramatically lowers the fee cap 

assuming that rebates would follow. 

While reducing the fee cap to $0.0002 

would reduce the likelihood that an 

exchange would offer rebates at current 

levels (assuming the exchange desired 

to fund transaction-based rebates only 

through transaction-based fees), 

exchanges would retain the ability to 

pay rebates and could subsidize them 

from other sources of revenue leading to 

rebates that greatly exceed $0.0002. In 

contrast, only a complete prohibition on 

rebates will permit researchers to 

observe directly the impact of rebates on 

order routing behavior, execution 

quality, and market quality, and 

compare this Test Group to the Control 

Group and the other Test Group where 

rebates can continue to be offered. 

Further, imposing a fee cap of $0.0002 

instead of prohibiting rebates would not 

allow Test Group 2 to test, within the 

current Regulation NMS regulatory 

structure, natural equilibrium pricing 

for transaction fees, particularly if the 

cap is below where the natural 

equilibrium price would otherwise be 

found. 

Two commenters expressed concern 

that because exchanges can continue to 

charge access fees of up to $0.0030 per 

share in the no-rebate Test Group, they 

may fail to engage in competition on 

fees.243 In contrast, another commenter 

believed that, in the no-rebate Test 

Group, ‘‘the fee for removing liquidity 

could still move closer to zero in order 

for exchanges to incentivize takers in 

the absence of rebates.’’ 244 The 

Commission believes that observing 

price competition in the absence of any 

distortive effects caused by rebates is an 

important aspect of the Pilot. 

Accordingly, the no-rebate Test Group is 

intended to test, within our current 

regulatory structure, whether 

competitive market forces are sufficient 

to produce natural equilibrium pricing 

for transaction fees in the absence of 

rebates. 

h. Prohibiting Linked Pricing 

In connection with prohibiting 

rebates, the no-rebate Test Group also 

would prohibit Linked Pricing, such 

that an exchange would be prohibited 

from adopting any discounts on 

transaction fees to remove (i.e., ‘‘take’’) 

liquidity where that discount is 

determined based on the broker-dealer’s 

posted (i.e., ‘‘make’’) volume on the 

exchange, which would result in the 

broker-dealer paying a lower take fee in 

return for providing a certain level of 

liquidity on the exchange.245

Some commenters that addressed the 

prohibition on Linked Pricing were 

supportive of the proposal and generally 

believed that the prohibition would 

preserve the integrity of the Pilot and 

facilitate an environment where 

exchanges are able to set transaction 

fees at a natural equilibrium level.246 In 

contrast, two exchange commenters 

opposed the prohibition.247 Specifically, 

one commenter characterized this 

aspect of the proposal, in conjunction 

with the prohibition on rebates, as an 

‘‘unjustified pricing restriction’’ that is 

‘‘unrelated to Regulation NMS’s Access 

5222 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

248NYSE Letter I, at 12. 249See Proposing Release, supra note 2, at 13023– 

24. 250See RBC Letter I, at 3; MFS Letter, at 2–3. 251As is the case for any fee or fee change an 

exchange adopts, if an exchange were to propose 

such a fee change it would need to analyze in its 

Form 19b-4 filing how its fee change constitutes an 

‘‘equitable allocation’’ of ‘‘reasonable’’ fees and how 

it is not ‘‘unfairly discriminatory.’’ See 15 U.S.C. 

78s(b)(3)(A)(ii). 

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

253 IEX Letter I, at 7. 

254See Proposing Release, supra note 2, at 13024. 

255See id. at 13024 n.140. 

256See Clark-Joseph Letter, at 2–3. 

257See, e.g., Brandes Letter, at 2; Themis Trading 

Letter I, at 3; CFA Letter, at 7; Clearpool Letter, at 

4; Healthy Markets Letter I, at 33; Decimus Letter, 

at 6 n.22. 

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

Fee Cap.’’ 248 As discussed above, the 

no-rebate Test Group, including the 

Linked Pricing prohibition, is not based 

exclusively on the Rule 610(c) fee cap. 

The Commission continues to believe 

that prohibiting Linked Pricing supports 

the objective of the no-rebate Test 

Group, which is to gather data on the 

impact of creating an environment 

where fee levels are not potentially 

distorted by the rebates they subsidize 

and rebates do not influence routing, 

particularly for customer orders.249 In 

the absence of a Linked Pricing 

prohibition, exchanges could use make 

(take) volume to subsidize take (make) 

activity, which could perpetuate the 

cross-subsidization of fees. For example, 

if an exchange adopts Linked Pricing for 

the no-rebate Test Group securities, it 

might offer a discounted transaction fee 

to remove liquidity only to those market 

participants that post a certain volume 

on the exchange. Perpetuating this 

potential distortion could cloud the 

Pilot results for the no-rebate Test 

Group if the Linked Pricing incentive 

interferes with the Pilot’s ability to 

isolate and analyze the impacts on fees 

and routing that the no-rebate Test 

Group is designed to study. 

Two commenters recommended that 

the Commission also prohibit an 

exchange from offering any inducement, 

including discounts on non-transaction 

fees, such as those for market data, colocation, or connectivity ports, which 

are linked to trading volumes in the norebate Test Group.250 The Commission 

is not expanding the application of the 

Linked Pricing prohibition in the 

manner suggested by these commenters. 

The Pilot, and the no-rebate Test Group 

specifically, is designed to test the 

extent to which transaction fees and 

rebates create conflicts of interest that 

influence order routing or introduce 

distortions that impede execution 

quality and market quality. The Pilot is 

not designed to eliminate or control for 

all potential inducements to transact on 

a particular market and the Commission 

believes that expanding the Pilot to a 

wider array of variables could inhibit 

the Pilot’s ability to isolate the impacts 

of exchange transaction-based rebates 

and the effects they may have.251

Further, two commenters requested 

the Commission to clarify that the 

Linked Pricing prohibition applies 

across Test Groups such that exchanges 

may not tie rebates or transaction fee 

discounts in another Test Group to 

volume in the no-rebate Test Group.252

As previously stated in the Proposal, the 

no-rebate Test Group is designed to 

gather data on the impact of creating an 

environment where fee levels are not 

potentially distorted by rebates and 

rebates do not influence routing. In 

proposing the Linked Pricing 

prohibition, the Commission recognized 

that a Linked Pricing arrangement could 

potentially distort transaction fee 

pricing if fees continue to be set at a 

subsidy level above their natural 

equilibrium, and it also could 

perpetuate the potential conflicts of 

interest associated with rebates and 

order routing. Any Linked Pricing 

incentives offered by exchanges that are 

linked, or otherwise related to, posting 

or removing liquidity in Pilot Securities 

included in the no-rebate Test Group 

would contradict the Commission’s 

intent for the no-rebate Test Group and 

frustrate the ability of the Pilot to 

generate useful data in that group. 

Accordingly, the Linked Pricing 

prohibition in Test Group 2 prohibits 

exchanges from offering any discounts 

or incentives on transaction fees that are 

linked to activity, whether it be posting 

or removing activity, in any securities 

included in Test Group 2, as well as 

prohibits exchanges from offering 

Linked Pricing arrangements in Test 

Group 2 securities that are based on, or 

include, activity in any Pilot Securities. 

In addition, one commenter 

‘‘suggest[ed] that the linked pricing 

prohibition should extend to auction 

fees or any other transaction fees 

charged by the exchange,’’ as ‘‘[c]losing 

auction fees, especially, are a significant 

source of listing market revenue, and 

. . . discounts on these fees could 

likewise lead to the distortions 

described by the Commission (or even 

to increases in auction fees to other 

participants to fund the targeted 

discounts).’’ 253 Because Rule 610T(a)(3) 

prohibits exchanges from providing a 

discount or incentive on transaction 

fees applicable to removing (providing) 

liquidity that is linked to providing 

(removing) liquidity, and auction fees 

are ‘‘transaction fees,’’ the Linked 

Pricing prohibition applies to auction 

fees. Exchanges will not be permitted to 

consider make (take) volume during 

intraday trading when calculating 

auction fees, as such an arrangement 

would perpetuate potential distortions 

associated with fee-and-rebate pricing 

models including the crosssubsidization of fees. 

i. Linked Pricing Market Maker 

Exception 

The Commission proposed an 

exception to the Linked Pricing 

prohibition to permit an exchange to 

adopt new rules to provide non-rebate 

Linked Pricing to its registered market 

makers during the Pilot in consideration 

for the market maker meeting rulesbased market quality metrics.254 The 

Commission explained that to qualify 

for this limited exception, an exchange 

would need to propose market making 

standards in a rule change filing 

submitted pursuant to Section 19(b)(2) 

of the Exchange Act, and also would 

need to propose the fee incentive it 

would provide for meeting those 

standards.255

Several commenters requested further 

clarification about the market maker 

exception to the prohibition on Linked 

Pricing. Specifically, one commenter 

recommended that the Commission 

provide additional detail about the 

types of market quality metrics upon 

which access to Linked Pricing is 

contingent.256 Other commenters 

believed that it is important that any 

such standards adopted by exchanges be 

sufficiently stringent to prevent market 

participants from availing themselves of 

Linked Pricing in a manner that would 

jeopardize the ability of the no-rebate 

Test Group to provide valuable data on 

the impact of the absence of rebates (or 

a rebate-like incentive) on order routing 

behavior, execution quality, and market 

quality or that would permit market 

participants to unfairly exploit this 

aspect of the Pilot.257

The Commission continues to believe 

that permitting exchanges to adopt rules 

to offer Linked Pricing to their 

registered market makers for securities 

in the no-rebate Test Group preserves 

the ability of an exchange to attract 

market makers through non-rebate 

incentives and thereby helps maintain 

the baseline framework in which 

exchanges can provide incentives to 

their registered market makers.258

Commenters highlighted the importance 

of ensuring that any new rules that 

exchanges propose to provide Linked 

Pricing to registered market makers in 

the no-rebate Test Group be designed so 

as to not inhibit the Pilot’s ability to 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5223 

259See id. While it will be up to each individual 

exchange to design market quality metrics for 

offering non-rebate Linked Pricing to their 

registered market makers, such metrics could 

include, for example: (1) Requirements to trade to 

stabilize the market; (2) requirements on 

consecutive price changes and price continuity; (3) 

material time quoting on both sides of the NBBO; 

(4) materially enhanced quoted depth on both sides 

of the NBBO; (5) frequency of setting an improved 

BBO on the exchange; (6) frequency of setting an 

improved NBBO; and (7) compliance with narrow 

maximum quote widths. 

260See Proposing Release, supra note 2, at 13024. 

261See Healthy Markets Letter I, at 19. 

262See id. 263See 17 CFR 242.610(c). Consistent with Rule 

610(c), the Control Group will only cap fees for 

taking (removing) a protected quotation; it will not 

apply to fees for posting liquidity or otherwise cap 

or prohibit rebates. See also Proposing Release, 

supra note 2, at 13024. 

264See Proposing Release, supra note 2, at 13025. 

A ‘‘trade at’’ provision would require that orders be 

routed to a market with the best displayed price or 

be executed at a materially improved price. 

265See e.g., Adorney Letter, at 1; Birch Bay Letter, 

at 1. In addition, in clarifying its position on rebates 

in equity market structure, NYSE stated that it 

could support a prohibition on rebates if ‘‘done in 

a measured manner that creates an offsetting 

incentive to display liquidity, such as a ‘Trade At’ 

provision[ ]’’ which the Pilot does not provide. 

NYSE Letter II, at 5. 

266See, e.g., MFA Letter, at 3; ICI Letter I, at 3; 

BlackRock Letter, at 2; FIA Letter, at 5; SIFMA 

Letter, at 4; Fidelity Letter, at 10; Citadel Letter, at 

6–7; Citi Letter, at 3. 

267See SIFMA Letter, at 4; Citi Letter, at 3. 

268See also infra Section IV.E (discussing tradeat). 

269See, e.g., Clark-Joseph Letter, at 2; Nasdaq 

Letter I, at 13; Cboe Letter I, at 27–28. 

270See Barnard Letter, at 1. Another commenter 

recommended including a Test Group that did not 

cap fees because it believed that the current 

structure encourages exchanges to charge fees for 

data feeds and technology services, which the 

commenter suggests are higher than they otherwise 

would be if transaction fees were not capped. See 

Modern IR Letter, at 3. 

271NMS Adopting Release, supra note 10, at 

37545. 

generate useful data on the impact of 

rebates on order routing behavior, 

execution quality, and market quality. 

The Commission agrees that if they are 

not narrowly tailored, these non-rebate 

incentive programs could continue to 

potentially distort transaction fee 

pricing, particularly if the exchange’s 

fees are set at a subsidy level above the 

natural equilibrium within the current 

regulatory structure to subsidize these 

market maker incentives. 

Rather, the market maker exception to 

Linked Pricing is intended to permit an 

exchange to impose rules for its 

registered market makers in ways that 

would improve its market in a 

meaningful way, such that it could use 

the enhanced liquidity provided by its 

registered market makers to improve its 

displayed quotation and thereby attract 

buyers and sellers to the exchange.259

The non-rebate incentives would only 

apply to trading activity by a registered 

market maker in its capacity as a market 

maker (i.e., acting as principal), and 

would not apply to any customer 

activity or activity from other trading 

desks or business units affiliated with 

the market maker (and possibly using 

the same MPID), be it agency, principal 

or riskless principal trading, traded by 

or through such market maker. 

Accordingly, only a registered market 

maker’s principal trading activity in its 

capacity as a registered market maker in 

the no-rebate Test Group would be able 

to satisfy any market quality metrics, 

and the only trades that would be 

eligible to receive the non-rebate 

incentive pricing would be a registered 

market maker’s principal trades in its 

capacity as a registered market maker in 

the no-rebate Test Group securities. 

8. Control Group 

The Commission proposed that Pilot 

Securities that are not placed in one of 

the Test Groups would be placed in the 

Control Group.260 One commenter 

addressed the Control Group and 

supported the Commission’s proposed 

approach.261 The Commission continues 

to believe that a control group is vital 

to test the effects of fee changes in the 

Test Groups, as a control group subject 

to the current access fee cap would 

provide an appropriate baseline for 

analyzing the effects of the Pilot against 

the status quo.262 For these reasons and 

the reasons discussed in the Proposing 

Release, the Commission is adopting the 

Control Group as proposed, which will 

be subject to the current Rule 610(c) 

access fee cap.263

9. Alternative Designs 

a. Include a Trade-At Requirement 

In the Proposing Release, the 

Commission asked whether the Pilot 

should include a ‘‘trade-at’’ provision 

that would restrict price matching of 

protected quotations.264 Several 

commenters supported including a 

trade-at requirement because they 

believed doing so would increase the 

amount of liquidity available on 

exchanges and thereby further price 

discovery.265

In contrast, other commenters 

opposed including a trade-at 

requirement as they believed doing so 

would increase the Pilot’s complexity; 

impact the ability of the data to assess 

the impact of transaction fees and 

rebates on order routing, execution 

quality, and market quality; be 

inconsistent with, or unnecessary for, a 

study of the issues pertinent to the Pilot; 

and be anti-competitive.266 In addition, 

two commenters noted that a trade-at 

requirement would not be necessary 

because the reduction in the fee cap 

ultimately could result in more volume 

being executed on exchanges.267

The Commission believes that adding 

a trade-at requirement would 

unnecessarily complicate the Pilot in a 

manner that would increase costs on 

market participants and potentially 

impact the ability of the Pilot to isolate 

the effects of changes in exchange 

transaction fees and rebates. 

Accordingly, the Commission is not 

including a trade-at requirement in the 

Pilot. If the Pilot were to also assess the 

impact of a trade-at requirement, it 

would need to increase the number of 

Test Groups, thereby increasing the 

number of securities included in the 

Pilot, to be able to isolate the effects of 

a trade-at requirement separately from 

the effects of changes in exchange 

transaction fees and rebates. The 

Commission believes any potential 

benefits from analyzing the impact of a 

trade-at requirement do not justify the 

additional costs that expanding the Pilot 

would impose. Rather than introduce 

another variable into the Pilot, the 

Commission believes that the Pilot 

should remain focused on permitting an 

analysis, in the context of our current 

market structure, of the effect of 

exchange transaction fees and rebates. 

Further, the Commission notes that the 

Tick Size Pilot featured a trade-at test 

group, so as that pilot’s post-pilot period 

concludes, the Commission will have 

access to current data to analyze the 

impact of a trade-at prohibition in the 

context of that pilot.268

b. No Fee Cap Test Group 

Several commenters advocated for 

including a Test Group that does not 

cap transaction fees, believing that it is 

important to test whether competition 

alone can constrain pricing and result in 

a natural equilibrium transaction fee.269

One commenter noted that currently 

fees tend to ‘‘cluster’’ at the access fee 

cap imposed by Rule 610(c) and as such 

recommended including an additional 

Test Group that does not cap fees.270

When it adopted Rule 610(c), the 

Commission explained that the access 

fee cap is necessary to, among other 

things, inhibit the ability of exchanges 

to take advantage of the Order 

Protection Rule by acting as a ‘‘toll 

booth’’ between price levels and ensure 

that quotations are fair and useful by 

limiting the ability of high fees to distort 

the price of displayed limit orders.271

The Commission believes that the norebate Test Group will permit analysis 

of the impact of competitive forces on 

fees in the absence of current practices 

5224 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

272See, e.g., Goldman Sachs Letter, at 2 

(characterizing $0.0030 as an ‘‘outdated 

benchmark’’ that ‘‘is too high and far from 

representative of true prices in the marketplace’’). 

273The Commission notes that the Proposal 

included a question regarding whether a fee cap 

would continue to be necessary to constrain 

exchange pricing if equilibrium pricing is achieved 

and the Commission expects that some market 

participants may analyze the Pilot results for 

answers to this question. See Proposing Release, 

supra note 2, at 13025. 

274See Clearpool Letter, at 3; Cboe Letter II, at 8– 

9. Another commenter also stated that it thought it 

was ‘‘a worthwhile exercise to explore the 

possibility of a move to basis points. . . . ’’ See Citi 

Letter, at 6. 

275See Clearpool Letter, at 3. 

276See Nasdaq Letter I, at 13; TD Ameritrade 

Letter, at 6; Angel Letter II, at 2; Cboe Letter II, at 

8. 

277See TD Ameritrade Letter, at 6. 

278See Angel Letter II, at 2. See also Cboe Letter 

II, at 8. 

279See Morgan Stanley Letter, at 3. 

280See supra note 200 and accompanying text. 

281See id. 

282See Transcript of the Division of Trading and 

Markets’ Roundtable on Market Structure for 

Thinly-Traded Securities (April 23, 2018), available 

at https://www.sec.gov/spotlight/equity-marketstructure-roundtables/thinly-traded-securitiesrountable-042318-transcript.txt. 

283See Proposing Release, supra note 2, at 13025. 

284See SIFMA Letter, at 4; JPMorgan Letter, at 3; 

Schwab Letter, at 3 (also stating that eliminating 

Rule 611 for certain Pilot Securities ‘‘would 

significantly negatively impact retail order flow and 

the quality of trade execution’’). 

285See T. Rowe Price Letter, at 2–4. 

286See id. at 4. 

that use fees to subsidize those rebates. 

Specifically, to the extent exchanges 

will no longer need to charge access fees 

up to $0.0030 to subsidize rebates in 

that Test Group, the Commission 

believes that competitive forces among 

the exchanges may result in fees 

approaching a new equilibrium level, 

within the current regulatory structure, 

for stocks in the no-rebate Test 

Group.272

The Commission notes that the order 

protection requirements of 17 CFR 

242.611 (Rule 611) will continue to 

apply to all of the Pilot Securities 

including those in the no-rebate Test 

Group. As such, the basis for imposing 

a fee cap (summarized above) remains 

intact during the Pilot and the 

Commission believes that applying the 

current fee cap to the no-rebate Test 

Group will guard against the possibility, 

albeit highly unlikely, that an outlier 

exchange could seek to charge 

exorbitant fees for the no-rebate Test 

Group stocks that would be inconsistent 

with the rationale behind the Rule 

610(c) fee cap.273

c. Basis Point Pricing 

Two commenters recommended that, 

because stock prices have increased 

(i.e., a number of high profile stocks 

currently trade above $100 per share), 

using basis point pricing may be a better 

reference point than using the current 

access fee cap because the current 

access fee cap can impact stocks 

differently based on their price.274

Specifically, one of these commenters 

proposed that ‘‘Test Group 1 contain the 

same constraints as Test Group 3 but 

with an access fee limitation expressed 

in basis points.’’ 275 However, the 

Commission believes that doing so 

would increase the Pilot’s complexity 

and could interfere with the Pilot’s 

ability to provide useful data to assess 

the impact of the current exchange fee 

models on order routing behavior, 

execution quality, and market quality 

because exchange transaction fees and 

rebates are currently not assessed in 

basis points and thus this would 

introduce a new variable into the Test 

Group as it could raise or lower the fees 

depending on a stock’s share price, 

which can vary over time. The more 

variables that are introduced, the more 

difficult it could be to isolate the effects 

of a particular change and uncover 

causal connections. Accordingly, the 

Commission is not adopting a 

requirement that one of the Test Groups 

include an access fee cap expressed in 

basis points. 

d. Higher Fee Caps and Fees Based on 

Tick Size 

Four commenters addressed a 

question in the Proposing Release about 

including a Test Group that would 

allow for access fees higher than the 

current cap under Rule 610(c).276 One of 

these commenters specifically 

recommended reducing access fees to 

$0.0005 per share for the most liquid 

securities, while imposing gradually 

higher access fees for stocks of lower 

liquidity, up to a cap of potentially 

$0.0050 for the least liquid securities.277

Another commenter recommended 

including an additional Test Group with 

an access fee cap of $0.0040, believing 

this would provide data to test whether 

an increase in the fee cap reduces bidask spreads in light of the many 

comments contending that spreads will 

increase in conjunction with lower 

rebates connected to a reduced access 

fee cap.278 In addition, one commenter 

suggested that if tick sizes were set 

based on the characteristics of an 

individual stock, the transaction fee cap 

could then be a particular percentage of 

the tick size.279 Such an approach could 

result in an access fee cap above 

$0.0030 per share for certain securities. 

The Commission has carefully 

considered these suggestions. As 

discussed above, other commenters 

have noted that the current access fee 

cap was set thirteen years ago when 

markets and technology were markedly 

different.280 Indeed, a few commenters 

argued it was outdated and too high.281

Accordingly, the Commission does not 

believe that raising the access fee cap to 

levels that are above what trading 

centers were charging thirteen years ago 

necessarily is consistent with the 

technological efficiencies that have been 

realized in the intervening years. While 

market-based solutions and even 

regulatory responses to enhance the 

investor experience with trading in 

thinly-traded securities are worthy of 

attention, and were the subject of a 

recent Division of Trading and Markets 

staff roundtable, the Commission does 

not believe that the Pilot should 

introduce the potential for higher 

rebates—and the further exacerbated 

distortions that would likely accompany 

them—when it is attempting to study 

the effect of the current exchange fee 

models and fee and rebate levels.282

Accordingly, the Commission is not 

adopting a higher fee cap in any of the 

Pilot’s Test Groups. 

e. Order Protection Rule 

The Commission solicited comment 

on whether it would be appropriate to 

suspend the Rule 611 order protection 

requirements in one or more Test 

Groups.283 In response, three 

commenters opposed eliminating the 

order protection requirements within 

the Pilot because doing so would 

increase the cost and complexity of the 

Pilot, and also could complicate 

analysis of the Pilot’s results to the 

extent it clouded the focus on 

transaction fees and rebates.284

In contrast, one commenter 

recommended eliminating the order 

protection requirements for securities in 

the no-rebate Test Group.285 This 

commenter stated that prohibiting 

rebates is insufficient to ‘‘remove the 

perceived or real conflicts on broker 

routing or materially address’’ various 

negative effects that the commenter 

believed Rule 611 has had on the 

equities markets.286

After considering the comments 

received, the Commission believes that 

the Pilot should not introduce 

additional variables by, in this case, 

removing the Rule 611 protected 

quotation status for automated 

quotations in any particular Test Group. 

In order to add a new variable to the 

Pilot, the Commission would need to 

include additional Test Groups and 

increase the number of securities in 

order to be able to isolate separately the 

effects of each variable that is included 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5225 

287Pragma Letter, at 4. See also Proposing 

Release, supra note 2, at 13025. 

288See Clearpool Letter, at 3–4. 

289See Birch Bay Letter, at 2. 

290Morgan Stanley Letter, at 2. 

291 Id. 

292 Id. 

293See Goldman Sachs Letter, at 1–4. 

294 Id. at 1. 

295 Id. 

in the Pilot or else it would create an 

asymmetric Pilot that would make it 

more difficult to evaluate the data and 

establish causal inferences regarding the 

impacts of changes to exchange 

transaction fees and rebates. As 

discussed above, most commenters were 

critical of the Pilot’s proposed size. The 

Commission desires to have a narrowly 

tailored pilot focused on generating 

useful data on the impact of exchange 

fees and rebates on order routing 

behavior, execution quality, and market 

quality. Adding another variable to the 

Pilot would increase the Pilot’s 

complexity as well as costs of the Pilot. 

f. Other Ideas for Additional Test 

Groups and Related Questions 

In addition to the above questions, the 

Commission asked a number of other 

questions in the Proposing Release to 

solicit commenters’ opinions on equities 

market structure issues and whether the 

Pilot should be used as a vehicle to 

further investigate other related areas. 

The Commission received a few 

comments on these points. For example, 

in response to a question about whether 

commenters believe the minimum 

trading increment should be reduced for 

the most actively traded NMS stocks if 

the Pilot’s data suggests that rebates do 

not significantly improve market quality 

or execution quality for these securities, 

one commenter stated it ‘‘would 

strongly support inclusion of a halfpenny spread bucket, or consideration 

of a separate small-tick pilot for highly 

liquid stocks.’’ 287

Another commenter recommended 

that the Pilot test a prohibition on 

‘‘tiered pricing,’’ whereby exchanges 

offer lower per share fees or greater per 

share rebates to market participants that 

transact in greater volumes, believing 

that absent such a prohibition, 

exchanges would continue to offer these 

incentives, which would serve ‘‘to 

potentially work around the prohibition 

on offering rebates.’’ 288

Further, one commenter suggested 

adding a new Test Group ‘‘to test an 

anti-fragmentation policy,’’ in which 

‘‘the order that sets the SIP NBBO 

receives the execution in all 

circumstances (e.g., bypassing hidden 

orders). ’’289

The Commission appreciates all of 

these recommendations. After 

considering these comments, as well as 

other comments opposed to including 

more NMS stocks in the Pilot, the 

Commission believes that the Pilot 

should not introduce additional 

variables. In order to add a new variable 

to the Pilot, the Commission would 

need to include additional Test Groups 

and materially increase the number of 

securities (or materially increase the 

Pilot’s duration) to be able to isolate 

separately the effects of each variable 

that is included in the Pilot. Otherwise, 

adding variables would create an 

asymmetric Pilot that would make it 

more difficult to evaluate the data and 

establish causal inferences regarding the 

impacts of changes to exchange 

transaction fees and rebates. As 

discussed above, most commenters were 

critical of the Pilot’s proposed size and 

the Commission similarly desires to 

have a narrowly tailored pilot focused 

on generating useful data on the impact 

of exchange fees and rebates on order 

routing behavior, execution quality, and 

market quality. Adding another variable 

to the Pilot would increase the Pilot’s 

size, complexity, and costs. 

g. Gradual Reduction of Current Fee Cap 

Across All Stocks 

One commenter suggested that, rather 

than conducting the Pilot, the 

Commission should instead consider 

imposing a ‘‘gradual reduction of the 

current fee cap across all stocks 

periodically.’’ 290 The commenter stated 

that this approach would facilitate data 

collection and an opportunity ‘‘to 

observe order routing behavior changes, 

while applying the same economics to 

all stocks uniformly.’’ 291 Furthermore, 

the commenter stated that if a control 

group was necessary in this scenario 

‘‘for comparison purposes’’ it would 

recommend placing 50% of stocks in 

the control group and the other 50% in 

the Test Group subject to the gradual 

reductions in access fees.292

The Commission has considered this 

alternative but believes that the Pilot is 

a preferable approach because it will 

permit researchers to conduct 

differences-in-differences analysis over 

a much shorter time frame. By 

establishing stratified treatment groups 

and simultaneously testing different 

changes in the same variable, the Pilot 

will reduce the impact of events 

(economic, natural, political, etc.) across 

time and thereby is more conducive to 

an apples-to-apples comparison of the 

various treatment groups to one another. 

Pursuing a simultaneous and linear 

gradual reduction, such as that 

proposed by the commenter, could 

require greatly extending the Pilot’s 

duration depending on the number of 

fee cap levels to be tested. More 

importantly, this proposed alternative 

would not provide the Commission with 

the opportunity to directly observe the 

impact of rebates on order routing 

behavior, execution quality, and market 

quality because it would not necessarily 

include a prohibition on rebates and 

therefore having a no-rebate bucket will 

be substantially more informative. 

Lastly, as the Commission believes that 

a Control Group is necessary to ensure 

the usefulness of the Pilot’s data, 

pursuing the proposed structure would 

impact more NMS stocks than the Pilot 

(as 50% of stocks would be included in 

the Test Group and 50% in the control 

group). 

h. $0.0010 Access Fee 

One commenter recommended that 

rather than pursuing the Pilot, the 

Commission should instead amend Rule 

610(c) to reduce the access fee cap to 

$0.0010 and also ‘‘conduct an 

abbreviated study of the effects of 

eliminating rebates similar to the 

criteria of Pilot Test Group Three.’’ 293

This commenter stated that ‘‘there is 

broad recognition’’ that the access fee 

cap should be reduced and the Pilot will 

‘‘be lengthy, complex and costly’’ but 

‘‘will not yield a different 

conclusion.’’ 294 The commenter stated 

that reducing the access fee cap to 

$0.0010 would be calibrated with 

present-day trading and execution costs, 

would better ensure displayed prices 

reflect the actual economic costs of an 

execution, and would allow exchanges 

to continue maintain their current net 

capture rates, while also choosing to 

offer rebates to incentivize liquidity 

provision if they chose to do so.295

The Commission believes that its 

revised Pilot design responds to this 

commenter’s core recommendation, 

though the Commission is instituting a 

$0.0010 fee cap as part of the Pilot and 

not as an amendment to Rule 610(c). 

The Commission continues to believe 

that a Pilot is necessary to provide data 

to objectively evaluate the effect of 

exchange fees and rebates. Ultimately, 

the Pilot will enable a data-driven 

analysis of the impact of transaction fees 

and rebates on order routing behavior, 

execution quality, and market quality, 

which will serve as a valuable precursor 

to the Commission’s consideration of 

future policy making in this area. 

10. Metrics To Assess the Pilot 

A number of commenters 

recommended that the Commission 

5226 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

296See, e.g., State Street Letter, at 2; Fidelity 

Letter, at 3–4; Capital Group Letter, at 4; ICI Letter 

I, at 5; OMERS Letter, at 2; MFS Letter, at 2; Virtu 

Letter, at 8; FIA Letter, at 2; SIFMA Letter, at 2– 

3, 5; TD Ameritrade Letter, at 2; STANY Letter, at 

3; Morgan Stanley Letter, at 3; Cboe Letter I, at 29; 

Nasdaq Letter I, at 7; NYSE Letter, at 2; Pragma 

Letter, at 2; ModernNetworks Letter; Healthy 

Markets Letter I, at 35. 

297See, e.g., State Street Letter, at 2–3; Fidelity 

Letter, at 8; Vanguard Letter, at 3; ICI Letter I, at 

5; T. Rowe Price Letter, at 4; MFS Letter, at 2; 

BlackRock Letter, at 2–3; SIFMA Letter, at 5–6; 

Morgan Stanley Letter, at 3; Spatt Letter, at 5; Cboe 

Letter I, at 29; IEX Letter I, at 2; Pragma Letter, at 

2–3. 

298See SIFMA Letter, at 3. Another commenter 

requested that the Commission clarify the role it 

expects the Division of Economic and Risk Analysis 

to play in analyzing the Pilot’s data and provide an 

anticipated timeline for the issuance of a report on 

the Pilot data. See IEX Letter I, at 2. 

299See Fidelity Letter, at 3, 8; MFS Letter, at 2. 

300See Virtu Letter, at 8. 

301For example, institutional firms could study 

their ability to capture the spread when passively 

posting, and how that is impacted within the Pilot’s 

treatment groups. 

302The Commission encourages market 

participants to disclose what sources of data they 

used for their analyses and describe the 

methodology they used, and to make those reports 

publicly and freely available. 303For example, the Pilot’s order routing datasets 

will collect aggregated data, not individual orderby-order level data, and reflects the ‘‘child’’ orders 

that are processed by an exchange. Thus, the order 

routing dataset will not capture the entire lifecycle 

of a ‘‘parent’’ order from its inception through to 

execution. Accordingly, the Pilot’s order routing 

datasets will not by themselves permit analyses on 

an order-by-order basis, and will therefore be 

unable to assess the execution quality of orders at 

the ‘‘parent’’ level. If market participants and other 

interested parties conduct parent order-level 

analyses and make their findings public, then the 

Commission would be able to consider them as it 

assesses the Pilot’s ultimate impact on order routing 

behavior, execution quality, and market quality. 

See, e.g., T. Rowe Price Letter, at 4 (recommending 

that the Commission view analyses of the Pilot 

conducted by registered investment advisers as a 

‘‘key input’’). 

304As noted in the Proposal, the Pilot is designed 

to produce an exogenous shock that simultaneously 

creates distinct fee environments, each of which 

restricts transaction-based fees or rebates 

differently, enabling synchronized comparisons to 

the current environment for purposes of inferring 

the existence of causal relationships. See Proposing 

Release, supra note 2, at 13047 and 53. An 

exogenous shock to a system occurs when an 

element of the system is changed from without the 

system. (i.e., the change or shock is not under the 

control or influence of those within the system) but 

can induce endogenous (i.e., within the system) 

responses. In the Pilot’s context, the exogenous 

shock takes the form of a reduction of the maximum 

permissible transaction fees and a prohibition on 

rebates and Linked Pricing on all U.S. equities 

exchanges. See infra Section IV. 

305See infra Section IV.B.1. 

306For example, a result that shows no impact on 

liquidity for a Test Group may still be relevant to 

the Commission’s consideration of the effects of 

transaction fee-and-rebate pricing models on order 

routing behavior, execution quality, and market 

quality and whether the existing exchange 

transaction-based fee and rebate structure continues 

to further the statutory goals. 

more clearly articulate what it believes 

would constitute a ‘‘successful’’ Pilot 

and how it will judge whether the Pilot 

achieves that measure of success.296

Several of these commenters suggested 

specific metrics or criteria they thought 

the Commission should analyze when 

evaluating the impact of the Pilot, many 

of which were measurement criteria 

suggested by EMSAC.297 One 

commenter suggested that the 

Commission provide guidance about 

how its staff will be evaluating the 

metrics used to determine whether to 

recommend market structure changes to 

the Commission following the Pilot.298

In addition, two commenters suggested 

the Commission designate an 

independent third party to conduct an 

analysis of the Pilot data upon the 

Pilot’s completion.299 Another 

commenter stated that the ‘‘industry 

should be afforded the opportunity to 

comment’’ on the metrics and criteria 

used to evaluate the Pilot.300

In response to these comments, the 

Commission emphasizes that its staff 

will likely not be the sole entity 

analyzing data related to the Pilot. As 

was the case for the recent Tick Size 

Pilot, the Commission believes that 

market participants will publish their 

own analyses of the Pilot using data that 

is uniquely available to them and the 

metrics that they believe are most useful 

or relevant, and encourages market 

participants to do so.301 To the extent 

that interested parties prepare their own 

analyses, they may submit them to 

tradingandmarkets@sec.gov with the 

words ‘‘Transaction Fee Pilot Analysis’’ 

in the subject line, and the Commission 

will post those reports on its public 

website.302

The Commission encourages market 

participants to make public any analysis 

they perform on their own trading 

activity, such as non-proprietary 

transaction cost analysis (‘‘TCA’’), so 

that it may be publicly reviewed and 

used to help inform the public dialogue 

concerning the effect of exchange fees 

and rebates.303 To the extent that 

independent analyses are made public, 

they can contribute to the Commission’s 

consideration of any future regulatory 

action in this area. 

Given the valuable input of 

independent analysis, the Commission 

believes that the success or failure of the 

Pilot will be determined by whether it 

produces an exogenous shock that 

generates measurable responses capable 

of providing insight into the effects of 

fees and rebates on the markets and 

market participant behavior.304 In the 

absence of a Commission Pilot that 

effects change across all equities 

exchanges in a coordinated manner, 

researchers would be unable to collect 

meaningful, comparative data to test the 

effects of such changes and perform 

those analyses.305

Success or failure of the Pilot is thus 

independent of the outcome of the Pilot. 

For example, a Pilot that shows, with 

statistical significance, that rebates 

narrow the quoted spread in thinlytraded stocks would be equally 

‘‘successful’’ as a Pilot that shows that 

rebates do not narrow the spread in 

such stocks. In this sense, the ‘‘success’’ 

of the Pilot is that it created the 

conditions that permit measurement 

and analysis of that issue in a manner 

that helps resolve speculative 

assumptions among the commenters 

about the impact of fees and rebates. 

Furthermore, it is worth noting that 

the data collected pursuant to Rule 610T 

is only part of what researchers will 

need to conduct analysis of the impact 

of exchange fees and rebates on the 

markets. For example, the Pilot’s order 

routing datasets contain data to help 

assess order routing and certain aspects 

of execution quality, but will not 

contain any data on exchange 

quotations, which is available from 

existing sources. Consequently, 

researchers will need to use existing 

data sources to assess the impact of the 

Pilot on exchange quoting activity and 

market quality. As such, to the extent 

that the Pilot data produces null results, 

for example the Pilot’s order routing 

datasets do not show any change in 

liquidity during the Pilot, the 

Commission believes that independent 

analysis from market participants, 

looking at order-level data, may 

nevertheless detect an impact. Even if 

the Pilot produces a null result for some 

metrics, and third-party analysis is not 

publicly available or does not find an 

impact, the Commission nevertheless 

believes the Pilot would still be useful 

to inform future policymaking that is 

intended to benefit investors.306

In response to commenters’ requests 

for additional insight into the types of 

questions that the Commission hopes 

the Pilot will be able to answer, the 

Commission believes that the order 

routing datasets, as well as other data 

that is already readily accessible to 

researchers, should facilitate analysis of 

the impact of the Pilot through a broad 

spectrum of metrics. In particular, the 

Commission will consider, and 

encourages others to consider, the 

following questions in contemplating 

the impact of changes to fees and 

rebates across the exchanges. These 

questions include, but are not limited 

to: 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5227 

307See, e.g., IEX Letter I, at 1; Joint Pension Plan 

Letter, at 2; Better Markets Letter, at 3; Brandes 

Letter, at 2; Clearpool Letter, at 7. 

308See, e.g., RBC Letter I, at 4; T. Rowe Price 

Letter, at 4; Citi Letter, at 2. 

309See, e.g., Nasdaq Letter I, at 1, 3 (‘‘[A] 

transaction fee experiment is inappropriate at this 

time because there are alternatives and 

prerequisites the Commission must further 

evaluate.’’); NYSE Letter I, at 17–19 (stating that the 

Commission should consider ‘‘less costly and more 

effective alternatives’’ to the Pilot); Cboe Letter I, at 

12, 22, 27 (recommending that the Commission 

undertake a ‘‘holistic examination of the entire 

equities market framework’’ including 

consideration of ‘‘possible changes to the Order 

Protection Rule [and] the Minimum Tick Increment 

Rule,’’ ‘‘[s]trengthening and [a]rticulating the Duty 

of Best Execution,’’ providing ‘‘greater broker-dealer 

transparency,’’ and adopting amendments to 

Regulation ATS). 

310See, e.g., Nasdaq Letter I, at 1, 3; NYSE Letter, 

at 17–18; Cboe Letter I, at 12, 22, 27, Fidelity Letter, 

at 4. See also Securities Exchange Act Release Nos. 

83663 (July 18, 2018), 83 FR 38768 (August 7, 2018) 

(‘‘Regulation ATS–N’’) and 34528 (November 2, 

2018), 83 FR 58338 (November 19, 2018) 

(‘‘Amendments to Order Handling Disclosure’’). 

311 ICI Letter I, at 5–6, 6 n.12; ICI Letter II, at 3. 

See also, e.g., RBC Letter I, at 4; Citi Letter, at 2; 

Citadel Letter, at 3, 7 (stating that ‘‘it is important 

to first finalize and implement . . . Rule 606 

enhancements before implementing the Pilot’’ to 

‘‘safeguard the integrity of the Pilot by ensuring that 

any changes to broker-dealer order routing practices 

that result from the increased transparency 

mandated by amended Rule 606 are isolated from 

any similar changes that result from the design of 

the Pilot’’); Spatt Letter, at 4 (stating that the ‘‘the 

enhanced disclosures proposed would strengthen 

the potential causal inference that the response to 

[the Pilot] would allow’’). Some commenters 

questioned whether the Pilot should proceed, 

because they believed that the adoption of 

Regulation ATS–N and the Amendments to Order 

Handling Disclosure will ‘‘impact the very potential 

conflicts of interest the Commission aims to study 

. . . .’’ Nasdaq Letter II, at 2–4; see also NYSE 

Letter IV, at 2–3. As noted in this section, the scope 

of the Pilot is broader than just conflicts of interest. 

Therefore, those initiatives, or the impact they may 

have on order routing behavior, would not provide 

sufficient data to evaluate the effects of transaction 

fees and rebates on market quality and execution 

quality. See infra Section IV.B.1. 

312Nasdaq Letter I, at 1–2, 4; Nasdaq Letter II, at 

2–4 (suggesting that the adoption of these 

regulations ‘‘further reduce[d] the already weak 

need for the [Pilot]’’). See also, e.g., STANY Letter, 

at 2; ASA Letter, at 5–6; Era Letter, at 1. But cf. 

Verret Letter I, at 4 (stating that the ‘‘collection of 

data from broker-dealers’’ or the use of ‘‘existing 

data contained in [OATS]’’ were not ‘‘feasible 

alternatives,’’ because a ‘‘randomized trial is far 

superior for the purpose of generating robust 

statistical analysis to inform subsequent 

rulemaking’’); Proposing Release, supra note 2, at 

13046–47 (outlining the limitations of existing data 

sources). 

313See, e.g., STANY Letter, at 2; FIA Letter, at 3; 

Grasso Letter, at 2. But cf. ICI Letter II, at 3 (noting 

that disclosure-based rulemakings ‘‘will not directly 

reduce the potential for exchange transaction 

pricing models to create conflicts of interest for 

broker dealers, nor will they provide data that 

would allow an institutional investor to measure 

the impact of fee avoidance on routing decisions’’); 

Luminex Letter, at 1; Spatt Letter, at 4; IEX Letter 

II, at 9. 

1. To what extent do access fees and 

rebates impact routing decisions for 

liquidity-taking orders? Are orders to take 

liquidity more likely to be routed to an 

exchange (compared to an off-exchange 

venue or ATS) in a lower access fee 

environment than they are currently? To 

what extent are impacts or changes in routing 

decisions driven by potential conflicts of 

interest created by transaction fees and 

rebates rather than other factors such as fill 

rates and execution quality? 

2. To what extent do access fees and 

rebates impact routing decisions for 

liquidity-supplying orders? Are orders to 

provide liquidity less likely to be routed to 

an exchange (compared to an off-exchange 

venue or ATS) in a lower rebate environment 

than they are currently? To what extent do 

impacts or changes in order routing appear 

to be driven by potential conflicts of interest 

caused by rebates rather than other factors 

such as execution quality (e.g., fill-rates, time 

to fill, capturing the quoted spread, adverse 

selection, or reversion)? 

3. What impact does a reduction or 

elimination in rebates have on the NBBO, 

including spread width and the depth of 

interest displayed at the NBBO? To what 

extent does a potential decrease in depth of 

interest at the NBBO result in lower fill rates 

or smaller fill sizes for investor orders? Are 

natural investors better able to obtain queue 

priority in exchange order books, and are 

they more frequently able to capture the 

quoted spread when posting passively (e.g., 

buy on the bid and sell on the offer)? 

4. Are there common characteristics for 

securities (e.g., average daily trading volume, 

price, or market capitalization) where a 

reduction or elimination of rebates begins to 

impact quoted spread? If so, what are those 

common characteristics and at what level do 

reduced rebates begin to have an impact on 

quoted spread? To what extent does a change 

in quoted spread affect transaction costs for 

investor orders? If quoted spread widens in 

a security, to what extent is the potential 

spread cost offset by the reduction in the 

transaction fees paid, or a change in the 

ability to capture the quoted spread? 

5. Are there common characteristics for 

securities where a reduction or elimination of 

rebates does not impact quoted spread? If so, 

what are those common characteristics (e.g., 

average daily trading volume, price, or 

market capitalization)? 

6. Are there common characteristics for 

securities (e.g., average daily trading volume, 

price, or market capitalization) where a 

reduction or elimination of rebates begins to 

impact effective spread? 

7. How can we best understand the effects 

of rebates provided on inverted venues 

(where rebates are paid to takers of 

liquidity)? 

8. What impact do lower access fees and 

rebates have on the amount of displayed and 

non-displayed liquidity on exchanges? 

9. In the absence of rebates, do competition 

and market forces operate to produce a 

market equilibrium (within the current 

regulatory structure) that constrains 

transaction fees to levels at or below today’s 

current access fee cap? What do such market 

forces, and any resultant equilibrium pricing, 

tell us about the need to impose a cap on 

access fees? Does the Pilot provide any data 

that suggests, in the absence of rebates, an 

access fee cap would still be necessary as 

long as Rule 611 of Regulation NMS 

continues to impose order protection 

requirements on exchanges with protected 

quotes? 

10. What is the impact of a lower fee cap 

on trading volumes on each exchange? What 

is the impact of a lower fee cap on other 

measures of liquidity on each exchange? How 

should we understand the difference between 

volume and liquidity? 

11. What is the impact of lower rebates on 

the ability of smaller exchanges to attract 

liquidity-supplying orders? 

By providing a mechanism that is 

uniquely capable of facilitating an 

empirical review of these and similar 

questions, the Pilot is an essential tool 

that can further the understanding of an 

important component of equities market 

structure. While other market structure 

issues also might benefit from a pilot, 

exchange transaction fees currently are 

a prime focus for empirical study, as 

evidenced by, among other things, the 

EMSAC’s recommendation to the 

Commission and the number and nature 

of comments the Commission received 

on its proposal. Ultimately, the 

Commission desires to use the Pilot’s 

results to help assess whether (and, if 

so, in which types of NMS stocks) 

rebates have a positive impact on 

execution and market quality, or 

whether they have no or little effect or 

a negative effect. 

D. Timing and Duration 

1. Disclosure Initiatives and the Pilot 

While a number of commenters urged 

the Commission to proceed 

expeditiously with its proposed pilot,307

other commenters believed the 

Commission should pursue different 

market structure initiatives before 

conducting the Pilot 308 or in lieu of the 

Pilot.309 The Commission has adopted 

two of the market structure initiatives 

identified by commenters—namely, 

proposals to enhance the operational 

transparency of ATSs and to enhance 

disclosure of order routing behavior.310

While some commenters believed that 

the information and data from those 

new rules would complement the Pilot 

and ‘‘improve understanding of pilot 

data,’’ 311 others believed the new rules 

would instead allow the Commission to 

determine ‘‘whether a problem exists 

without risking the potential negative 

impact of a pilot’’ 312 or thought that 

potential conflicts of interest in order 

routing behavior would be better 

addressed through increased 

transparency and disclosure than by the 

Pilot.313 The Commission disagrees. 

Comments urging the Commission to 

pursue disclosure-based initiatives 

focused only on one narrow aspect of 

5228 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

314See, e.g., Nasdaq Letter I, at 3–4; Fidelity 

Letter, at 6; Cboe Letter I, at 21–22. 

315See Cboe Letter I, at 12; FIA Letter, at 3; 

Nasdaq Letter I, at 4. 

316See, e.g., IEX Letter II, at 9; Better Markets 

Letter, at 3; Brandes Letter, at 2; AJO Letter, at 2; 

OMERS Letter, at 3; Clearpool Letter, at 7. Some of 

these commenters suggested that the Pilot should 

proceed in conjunction with action on other market 

structure initiatives. See, e.g., SIFMA Letter, at 1; 

Pragma Letter, at 3–4. 

317See, e.g., Verrett Letter I, at 5; Better Markets 

Letter, at 3. 

318Brandes Letter, at 2. 

319Themis Trading Letter I, at 6. See also ICI 

Letter I, at 3. 

320See Proposing Release, supra note 2, at 13025. 

The Commission notes that the proposed language 

in Rule 610T(c)(a)(ii) has been modified slightly. As 

proposed, Rule 610T(c)(1)(ii) contained the phrase 

‘‘shall continue for up to another year.’’ As adopted, 

the phrase ‘‘shall continue for up to one additional 

year’’ is being substituted for the phrase ‘‘shall 

continue for up to another year’’ to simplify the rule 

text without substantively changing the 

requirement. 

321See, e.g., SIFMA Letter, at 3; AGF Letter, at 2; 

Wellington Letter, at 2. See also RBC Letter I, at 6 

(stating ‘‘a pilot of at least one year and no more 

than two years will ensure that ample data is 

collected over time, that the restrictions of the 

various Pilot Test Groups cannot be evaded by 

delay, and that the Pilot does not exist for a period 

of time beyond which its data would be cumulative 

or of marginal significance relative to data produced 

earlier in the Pilot period’’). 

322See Citi Letter, at 5 (stating that ‘‘[c]ostsensitive firms may be able to more quickly adapt 

to new pricing, while liquidity-based routers may 

need time to collect a new sample set to adjust their 

routing logic,’’ such that ‘‘data in the weeks closer 

to the conclusion of the Pilot may more accurately 

reflect the state of the market and what the 

implications would be if implemented long-term’’). 

One commenter, however, did not believe that 

certain ‘‘broker-dealers, proprietary traders, and 

algorithm vendors’’ would ‘‘incorporate the new 

fees into their routing systems on a timely basis, if 

ever,’’ because according to this commenter, 

‘‘[c]hanges are costly and may prove to be 

ultimately unnecessary if pricing reverts following 

the termination of the pilot study.’’ Larry Harris 

Letter, at 11. 

323 Joint Asset Managers Letter, at 2. See also Joint 

Pension Plan Letter, at 2; Brandes Letter, at 2. 

324See, e.g., SIFMA Letter, at 3; CFA Letter, at 6; 

Fidelity Letter, at 9; IEX Letter I, at 4. 

325See, e.g., Babelfish Letter, at 3; Healthy 

Markets Letter I, at 19. 326See TD Ameritrade, at 5; see also, e.g., 

NorthWestern Letter, at 1. 

327See, e.g., FIA Letter, at 4; STANY Letter, at 3– 

4. 

328Magma Letter, at 3. See also, e.g., Apache 

Letter, at 1; Unitil Letter, at 2. 

329See, e.g., Ethan Allen Letter, at 1; 

ProAssurance Letter, at 2; Knight-Swift Letter, at 2. 

330NYSE Letter I, at 16. 

331See, e.g., Citi Letter, at 5; Babelfish Letter, at 

3. 

332See Proposing Release, supra note 2, at 13071. 

the Pilot—studying the conflicts of 

interest between brokers and their 

customers that are presented when 

exchanges pay rebates. However, such 

an approach does not adequately 

advance the Pilot’s broader purpose— 

obtaining a better understanding of all 

potential impacts from fees and rebates, 

and how fees and rebates may affect 

stocks differently depending on their 

liquidity. 

Similarly, some commenters 

recommended that, either before 

conducting the Pilot or in lieu of the 

Pilot, the Commission should pursue 

other market initiatives such as 

enhancing broker-dealers’ duty of best 

execution 314 or undertaking a ‘‘broader 

review of equity market structure,’’ 

including the consideration of possible 

changes to the Order Protection Rule or 

the Minimum Tick Increment Rule.315

Other commenters disagreed and did 

not believe that the Commission should 

delay the Pilot in order to pursue other 

market structure initiatives.316 For 

example, a few commenters advocated 

proceeding with the Pilot because the 

Pilot may help to inform future policy 

changes in these other areas.317 Other 

commenters characterized the ‘‘holistic 

reform’’ advocated by other commenters 

as ‘‘an elusive goal’’ 318 in light of 

market participants’ competing 

interests—one that has been used to 

‘‘slow down market structure reform for 

the past decade.’’ 319

The Commission believes that there is 

no need to delay proceeding with the 

Pilot in order to pursue other potential 

equity market structure initiatives. The 

Pilot seeks to resolve several equity 

market structure questions that have 

been debated for several years. 

Similarly, the Commission does not 

believe that it needs to complete the 

Pilot before proceeding to consider 

other equity market structure initiatives. 

Other initiatives may implicate equity 

market structure questions that are 

narrower or broader than, or 

independent of, exchange fee models, 

such as considering innovative 

approaches to thinly-traded securities. 

The Commission expects that it will 

continue to evaluate the need for other 

changes to equity market structure 

during the Pilot. 

2. Automatic Sunset at Year One 

The Commission proposed that the 

Pilot have a duration of one year with 

a maximum period of two years. 

Specifically, the proposed Pilot duration 

featured an automatic sunset at the end 

of the first year unless, prior to that 

time, the Commission publishes a notice 

that the Pilot shall continue for up to 

one additional year.320

After careful consideration of the 

comments received, the Commission is 

adopting Rule 610T(c) as proposed. 

Many commenters supported the 

proposed duration of the Pilot.321 For 

example, one commenter asserted that 

‘‘each pricing experiment needs to be in 

place for a sufficient length of time to 

enable the firms to adjust their routing 

logic.’’ 322 Others agreed that the 

proposed duration would reduce the 

‘‘desire to ‘wait out’ the Pilot’’ and 

would avoid ‘‘the incentive to alter 

behavior in order to distort the Pilot’s 

results . . . .’’ 323 Several commenters 

supported the automatic sunset 

provision after one-year.324

A few commenters, however, thought 

the proposed duration was too short and 

that a minimum two-year pilot would be 

necessary.325 Some other commenters 

believed that the necessary data could 

be obtained within a shorter time frame. 

Among commenters advocating for a 

shorter Pilot Period, the recommended 

duration varied and ranged from those 

who felt there would be an ‘‘immediate 

and measurable impact upon 

implementation’’ 326 to those who felt 

the appropriate time frame should be 

modified to an absolute maximum of 

one year.327 One commenter questioned 

whether a ‘‘1–2 year pilot that changes 

fees on 3,000 names’’ was ‘‘really a 

‘pilot’ or in fact a de facto imposition of 

a significant reduction of transaction 

fees[.]’’ 328 Several commenters 

expressed their view that the proposed 

length of the Pilot would ‘‘exacerbate[ ] 

the negative impact upon the affected 

issuers.’’ 329

One commenter took issue with the 

proposed length of the Pilot by 

challenging what it believed to be 

conflicting statements of the 

Commission in its original Proposal. 

According to the commenter, the 

Commission asserted, on the one hand, 

that the ‘‘market quickly reacts to 

changes in (and elimination of) pricing 

changes, but on the other hand, claims 

that the market does not react unless the 

changes are in effect for at least a 

year.’’ 330 The Commission believes both 

of those statements are correct and do 

not conflict. While many market 

participants will react promptly to 

pricing changes, particularly those with 

cost-based routing algorithms, others 

may need additional time to fine tune 

liquidity-based routing algorithms as 

order flow changes in response to fee 

changes.331 More importantly, however, 

the Pilot needs to be long enough to 

discourage any market participant 

inclined to resist adapting its behavior 

to the fee changes.332

A few commenters opposed the oneyear sunset provision, but for a variety 

of different reasons. For example, one 

commenter thought a full two-year pilot 

was necessary, another thought the 

Commission separately has the 

authority to revise or terminate the Pilot 

early and does not need a sunset 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5229 

333See Babelfish Letter, at 3; Healthy Markets 

Letter I, at 19; Cboe Letter I, at 19. 

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

335See Proposing Release, supra note 2, at 13025– 

26. See also Proposed Rule 610T(c). 

336Proposed Rule 610T(d) and (e). See also 

Proposing Release, supra note 2, at 13029, 13032. 

Primary listing exchanges will also be required to 

prepare and publicly post updated Pilot Securities 

Exchange Lists and Pilot Securities Change Lists for 

the duration of the Pilot Period and through the 

post-Pilot Period. Id. at 13027–28. The pre-Pilot 

data is intended to establish a baseline against 

which to assess the effects of the Pilot, while the 

post-Pilot Period is intended to help assess any 

post-Pilot effects following the conclusion of the 

Pilot. 

337See FIF Letter, at 7, 9; Healthy Markets Letter 

I, at 19. 

338See IEX Letter I, at 4; FIA Letter, at 4. 

339See e.g., SIFMA Letter, at 3; Issuer Network 

Letter I, at 4; State Street Letter, at 4; Cboe Letter 

I, at 28. 

340See Citi Letter, at 4; TD Ameritrade Letter, at 

1, 5; Morgan Stanley Letter, at 4; Cboe Letter I, at 

28–29; Vanguard Letter, at 3; STANY Letter, at 4; 

Angel Letter II, at 3. 

341See Schwab Letter, at 2; Cboe Letter I, at 29. 

342See TD Ameritrade Letter, at 5. See also 

Morgan Stanley Letter, at 4; SIFMA Letter, at 3. 

provision, and a third was critical of the 

lack of metrics that would accompany 

the automatic sunset.333

After careful consideration of the 

comments received, the Commission is 

adopting the Pilot’s duration as 

proposed. The Commission believes that 

the Pilot’s duration will provide an 

appropriate balance between providing 

certainty about the maximum duration 

for the Pilot while also allowing 

flexibility to conduct a Pilot for more 

than one year if necessary to collect 

representative data. Further, the Pilot’s 

duration should be long enough to make 

it economically worthwhile for market 

participants to adapt their behavior and 

not ‘‘wait out’’ the Pilot. In addition, in 

light of the number of Pilot Securities 

selected, which were selected to ensure 

sufficient statistical power to allow for 

meaningful analysis, the Pilot’s duration 

will allow for the collection of a robust 

and representative data set over a 

sufficiently long period of time,. The 

Commission considered a shorter time 

period for the Pilot, but is concerned 

that short-term or seasonal events could 

unduly impact the Pilot results and 

therefore data collected over a shorter 

duration may not yield a sufficiently 

representative dataset that would be 

capable of permitting analysis into the 

impact of transaction-based fees and 

rebates and the effects that changes to 

those fees and rebates have on order 

routing behavior, execution quality, and 

market quality. For example, a shorter 

pilot period could be impacted by 

seasonal idiosyncrasies, macroeconomic 

factors, or even weather events. 

Further, the Commission recognizes 

that some market participants, for 

example, broker-dealers whose 

liquidity-focused routing strategies are 

based on, and continually updated 

based on, several weeks’ worth of data, 

will need time to fine tune their revised 

routing strategies. While some market 

participants may adjust quickly, others, 

like proprietary trading market 

participants, may wait to see how other 

market participants react before refining 

their own routing strategies.334 In other 

words, it could take a few months before 

some market participants finish 

calibrating their routing strategies to the 

fees and rebates that the exchanges 

adopt consistent with the Pilot’s 

requirements and adjust them as trading 

dynamics settle in response to those 

changes. The exchanges also could take 

a number of weeks to settle on new fee 

models as they see how other exchanges 

modify their fee models to comply with 

the Pilot’s requirements and then 

respond accordingly, which could 

further delay the time it takes for brokerdealers to adjust their routing and 

trading algorithms. Accounting for all of 

this, the Commission intends that the 

proposed duration of the Pilot be long 

enough to encourage wide participation 

by all market participants (and 

discourage ‘‘waiting out’’ the Pilot) and 

thereby help ensure that the Pilot 

produces results that are more reliable, 

robust, and useful. 

The Commission also considered 

extending the Pilot period to two-years 

as suggested by several commenters, 

and as was recommended by the 

EMSAC, but continues to believe that 

the inclusion of the automatic sunset 

provision at the end of the first year is 

preferable because it will provide 

flexibility in the event that the 

Commission believes additional time is 

necessary to ensure the collection of a 

robust dataset with adequate statistical 

power for analysis, but will allow the 

Pilot to automatically end after one-year 

in the event that sufficient data is 

collected by that point with sufficient 

statistical power to allow for meaningful 

analysis. 

3. Pre- and Post-Pilot Periods 

The Commission proposed a sixmonth pre-Pilot Period as well as a sixmonth post-Pilot Period.335 During 

those periods, the Commission 

proposed to require the equities 

exchanges to collect and make available 

the order routing datasets and Exchange 

Transaction Fee Summaries in order to 

provide necessary benchmark 

information against which researchers 

could assess the impact of the Pilot.336

Two commenters supported the 

proposed six-month pre-Pilot and postPilot data collection periods.337 In 

contrast, two commenters suggested 

adopting three-month long pre-Pilot and 

post-Pilot Periods.338

The Commission desires to 

implement the Pilot in a manner that 

imposes the least amount of costs on the 

exchanges without compromising the 

ability of the Pilot to obtain useful data. 

The Commission believes that sixmonth pre- and post-Pilot Periods are 

necessary to establish a baseline against 

which to compare the data collected 

during the Pilot Period and any postPilot effects following the conclusion of 

the proposed Pilot. Although the 

Commission appreciates the desire of 

market participants to expedite the Pilot 

while constraining costs, the 

Commission considers six months to be 

necessary to provide the targeted 

statistical power for obtaining baseline 

data. As discussed above, statistical 

power largely is a function of the 

number of observations over a specified 

period of time. In order to shorten the 

pre- and post-Pilot Periods (e.g., to three 

months instead of six months) while 

maintaining the same statistical power, 

the Commission would need to increase 

the number of securities in the Pilot by 

at least 120 securities. As discussed 

above and consistent with the 

comments it received, the Commission 

desires to limit, not increase, the 

number of securities included in the 

Pilot. Accordingly, the Commission is 

not adopting a shorter duration for the 

pre- and post-Pilot Periods. 

4. Early Termination 

Proposed Rule 610T did not contain 

a specific provision regarding early 

termination of the Pilot. Several 

commenters recommended that the 

Commission develop specific criteria for 

evaluating the possibility that the Pilot 

may need to be terminated early.339

Some recommended that the Pilot 

specifically include a ‘‘kill switch’’ to 

effectuate an early termination.340

Several commenters supported the need 

for the Commission to address 

unanticipated negative consequences 

quickly,341 but one commenter 

cautioned that the Commission would 

need to act in a measured manner 

because the industry would need time 

to unwind the Pilot.342 One commenter 

suggested that the Commission might 

want to terminate the Pilot early if (1) 

it produced a ‘‘robust statistical sample 

set earlier than a year, such that [the 

Commission could] end the Pilot and 

proceed to adopt permanent rule 

changes’’ and (2) ‘‘if there is unintended 

impact from the Pilot that warrants a 

5230 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

343See Vanguard Letter, at 3. See also Angel 

Letter II, at 3 (noting that the Pilot could be 

suspended quickly if ‘‘there is abundant evidence 

one way or the other about the results,’’ such as ‘‘a 

dramatic increase in market quality for one 

particular treatment group,’’ in which case ‘‘that 

particular group’s treatment could become the new 

rule,’’ or ‘‘if the pilot produces fast and unequivocal 

results showing harm to one particular treatment 

group, that treatment should be halted’’). 

344See Schwab Letter, at 2; Citi Letter, at 4. 345See Schwab Letter, at 2. 

346See STANY Letter, at 4. 

347 Verret Letter I, at 5. 

348See 15 U.S.C. 78mm (setting forth the 

Commission’s authority, by rule, regulation or 

order, to conditionally or unconditionally exempt 

persons, transactions or securities (or classes 

thereof) from any Exchange Act provision, rule or 

regulation if such exemption is necessary or 

appropriate in the public interest and is consistent 

with the protection of investors). 

349See State Street Letter, at 4; TD Ameritrade 

Letter, at 4; STANY Letter, at 3. See also 

Recommendation for an Access Fee Pilot (July 8, 

2016), available at https://www.sec.gov/spotlight/ 

emsac/recommendation-access-fee-pilot.pdf 

(‘‘EMSAC Pilot Recommendation’’). 

350See AJO Letter, at 2. 

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

352See Proposed Rule 610T(b)(1). See also 

Proposing Release, supra note 2, at 13026. When 

the Commission publishes this list, the pre-Pilot 

Period will have been in place for approximately 

five months. 

353See Proposed Rule 610T(b)(1)(iii) (defining 

‘‘primary listing exchange’’ for purposes of Rule 

610T). 

354See Proposing Release, supra note 2, at 13027– 

28. The Commission notes that the proposed 

language in Rule 610T(b)(3)(i) has been modified 

slightly. As proposed, Rule 610T(b)(3)(i) contained 

the phrase ‘‘throughout the duration of the Pilot, 

including the post-Pilot Period.’’ As adopted, the 

phrase ‘‘throughout the end of the post-Pilot 

Period’’ is being substituted for the phrase 

‘‘throughout the duration of the Pilot, including the 

post-Pilot Period’’ to simplify the rule text without 

substantively changing the applicability of the 

posting requirement. 

355See FIF Letter, at 5. 

356 Id. 

357See 17 CFR 242.1001(a)(1). SCI systems 

include all computer, network, electronic, 

technical, automated or similar systems of, or 

operated by or on behalf of, an SCI entity that 

directly support activities such as trading and order 

routing, among other things. 17 CFR 242.1000. 

358See Proposing Release, supra note 2, 13026– 

28. 

stoppage.’’ 343 Other commenters 

emphasized the need for the 

Commission to closely monitor the 

impact of the Pilot on retail investors in 

particular.344 For example, one 

commenter argued that if the Pilot data 

suggests ‘‘clear harm to the retail 

investor in . . . relevant execution 

quality metrics’’ like ‘‘quoted spread, 

depth of liquidity, intraday stock 

volatility, and opportunities for price 

improvement on impacted securities,’’ 

then the Pilot ‘‘should be immediately 

suspended.’’ 345 Another commenter 

urged the Commission to closely 

monitor the Pilot’s effect on thinlytraded stocks and establish 

‘‘predetermined means for 

discontinuing the Pilot in the event that 

the reviewed data shows undue harm to 

market or execution quality.’’ 346

However, one commenter noted that the 

Commission is not obligated to ‘‘cease 

the [P]ilot if the costs to liquidity prove 

significant.’’ 347

The Commission acknowledges the 

concerns raised by commenters 

regarding the potential for unintended 

and unanticipated consequences to the 

equities markets that the Pilot may have. 

The Commission intends to carefully 

monitor for any such effects during the 

Pilot Period. However, the Commission 

does not believe that it is necessary to 

add a ‘‘kill switch’’ to Rule 610T 

because the Commission already has 

broad exemptive authority that obviates 

the need for a separate kill switch. For 

example, if at any time the Commission 

believes that the protection of investors 

may be compromised by the Pilot, the 

Commission has broad authority under 

Section 36 of the Exchange Act to 

modify or terminate the Pilot early.348

5. Inclusion of a Phase-In Period 

The Commission did not propose a 

phase-in period for the Pilot. Three 

commenters recommended a phase-in 

period without elaborating on its 

purpose, though they referenced the 

EMSAC’s recommendation for an initial 

three-month phase-in period involving 

10 stocks.349 A different commenter did 

not believe that the EMSAC’s threemonth phase-in period was 

necessary.350

The Commission has considered these 

comments and believes a phase-in 

approach is not necessary and 

unnecessarily would add to the length 

of the Pilot. Although such an approach 

would allow the markets and market 

participants to implement the required 

fee changes in a staged manner and 

provide an opportunity to address 

unforeseen implementation issues, the 

Commission continues to believe that, 

because exchange fees can become 

immediately effective upon their filing 

with the Commission, the markets and 

market participants are accustomed to 

dealing with frequent exchange fee 

changes in which fees can change on all 

stocks at once, or only for a subset of 

stocks or a subset of trading 

mechanisms. Accordingly, exchanges 

and market participants should be 

capable of accommodating the terms of 

the proposed Pilot with the advance 

notice contemplated by the Pilot. 

Further, although exchanges would be 

required to collect and report certain 

data, the proposed Pilot would not 

necessitate changes to exchange trading 

systems, and therefore, the Commission 

continues to believe a phased 

implementation schedule is not 

necessary to test the types of changes 

contemplated by the Pilot. 

E. Data 

The Commission proposed that 

certain data be collected and made 

publicly available in order to facilitate 

the Commission’s and researchers’ 

ability to assess the impact of the Pilot, 

as well as to promote transparency 

about the Pilot Securities and to provide 

basic information about equities 

exchange fees and changes to those fees 

during the Pilot.351 The Commission is 

adopting the Pilot Securities Lists, the 

Exchange Transaction Fee Summary, 

and the order routing datasets subject to 

the modifications described below. 

1. Pilot Securities Exchange Lists and 

Pilot Securities Change Lists 

As proposed, the Commission would 

publish, approximately one month 

before the start of the Pilot Period, the 

initial List of Pilot Securities, which 

identifies the securities in the Pilot and 

their designated Test Group (or the 

Control Group).352 Thereafter, each 

primary listing exchange 353 would 

publish a freely and publicly available 

daily Pilot Securities Exchange List of 

the Pilot Securities that are primarily 

listed on its exchange and also publish 

a Pilot Securities Change List of the 

cumulative changes to that list, and 

keep both lists available on their 

websites for five years.354

The Commission received one 

comment that was supportive of the 

proposed requirements for 

disseminating and updating the Pilot 

Securities lists, including the pipedelimited ASCII file format and the five 

year retention period.355 This 

commenter also had ‘‘no objections to 

the proposed posting requirements, 

providing there is adequate data 

security and controlled access.’’ 356 The 

Commission is not adopting any new 

requirements for data security with 

respect to the Pilot Securities lists 

because that data is not private or 

otherwise sensitive in nature and 

because the exchanges already are 

subject to Regulation SCI governing 

access to their systems that support 

trading.357

For the reasons stated in the 

Proposing Release, the Commission is 

adopting as proposed the requirements 

in Rule 610T(b) for the primary listing 

exchanges to publicly post on their 

websites downloadable files containing 

the Pilot Securities Exchange Lists and 

the Pilot Securities Change Lists.358 The 

Commission is adding one additional 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5231 

359The Commission is also modifying the name 

of the field specified in proposed Rule 

610T(b)(2)(ii)(E). The Commission proposed the 

field be named ‘‘Test Group.’’ As adopted, the field 

will be named ‘‘Pilot Group’’ to provide additional 

clarity. 

360See Proposing Release, supra note 2, 13019, 

13051. 

361The Commission notes that the proposed 

language in Rule 610T(e) has been modified 

slightly. As proposed, Rule 610T(e) contained the 

phrase ‘‘each national securities exchange that 

trades NMS stocks. . . .’’ As adopted, the clause 

‘‘that facilitates trading in NMS stocks’’ is being 

substituted for the phrase ‘‘that trades NMS stocks’’ 

to clarify that exchanges facilitate trading by their 

members in NMS stocks. In addition, the 

Commission notes that, as proposed, Rule 610T(e) 

contained a parenthetical which explained that data 

requirements set forth in subsection (e) were 

‘‘applicable to securities having a price greater than 

$1.’’ As adopted, that parenthetical has been 

modified slightly to clarify that the requirements of 

subsection (e) apply to ‘‘securities having a price 

equal to or greater than $1.’’ 

362See Proposed Rule 610T(e). See also Proposing 

Release, supra note 2, at 13029–30. 

363See Proposing Release, supra note 2, at 13030. 

See also Rule 610T(e). 

364See, e.g., SIFMA Letter, at 6; Better Markets 

Letter, at 7; Spatt Letter, at 4–5; and IEX Letter I, 

at 9. 

365See Proposing Release, supra note 2, at 13031. 

366See CFA Letter, at 5; Healthy Markets Letter 

I, at 22. 

367See IEX Letter I, at 9. 

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

369See Proposing Release, supra note 2, at 13031. 

370See RBC Letter I, at 5. 

371See Better Markets Letter, at 7; CFA Letter, at 

5; Healthy Markets Letter I, at 23. 

field, ‘‘stratum code,’’ to both lists.359

As discussed in the Proposal and above, 

the Commission will stratify Pilot 

Securities as it assigns them to the Test 

Groups and Control Group to ensure 

that each group has a similar 

composition, which facilitates 

comparison across groups.360 As it does 

so, the Commission will assign a 

stratum code to each Pilot Security that 

identifies that security’s liquidity strata. 

The code is a static value and, as such, 

will remain constant throughout the 

Pilot. The Commission will include this 

stratum code on the initial List of Pilot 

Securities that it disseminates. To link 

each Pilot Security and its stratum code, 

the Commission is requiring the primary 

listing exchanges to include this data 

element on each Pilot Securities 

Exchange List and Pilot Securities 

Change List. Including this field on each 

list will clearly identify each Pilot 

Security’s liquidity stratum, thereby 

allowing researchers to control for the 

fact that within some liquidity strata, 

the ratio of Test Group stocks to Control 

Group stocks is lower than it is for 

others, which should facilitate analysis 

of the Pilot’s data. 

2. Exchange Transaction Fee Summary 

As proposed, each exchange that 

trades NMS stocks would be required to 

compile, update monthly, and make 

freely and publicly available a dataset 

using an XML schema published on the 

Commission’s website that contains 

specified information on its fees and fee 

changes during the Pilot.361

In particular, each exchange would 

identify, among other things, the ‘‘Base’’ 

take fee (rebate), the ‘‘Base’’ make rebate 

(fee), the ‘‘Top Tier’’ take fee (rebate), 

and the ‘‘Top Tier’’ make rebate (fee), as 

applicable, as well as the Pilot Group 

(i.e., 1, 2, or Control) that applies to the 

fee being reported.362 Exchanges also 

would calculate the ‘‘average’’ and 

‘‘median’’ per share fees and rebates, 

which the exchange would compute as 

the monthly realized average or median 

per-share fee paid or rebate received by 

participants on the exchange during the 

prior calendar month, reported 

separately for each participant category 

(registered market makers or other 

market participants), Test Group, 

displayed/non-displayed, and top/depth 

of book.363

In the Proposing Release, the 

Commission asked several questions 

about the Exchange Transaction Fee 

Summary including questions about the 

proposed form, content, and posting 

requirements. Commenters supported 

requiring the equities exchanges to 

publicly post the Exchange Transaction 

Fee Summary as well as the proposed 

fields included in the summaries.364

Among those questions included in 

the Proposing Release, the Commission 

specifically asked commenters to 

suggest types of information that should 

be captured on the Exchange 

Transaction Fee Summary that would be 

useful to make comparisons across 

exchanges, and a few commenters 

offered specific suggestions.365

Specifically, two commenters requested 

that the Exchange Transaction Fee 

Summary include the number of pricing 

tiers used by the exchanges, the number 

of firms that were in each tier, and 

information on transaction costs in each 

tier.366 Similarly, another commenter 

suggested that the Exchange Transaction 

Fee Summary provide context on the 

Base and Top Tier fees by including the 

number of member firms, by participant 

type, that qualified for the Base and Top 

Tier fees and rebates reported on the 

Exchange Transaction Fee Summary.367

While the Commission appreciates 

these suggestions, it believes that adding 

more granular details about specific 

pricing tiers, which can vary greatly by 

exchange, would overcomplicate the fee 

summaries such that it would be 

difficult to standardize the information, 

thereby rendering the data less useful to 

researchers when comparing exchanges 

for purposes of the Pilot.368 Further, 

with respect to the number of members 

qualifying for the Base and Top Tier fees 

and rebates, the Commission believes 

that the information that exchanges will 

report on average and median realized 

fees and rebates should be sufficient for 

purposes of analyzing the Pilot’s results, 

including any changes in order routing. 

We believe that the disclosure of the 

number of members qualifying for the 

Base and Top Tier fees and rebates 

would also require other disclosures 

(including, e.g., such member’s trade 

volume at each tier) in order to provide 

context to the information. Providing all 

of these additional data points would 

increase the costs and complexity of the 

Pilot. The Commission however, does 

not believe that the incremental benefit 

of this information justifies additional 

costs and complexities. Accordingly, the 

Commission will not be requiring the 

exchanges to include additional 

information on their pricing tiers. 

As part of its request for comment in 

the Proposal on what additional 

information would be helpful to include 

in the Exchange Transaction Fee 

Summary, the Commission specifically 

asked whether other measures beyond 

average and median fees should be 

selected.369 In response, one commenter 

recommended that in addition to 

requiring the average and median per 

share fees and rebates, the Commission 

also require the ‘‘mode’’ per share fee 

and rebate (i.e., the most frequently paid 

fee and rebate by each exchange’s 

members), because the commenter 

believed it would ‘‘enable a more 

accurate comparison of the fees and 

rebates most often applied by each 

exchange.’’ 370 The Commission 

appreciates this suggestion, but 

continues to believe that for purposes of 

this Pilot, the proposed information on 

mean and median realized fees and 

rebates will be sufficient for purposes of 

analyzing the results of the Pilot, 

including any changes in order routing. 

Lastly, a few commenters requested 

that the Exchange Transaction Fee 

Summary information be hosted at a 

central location rather than posted on 

the exchanges’ individual websites.371

While the Commission recognizes that it 

could be more convenient if the 

information were made available in one 

central location, because the data must 

be made available unencumbered and in 

a standardized XML schema format, the 

Commission believes that any person 

would readily be able to obtain and 

combine the summaries posted by each 

equities exchange with minimal effort. 

5232 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

372See Proposing Release, supra note 2, at 13031. 373Proposed Rule 610T(d)(1)–(2). The 

Commission notes that the proposed language in 

Rule 610T(d) has been modified slightly. As 

proposed, Rule 610T(d) contained the phrase ‘‘each 

national securities exchange that trades NMS 

stocks. . . .’’ As adopted, the clause ‘‘that facilitates 

trading in NMS stocks’’ is being substituted for the 

phrase ‘‘that trades NMS stocks’’ to clarify that 

exchanges facilitate trading by their members in 

NMS stocks. 

374See Proposing Release, supra note 2, at 13032. 375See, e.g., Barnard Letter, at 1; CII Letter, at 2– 

3; Better Markets Letter, at 7; Invesco Letter, at 1– 

2; Wellington Letter, at 1; CFA Letter, at 5; 

Clearpool Letter, at 6; ICI Letter I, at 5; RBC Letter 

I, at 5; Joint Pension Plan Letter, at 2; Oppenheimer 

Letter, at 2; IEX Letter I, at 10; Capital Group Letter, 

at 4; Healthy Markets Letter I, at 24; Angel Letter, 

at 1; Verret Letter I, at 1, 7; Spatt Letter, at 3. 376See, e.g., Clark-Joseph Letter, at 1; Nuveen 

Letter, at 2; NYSTRS Letter, at 1; RBC Letter I, at 

2; Invesco Letter, at 2; CFA Letter, at 1; State Street 

Letter, at 2; AJO Letter, at 1; Vanguard Letter, at 2. 377See, e.g., AJO Letter, at 3–4; ICI Letter I, at 5; 

CFA Letter, at 5. 

378See infra notes 382, 386, and 395–397. 

379See supra notes 41–46. 

380See infra note 404. 

381See Proposing Release, supra note 2, at 13031, 

13033. 

382See FIA Letter, at 3 fn. 8; FIF Letter, at 6; 

Citadel Letter, at 3 fn. 5; IEX Letter I, at 10. 

383See FIA Letter, at 3 fn. 8; IEX Letter I, at 10. 

384See, e.g., FIX Tag 528 (Order Capacity) under 

FIX 4.4 and Fix Tag 47 (Rule80A) under TIF 4.2, 

available at http://btobits.com/fixopaedia/ 

index.html. 

385See Proposing Release, supra note 2, at 13033. 

386See FIA Letter, at 3; SIFMA Letter, at 8; 

Citadel Letter, at 3; Citi Letter, at 5–6. 

387SIFMA Letter, at 8. See also Cboe Letter I, at 

3 fn. 8. 

Because of this, the Commission is not 

adopting a requirement on exchanges to 

consolidate this material and make it 

available in a central location. 

3. Order Routing Data 

To facilitate an examination of the 

impact of the Pilot on order routing 

behavior, execution quality, and market 

quality, the Commission proposed to 

require throughout the Pilot (including 

during the pre-Pilot Period and the postPilot Period) that each equities exchange 

prepare and publicly post a monthly 

downloadable file containing sets of 

anonymized order routing data in 

accordance with the specifications 

proposed in Rule 610T(d).372

Specifically, Rule 610T(d) would 

require exchanges to provide the order 

routing information in two datasets— 

one for liquidity-providing orders and 

one for liquidity-taking orders, both 

aggregated by day, security, and brokerdealer.373 The Commission further 

proposed that equities exchanges would 

be required to anonymize the identity of 

individual broker-dealers before making 

the order routing datasets publicly 

available, using an anonymization key 

provided by the Commission.374

A number of commenters supported 

the proposed requirements regarding the 

order routing datasets, expressing the 

belief that these requirements would 

provide researchers with useful data 

that would facilitate an analysis of the 

impact of transaction fees and rebates 

on order routing, execution quality, and 

market quality.375 Several commenters 

believed the data would enable the 

Commission to make data-driven 

decisions on potential future equity 

market structure policy initiatives.376

Others specifically supported the 

website posting requirement to make the 

data freely and publicly available.377

In addition, other comments 

addressed matters such as: Separating 

held and not-held orders in the datasets, 

separating principal from agency orders 

in the datasets, and not collecting 

‘‘parent order’’ routing information.378

Other commenters expressed concern 

that not collecting similar data from 

non-exchange venues would decrease 

the utility of the data and provide the 

Commission with an incomplete picture 

of the Pilot’s impact.379 Other 

commenters were critical of the 

proposed order routing data 

requirements because they believed, 

despite the anonymization and 

aggregation requirements, that publicly 

available data could be reverse 

engineered to reveal commerciallysensitive information about individual 

broker-dealers.380 These concerns are 

discussed further, below. 

a. Held and Not-Held Orders 

The Commission proposed to require 

exchanges to separate out held and notheld orders in the order routing datasets 

and requested comment on whether 

orders should be separated out in that 

manner and whether there are certain 

shared characteristics of such orders 

that would be beneficial to assess when 

analyzing the Pilot data.381 In response, 

several commenters stated that 

exchanges currently do not capture 

whether orders are held or not held.382

Two commenters added that capturing 

that information would impose 

additional costs on market participants 

who would need to update their systems 

to include this information in the order 

messages they send to exchanges, as 

well as impose additional costs on 

exchanges to capture and report 

whether an order is held or not held.383

The Commission has considered these 

comments and has determined not to 

require the exchanges to separate held 

and not-held orders in the order routing 

datasets. In proposing to require capture 

of held and not-held orders, the 

Commission sought to include a data 

field that is readily available to and 

currently captured by exchanges and 

that would provide insight into the 

capacity in which a broker-dealer is 

handling orders. In turn, that 

information could be useful to assess 

the broker-dealer’s routing of those 

orders. For example, orders that are 

‘‘held to the market’’ may be routed 

differently than orders that are ‘‘not 

held’’ and for which the broker-dealer 

exercises more discretion in their 

execution. By separating out these 

orders, researchers would have access to 

an additional metric that potentially 

could be helpful in analyzing the Pilot 

data and parsing the results. 

As commenters have indicated, 

however, broker-dealers do not transmit 

this information to exchanges and 

exchanges thus do not capture it. The 

Commission does not wish to impose 

new data collection requirements with 

respect to this Pilot data field, and 

therefore is not adopting this element. 

However, as detailed below, the 

Commission is adopting a new 

requirement for exchanges to instead 

separate out orders based on their order 

capacity (e.g., principal, riskless 

principal, and agency), which 

information currently is transmitted to 

exchanges by broker-dealers.384

b. Principal Order Flow and Order 

Capacity 

In response to the Commission’s 

question in the Proposing Release about 

what data are necessary to facilitate an 

analysis of the potential conflicts of 

interest associated with transaction fees 

and rebates,385 several commenters 

requested that the order routing datasets 

exclude orders marked as principal or 

riskless principal because the potential 

conflicts of interest posed by exchange 

transaction fees and rebates pose a 

potential harm primarily when brokerdealers are routing orders for customers 

in an agency capacity and may be 

unduly influenced by exchange fees and 

rebates to the detriment of obtaining the 

best execution for the customer’s 

order.386 To the extent a broker-dealer is 

routing its own proprietary order and is 

unduly influenced by exchange fees and 

rebates, then, at worst, it would only be 

harming itself. In other words, as noted 

by one commenter, ‘‘a broker may route 

principal orders to maximize rebates 

and minimize access fees which would 

not be considered a conflict of 

interest.’’387

Without separating out orders by their 

order capacity, one commenter argued 

that the order routing datasets could 

generate ‘‘misleading results’’ because 

the trades of various market participants 

could be aggregated at the same broker 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5233 

388See FIA Letter, at 3 fn. 9. 

389See Clearpool Letter, at 6. 

390 Id. 

391See, e.g., Fidelity Letter, at 8; ICI Letter I, at 

5; SIFMA Letter, at 5–6; IEX Letter I, at 2. See also 

Proposing Release, supra note 2, at 13033. 

392See supra notes 224–225 and accompanying 

text. 

393See Mulson Letter I. 394See supra Section II.C.10. 

due to ‘‘direct market access 

arrangements,’’ and these orders would 

be indistinguishable from customer 

orders routed by that broker.388 In this 

way, agency orders (which are subject to 

conflicts of interest concerns that are 

relevant to the Pilot) could be mixed in 

with principal orders (which are not 

subject to conflicts of interest concerns 

that are relevant to the Pilot) and the 

inability to distinguish them could 

cloud the results. Accordingly, one 

commenter recommended separating 

principal and agency orders in the order 

routing datasets, while continuing to 

include both types of order flow.389 The 

commenter believed that specifically 

identifying the extent to which orders 

are principal orders or agency orders 

‘‘would further facilitate the analysis of 

order flow and a better understanding of 

the efficacy of the [P]ilot.’’ 390

After careful consideration of these 

comments, the Commission has 

determined to require exchanges to 

separate out orders by order capacity 

(e.g., principal, riskless principal, and 

agency). Requiring exchanges to 

separately aggregate orders according to 

their order capacity will allow 

researchers to more precisely parse the 

data as recommended by several 

commenters, particularly when 

analyzing the potential conflicts of 

interest in broker-dealer routing 

presented by exchange fee-and-rebate 

pricing models. For example, 

researchers will be able to separate out 

and exclude principal orders when 

studying conflicts of interest, as 

conflicts of interest do not present the 

potential for harmful impact with 

respect to such orders as they do for 

agency orders where the broker-dealer is 

routing for others. In addition, 

researchers will be able to include 

orders of any order capacity when 

studying other questions, such as 

intermediation, queue length, and time 

to execution, as such issues are relevant 

to orders of any capacity. 

Further, the Commission believes that 

principal orders should be included in 

the order routing datasets, as the Pilot 

is designed to assess more than just 

conflicts of interest between brokers and 

their customers in order routing. It also 

is designed to observe the impact of 

exogenous shocks to transaction fees 

and rebates on execution quality and 

market quality broadly. Accordingly, the 

Pilot will provide the opportunity to 

obtain useful data on matters such as 

intermediation, queue length, and time 

to execution; the impact of fees and 

rebates on liquidity adding and liquidity 

removing activity; the relationship 

between payment of rebates on making 

activity (or taking activity on an 

inverted exchange) and fee levels for 

taking activity (or making activity on an 

inverted exchange); and the impact of 

fees and rebates on order routing 

behavior generally. Consideration of 

these issues directly implicates 

principal order flow and, as such, the 

Commission believes it is critical for the 

aggregated volume statistics included in 

the order routing datasets to include 

principal orders. 

c. Order Designation 

In response to questions in the 

Proposing Release on specific measures 

and data that would facilitate an 

analysis of the effects that changes to 

transaction fees and rebates have on 

order routing behavior, execution 

quality, and market quality, several 

commenters recommended that the 

Commission analyze the impacts of fees 

and rebates on various aspects of the 

execution quality of investors’ limit 

orders.391 Further, on the impact that 

prohibiting rebates may have on quoted 

spreads and displayed liquidity, 

commenters also disagreed about the 

willingness and ability for investors, 

other than those that are motivated by 

rebate capture, to post liquidity in order 

to capture the quoted spread.392 In 

addition, in attempting to utilize 

transaction data to analyze the impact of 

reduced or eliminated rebates, one 

commenter recommended that the 

dataset exclude orders that presently are 

not eligible for rebates, such as those 

designated for participation in opening 

and closing auctions.393

While analyzing the impact of 

reduced or eliminated rebates is one 

potential analysis for which the Pilot’s 

data may be useful, the Pilot’s purpose 

is broader in scope. As such, the 

Commission continues to believe that it 

is appropriate for the order routing 

datasets to capture all liquidityproviding and liquidity-taking orders. 

However, in response to the 

commenters’ recommendations 

discussed above and in an effort to 

ensure that the order routing data be as 

useful as possible and facilitate an 

analysis of the impacts of the Pilot, the 

Commission has determined to further 

refine the order routing dataset by 

requiring exchanges to report separately 

the volume statistics by ‘‘order 

designation,’’ which will require 

exchanges to separate out post-only 

orders as well as auction orders. 

Separating the volume statistics in 

this manner will allow isolation of the 

cumulative number of post-only orders, 

which are limit orders that include 

instructions to never remove liquidity, 

and may be more reflective of a rebatesensitive market participant. With the 

data further refined in this manner, the 

Commission believes the data will be 

more useful in analyzing the impacts of 

the Pilot both in comparing the pre-Pilot 

data to the Pilot data and in comparing 

the data across the Test Groups and 

Control Group during the Pilot. In 

particular, the further refinement will 

facilitate assessment of the impact of the 

Pilot on the willingness of investors to 

passively post orders and their ability to 

obtain queue priority (i.e., represent the 

best price in the exchange’s limit order 

book) and capture the quoted spread 

when doing so (i.e., buy on the bid and 

sell on the offer).394

Furthermore, with respect to auction 

orders, which are orders specifically 

designated for execution in either an 

opening or closing auction, instead of 

separating out auction orders, exchanges 

may instead elect to simply exclude 

them from the order routing datasets, as 

an alternative means of complying with 

the order designation requirement. The 

Commission has determined to allow 

the exchanges to choose between these 

two approaches so that they may choose 

the option that is the least burdensome. 

If exchanges choose to include auction 

order data in the order routing datasets, 

they will need to comply with the 

requirement by separating orders by 

order designation, so that these orders 

may be separately identified and 

accounted for in any analyses of the 

Pilot’s data. 

The ability to isolate auction orders 

recognizes the uniqueness of the auction 

process and will facilitate separation of 

that data in order to study the Pilot’s 

impact on trading during the regular 

market session without potentially 

biasing the results by including auction 

activity, for which different trading 

rules, order types, and fees apply. 

5234 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

395See, e.g., Healthy Markets Letter I, at 24–25; 

Pragma Letter, at 3; NYSE Letter I, at 9–10; NYSE 

Letter II, at 12–13; Viable Mkts Letter, at 2; 

Babelfish Letter, at 3. 

396See e.g., Healthy Markets Letter I, at 24–25; 

Pragma Letter, at 3; NYSE Letter I, at 9–10; NYSE 

Letter II, at 12; Viable Mkts Letter, at 2. 

397See Babelfish Letter, at 3. 

398See FINRA OTC Transparency Data, available 

at https://otctransparency.finra.org/. 

399See supra note 302 and accompanying text. 

400See Healthy Markets Letter I, at 23–24; 

Clearpool Letter, at 6. 

401Healthy Markets Letter I, at 23. 

402See Citadel Letter, at 3; TD Ameritrade Letter, 

at 6. In response to the Commission’s solicitation 

of comment in the Proposing Release on whether 

the CAT repository, if it were operational, would 

provide sufficient data to evaluate the Pilot, one 

commenter stated that it believed the data reported 

from the CAT would provide the necessary 

information with respect to order routing data. See 

FIF Letter, at 2. 

403See Proposing Release, supra note 2, at 13031 

n. 172 and accompanying text. 

404See, e.g., FIA Letter, at 3; Virtu Letter, at 7– 

8; SIFMA Letter, at 6; FIF Letter, at 2; Citadel Letter, 

at 4; Citi Letter, at 6; TD Ameritrade Letter, at 5; 

STANY Letter, at 5; IEX Letter I, at 10; Credit Suisse 

Commentary, at 6; Morgan Stanley Letter, at 4. 

405See Clearpool Letter, at 6–7. 

d. Broker Routing Data 

Several commenters addressed the 

utility of obtaining order routing data 

from broker-dealers that route customer 

orders in assessing the potential 

conflicts of interest related to 

transaction fees and rebates.395 Several 

of these commenters explained that 

obtaining data from broker-dealers (in 

addition to or in place of obtaining such 

data from exchanges) would facilitate an 

analysis of the impact of transaction fees 

and rebates on order routing behavior 

and potential conflicts of interest from 

the perspective of customers, as the 

brokers would have information that 

can be used to assess the execution 

quality of a ‘‘parent order’’ and would 

provide information on the broader 

universe of potential routing 

destinations, including non-exchange 

trading venues.396 One commenter 

added that investors needed to conduct 

their own analyses of their orders to 

understand the impact of the Pilot on 

their brokers.397

The Commission is not requiring data 

collection from broker-dealers or nonexchange trading venues. The order 

routing datasets will include aggregated 

data from exchanges (as opposed to 

individual order level data from brokerdealers) representing the sum totals of 

the ‘‘child’’ orders that are processed by 

an exchange. While the Pilot will not 

capture the entire lifecycle of a ‘‘parent’’ 

order from its inception, the 

Commission believes that its approach 

will minimize the implementation costs 

on market participants while ensuring 

that the Commission and researchers 

have useful data on child orders to 

observe the impacts of introducing 

exogenous shocks to exchange 

transaction fees and rebates. The order 

routing data provided by the exchanges 

represents the information that would 

be directly correlated to these 

exogenous shocks. Data that is available 

elsewhere 398 will provide the ability to 

understand any observed changes in 

order flows or market share to nonexchange venues during the Pilot. 

Further, the Commission agrees with 

the commenters that noted that market 

participants need to conduct their own 

analyses of their own order flow. If 

market participants conduct their own 

analyses, including parent order-level 

analyses, and wish to provide that 

information to the Commission and the 

public, the Commission would be able 

to consider the information in assessing 

the Pilot’s ultimate impact on order 

routing behavior, execution quality, and 

market quality. The Commission 

encourages market participants to 

conduct analyses and make the results 

of their analyses public. The 

Commission also encourages any 

interested party that prepares an 

analysis of the Pilot to submit it to the 

Commission for posting on the 

Commission’s website.399

e. Directed Orders 

Two commenters recommended that 

the order routing datasets identify 

whether orders are directed or nondirected.400 One of these commenters 

believed that directed orders do not 

feature ‘‘the same level of discretion and 

conflicts of interest that are the primary 

focus of the’’ Pilot.401 After careful 

consideration of these comments the 

Commission has determined not to 

require the order routing datasets to 

identify directed orders. The 

Commission recognizes that researchers 

may be interested in isolating orders 

directed by customers to specific 

exchanges because these orders may not 

be subject to the same potential conflicts 

of interest that may be present when a 

broker chooses where to route a 

customer order. However, separating out 

directed orders in the datasets (which 

report aggregated data and not order-byorder data) would require exchanges 

and broker-dealers to incur additional 

costs in preparing the Pilot’s order 

routing data. Further, the Pilot is 

designed to assess more than just 

conflicts of interest between brokers and 

their customers in order routing, and 

separate identification of directed and 

non-directed orders is not germane to 

the other questions the Pilot is designed 

to explore. Accordingly, the 

Commission believes that the additional 

implementation costs that adding such 

a requirement would impose are not 

justified by any benefits that may accrue 

from identifying, on an aggregated basis, 

directed orders in the order routing 

data. 

f. Utilizing the Consolidated Audit Trail 

Two commenters recommended that, 

instead of requiring separate order 

routing datasets, the Commission 

instead use data that the equities 

exchanges will report to the 

Consolidated Audit Trail (‘‘CAT’’).402 In 

the Proposing Release, the Commission 

stated that if the equities exchanges are 

reporting to the CAT at the time the 

Pilot commences, they would be able to 

compile the order routing datasets by 

utilizing the data they collect pursuant 

to the CAT national market system 

plan.403 However, there have been 

delays in the development and building 

of the CAT, and the reporting required 

by the first phase of the CAT NMS Plan 

has been delayed. Although the 

exchanges and FINRA have recently 

begun to report certain data to the CAT 

central repository, they continue to 

work to fully implement the first phase 

of the CAT NMS Plan, including 

linkages between reported events and 

regulators’ query functionality. The 

Commission believes that it is important 

to proceed with the Pilot and not delay 

the Pilot until the exchanges have begun 

full reporting to the CAT and the CAT 

operates in a manner that would 

facilitate the data analysis contemplated 

by the Pilot. 

g. Anonymization and Public 

Availability 

Several commenters expressed 

concerns about having the exchanges 

publicly post the order routing datasets, 

despite the requirement that the 

exchanges anonymize the identities of 

broker-dealers before making the 

datasets publicly available. These 

commenters believed that the order 

routing data could potentially be 

‘‘reversed engineered’’ such that market 

participants might be able to ascertain 

the identities of individual brokerdealers in some circumstances.404 In 

contrast, one commenter acknowledged 

that ensuring confidentiality is 

‘‘critical’’ and was ‘‘pleased to see that 

the SEC has recognized this in 

proposing anonymizing certain of the 

proposed data to protect confidential 

information.’’ 405

Of the commenters concerned about 

the potential for reverse engineering, 

one of these commenters provided an 

example of how the information could 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5235 

406Citadel Letter, at 4. 

407See id. 

408 Id. 

409 Id. 

410See TD Ameritrade Letter, at 5. 

411See, e.g., Citadel Letter, at 4; Credit Suisse 

Commentary, at 6; IEX Letter I, at 10; Morgan 

Stanley Letter, at 4; STANY Letter, at 5; SIFMA 

Letter, at 6–7; TD Ameritrade Letter, at 5; FIF Letter, 

at 7. 

412See Lipson Letter, at 1; Spatt Letter, at 3. 

413See Citadel Letter, at 5; Citi Letter, at 6. 

414See SIFMA Letter, at 7; STANY Letter, at 5; 

Fidelity Letter, at 11. 

415Several commenters expressed concerns that 

the equities exchanges would have access to the 

Broker Dealer Anonymization Key. See, e.g., Virtu 

Letter, at 8; SIFMA Letter, at 7; FIF Letter, at 2; 

STANY Letter, at 5; IEX Letter I, at 10; Morgan 

Stanley Letter, at 4. As adopted, the exchanges 

would not have access to the Broker Dealer 

Anonymization Key, which addresses the 

commenters’ concerns. 

416The Commission will deem broker-dealer 

identifying order routing data as being subject to a 

confidential treatment request under 17 CFR 200.83 

without the need to submit a request. The Freedom 

of Information Act provides at least two potentially 

pertinent exemptions under which the Commission 

has authority to withhold certain information. See 

5 U.S.C. 552(b)(4) and (8). 

417See Proposing Release, supra note 2, at 13033 

(asking whether commenters think exchanges 

should be required to report the datasets directly to 

the Commission). Further, in its Proposal, the 

Commission noted that it considers the order 

routing data to be ‘‘regulatory’’ information and 

proposed to prohibit exchanges from accessing or 

using the information for commercial purposes. See 

id. at 13032. The Commission is adopting as 

proposed the prohibition on exchange personnel 

accessing the data for commercial purposes, as 

exchanges will have access to the information. 

418See id. at 13032. See also Rule 610T(d)(1)(iv) 

and (d)(2)(iv). 

be reverse engineered if ‘‘a market 

participant could direct a large order in 

a particular symbol to a specific brokerdealer, and then identify the presence of 

that order’’ in the order routing 

datasets.406 This commenter added that 

market participants may also be able to 

compare the order routing datasets with 

reports published pursuant to 17 CFR 

242.605 (Rule 605 of Regulation NMS) 

to determine the identity of brokerdealers.407 Once a broker-dealer’s 

identity is likely known, this 

commenter believed that competitors 

could use the order routing datasets to 

discern that broker’s ‘‘(a) market share 

and activity in a given security, (b) 

overall routing practices, and (c) relative 

aggressiveness or passiveness in specific 

securities.’’ 408 This commenter also 

believed that strategies used by 

institutional investors that are 

customers of broker-dealers ‘‘may also 

be susceptible to reverseengineering.’’ 409 Another commenter 

added that it believed ‘‘market 

participants and others will be able to 

identify certain broker-dealers routing 

strategies by comparing the Pilot data to 

publicly available 17 CFR 242.606 (Rule 

606) disclosures, or by other means,’’ 

although it did not specify those other 

means.410

Several of the commenters that 

expressed concern about the public 

availability of the order routing data, 

despite the proposed anonymization 

requirements, recommended approaches 

to address their concerns. Some of these 

commenters stated that the Commission 

should receive order routing data at the 

broker-dealer level, but that the public 

should only have access to data that is 

further aggregated, such that the data 

would include statistics for firms of 

similar types or business models, or 

simply aggregate all orders received by 

the exchange.411 However, in contrast, 

two commenters noted that the order 

routing data aggregated by broker would 

be important to analyses undertaken by 

researchers and therefore should be 

made more broadly available.412 Two 

other commenters suggested that if the 

order routing data aggregated by broker 

would be helpful for researchers, the 

Commission should provide that data to 

researchers only if they sign a nondisclosure agreement.413 In addition, 

three commenters recommended that if 

order routing datasets are to be made 

publicly available on exchange 

websites, they should be subject to a 120 

day delay instead of a 30 day delay.414

The Commission appreciates 

commenters’ concerns about the need to 

safeguard the confidentiality of the 

order routing datasets. The Commission 

agrees that if market participants were 

able to identify specific broker-dealers 

in the datasets, there is the potential 

that the data could be reverse 

engineered to reveal proprietary 

information about trading attributable to 

specific broker-dealers. The 

Commission has revised its approach to 

eliminate the public availability of the 

order routing datasets to help address 

these concerns, while still furthering the 

goals of the Pilot. More specifically, to 

address commenters’ concerns with the 

public availability of the data and the 

exchanges’ role in preparing it for 

dissemination, the Commission is not 

adopting the requirement for the 

exchanges to anonymize 415 and 

publicly post the order routing data. 

The Commission, however, believes it 

is important for the Commission itself to 

have access to the order routing dataset, 

so the Commission can consider the 

effects of rebates and transaction-based 

fees on order routing behavior, 

execution quality, and market quality. 

Accordingly, given the potential for 

reverse engineering, the Exchanges will 

be required to provide order routing 

data directly to the Commission. 

While the Commission anticipated 

benefits from market participants, 

researchers, and others in conducting 

independent analysis of the Pilot and its 

impacts, the Commission has carefully 

balanced the concerns about possible 

reverse engineering of the order routing 

data against these benefits. The 

Commission believes that it can assess 

the effects of the transaction-fee and 

rebate models on order routing behavior 

and thereby achieve this goal of the 

Pilot without requiring public 

disclosure of order routing data 

attributable to a specific broker-dealer. 

The Commission is not adopting the 

requirement for exchanges to make 

public in an anonymized form the order 

routing data, but the exchanges will 

instead identify individual brokerdealers by MPID or CRD number in the 

order routing data they send to the 

Commission. The Commission 

recognizes that order routing data 

attributable to a specific broker-dealer is 

particularly sensitive and is non-public 

information.416 The Commission, 

however, intends to make public 

analyses, results, and studies using the 

order routing data. In determining 

whether and how to make public this or 

any other information, the Commission 

will be sensitive to the concerns 

articulated by commenters and will 

consider steps such as aggregating or 

anonymizing order routing data. 

Specifically, the Commission is 

adopting a requirement for each 

exchange to prepare and transmit 

directly to the Commission, in pipedelimited ASCII format, no later than 

the last day of each month, a file 

containing sets of order routing data.417

While the Commission is not requiring 

the exchanges to anonymize the data 

and thus will no longer provide 

exchanges with the Broker-Dealer 

Anonymization Key, the Commission is 

requiring each exchange to provide its 

order routing data by broker-dealers’ 

CRD number and MPIDs in order to 

provide aggregated broker-dealer level 

data to the Commission to facilitate its 

analysis of the data.418

The Commission believes that the 

suggested alternative to further 

aggregate the datasets, for example, to 

combine the data of several firms 

together or combine all firms together, 

would seriously compromise the ability 

of researchers to investigate the 

potential conflicts of interest in routing 

because researchers would not be able 

to see an individual broker-dealer’s 

orders across all exchanges and thereby 

would not be able to assess how any 

particular broker-dealer may have been 

influenced by fees and rebates at 

5236 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

419See, e.g., CFA Letter, at 5 (believing that 

‘‘breaking the data out at the broker-dea[le]r level 

will permit a closer examination of how different 

broker-dealers may change their order routing 

behavior in response to changes in fees and rebates 

at each exchange.’’); Lipson Letter, at 1; Spatt Letter, 

at 3; Better Markets Letter, at 7; Healthy Markets 

Letter I, at 24 fn. 87. 

420The Commission notes that the proposed 

language in Rule 610T(d)(1)(vi)(F), (d)(1)(xii)(H), 

and (d)(2)(vi)(F) has been modified slightly. As 

proposed, Rule 610T(d)(1)(vi)(F) and Rule 

610T(d)(2)(vi)(F) both noted that the order size code 

at the largest share bucket was ‘‘> 10,000.’’ As 

adopted, the largest share bucket order size code 

will be reflected as ‘‘≥ 10,000 share bucket.’’ In 

addition, as proposed, Rule 610T(d)(1)(xii)(H) set 

forth a time frame of ‘‘> 30 minutes of order 

receipt.’’ As adopted, that time frame will be 

clarified to state that the time frame is ‘‘≥30 minutes 

of order receipt.’’ 

421See Proposing Release, supra note 2, at 13033. 

422See id. 

423See id. at 13033–34. 

424See FIF Letter, at 7–8. 

425See id. at 8. 

426See FIF Letter, at 8. 

427See Cboe Letter I, at 21. 

428See supra notes 349–350 and accompanying 

text. 

429Although broker-dealers will need to account 

for different fee and rebate levels across two Test 

Groups and the Control Group if exchanges 

maintain different fee and rebate levels across the 

treatment groups, they will have seven months 

before the start of the Pilot Period to update their 

execution algorithms, including to accommodate 

the prohibition on rebates and Linked Pricing in the 

no-rebate Test Group. 

430The fields in the Exchange Transaction Fee 

Summary that are calculated based on a look-back 

period to the prior month are: Rule 610T(e)(9) 

(month and year of the average and median figures); 

(12) average take/make; and (13) median take/make. 

431See Proposed Rule 610T(d). 

different exchanges.419 Because brokerdealer level data already is consolidated 

(i.e., the data would not separate out 

individual customer activity), adding 

another level of consolidation by 

grouping broker-dealers together would 

cloud insight into the potential conflicts 

of interest question, rendering the data 

potentially useless for the purpose of 

studying conflicts of interest. 

Accordingly, the Commission continues 

to believe that it needs access to the 

order routing data in its proposed form, 

without further aggregation of the 

data.420

F. Implementation 

The Commission proposed to publish 

a notice setting forth the start and end 

dates of the pre-Pilot, Pilot, and postPilot Periods.421 If applicable, the 

Commission also would publish a 

notice if it determines to suspend the 

one-year sunset of the Pilot Period.422

As discussed in the Proposing Release, 

the start date of the pre-Pilot Period 

would be one month from the date the 

Commission issues the notice, and the 

end date of the pre-Pilot Period would 

be six months from the pre-Pilot 

Period’s start date. Thus, the Pilot, 

which is to start at the conclusion of the 

pre-Pilot Period, would begin seven 

months from the date the Commission 

issues the notice. The post-Pilot Period 

would commence at the conclusion of 

the Pilot and would end six months 

from the post-Pilot Period’s start date. 

The Commission proposed to publish 

the initial notice setting forth the start 

date for each of the Pilot’s three periods, 

and do so with a one-month minimum 

advance notice in order to allow the 

equities exchanges to finalize their 

preparations for the Pilot’s pre-Pilot 

Period, as well as provide at least a 

seven-month advance notice to market 

participants of the start date on which 

the Pilot’s conditions would go into 

effect.423

One commenter agreed that a onemonth period between the 

Commission’s notice and the start of the 

pre-Pilot Period would be ‘‘sufficient 

provid[ed] there are no changes to the 

Pilot securities lists and assigned test/ 

control groups.’’ 424 This commenter 

also agreed that the proposed sevenmonth period following the 

Commission’s notice would be 

‘‘sufficient to prepare for the Pilot.’’ 425

However, this commenter requested that 

‘‘any technical specification materials 

required to support implementation of 

the Pilot be reviewed with the industry 

and finalized in an expeditious manner, 

six months prior to the launch of the 

pre-Pilot data gathering phase,’’ which 

the commenter believed would ‘‘allow[ ] 

necessary time for industry firms to 

properly scope necessary development 

work and assign respective 

resources.’’ 426 Another commenter, 

however, did not believe that a one 

month period prior to the start of the 

pre-Pilot period would be sufficient for 

the industry to prepare and instead 

estimated that ‘‘the implementation of 

the pre-Pilot processing alone [would] 

take between three to four months.’’ 427

As discussed and addressed above, a 

few commenters recommended that the 

Pilot begin with a limited phase-in 

period with a small number of 

securities.428

After careful consideration of the 

comments received, the Commission 

continues to believe that the proposed 

implementation approach should 

provide adequate notice and time for 

those impacted by the Pilot to prepare 

for its requirements. The Pilot will begin 

with a six-month pre-Pilot period 

during which exchanges will not need 

to revise their fees to comply with the 

Pilot. At the conclusion of the pre-Pilot 

Period, exchanges will be required to 

revise any of their fees, which will 

apply to the Pilot Securities, that 

currently exceed the terms of the Pilot’s 

Test Groups. While the Exchange Act 

allows exchanges to file their fees for 

immediate effectiveness, exchanges may 

choose to preview their Pilot-related fee 

changes to their membership to provide 

them with additional time to adjust 

their order routing systems in response 

to those changes.429 The Commission 

does not anticipate that technical 

specification materials will be required 

to support implementation of the Pilot 

by broker-dealers because the Pilot 

solely concerns exchange fees which 

exchanges commonly adjust with little 

or no advance notice though 

immediately effective fee filings with 

the Commission. Therefore, brokerdealers currently are accustomed to 

accommodating the types of fee changes 

that would be required to comply with 

the requirements of the Pilot. 

Further, the Commission believes that 

publishing the start date for each of the 

Pilot’s three periods in advance, with at 

least one month’s advance notice, will 

provide the exchanges with time to 

prepare the three types of data required 

by the Pilot. First, because the 

Commission will determine the initial 

List of Pilot Securities, the exchanges 

will only need to perform the 

ministerial task of separating out their 

listed issuers and creating the Pilot 

Securities Exchange Lists and Pilot 

Securities Change Lists. Second, the 

Exchange Transaction Fee Summaries 

will require each exchange to 

summarize its own fees, for which it is 

solely responsible, in the specified XML 

format. For the initial Exchange 

Transaction Fee Summary, which 

would be posted prior to the start of 

trading on the first day of the pre-Pilot 

Period, exchanges would not need to 

include information that is calculated 

on a look-back basis, because the lookback period for that report would predate the pre-Pilot Period. Accordingly, 

preparation of the initial Exchange 

Transaction Fee Summary report should 

be streamlined.430 Finally, the order 

routing datasets, because they also are 

prepared on a look-back basis, will not 

need to be prepared until the end of the 

second month of the pre-Pilot Period (as 

it will contain data for the first month 

of the pre-Pilot period).431 Accordingly, 

the Commission continues to believe 

that the proposed time frames set forth 

in Rule 610T(c)(4) are sufficient to allow 

the equities exchanges and market 

participants to prepare for the 

requirements of the pre-Pilot Period, the 

Pilot Period, and the post-Pilot Period. 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5237 

432 15 U.S.C. 78k–1(a)(1)(C), (a)(2); see also id. 

sec. 78k–1(c)(1) (stating that self-regulatory 

organizations shall not make use of the mails or any 

means or instrumentality of interstate commerce to 

collect, process, distribute, publish, or prepare for 

distribution or publication any information with 

respect to quotations to assist, participate in, or 

coordinate the distribution or publication of such 

information, or to effect any transaction in, or to 

induce or attempt to induce the purchase or sale of, 

any such security in contravention of such rules 

and regulations as the Commission shall prescribe 

to ‘‘assure the . . . fairness and usefulness of the 

form and content of such information’’). 

433 15 U.S.C. 78f(b)(4), (b)(5), (b)(8). The 

Commission also has authority to adopt the Pilot 

pursuant to Exchange Act Sections 17(a) [15 U.S.C. 

78q(a)] (requiring each exchange to make and keep’’ 

for prescribed periods such records, furnish such 

copies thereof, and make and disseminate such 

reports as the Commission, by rule, ‘‘prescribes as 

necessary or appropriate in the public interest, for 

the protection of investors, or otherwise in 

furtherance of the purposes of [the Act]’’), and 23(a) 

[15 U.S.C. 78w(a)] (granting the Commission the 

power to make such rules and regulations as may 

be ‘‘necessary or appropriate to implement the 

provisions of this chapter’’ for which the 

Commission is responsible or for the execution of 

the functions vested in the Commission by the Act). 

434City of Providence, Rhode Island v. BATS 

Global Mkts., Inc., 878 F.3d 36, 41 (2d Cir. 2017). 

435See Cboe Letter I, at 10–11. See 15 U.S.C. 

78s(b)(3)(A). 

436 15 U.S.C. 78s(b)(1). 

437 Id. Sec. 78s(b)(3). 

438 Id. Sec. 78s(b)(3)(B), (C). 

439 Id. Sec. 78s(c). 

440 5 U.S.C. 500, et seq. 

441A few commenters suggested that the Pilot 

‘‘would not withstand judicial scrutiny’’ because 

certain aspects of the Pilot were ‘‘arbitrary and 

capricious and not in accordance with law.’’ See, 

e.g., Nasdaq Letter I, at 3. Specifically, these 

commenters challenged the sufficiency of the 

Commission’s economic analysis, the exclusion of 

non-exchange trading centers from the Pilot, the 

inclusion of ETPs in the Pilot, the ability of the 

Pilot to provide the Commission with usable data, 

and the Commission’s decision to pursue a Pilot 

instead of other market structure initiatives. See, 

e.g., Nasdaq Letter I, at 1–4, 8–9, 11; Cboe Letter I, 

at 12; NYSE Letter, at 2–3, 7. These specific 

concerns are addressed in Section IV (discussing 

the Commission’s economic analysis), Section 

II.A.4 (discussing the exclusion of non-exchange 

trading centers from the Pilot), Section II.B.3 

(discussing the inclusion of ETPs in the Pilot), 

Section II.E (discussing the ability of the Pilot to 

provide the Commission with usable data), notes 

307–319 supra (discussing the Commission’s 

decision to pursue a Pilot in conjunction with other 

market structure initiatives). 

442Nasdaq Letter I, at 11 (quoting Motor Vehicle 

Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. 

Ins. Co., 463 U.S. 29, 43 (1983)). 

443 Id. at 11–12. 

444 Verret Letter I, at 5–6. 

445 Id. at 6. 

No comments were received regarding 

the required notice to suspend the 

automatic sunset provision. 

Accordingly, the Commission adopts 

this aspect of the Pilot for the reasons 

outlined in the Proposing Release. 

G. The Commission’s Authority To 

Conduct the Pilot 

The Commission is adopting the Pilot 

in furtherance of its statutory 

responsibilities. In 1975, Congress 

directed the Commission, through 

enactment of Section 11A of the 

Exchange Act, to use its authority under 

the Exchange Act to facilitate the 

establishment of a national market 

system to link together the multiple 

individual markets that trade securities. 

Congress intended the Commission to 

take advantage of opportunities created 

by new data processing and 

communications technologies to 

preserve and strengthen the securities 

markets. Congress also directed the 

Commission to exercise this authority 

‘‘to carry out’’ certain ‘‘objectives,’’ 

which include assuring: ‘‘economically 

efficient execution of securities 

transactions’’; ‘‘fair competition among 

brokers and dealers, among exchange 

markets, and between exchange markets 

and markets other than exchange 

markets’’; the ‘‘availability . . . of 

information with respect to quotations 

for and transactions in securities’’; and 

’’ an opportunity . . . for investors’ 

orders to be executed without the 

participation of a dealer.’’ 432 In 

addition, the Exchange Act elsewhere 

requires that the rules of national 

securities exchanges (i) ‘‘provide for the 

equitable allocation of reasonable dues, 

fees, and other charges among its 

members and issuers and other persons 

using its facilities,’’ (ii) not be designed 

to ‘‘permit unfair discrimination 

between customers, issuers, brokers, or 

dealers,’’ and (iii) not ‘‘impose any 

burden on competition not necessary or 

appropriate in furtherance of the 

purposes of [the Act].’’ 433

Through these provisions Congress 

conferred on the Commission ‘‘broad 

authority to oversee the SROs’ ‘. . . 

operation . . .’ of the national market 

system.’’ 434 And it is pursuant to this 

authority that the Commission 

originally adopted Rule 610(c). The 

Pilot reflects the Commission’s efforts to 

evaluate, in light of changing market 

conditions, whether the existing 

transaction-based fee and rebate 

structure continues to further the 

statutory goals. In that sense, the Pilot 

follows as an appropriate progression 

from Rule 610, and it represents an 

important step in the Commission’s 

continuing obligation to implement 

Congress’s objectives for the national 

market system. 

The Commission disagrees with the 

suggestion by one commenter that the 

Pilot is inconsistent with Exchange Act 

Section 19(b)(3)(A), which sets out part 

of the process by which proposed rule 

changes by self-regulatory organizations 

may become effective.435 Contrary to the 

commenter’s suggestion, nothing in 

Section 19 interferes with the 

Commission’s authority described 

elsewhere in the Exchange Act. Indeed, 

Section 19 itself makes clear that the 

Commission retains ultimate authority 

over the rules of registered exchanges, 

providing that ‘‘[n]o proposed rule 

change [by a self-regulatory 

organization] shall take effect unless 

approved by the Commission or 

otherwise permitted in accordance with 

[Section 19(b)]’’ 436 and making clear 

that the Commission retains authority to 

suspend and institute proceedings to 

approve or disapprove even those 

exchange rules that are permitted to take 

effect upon filing with the 

Commission.437 Moreover, Section 19 

explicitly permits the Commission to 

summarily implement or suspend any 

such proposed rule changes if, in the 

Commission’s view, doing so would 

serve the public interest, protect 

investors, or assist in maintaining fair 

and orderly markets.438 And it makes 

clear that the Commission retains 

authority to amend exchanges’ rules on 

its own initiative.439

Commenters also disagreed about 

whether the Pilot complied with the 

Commission’s statutory obligations 

under the Administrative Procedure 

Act 440 (‘‘APA’’) and whether the Pilot is 

consistent with the Exchange Act.441

For example, working from the premise 

that the APA requires the Commission 

to ‘‘ ‘examine[ ] the relevant data and 

articulate[ ] a satisfactory explanation 

for its action including a rational 

connection between the facts found and 

the choices made,’ ’’ 442 one commenter 

believed that the Commission ‘‘lacks the 

administrative record,’’ ‘‘evidence’’ and 

‘‘analysis’’ that would be ‘‘needed to 

justify such drastic government 

intrusion into free markets.’’ 443 Another 

commenter, however, disputed that 

notion and observed that the 

Commission had developed the Pilot, in 

part, by relying on ‘‘empirical 

literature’’ that ‘‘is directly on point and 

speaks to the potential distortionary 

effects that the pilot program is 

designed to study’’ and that ‘‘certainly 

provides strong empirical support for 

further analysis by way of data 

generated through a pilot study.’’ 444

The responding commenter also found 

it significant that the Commission was 

‘‘presently in the midst of a formal 

notice and comment process . . . which 

was informed by years of discussion at, 

and a proposal from, the [EMSAC]’’ and 

that the Commission ‘‘had chosen to act 

via a pilot program rather than a 

proposal for a long-term rule.’’ 445 The 

commenter therefore believed the 

5238 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

446 Id. at 5. 

447See, e.g., Swan Letter; IEX Letter I; NYSE 

Letter I. 

448See Proposing Release, supra note 2, at 13009 

n.6, 13012–14. 

449See id. at 13009–14. 

450See IAC Recommendation. 

451See, e.g., Section II.A.2. supra for a discussion 

of comments regarding the impact of current pricing 

models on market quality, execution quality, and 

order routing. 

452Nasdaq Letter I, at 2. See also Cboe Letter I, 

at 1. 

453Nasdaq Letter I, at 5, 11–12. See also Cboe 

Letter I, at 11; Mexco Letter, at 1. One commenter 

agreed that ‘‘price controls on access fees indicate 

something is broken in market structure,’’ but 

observed that ‘‘there has been no serious economic 

analysis, let alone a cost-benefit analysis, of what 

the optimal fee cap (if any) should be’’ and that the 

Pilot would ‘‘provide solid evidence that can be 

used to determine the optimal fee cap.’’ Angel 

Letter I, at 1–2; Angel Letter II, at 2. 

454Cboe Letter I, at 10 (citing 15 U.S.C. 

78s(b)(3)(A)(ii), which provides that ‘‘a proposed 

rule change shall take effect upon filing with the 

Commission if designated by the self-regulatory 

organization as. . . establishing or changing a due, 

fee, or other charge imposed by the self-regulatory 

organization on any person, whether or not the 

person is a member of the self-regulatory 

organization’’). This commenter also noted that 

‘‘every single exchange transaction fee in place 

today was filed with, and processed by, the 

Commission’’ and that any fees that were 

inconsistent with the Exchange Act ‘‘could have 

been suspended or abrogated by the Commission if 

that were deemed necessary.’’ Id. at 6. 

455NYSE Letter I, at 11. This commenter 

identified the relevant ‘‘objectives’’ of Rule 610(c) 

as preventing the exchanges from ‘‘undermining 

Regulation NMS’s price protection and linkage 

requirements.’’ Id. Another commenter similarly 

characterized the ‘‘justification for the fee cap under 

Rule 610(c)’’ as ‘‘the existence of sustained market 

power created by the requirement of best execution 

and the prohibition against trading through,’’ which 

would permit exchanges to ‘‘charge high access fees 

thereby undermining Regulation NMS’s price 

protection and linkage requirements.’’ This 

commenter believed that the Commission had 

wrongfully assumed ‘‘that the market power 

presumably wielded by equities exchanges is so 

great that they may charge excessive fees now and 

in the future’’ unless ‘‘artificial government price 

constraints’’ are imposed. Nasdaq Letter I, at 12–13, 

12 n.38. The third commenter stated that the 

‘‘original fee cap rationale’’ was to ‘‘address 

predatory outlier pricing.’’ Cboe Letter I, at 14. 

456Cboe Letter I, at 14. 

457NYSE Letter I, at 12. See also Cboe Letter I, 

at 10 (stating that it was a ‘‘conflict[ ] with the 

purposes of the Exchange Act and [a] depart[ure] 

from Commission precedent’’ to ‘‘cap fees for 

transactions that do not implicate intermarket price 

protection’’ and ‘‘ban[ ] linked pricing,’’ which has 

been ‘‘utilized by exchanges with SEC consent for 

years’’). 

458See Securities Exchange Act Release No. 

51808 (June 9, 2005), 70 FR 37496, 37545 (June 29, 

2005) (File No. S7–10–04). 

Commission had fulfilled its statutory 

obligations in ‘‘determin[ing] that, given 

existing evidence suggesting the 

distortive effect of practices in the 

market tied to rebates or access fees, a 

pilot program will provide sufficient 

information to inform potential future 

rulemaking.’’ 446

The Commission agrees and notes that 

it has carefully examined available data 

on this issue, engaged in a lengthy and 

deliberative process, and taken into 

account the recommendations of two 

independent advisory bodies (EMSAC 

and the Investor Advisory Committee). 

The Commission developed the Pilot 

through a thorough review of the 

empirical literature, which was cited 

and discussed in the Proposing Release, 

as well as submitted as comments in 

response to this proposal.447 Moreover, 

as discussed in the Proposal, the 

EMSAC conducted a thorough process 

to consider, and ultimately formally 

recommend, that a pilot be 

conducted.448 The EMSAC reflected a 

broad and diverse set of perspectives. In 

addition, EMSAC heard testimony from 

experts during its open meetings (which 

included as panelists senior executives 

from exchanges) regarding exchange fee 

models, the appropriateness of a 

transaction fee pilot, and the shape that 

such a pilot should take.449 In addition 

to EMSAC, the independent Investor 

Advisory Committee also submitted a 

recommendation in support of the 

Pilot.450

After considering all of the available 

information, the Commission has 

identified a fundamental disagreement 

among exchanges, market participants, 

academics, and industry experts 

regarding the impact of such fees and 

rebates on the markets.451 This 

disagreement is further exacerbated by 

the lack of data to evaluate these 

competing claims. The Commission 

believes that the Pilot is necessary to 

study the impact of exchange fees and 

rebates to determine whether a 

regulatory response is needed to 

mitigate the potential distortions that 

current exchange pricing models 

introduce to order routing behavior, 

market quality, and execution quality. 

Some commenters argued that the 

Pilot’s imposition of new fee caps 

constituted ‘‘impermissible government 

rate-making.’’ 452 For example, one 

exchange commenter stated that 

‘‘[g]overnment-imposed price controls’’ 

‘‘reduce choices for market 

participants,’’ ‘‘distort competition 

between over-the-counter venues and 

exchanges,’’ and are ‘‘costly to 

administer and lacking in an incentive 

to be efficient,’’ such that ‘‘they are only 

indicated where they overcome severe 

market imperfection such as monopoly 

ownership of a critical resource.’’ 453 As 

discussed above, another commenter 

asserted that the Exchange Act ‘‘plainly 

contemplates that exchanges, rather 

than the SEC, will make an initial 

determination as to the price of a 

particular product or service,’’ and 

indicating that ‘‘fee setting is the 

province of each exchange, subject to 

the competitive forces that naturally 

control fees’’ and ‘‘subject to oversight 

only in particular situations.’’ 454

Commenters expanded on this 

argument by stating that the 

Commission had not sufficiently 

‘‘evaluate[d] whether there is any 

evidence that the Commission’s 

objectives in adopting the cap on access 

fees . . . are not being met.’’ 455 One 

commenter, for example, found it 

‘‘concerning that the fee caps in the 

proposed Pilot do absolutely nothing to 

further the justification of the original 

cap and, unlike the original access fee 

cap, are set at levels that completely 

undercut existing rates.’’ 456 Exchange 

commenters further contended that the 

Pilot imposes ‘‘completely new 

limitations on exchanges’ business’’ that 

were ‘‘unrelated to Regulation NMS’s 

Access Fee Cap,’’ because the Pilot 

would ‘‘expand[ ] the cap on fees that 

exchanges may charge for execution not 

only against a protected quote, but for 

execution against any quote on an 

exchange, including depth-of-book and 

non-displayed orders,’’ as well as ‘‘limit 

. . . the rebates that an exchange pays’’ 

and ‘‘pricing that is linked to providing 

or removing liquidity on an 

exchange.’’ 457

The Pilot has two Test Groups, one of 

which does not cap fees at all, but rather 

leaves in place the current Rule 610(c) 

fee cap and simply prohibits exchanges 

from paying rebates or offering Linked 

Pricing. The other Test Group does 

impose a lower fee cap for a small 

portion of NMS stocks (730 out of over 

8,000 NMS stocks) for a limited period 

of time, but is doing so to study the 

effects of exchange fee-and-rebate 

pricing models and to gather data to 

assess the impact on the markets and 

market participants of a revised and 

lowered cap compared to the current 

cap. Further, the Commission selected 

an amount for that cap that was 

recommended by commenters, 

including the Investor Advisory 

Committee. 

As explained above, the existing fee 

cap was designed, in part, to prevent 

trading centers from charging 

unreasonably high fees to market 

participants required to honor their 

quotations by the Order Protection 

Rule.458 Because ‘‘[a]ccess fees tend to 

be highest when markets use them to 

fund substantial rebates to liquidity 

providers, rather than merely to 

compensate for agency services,’’ the 

Commission was concerned that ‘‘the 

published quotations of [outlier] 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5239 

459 Id. 

460 Id. 

461 Id. 

462Nasdaq Letter I, at 13. 

463See, e.g., BlackRock Letter, at 1 (‘‘[T]he 

existing access fee cap is outdated and permits 

market forces to drive fees and rebates to excessive 

levels relative to the current magnitude of 

commissions and bid-ask spreads.’’); Goldman 

Sachs Letter, at 2 (identifying a ‘‘well-developed, 

general consensus amongst market participants that 

a $0.0030 per share Fee Cap is an outdated 

benchmark for execution costs in today’s trading 

environment . . . and far from representative of 

true prices in the marketplace’’); Citi Letter, at 1– 

2 (stating that ‘‘today’s 30-mil cap on access fees 

that the exchanges can charge to access liquidity on 

their venues represents a more significant 

percentage of the economics of each trade’’). 

464See, e.g., ICI Letter I, at 2 (‘‘Transaction fees 

and rebates also undermine market transparency 

because the prices displayed by exchanges—and 

provided on trade reports—do not include fee or 

rebate information and therefore do not fully reflect 

net trade prices.’’); Goldman Sachs Letter, at 3 

(stating that ‘‘displayed prices do not reflect the 

actual economic costs because exchange fees and 

rebates are not reflected in those prices’’); 

Oppenheimer Letter, at 2 (‘‘[T]o the extent that 

transaction fees and rebates obfuscate the actual 

price bid or offered for a security, the ‘maker-taker’ 

pricing model has the potential to undermine price 

transparency . . . .’’). 

465 In response to commenters who complained 

that the Pilot’s fee cap Test Group applies to fees 

to provide liquidity, instead of being limited to fees 

to remove liquidity as is the case for Rule 610(c), 

and therefore it is ‘‘unrelated’’ to the existing fee 

regime and the Rule 610(c) construct, the 

Commission notes that when it adopted the Rule 

610(c) fee cap it expressly noted that it would 

‘‘monitor the operation of these rules to assess 

whether in practice . . . broader coverage of the 

rule is necessary.’’ See NMS Adopting Release, 

supra note 10, at 37546. 

466 IEX Letter I, at 6. 

467 Verret Letter I, at 2. See also IAC 

Recommendation, at 1 (‘‘[T]he purpose of the Pilot 

is not to consider imposing price controls, but 

instead to consider requiring fees (of whatever size) 

to be structured so as to minimize complexity and 

agency costs.’’). 

468 IEX Letter I, at 6–7 (‘‘The fact that the SEC has 

not previously chosen to use its authority to 

prohibit rebates, or test their elimination through a 

pilot, does not mean it lacks authority. . . .’’); see 

also Verret Letter I, at 3. 

469 IEX Letter II, at 9. See also Verret Letter I, at 

2 (stating that ‘‘one might properly describe the Reg 

NMS regime as itself a decade-long experiment in 

price controls’’). 

470 IEX Letter I, at 7; IEX Letter II, at 9 (‘‘NYSE 

seems to be saying, ‘We are fine with the current 

fee regulation, because we have been able to operate 

very profitably under it, but it would be illegal to 

even test different fee restrictions unless you 

impose them on ATSs.’’). See also, e.g., Verret 

Letter I, at 2 (‘‘Exchanges appear comfortable when 

price controls on the liquidity taking side benefit 

their business models, but challenge the 

Commission’s authority to implement what they 

describe as price controls when their own business 

models are negatively impacted.’’); Larry Harris 

Letter, at 6 (noting that ‘‘exchange holding 

companies have a strong interest in maintaining the 

current system’’ and that the ‘‘SEC may reasonably 

consider these interests when evaluating comments 

submitted by the exchanges); Themis Trading Letter 

II, at 3 (stating that the Commission should not be 

‘‘distracted. . . by conflicted stock exchanges 

desperately fearful that their business models might 

come crashing down’’). 

471See, e.g., Cboe Letter I, at 9. 

472NYSE Letter I, at 12. 

473 Id. See also Cboe Letter I, at 11. For example, 

the commenter noted that the Commission had 

‘‘provided no analysis or discussion demonstrating 

its reasoned decision-making of how the specific fee 

structures to be mandated in the Proposal would be 

equitably allocated or reasonable’’ under Section 6 

of the Exchange Act. NYSE Letter I, at 12. See also 

15 U.S.C. 78f(b)(4) (requiring the rules of an 

exchange to ‘‘provide for the equitable allocation of 

reasonable dues, fees, and other charges among its 

members and issuers and other persons using its 

facilities’’). 

474 If any of the provisions of these amendments, 

or the application thereof to any person or 

circumstance, is held to be invalid, such invalidity 

shall not affect other provisions or application of 

such provisions to other persons or circumstances 

that can be given effect without the invalid 

provision or application. 

475 44 U.S.C. 3501 et seq. 

markets would not reliably indicate the 

true price that is actually available to 

investors or that would be realized by 

liquidity providers.’’ 459 The 

Commission explained that the fee cap 

helped assure the fairness and 

usefulness of quotation information; 

limit the extent to which the true price 

for those who access quotations can 

vary from the displayed price; permit 

broker-dealers to route orders in a 

manner consistent with the operation of 

a national market system; and protect 

limit orders and promote best-priced 

quotations.460 Accordingly, the 

Commission imposed a $0.0030 fee cap, 

which it believed reflected a 

competitive rate that was consistent 

with current business practices at the 

time (i.e., in 2005).461

In establishing the Rule 610(c) fee 

cap, the Commission did not, however, 

cede its responsibility to ensure that 

markets continue to function in a fair, 

transparent, and efficient manner; nor 

did it state that the $0.0030 fee cap 

could not be revisited if market 

conditions changed. The Pilot is 

designed to determine, among other 

things, whether such a change has 

occurred. Despite assertions by one 

commenter that ‘‘powerful competitive 

forces are clearly present that 

discourage exchanges from exercising 

unabated pricing power,’’ 462 a $0.0030 

fee is still consistently charged by many 

exchanges, raising concerns among 

other commenters that the fee cap is 

stuck at a non-competitive and, perhaps, 

an artificially high rate.463 Several 

commenters have also indicated that 

current pricing models have resulted in 

the kind of distortive pricing that Rule 

610(c) was designed to prevent.464

Testing lower fee levels, and a no-rebate 

fee regime,465 will help the Commission 

to determine whether further regulatory 

action is needed to achieve the 

objectives of Rule 610(c) as well as the 

Commission’s statutory mandate to 

oversee the equities markets. 

The Commission’s position is echoed 

by other commenters that found the 

‘‘suggest[ion] that the Commission lacks 

the authority to implement the Pilot, or 

that testing a rebate ban or alternative 

access fee caps would constitute an 

impermissible form of price control . . . 

meritless’’ 466 or ‘‘entirely 

inaccurate.’’ 467 One commenter, for 

example, noted that the Exchange Act 

‘‘provides very broad authority for the 

Commission to regulate all aspects of 

exchange operation, including fee 

schedules . . . .’’ 468 This commenter 

further observed that ‘‘it makes no sense 

to attack the Commission’s proposal as 

an impermissible form of ‘rate setting’ 

when the markets have been operating 

with exchange fee limits for more than 

10 years.’’ 469 Moreover, this commenter 

asserted that ‘‘exchange criticisms’’ 

regarding ‘‘price control[s]’’ are 

‘‘contradicted by their acceptance of 

th[e] existing price regulation’’ in Rule 

610(c), which ‘‘may better serve their 

interests than the alternative caps and 

rebate prohibition included in the 

Pilot.’’ 470

A few other commenters believed that 

the Commission had not sufficiently 

identified or discussed the statutory 

authority to conduct the Pilot.471 One 

commenter stated that the Proposing 

Release did not contain an ‘‘explanation 

as to how those specific statutory 

sections [cited by the Commission], 

either individually or collectively, 

provide the Commission with the 

authority to carry out the Proposal’s 

broad rate-setting requirements’’ or a 

‘‘discussion of the Commission’s 

statutory authority at all . . . .’’ 472 This 

commenter asserted that the 

Commission ‘‘cannot simply skip this 

analysis or assume it has unrestricted 

authority to conduct pilots on the basis 

that the Proposal is intended to be 

temporary.’’ 473

The Commission notes that it 

followed its standard practice in the 

Proposing Release to identify the 

statutory authority under which it 

promulgated its Proposal. The 

Commission has complied with its 

statutory obligations in promulgating 

the Pilot and has clear statutory 

authority to adopt the Pilot, which the 

Commission believes furthers the 

purposes of the Exchange Act.474

III. Paperwork Reduction Act 

Certain provisions that the 

Commission is adopting today contain 

‘‘collection of information 

requirements’’ within the meaning of 

the Paperwork Reduction Act of 1995 

(‘‘PRA’’).475 The Commission published 

5240 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

476See Proposing Release, supra note 2, at 13038– 

39. 

477 44 U.S.C. 3507; 5 CFR 1320.11. 

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

479See supra Section II.E.0. 

480See supra Section II.E.3. 

481See supra Section II.E.0. 

482See Proposing Release, supra note 2, at 13036. 

The Commission based this estimate on a full-time 

Compliance Manager and Programmer Analyst each 

spending approximately 4 hours, for a combined 

total of approximately 8 hours, to compile and 

publicly post to an exchange’s website a 

downloadable file containing the initial Pilot 

Securities Exchange List. See id. at 13036 n.186. 

483See NYSE Letter I, at 15. 

484See id. 

a notice requesting comment on the 

collection of information requirements 

in the Proposing Release 476 and 

submitted relevant information to the 

Office of Management and Budget 

(‘‘OMB’’) for review in accordance with 

the PRA and its implementing 

regulations.477 The title of the new 

collection of information for Rule 610T 

is ‘‘Transaction Fee Pilot Data.’’ 

Compliance with these collections of 

information requirements is mandatory. 

An agency may not conduct or sponsor, 

and a person is not required to respond 

to, a collection of information unless the 

agency displays a currently valid 

control number. We have applied for an 

OMB Control Number for this collection 

of information. 

The Commission requested comment 

on the collection of information 

requirements in the Proposing Release. 

The Commission received two comment 

letters on the estimates for the collection 

of information requirements included in 

the Proposing Release, which are 

discussed below.478

A. Summary of Collection of 

Information 

The Pilot requires the equities 

exchanges to prepare four sets of data 

that constitute a collection of 

information within the meaning of the 

PRA. First, pursuant to Rule 610T(b), 

the primary listing exchanges will be 

required to prepare and publicly post 

two sets of data on the Pilot Securities 

listed on their markets—the Pilot 

Securities Exchange Lists and the Pilot 

Securities Change Lists.479 In addition, 

pursuant to Rule 610T(d), all equities 

exchanges will be required to provide to 

the Commission monthly order routing 

datasets.480 Lastly, pursuant to Rule 

610T(e), all equities exchanges will be 

required to prepare and publicly post 

the Exchange Transaction Fee 

Summaries, which are monthly 

summaries of information concerning 

fees assessed and rebates paid to market 

participants transacting on the 

exchange.481

B. Proposed Use of Information 

The data collected during the Pilot, 

including the Pilot Securities Exchange 

Lists, Pilot Securities Change Lists, 

Exchange Transaction Fee Summaries, 

and order routing datasets, will allow 

researchers and market participants to 

have ready access to information that 

will facilitate the study of the impact of 

an exogenous shock to transaction fees 

and rebates on order routing behavior, 

execution quality, and market quality. 

In turn, this information should 

facilitate a data-driven evaluation of 

future policy choices. 

In addition, by publishing and 

maintaining a Pilot Securities Exchange 

List and a Pilot Securities Change List, 

each primary listing exchange would 

help ensure that the Commission, 

market participants, researchers, and the 

public have up-to-date information on 

corporate changes to listed issuers that 

impact the list of Pilot Securities, as 

well as changes to the composition of 

any of the Test Groups during the Pilot. 

C. Respondents 

The respondents to this collection of 

information will be the equities 

exchanges, which are registered national 

securities exchanges that trade NMS 

stocks. Specifically, Rule 610T(b), 

which covers the Pilot Securities 

Exchange Lists and Pilot Securities 

Change Lists, will apply to the six 

primary listing exchanges for NMS 

stocks. Rule 610T(d), which requires 

datasets on order routing, will apply to 

all thirteen equities exchanges that are 

currently registered with the 

Commission. Rule 610T(e), which 

requires datasets on fees (rebates) and 

fee (rebate) changes, will apply to all 

thirteen equities exchanges currently 

registered with the Commission. 

D. Total Initial and Annual Reporting 

and Recordkeeping Burdens 

The burdens associated with the Pilot 

are described fully below, but the below 

table briefly summarizes the relevant 

burdens set forth in the Proposing 

Release and in this release. 

Category Release 

Annual 

burdens 

(hours/ 

exchange) 

One-time 

burdens 

(hours/ 

exchange) 

Pilot Securities Exchange Lists ...................................................... Proposing Release ...................................... N/A 8 

Adopting Release ........................................ N/A 44 

Pilot Securities Change Lists ......................................................... Proposing Release ...................................... 126 12 

Adopting Release ........................................ 126 12 

Exchange Transaction Fee Summaries ......................................... Proposing Release ...................................... 64 86 

Adopting Release ........................................ 64 86 

Order Routing Datasets ................................................................. Proposing Release ...................................... 112 80 

Adopting Release ........................................ 124 80 

1. Pilot Securities Exchange Lists and 

Pilot Securities Change Lists 

Upon publication of the initial List of 

Pilot Securities by the Commission, the 

primary listing exchanges would be 

required to determine which Pilot 

Securities are listed on their market and 

compile and publicly post 

downloadable files containing a list of 

those securities, including all data fields 

specified in Rule 610T(b)(2)(i) on their 

websites in pipe-delimited ASCII 

format. The Commission preliminarily 

estimated that each primary listing 

exchange would incur, on average, a 

one-time burden of approximately 8 

burden hours per primary listing 

exchange to compile and publicly post 

its initial Pilot Securities Exchange 

List.482 One commenter stated that it 

‘‘anticipates it could take as many as 44 

hours’’ to compile the initial Pilot 

Securities Exchange List.483 The 

commenter stated that its estimates of 

the costs associated with the Pilot are 

based on its ‘‘prior experience 

implementing the Tick Size Pilot, and 

other similar initiatives . . . .’’ 484 In 

light of this comment, the Commission 

is increasing its estimate. While, unlike 

for the Tick Size Pilot, the Commission 

will prepare the Initial List of Pilot 

Securities and assign them to their 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5241 

485The Commission continues to believe that this 

will require the services a full-time Compliance 

Manager and Programmer Analyst. The Commission 

estimates that each Compliance Manager and 

Programmer Analyst will each spend approximately 

22 hours, for a combined total of approximately 44 

hours, to compile and publicly post to an 

exchange’s website a downloadable file containing 

the initial Pilot Securities Exchange List. 

486 44 burden hours per primary listing exchange 

× 6 primary listing exchanges = 264 burden hours. 

487The Commission derived the total estimated 

burdens from the following estimates: (Attorney at 

4 hours) + (Compliance Manager at 4 hours) + 

(Programmer Analyst at 4 hours) = 12 burden hours. 

See Proposing Release, supra note 2, at 13036. 

488The Commission based this estimate on a fulltime Compliance Manager and Programmer Analyst 

together spending approximately 30 minutes per 

trading day updating and posting the required lists 

(approximately 252 trading days × 30 minutes per 

trading day = 7,560 minutes (126 hours)). See id. 

489NYSE Letter I, at 15. 

490 Id. See also Cboe Letter I, at 21 (stating that 

the ‘‘implementation and ongoing costs of the Pilot 

will be significantly larger in terms of burden hours 

and expenditures than the Commission estimates,’’ 

but providing no specific analysis or alternative 

estimates). 

491See Proposing Release, supra note 2, at 13036. 

The Commission notes that it has revised its 

aggregate burden estimate upwards to 371 hours for 

each exchange to address commenter concerns that 

the estimated burden associated with compiling 

and publicly posting the initial Pilot Securities 

Exchange List was too low. 

492See Proposing Release, supra note 2, at 13027 

n.153 and accompanying text; note 740 infra. 

493 126 burden hours per primary listing exchange 

× 6 primary listing exchanges = 756 burden hours. 

494See Proposing Release, supra note 2, at 13037. 

The Commission preliminarily estimated that an 

equities exchange would assign responsibilities for 

review and potential modification of its systems 

and technology to an Attorney, a Compliance 

Manager, a Programmer Analyst and a Senior 

Business Analyst. The Commission estimated the 

burden of reviewing and potentially modifying its 

systems and technology to be as follows: (Attorney 

at 20 hours) + (Compliance Manager at 20 hours) 

+ (Programmer Analyst at 20 hours) + (Business 

Analyst at 20 hours) = 80 burden hours per equities 

exchange. See id. at 13037 n.194. 

respective treatment groups, and 

therefore the exchanges will only need 

to separate out their listed securities 

into a separate list, the Commission 

nevertheless will increase its estimate as 

the commenter suggested. Accordingly, 

the Commission estimates that each 

primary listing exchange would incur, 

on average, a one-time burden of 

approximately 44 burden hours per 

primary listing exchange to compile and 

publicly post their initial Pilot 

Securities Exchange List.485

Accordingly, the Commission believes 

that the aggregate one-time burden 

associated with the initial Pilot 

Securities Exchange Lists would be 264 

burden hours.486

After posting its initial Pilot 

Securities Exchange List, each equities 

exchange will be required to keep 

current that list to reflect any changes, 

and to also prepare and publicly post on 

its website until the end of the postPilot Period the Pilot Securities Change 

List prior to the beginning of trading 

each trading day. The Commission 

preliminarily estimated that each 

primary listing market would incur a 

one-time burden of approximately 12 

burden hours of internal legal, 

compliance, and information technology 

operations to develop appropriate 

systems to track and compile changes 

relevant to Pilot Securities listed on its 

market.487 The Commission also 

preliminarily estimated that, once the 

primary listing exchanges have 

established these systems, on average, 

each primary listing exchange would 

incur 0.5 burden hours daily, or 126 

burden hours annually to compile any 

changes related to Pilot Securities, such 

as name changes or mergers, and to 

publicly post the updated Pilot 

Securities Exchange Lists and Pilot 

Securities Change Lists on its website 

prior to the start of each trading day.488

One exchange commenter stated that 

‘‘the Commission predicts it that would 

take only 12.5 hours to develop and 

maintain systems to comply’’ with the 

requirements to update prior to the start 

of each trading day the Pilot Securities 

Exchange Lists and Pilot Securities 

Change Lists.489 Based on ‘‘its prior 

experience implementing the Tick Size 

Pilot, and other similar initiatives,’’ this 

commenter further stated that it 

believed ‘‘it could take as many as 300.5 

hours to develop and maintain those 

systems.’’ 490 While the commenter did 

not elaborate on how it computed its 

estimate or whether it represents an 

aggregate burden estimate or an 

annualized estimate, the commenter 

appears to have misunderstood the 

burden estimates contained in the 

Proposing Release because the 

Commission’s estimate greatly exceeded 

12.5 hours. Specifically, the 

Commission’s preliminary estimates 

included a one-time burden of 8 hours 

for primary listing exchanges to compile 

and publicly post the initial Pilot 

Securities Exchange List, a one-time 

burden of 12 hours for primary listing 

exchanges to develop appropriate 

systems to track and compile changes to 

Pilot Securities, and an ongoing burden 

of 126 hours annually to compile any 

such changes and publicly post the 

updated Pilot Securities Exchange Lists 

and Pilot Securities Change Lists, for an 

aggregate burden estimate of 335 hours 

per exchange for the entire Pilot.491

Assuming that the commenter’s estimate 

of 300.5 hours is meant to be an 

aggregate burden estimate, the 

Commission notes that its revised 

aggregate burden estimate of 371 hours 

exceeds the commenter’s estimate. 

The Commission’s estimates are 

averages that take into account the 

diverse set of six primary listing 

exchanges and the expected burdens 

that they would collectively experience 

as a result of the Pilot. Moreover, the 

Commission expects that the primary 

listing exchanges will be able to 

leverage their experience and resources 

from the recent Tick Size Pilot to meet 

the requirements of the Pilot. As noted 

above, unlike for the Tick Size Pilot, the 

Commission will set the initial List of 

Pilot Securities and the primary listing 

exchanges only need to keep those lists 

up to date if their listed issuers 

experience any relevant change. 

Accordingly, the burdens on the 

primary listing exchanges with respect 

to the lists of Pilot Securities should be 

less than those incurred during the Tick 

Size Pilot.492

For those reasons, the Commission 

continues to believe its estimate of the 

aggregate one-time burden for primary 

listing exchanges to develop appropriate 

systems to track and compile changes 

relevant to Pilot Securities listed on 

their markets will be approximately 12 

burden hours for each primary listing 

exchange, or 72 total burden hours, and 

the average, aggregate annual burden to 

update and publicly post the lists of 

Pilot Securities will be approximately 

126 burdens hours for each primary 

listing exchange, or 756 total burden 

hours for all 6 exchanges.493

2. Exchange Transaction Fee Summaries 

The Commission is requiring that 

each equities exchange publicly post on 

its websites the Exchange Transaction 

Fee Summary each month, using an 

XML schema published on the 

Commission’s website. The Commission 

believes that all the data necessary to 

complete the summary are currently 

maintained by the equities exchanges. 

However, the equities exchanges will be 

required to compute the monthly 

realized average and median per share 

fees and rebates, each by participant 

type, that qualified for the Base and Top 

Tier fees and rebates, using fee and 

volume information that the equities 

exchanges maintain. 

The Commission preliminarily 

estimated that each equities exchange 

would incur a one-time burden of 

approximately 80 burden hours of 

internal legal, compliance, information 

technology, and business operations to 

develop appropriate systems for 

tracking fee changes, computing the 

monthly averages, and formatting the 

data and posting it on its website.494

One commenter objected generally to 

the Commission’s burden estimates, but 

5242 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

495Cboe Letter I, at 21 (stating that the 

‘‘implementation and ongoing costs of the Pilot will 

be significantly larger in terms of burden hours and 

expenditures than the Commission estimates,’’ but 

providing no specific analysis or alternative 

estimates). But cf. Better Markets Letter, at 2 (‘‘All 

of the data-fields are thoughtfully proposed, and the 

cost of producing them is minimal and certainly 

acceptable given the enormity of the benefits.’’ The 

commenter did not provide specific burden hour or 

cost estimates.). 

496 (Attorney at 20 hours) + (Compliance Manager 

at 20 hours) + (Programmer Analyst at 20 hours) + 

(Business Analyst at 20 hours) = 80 burden hours 

per equities exchange. 

497 80 burden hours per equities exchange × 13 

equities exchanges = 1,040 burden hours. 

498See Proposing Release, supra note 2, at 13037. 

(Attorney at 10 hours) + (Compliance Manager at 10 

hours) + (Programmer Analyst at 10 hours) + 

(Senior Business Analyst at 10 hours) = 40 burden 

hours. 

499See note 495 supra. 

500 (Attorney at 10.5 hours) + (Compliance 

Manager at 10.5 hours) + (Programmer Analyst at 

11 hours) + (Senior Business Analyst at 10.5 hours) 

= 40 burden hours. 

501 40 burden hours per equities exchange × 13 

equities exchanges = 520 burden hours. 

502See Proposing Release, supra note 2, at 13037. 

The Commission derived the total estimated burden 

from the following estimates: (Compliance Manager 

at 2 hours) + (Senior Business Analyst at 2 hours) 

= 4 burden hours per equities exchange. See id. at 

13037 n.198. 

503See id. at 13037 n.199 and accompanying text. 

504See id. at 13037. The Commission derived the 

total estimated burden from the following estimates, 

which reflect the Commission’s preliminary belief 

that the equities exchanges have experience posting 

information in an XML format on publicly-available 

websites: (Compliance Manager at 1 hour) + 

(Programmer Analyst at 1 hour) = 2 burden hours 

per equities exchange. See id. at fn. 200. 

505See note 495 supra. 

506 (Compliance Manager at 2 hours) + (Senior 

Business Analyst at 2 hours) = 4 burden hours per 

equities exchange. 

507 4 burden hours per equities exchange × 13 

equities exchanges = 52 burden hours. 

508 2 burden hours per equities exchange × 13 

equities exchanges = 26 burden hours. 

509See Proposing Release, supra note 2, at 13037. 

510See id. The Commission derived the total 

estimated burden from the following estimates: 

(Compliance Manager at 1 hour) + (Programmer 

Analyst at 1 hour) = 2 burden hours per equities 

exchange per month. 2 burden hours per equities 

exchange per month × 12 months per year = 24 

burden hours per equities exchange per year. See 

id. at 13037 n.203. 

511See note 495 supra. 

512 (Compliance Manager at 1 hours) + 

(Programmer Analyst at 1 hours) = 2 burden hours 

per equities exchange per month. 2 burden hours 

per equities exchange per month × 12 months per 

year = 24 burden hours per equities exchange per 

year. 

did not provide its own estimates of 

specific burden hours or costs.495 The 

Commission continues to estimate that 

each equities exchange will incur a onetime burden of approximately 80 burden 

hours of internal legal, compliance, 

information technology, and business 

operations to develop appropriate 

systems for tracking fee changes, 

computing the monthly averages, and 

formatting the data and posting it on its 

website.496 Accordingly, the one-time 

initial aggregate burden for all equities 

exchanges necessary for the 

development and implementation of the 

systems needed to capture the 

transaction fee information and post it 

on their websites in the specified format 

in compliance with Rule 610T(e) will be 

1,040 hours.497

The Commission also preliminarily 

estimated that, on average, an equities 

exchange would incur an ongoing 

burden of approximately 40 burden 

hours per year, approximately half the 

estimated burden to develop 

appropriate systems, to monitor and, if 

necessary, update its systems used for 

compiling, formatting and publicly 

posting the Exchange Transaction Fee 

Summaries.498 One commenter objected 

generally to the Commission’s burden 

estimates, but did not specifically 

explain whether or how this burden 

estimate was incorrect.499 The 

Commission continues to estimate that 

the annual ongoing burdens associated 

with monitoring and, if necessary, 

updating these systems would be 

approximately half the burdens of 

initially developing the systems. 

Accordingly, the Commission continues 

to estimate that an equities exchange 

will incur an ongoing burden of 

approximately 40 burden hours per year 

to monitor, and if necessary, update its 

systems used for compiling, formatting 

and publicly posting the Exchange 

Transaction Fee Summaries.500 The 

average aggregate, ongoing, annual 

burden for all equities exchanges to 

monitor their systems will be 520 

hours.501

The equities exchanges will be 

required to format, calculate certain 

figures, and post their initial Exchange 

Transaction Fee Summary at the outset 

of the pre-Pilot Period. As this would be 

the first time an equities exchange 

would be required to produce and post 

on its website such a summary, the 

Commission preliminarily estimated 

that it would require approximately 4 

burden hours for each equities exchange 

to complete the initial Exchange 

Transaction Fee Summary and perform 

the necessary calculations.502 In 

addition, each equities exchange will be 

required to make its summary publicly 

available on its website using an XML 

schema to be published on the 

Commission’s website. As the 

Commission preliminarily believed that 

the equities exchanges had experience 

applying the XML format to market 

data,503 the Commission estimated that 

initially each equities exchange would 

incur a burden of 2 burden hours 

specific to the initial Exchange 

Transaction Fee Summary to ensure that 

it has properly implemented the XML 

schema.504 One commenter objected 

generally to the Commission’s burden 

estimates, but did not specifically 

explain whether or how this burden 

estimate was incorrect.505 The 

Commission continues to estimate that 

each equities exchange will require 

approximately 4 burden hours to 

complete the initial Exchange 

Transaction Fee Summary,506 for an 

aggregate, initial burden of 52 hours to 

complete its initial Exchange 

Transaction Fee Summary.507 The 

Commission also continues to estimate 

that each equities exchange will incur 

an initial burden of approximately 2 

burdens hours for an aggregate, initial 

burden of 26 hours to post that dataset 

publicly on its website using an XML 

schema to be published on the 

Commission’s website. The total 

aggregate, initial burden to complete the 

initial Exchange Transaction Fee 

Summary will therefore be 78 burden 

hours.508

Each equities exchange will be 

required to update the Exchange 

Transaction Fee Summary on a monthly 

basis to account for changes from the 

prior month, if any, and to report 

monthly fee and rebate information. The 

Commission preliminarily believed that 

such updates would require fewer 

burden hours than the initial Exchange 

Transaction Fee Summary, as the 

equities exchanges would have 

experience calculating necessary data 

and formatting the reports as required 

by the Rule.509 Accordingly, the 

Commission preliminarily estimated 

that it would require approximately 2 

burden hours each month, or 24 burden 

hours on an annualized basis, for each 

equities exchange to update the 

Exchange Transaction Fee Summary.510

This estimate contemplated the impact 

of publicly posting the summary using 

the XML schema to be published on the 

Commission’s website. One commenter 

objected generally to the Commission’s 

burden estimates, but did not 

specifically explain whether or how this 

burden estimate was incorrect.511 The 

Commission continues to estimate that 

it will require approximately 2 burden 

hours each month, or 24 burden hours 

on an annualized basis, for each equities 

exchange to update the Exchange 

Transaction Fee Summary.512 As such, 

the equities exchanges will incur an 

aggregate, annual burden of 312 burden 

hours to update and publicly post on 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5243 

513 2 burden hours per equities exchange × 13 

equities exchanges × 12 monthly updates = 312 

burden hours per year. 

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

515See id. The Commission preliminarily 

estimated that an equities exchange will assign 

responsibilities for review and potential 

modification of its systems and technology to an 

Attorney, a Compliance Manager, a Programmer 

Analyst and a Senior Business Analyst. The 

Commission estimated the burden of reviewing and 

potentially modifying its systems and technology to 

be as follows: (Attorney at 20 hours) + (Compliance 

Manager at 20 hours) + (Programmer Analyst at 20 

hours) + (Senior Business Analyst at 20 hours) = 80 

burden hours per equities exchange. See id. at 

13038 n.207. 

516 80 burden hours per equities exchange × 13 

equities exchanges = 1,040 burden hours. 

517See Proposing Release, supra note 2, at 13038. 

The Commission derived the total estimated 

burdens from the following estimates, which 

reflected the Commission’s preliminary view that 

annual ongoing burdens would be approximately 

half the burdens of initially ensuring an exchange 

has the appropriate systems to capture the required 

information in the required format: (Attorney at 10 

hours) + (Compliance Analyst at 10 hours) + 

(Programmer Analyst at 10 hours) + (Business 

Analyst at 10 hours) = 40 burden hours per equities 

exchange. See id. at 13038 n.209. 

518 40 burden hours per equities exchange × 13 

equities exchanges = 520 burden hours. 

519See Proposing Release, supra note 2, at 13038. 

520See id. See also FR Doc. 2016–08552, 81 FR 

22143 (April 14, 2016) (‘‘Request to OMB for 

Extension of Rule 605 of Regulation NMS’’). 

521Compliance Manager at 3 hours + Programmer 

Analyst at 4 hours = 7 burden hours per month, per 

equities exchange. 7 burden hours per month × 12 

months = 84 burden hours per year, per equities 

exchange. 

522 84 burden hours per year × 13 equities 

exchanges = 1,092 burden hours. 

523NYSE Letter I, at 15. See also Cboe Letter I, 

at 21 (stating that the ‘‘implementation and ongoing 

costs of the Pilot will be significantly larger in terms 

of burden hours and expenditures than the 

Commission estimates,’’ but providing no specific 

analysis or alternative estimates). 

524The Commission notes that it has revised this 

estimate upwards to 124 burden hours annually. 

525See Proposing Release, supra note 2, at 13038. 

The Commission notes that it has revised this 

estimate upwards to 452 burden hours per exchange 

for the entire Pilot. 

their websites the Exchange Transaction 

Fee Summaries.513

3. Order Routing Datasets 

The Commission preliminarily 

estimated that, on average, there would 

be no paperwork burden to the equities 

exchanges to capture the order routing 

data required pursuant to Rule 610T(d) 

to be included in the order routing 

datasets, as the Commission expected 

that the equities exchanges would 

collect the required data to create the 

order routing datasets by leveraging 

existing systems and technology already 

in place for the collection and reporting 

of data.514 The Commission believes 

this continues to be true with the 

changes to the order routing datasets, 

which also involve data elements 

currently captured by existing systems. 

The Commission preliminarily 

believed, however, that the equities 

exchanges would incur an initial onetime burden of 80 burden hours per 

equities exchange to ensure that their 

systems and technology are able to 

accommodate the proposed 

requirements to aggregate, anonymize, 

and publicly post the order routing 

information.515 While the exchanges 

will still need to aggregate the data, they 

no longer will need to anonymize and 

publicly post it and instead will 

transmit the information to the 

Commission. The Commission 

continues to believe that each equities 

exchange would incur an initial onetime burden of 80 burden hours to 

ensure that its systems and technology 

are able to accommodate the 

requirements to aggregate and provide 

to the Commission the order routing 

information. Accordingly, the 

Commission estimates that the aggregate 

one-time initial burden for ensuring an 

exchange’s systems and technology are 

able to aggregate and provide to the 

Commission the required order routing 

data in compliance with Rule 610T(d) 

will be 1,040 burden hours.516

The Commission also preliminarily 

estimated that, on average, it would take 

an equities exchange approximately 40 

burden hours per year to ensure that the 

systems and technology are up to date 

so as to facilitate compliance with the 

Rule.517 The Commission continues to 

estimate that, on average, it would take 

an equities exchange approximately 40 

burden hours per year to ensure that the 

systems and technology are up to date 

so as to facilitate compliance with the 

Rule. Therefore, the Commission 

estimates that the aggregate annual 

burden to maintain the systems 

necessary to aggregate and provide to 

the Commission the required order 

routing information is approximately 

520 burden hours per year.518

Each equities exchange would incur 

an ongoing burden associated with 

creating and formatting the order 

routing datasets each month. The 

Commission noted that the equities 

exchanges have experience with 

creating similar datasets in accordance 

with their obligations under Rule 605 of 

Regulation NMS.519 The Commission 

preliminarily believed that each equities 

exchange would incur burdens similar 

to those associated with preparing Rule 

605 reports.520 Accordingly, the 

Commission preliminarily believed that 

each equities exchange would incur a 

burden of six burden hours per month, 

or 72 burden hours per year, to prepare 

and publicly post on its website the 

order routing datasets.521 While the 

order routing datasets will not be 

publicly posted but will instead be 

provided to the Commission, the 

Commission is requiring the equities 

exchanges to separate out post-only 

orders and auction-only orders (or 

exclude auction-only orders if they so 

choose). The Commission estimates that 

separating out these orders will require 

approximately 1 additional burden hour 

per month. As such, the Commission 

estimates that each equities exchange 

will incur a burden of approximately 

seven burden hours per month, or 84 

burden hours per year, to prepare and 

provide to the Commission the order 

routing datasets. Therefore, the 

aggregate, annual burden to prepare and 

provide to the Commission order 

routing datasets in accordance with 

Rule 610T(d) will be approximately 

1,092 burden hours.522

One exchange commenter stated that 

‘‘the Commission allocates 160 hours 

associated with producing order routing 

data,’’ but estimated that it ‘‘would 

actually require over 400 hours,’’ based 

on ‘‘its prior experience implementing 

the Tick Size Pilot, and other similar 

initiatives . . . .’’ 523 While the 

commenter did not elaborate on how it 

computed its estimate or whether it 

represents an aggregate burden estimate 

or an annualized estimate, the 

commenter appears to have 

misunderstood the burden estimates 

contained in the Proposing Release 

because the Commission’s estimate 

exceeds the 160 hours cited by the 

commenter. Specifically, the 

Commission’s preliminary estimate 

included a one-time burden of 80 hours 

and an ongoing burden of 112 hours 

annually,524 for an aggregate burden 

estimate of 416 hours per exchange for 

the entire Pilot.525 Second, the 

commenter does not explain how it 

calculated its estimate of ‘‘over 400 

hours,’’ break down the costs included 

in this estimate, or specify whether this 

number is an aggregate burden estimate 

or an annualized estimate. Assuming 

that the commenter’s estimate of over 

400 hours is meant to be an aggregate 

burden estimate, the Commission notes 

that its revised aggregate burden 

estimate of 452 hours is substantially 

similar. The Commission notes that 

exchanges will no longer be required to 

publicly post this data, but will instead 

transmit the datasets directly to the 

Commission. Moreover, the Commission 

expects that the exchanges will be able 

to leverage their experience and 

5244 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

526See Section C.2.a.iii. infra. See also, e.g., 

Better Markets Letter, at 2. 

527See, e.g., 5 U.S.C. 552 et seq.; 15 U.S.C. 78x 

(governing the public availability of information 

obtained by the Commission). 

528 17 CFR 240.17a–1. 

529Execution quality generally refers to how 

favorably customer orders are executed. Execution 

quality measures are similar to liquidity measures 

and tend to include transaction costs, the speed of 

execution, the probability that the trade will be 

executed, and the price impact of the trade. See 

NMS Adopting Release, supra note 10, at 37513– 

15, 37537–38. Market quality encompasses 

execution quality but also relates more generally to 

how well the markets function. Market quality 

measures include liquidity, price discovery, and 

volatility in prices. See, e.g., Henrik Bessembinder, 

Trade Execution Costs and Market Quality after 

Decimalization, 38 J. Fin. & Quantitative Analysis 

747–77 (2003), https://doi.org/10.2307/ 

4126742https://doi.org/10.2307/4126742; Maureen 

O’Hara & Mao Ye, Is Market Fragmentation 

Harming Market Quality? 100 J. Fin. Econ. 459–74 

(2011), https://doi.org/10.1016/ 

j.jfineco.2011.02.006. 

530See, e.g., James Angel, Lawrence Harris & 

Chester Spatt, Equity Trading in the 21st Century, 

1 Q. J. Fin. (2011), https://doi.org/10.1142/ 

S2010139211000067 (hereinafter ‘‘Angel, Harris, & 

Spatt’’); Robert H. Battalio, Shane A. Corwin, & 

Robert H. Jennings, Can Brokers Have It All? On the 

Relation Between Make-Take Fees and Limit Order 

Execution Quality, 71 J. Fin. 2193–237 (2016), 

http://onlinelibrary.wiley.com/doi/10.1111/ 

jofi.12422/full (hereinafter ‘‘Battalio Equity Market 

Study’’); Larry Harris, Maker-Taker Pricing Effects 

on Market Quotations 24–25 (USC Marshall Sch. 

Bus., Draft No. 0.91, 2013), http://bschool.huji.ac.il/ 

.upload/hujibusiness/Maker-taker.pdf (hereinafter 

‘‘Harris’’). 

531For commenters concurring with this 

assessment, see, e.g., Barnard Letter, at 1 (stating the 

Pilot ‘‘should provide credible analyses of the 

effects—both positive and negative—of exchange 

fees and rebates on the quality and efficiency of 

trading.’’); Better Markets Letter at 2 (stating that the 

Commission ‘‘lacks sufficient data to outlaw 

rebates’’ and believed that the Pilot ‘‘should fill this 

data and knowledge gap.’’). 

532Many commenters expressed support for the 

Pilot and the utility of the information that may be 

gained from it. See AJO Letter, at 1, CII Letter, at 

3, NYSTRS Letter, at 1, ICI Letter I, at 1–2, MFS 

Letter, at 1, Nuveen Letter, at 2, Clark-Joseph Letter, 

at 1, RBC Letter I, at 2, Invesco Letter, at 2, CFA 

Letter, at 1, State Street Letter, at 2, Wellington 

Letter, at 1, Joint Pension Plan Letter, at 2, 

Oppenheimer Letter, at 2, Angel Letter I, at 1, 

Vanguard Letter, at 2, Verret Letter I, at 1, T. Rowe 

Price Letter, at 1. 533See, e.g., Babelfish Letter, at 3; Clearpool 

Letter, at 2; T. Rowe Price Letter, at 1, 3, and ClarkJoseph Letter, at 1. 534See infra Section V.C.1.a.ii, for further 

discussion of the benefits of studying other 

economic effects of transaction fees and rebates. 

535See infra Section V., for discussion of existing 

studies related to these topics and their limitations. 

See also supra Section II.B (discussing the Nasdaq 

study, which examined a change in the access fees 

and rebates charged by Nasdaq for 14 stocks over 

a four-month period). 

resources from the Tick Size Pilot to 

meet the requirements of the Pilot.526

For those reasons, the Commission 

believes its estimate of the one-time 

burden for exchanges to develop and 

implement appropriate systems to 

aggregate the order routing data will be, 

on average, 80 burden hours for each 

exchange, and the ongoing annual 

burden to update these systems and to 

gather and to transmit the relevant data 

to the Commission will be, on average, 

124 burden hours for each exchange. 

E. Collection of Information Is 

Mandatory 

All of the collections of information 

pursuant to Rule 610T would be 

mandatory. 

F. Confidentiality of Responses to 

Collection of Information 

The Commission believes that the 

broker-dealer specific order routing data 

should be protected from disclosure 

subject to the provisions of applicable 

law.527 The Commission will deem 

broker-dealer identifying order routing 

data as being subject to a confidential 

treatment request under 17 CFR 200.83 

without the need to submit a request. 

The Pilot Securities Exchange List, Pilot 

Securities Change List, and the 

Exchange Transaction Fee Summary 

would not be confidential. Rather, each 

would be publicly posted by the 

exchanges. 

G. Retention Period for Recordkeeping 

Requirements 

National securities exchanges would 

be required to retain records and 

information pursuant to 17 CFR 

240.17a–1 (Rule 17a–1 under the 

Exchange Act).528

IV. Economic Analysis 

As discussed above, the Pilot is 

designed to produce information on the 

impact of transaction fee-and-rebate 

pricing models on order routing 

decisions by broker-dealers, as well as 

their impact on execution and market 

quality.529 In recent years, a number of 

academics and market participants have 

expressed concern that the structure of 

exchange transaction-based fee pricing 

may lead, for example, to potential 

conflicts of interest between brokerdealers and their customers when 

brokers-dealers route customer orders to 

trading centers offering rebates so that 

the broker-dealer can capture the 

rebates, even when these venues do not 

offer high execution quality.530

However, as discussed in more detail 

below, the Commission cannot 

determine from existing empirical 

evidence the impact, if any, of exchange 

transaction fee models on order routing 

decisions by broker-dealers or on market 

and execution quality.531 Specifically, 

determining whether a causal 

relationship between exchanges’ 

transaction fee-and-rebate pricing 

models and broker-dealers’ behavior is 

complicated because, for example, such 

pricing models and order routing 

decisions could be jointly determined 

and order routing decisions could 

influence fees just as fees could 

influence order routing decisions. 

Currently available data do not permit 

researchers to isolate these factors and 

thus identify the existence or direction 

of such a causal relationship, which in 

turn impedes researchers’ ability to 

determine the extent to which conflicts 

may exist and any potential negative 

impacts may manifest.532

Because of the existing lack of 

empirical evidence regarding the 

potential conflicts of interest and 

potential effects of exchange fee models, 

additional information would assist the 

Commission in making future regulatory 

decisions. To remedy the insufficiency 

of existing empirical evidence, the 

Commission is adopting the Pilot to 

generate data that is otherwise 

unavailable to study fees and rebates 

that exchanges assess to broker-dealers 

and observe the impacts of those fees 

and rebates on the markets and market 

participants. Specifically, the 

Commission expects that the data 

collected is likely to shed light on the 

extent, if any, to which broker-dealers 

route orders in ways that benefit the 

broker-dealer but may not be optimal for 

customers, and the extent to which 

exchange pricing models create 

distortions that may have adverse 

impacts. The data obtained from the 

Pilot will inform future regulatory 

initiatives to the ultimate benefit of 

investors.533 In addition, the Pilot will 

provide information about other 

potential economic effects of reducing 

access fee caps or prohibiting rebates 

and Linked Pricing. For example, the 

Pilot could offer information on whether 

prohibiting rebates and Linked Pricing 

alters broker-dealer behavior in a 

manner that affects market quality, such 

as by impacting quoted spreads across 

NMS stocks.534

The Pilot is uniquely capable of 

generating empirical evidence that is 

currently lacking because it is designed 

to provide an exogenous shock to 

transaction fee-and-rebate pricing 

models across all exchanges 

simultaneously and facilitate the 

collection of representative data across 

a broad range of securities.535 An 

exogenous shock to a system occurs 

when an element of the system is 

changed from without the system. (i.e., 

the change or shock is not under the 

control or influence of those within the 

system) but can induce endogenous (i.e., 

within the system) responses. In the 

Pilot’s context, the exogenous shock 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5245 

536See, e.g., CII Letter, at 3, NYSTRS Letter, at 1, 

RBC Letter I, at 2, Joint Pension Plan Letter, at 2, 

Oppenheimer Letter, at 2 

537See, e.g., Clearpool Letter, at 2. As discussed 

above, Nasdaq conducted its own fee experiment, 

but other exchanges did not conduct similar 

experiments simultaneous with Nasdaq. 

538See 15 U.S.C. 77b(b); 15 U.S.C. 78c(f). 

539See 15 U.S.C. 78w(a)(2). 

540 Id. 

541See Nasdaq Letter I, at 3, 11. 

542NYSE Letter I, at 3, 12. See also, e.g., Level 

Brands Letter, at 1; Johnson Letter, at 1; Sensient 

Letter; Tredegar Letter, at 1; Halliburton Letter, at 

1. 

543See ASA Letter, at 5. See also T.D. Ameritrade 

Letter, at 3 (estimating costs of widening spreads to 

its clients at $24,000,000). 

544NYSE Letter I, at 13. See also TD Ameritrade 

Letter, at 3 (estimating costs of widening spreads to 

its clients at $24,000,000 annually) and Energizer 

Letter, at 1. 

545See STANY Letter, at 2; Cboe Letter I, at 21; 

Nasdaq Letter I, at 10; FIA Letter, at 3; Citi Letter, 

at 5. 

546See, e.g., Vanguard Letter, at 3; Better Markets 

Letter, at 2; Healthy Markets Letter I, at 34; Angel 

Letter II, at 3. 

547See, e.g., Cboe Letter, at 7 n.14 and 20 (noting 

failure to adequately address lost revenue to 

exchanges); NYSE Letter I, at 3; NYSE Letter I, at 

3 and 13 (addressing impact on small businesses 

and issuers); Apache Letter, at 2 (noting potential 

negative cost impacts to issuers engaged in 

secondary offerings or conducting share 

repurchasing programs); Nasdaq Letter I, at 8 

(noting potential added cost to market makers when 

pricing arbitrage opportunities because of 

additional complexity in exchange pricing models 

under the Pilot). 

548 Verret Letter I, at 3–4. See also Verret Letter 

I, at 7 (asserting that ‘‘[a]rguments by the Exchanges 

concerning the pilot proposal’s failure to quantify 

costs are irrelevant, in so far as the proposal 

properly identifies where they might at present be 

unquantifiable and particularly where those 

unquantifiable costs relate to the data the pilot is 

intended to generate.’’). 

549 Verret Letter I, at 3–4. See also IEX Letter III, 

at 8, 10 (arguing that these commenters ignore ‘‘the 

full range of benefits that investors could realize if 

rebates were banned entirely’’). 

550 Verret Letter I, at 4–5. 

takes the form of a reduction of the 

maximum permissible transaction fees 

and a prohibition on rebates and Linked 

Pricing on all U.S. equities exchanges. 

This shock will allow researchers to 

explore how changes to fees and rebates 

could lead to changes in broker-dealer 

order routing and market and execution 

quality for a broad sample of NMS 

securities.536 Specifically, the reduction 

in fees or the elimination of rebates and 

Linked Pricing, as required in specific 

Test Groups of the Pilot, may reduce the 

magnitude or eliminate the potential 

conflict of interest between brokerdealers and their clients and the 

potential distortions introduced by 

exchange transaction-based fees and 

rebates. These effects would, in turn, be 

reflected in measurable changes to the 

order routing and execution quality of 

stocks in the Pilot’s Test Groups. 

The terms of the Pilot are discussed 

in Section II above. Exchanges will 

continue to be permitted to have varying 

fees within each Test Group, and will be 

permitted to change their fees at their 

discretion, subject to the proposed rule 

change filing requirements of Section 19 

of the Exchange Act, during the Pilot for 

securities within each Test Group, so 

long as they comply with the conditions 

applicable to that Test Group. 

In the absence of the Pilot, the 

Commission believes it is unlikely that 

exchanges would collectively undertake 

a similar pilot and voluntarily 

coordinate the exogenous shock to fees 

and rebates across a broad set of 

securities, broker-dealers, and 

exchanges that would be required to 

analyze the effects of changes to fees 

and rebates.537 By imposing the same 

modifications to fees and rebates on all 

U.S. equities exchanges, the Pilot will 

allow researchers to obtain data that 

will permit them to examine the impact 

of changes to fees and rebates on the 

order routing decisions of brokerdealers. If all exchanges were not 

subject to the pilot terms, the pilot data 

would be limited because broker-dealers 

could redirect their order flow to the 

non-participating exchanges. 

Accordingly, the Commission believes 

that the Pilot will enable the collection 

of valuable data that would otherwise be 

unavailable. 

The Commission is mindful of the 

costs imposed by, and the benefits 

obtained from, the rules it promulgates. 

Whenever the Commission engages in 

rulemaking and is required to consider 

or determine whether an action is 

necessary or appropriate in the public 

interest, Section 3(f) of the Exchange 

Act requires the Commission to 

consider whether the action would 

promote efficiency, competition, and 

capital formation, in addition to the 

protection of investors.538 Further, 

when making rules under the Exchange 

Act, Section 23(a)(2) of the Exchange 

Act requires the Commission to 

consider the impact such rules would 

have on competition.539 Section 23(a)(2) 

of the Exchange Act also prohibits the 

Commission from adopting any rule that 

would impose a burden on competition 

not necessary or appropriate in 

furtherance of the purposes of the 

Exchange Act.540

A few commenters challenged the 

sufficiency of the economic analysis 

contained in the Proposal. For example, 

one commenter argued the proposal was 

‘‘arbitrary and capricious’’ because the 

Commission failed to consider the 

economic consequences of its proposal 

and only partially framed the costs and 

benefits of the Proposal, ignoring 

important and significant factors and 

costs.541 Similarly, another commenter 

believed that the ‘‘cost-benefit analysis 

contain[ed] numerous flaws that are 

inconsistent with the Commission’s 

obligation to provide a ‘reasoned basis’ 

for its regulations,’’ namely that the 

Commission had ‘‘substantially 

underestimated the costs of the 

Proposal’’ and ‘‘fail[ed] to identify any 

countervailing market benefit that 

justifies imposing . . . harms on . . . 

exchanges and issuers.’’ 542 Another 

commenter thought the Commission 

understated the potential costs of the 

Pilot while overstating the benefits.543

For example, some commenters noted 

that they anticipated the Pilot would 

result in wider spreads, increased 

transaction costs, and increased broker 

commissions, all of which would result 

in added costs to investors.544 Several 

commenters thought the Commission 

failed to consider or underestimated the 

implementation costs of the Pilot,545

while other commenters challenged 

these assertions and instead believed 

the Pilot would impose minimal costs 

on exchanges and broker-dealers, 

particularly in light of the existing 

processes and technology that currently 

support immediately effective fee 

changes from the exchanges.546 Finally, 

other commenters felt that the economic 

analysis failed to adequately account for 

the projected costs to particular 

categories of market participant.547

Other commenters supported the 

Commission’s analysis. For example, 

one commenter argued that ‘‘differing 

estimates of costs is not a sufficient 

basis alone to challenge Commission 

action.’’ 548 This commenter argued that 

the commenters ‘‘tend to ignore the 

benefit side of cost-benefit analysis’’ and 

believed that ‘‘the most significant 

benefit of the pilot is its potential to 

inform subsequent rulemaking,’’ such 

that the ‘‘mere presence of uncertainty 

in the Commission’s estimates of 

potential costs and benefits does not by 

itself open the pilot program to 

challenge.’’ 549 While acknowledging the 

potential for ‘‘liquidity effects,’’ this 

commenter further noted that the 

Commission ‘‘is merely held to make a 

reasonable estimate of those costs before 

adopting a pilot program,’’ not to ‘‘make 

a perfect estimate’’ or ‘‘cease the pilot if 

the costs to liquidity prove 

significant.’’ 550

The economic analysis provided in 

the Proposing Release thoroughly 

described the potential economic effects 

of the Transaction Fee Pilot, including 

the benefits, costs, and alternatives and 

5246 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

551See Proposing Release, supra note 2. 

552See Section infra IV.B.2.a. 

553See, e.g., Better Market Letter at 1 (stating 

‘‘[p]ayments by the exchanges that incentivize and 

induce routing decisions by broker-dealers at the 

expense of best execution and market quality is one 

of the most entrenched and insidious market 

practices today, and requires forceful and 

independent intervention by the SEC.’’). See also 

Themis Trading Letter at 4–5; Larry Harris Letter at 

9; Clearpool at 2. 

554See Themis Trading Letter I, at 5. 

555See Larry Harris Letter, at 3 (noting that most 

brokerage customers do not know about potential 

broker agency problems and so do not know that 

their brokers may not be representing their orders 

as best they might). 

556While consolidated revenues may be available 

from Form 10–K filings for broker-dealers that are 

public reporting companies, broker-dealers do not 

report revenues attributable to specific sources, 

such as rebates from a particular exchange or 

payments for order flow from a particular venue. 

For instance, revenues derived from commissions 

and fees are often just reported in aggregate as 

‘‘Commissions and Fees.’’ Therefore, even though 

aggregate revenues for some broker-dealers are 

publicly available, customers do not have access to 

the information on individual sources of revenue 

that could reveal potential conflicts of interest. 

557These switching costs may be monetary, but 

may also have a time and effort component. 

558Collective action occurs when a number of 

individuals or entities work together to achieve a 

common objective, such as investors acting to 

reduce the potential conflicts of interest in order 

routing decisions by broker-dealers. 

the potential effect on efficiency, 

competition, and capital formation. 

Like the Proposing Release, where 

possible, the Commission has quantified 

below the likely economic effects of the 

Pilot; however, as explained further 

below, the Commission is unable to 

quantify all of the economic effects 

because it lacks the information 

necessary to provide reasonable 

estimates. In some cases, quantification 

depends heavily on factors outside of 

the control of the Commission, which 

makes it difficult to predict how market 

participants would act under the 

conditions of the Pilot. For example, 

because of the flexibility that market 

participants have with respect to the 

choice of trading center for execution of 

transactions and because those choices 

can be influenced by factors outside of 

the scope of the Pilot, such as volume 

discounts, the Commission cannot 

quantify, ahead of the Pilot, the 

economic impact of any changes in 

order routing decisions by brokerdealers that may result from the Pilot. 

Nevertheless, as described more fully 

below, the Commission provides both a 

qualitative assessment of the potential 

effects and a quantified estimate of the 

potential aggregate initial and aggregate 

ongoing costs, where feasible. 

A. Background and Market Failures 

The Commission’s Proposal provided 

a review of transaction-based fee 

models, including a discussion of the 

history and mechanics of transactionbased pricing and an overview of the 

concerns about potential conflicts of 

interest between broker-dealers and 

their customers attributed to access fees 

and rebates assessed by exchanges as 

well as the potential distortions that 

exchange fee models can introduce into 

market structure.551

The Commission considered whether 

competition within the broker-dealer 

industry, as well as competition among 

the equities exchanges, is sufficient to 

alleviate potential conflicts of interest 

presented by exchange fees and rebates 

and also the potential distortions such 

fee-and-rebate models may introduce. 

The Commission believes that 

competition between broker-dealers 

may not be capable of addressing these 

potential conflicts and distortions for 

three reasons: asymmetric information, 

switching costs, and a lack of collective 

action, each of which is discussed 

below. Further, competition between 

broker-dealers is not readily capable of 

independently resolving the other 

potential concerns presented by 

exchange fee models, such as excessive 

intermediation, fragmentation, 

complexity, and cross-subsidization 

because those issues are within the 

exclusive control of the exchanges. The 

limitations of competition among the 

equities exchanges is discussed in detail 

below. 

1. Market Failure at the Broker-Dealer 

Level 

The Commission considered whether 

competition could alleviate potential 

conflicts of interest between investors 

and broker-dealers, as investors choose 

broker-dealers to place orders on their 

behalf.552 To the extent that investors 

are able to identify broker-dealers that 

do not act on potential conflicts of 

interest in a manner inconsistent with 

the interests of their customers, 

investors could discourage brokerdealers from acting on such conflicts of 

interest and avoid doing business with 

those broker-dealers that do not offer 

such assurances. However, several 

commenters opined that competition 

and deference to market forces alone 

would not be sufficient to challenge the 

‘‘deeply rooted conflicts of interest’’ that 

they believe are present in today’s 

market structure.553 For example, one 

commenter noted that many 

institutional clients are tied to large 

broker/dealers because of the multitude 

of services that their brokers provide, so 

they cannot simply ‘‘fire their brokers’’ 

if they are unhappy with their routing 

decisions.554 Further, the Commission 

does not believe that competition among 

broker-dealers alone will be sufficient to 

address potential conflicts of interest in 

order routing decisions because of three 

conditions that are present in today’s 

markets: asymmetric information, 

switching costs, and a lack of collective 

action. 

First, asymmetric information 

between broker-dealers and their 

customers limits the ability of customers 

to identify broker-dealers that do not act 

on potential conflicts of interest.555 For 

example, customers do not generally 

have access to information about brokerdealers’ individual sources of 

revenue.556 As discussed below in more 

detail, although disclosures required 

pursuant to Rule 606 provide 

information about material conflicts of 

interest related to payment for order 

flow, these disclosures do not provide 

information on the effect of transaction 

fee-and-rebate pricing models on order 

routing decisions. Moreover, while 

under Rule 606, a customer may request 

certain information about how her 

broker routed certain orders on her 

behalf, a customer cannot necessarily 

use this information to compare how 

these orders would have been treated by 

broker-dealers other than her own. 

Further while recent amendments to 

Rule 606 would provide customers with 

limited information about transaction 

fees paid and transaction rebates 

received by the broker, the disclosure 

would not provide data to enable the 

customer to assess the impact of 

exchange transaction fees and rebates on 

market quality and execution quality. 

Second, even if investors had 

sufficient information to conclude they 

would be better served by a different 

broker-dealer, investors may face costs 

in switching broker-dealers.557 If these 

switching costs are high relative to the 

costs that investors anticipate may arise 

from potential conflicts of interest, 

investors may not switch broker-dealers 

even if it appears that their brokerdealer may have acted on conflicts of 

interest. 

The presence of switching costs also 

may exacerbate a collective action 

problem among investors.558 Investors 

could provide incentives to brokerdealers to eliminate potential conflicts 

of interest by threatening to move 

accounts away from broker-dealers 

known to act on conflicts of interest. 

The collective action problem arises 

because, although each customer 

individually bears a cost to switch 

accounts, the benefits of a successful 

threat are available to all customers 

whether they would switch or not. If the 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5247 

559Clearpool Letter, at 2. See also T. Rowe Price 

Letter, at 1 (‘‘enthusiastically agree[ing] with the 

Commission that a pilot is necessary to gather 

data,’’ in part because ‘‘exchanges have little 

incentive to reduce the fee cap on their own’’). See 

also Larry Harris Letter, at 9 (noting that ‘‘regulatory 

action is necessary to establish a common pricing 

standard because market forces alone will not do 

it’’). Larry Harris Letter, at 6 (noting that ‘‘exchange 

holding companies have a strong interest in 

maintaining the current system’’ and that the ‘‘SEC 

may reasonably consider these interests when 

evaluating comments submitted by the exchanges’’); 

Themis Trading Letter II, at 3 (stating that the 

Commission should not be ‘‘distracted . . . by 

conflicted stock exchanges desperately fearful that 

their business models might come crashing down’’). 

560See Larry Harris Letter, at 9. See also Themis 

Trading Letter I, at 5 (noting that several exchanges 

oppose the pilot because they are motivated by their 

‘‘own profit incentives and not what is best for the 

market’’). 

561See Proposing Release, supra note 2, at 13011– 

12. See also Section IV.B.1.a.ii, infra discussing the 

Nasdaq Experiment in greater detail. 

562See, e.g., Themis Trading Letter I, at 3 (stating 

that a ‘‘more comprehensive multilateral marketwide approach would be needed to yield usable 

data that could be used to test how lower access 

fees, and a lack of rebates, would impact market 

quality and marketplace behavior’’ (emphasis 

omitted)); IEX Letter III, at 6 (‘‘Nasdaq’s experiment 

and its outcomes aren’t a perfect proxy for what is 

likely to happen in the Transaction Fee Pilot. That 

experiment was done unilaterally and only in 

highly-liquid securities.’’); Larry Harris Letter, at 9 

(noting that Nasdaq’s ‘‘experimental fee reduction 

did not occur at all trading venues that traded the 

subject securities,’’ demonstrating that ‘‘regulatory 

action is necessary to establish a common pricing 

standard because market forces alone will not do 

it’’). 

563See supra Section IV.E.1 for the discussion of 

the alternative that the Commission proceed with 

rulemaking initiatives without first conducting the 

Pilot. That alternative differs from the baseline 

presented here because it directly presumes 

regulatory changes whereas the baseline for the 

Economic Analysis does not presume regulatory 

changes resulting from the Pilot. 

564See, e.g., Proposing Release supra note 6 at 

Section IV.A. and C. 

565Several commenters supported the Pilot as a 

necessary step to produce data to inform the heavily 

contested debate surrounding the impact of 

exchange fees and rebates on order routing, market 

quality, and execution quality. See, e.g., Barnard 

Letter, at 1 (‘‘historically there are many views on 

this topic, but a paucity of credible data from which 

to draw conclusions’’); Wellington Letter, at 1, and 

Clark-Joseph Letter, at 1. 

566See Nuveen Letter, at 2 

567See e.g., Spatt Letter, at 3 

568See e.g., Larry Harris Letter, at 10 

569See Babelfish Letter, at 2–3 

570See CFA Letter, at 2 

571See Healthy Markets Letter I, at 2, 6 

switching costs are high relative to the 

proportion of customer defections 

necessary to threaten a broker-dealer, 

customers are unlikely to generate 

enough of a threat to alter brokerdealers’ behavior. 

2. Market Failure at the Exchange Level 

Several commenters considered 

whether existing market forces, 

including competition among the 

equities exchanges, are sufficient to 

address the potential distortions caused 

by exchange pricing models. Some 

commenters felt that ‘‘some regulatory 

solution,’’ like the Pilot, ‘‘may be 

necessary to force market participants, 

particularly exchanges, to change the 

manner in which they conduct 

business’’ because competitive 

pressures on exchanges may serve as a 

barrier to market-led reforms in this 

area.559 Further, one commenter noted 

that ‘‘market forces cause the exchanges 

to choose maker-taker and inverted fee 

models to the detriment of the public 

interest’’ and therefore regulatory action 

is necessary to address market 

distortions caused by the maker-taker 

and taker-maker fee models.560

Further, the Commission notes that 

one market conducted a limited 

unilateral access fee experiment in 2015 

to test the impact of reductions to its 

fees and rebates on 14 securities traded 

on its market. 561 Several commenters 

noted the limited utility of that study 

given its narrow scope and applicability 

to one market.562 The fact that no other 

exchange joined in the 2015 access fee 

experiment, or independently 

undertook a similar study thereafter, 

supports the view that it is unlikely that 

competition among the exchanges alone 

would compel the exchanges to study, 

let alone address, potential distortions 

that may result from their fee and rebate 

models. 

B. Baseline 

We compare the economic effects of 

the rule, including benefits, costs, and 

effects on efficiency, competition, and 

capital formation, to a baseline that 

consists of the existing regulatory 

framework and market structure. As 

explained above, by temporarily altering 

the fee and rebate structure for certain 

NMS stocks (including ETPs), the Pilot 

is designed to produce information on 

order routing behavior that would not 

otherwise be available. The baseline, 

therefore, includes the existing 

information available to the 

Commission in the absence of a pilot, 

which the Commission could use to 

inform future regulatory action.563 The 

baseline also sets out the exchanges’ 

current practices with respect to fees 

and rebates and the regulations 

governing those fees and rebates. 

1. Current Information Baseline 

While the theoretical studies 

referenced in the Proposing Release 

suggest that transaction-based fee 

models create potential issues for 

investors,564 limited empirical evidence 

exists to date about the extent that 

potential conflicts of interest arise from 

maker-taker and taker-maker pricing 

models and how exchange transactionbased fees and rebates impact market 

and execution quality and affect the 

integrity and structure of the U.S. equity 

markets.565 Consequently, the relation 

between transaction-based pricing and 

conflicts of interest is not well 

understood.566 Additionally, 

commenters are divided as to how to 

interpret existing knowledge. One 

Commenter stated that we had ‘‘much to 

learn’’ 567 while other commenters felt 

that there was sufficient existing 

knowledge to move directly to rule 

making without a Pilot.568

Below, we discuss the existing 

information currently available to the 

Commission or the public that concerns 

the relationship between transactionbased fee-and-rebate pricing models and 

order routing decisions and we describe 

the limitations of this information for 

use in policy discussions regarding 

transaction-based fees and rebates and 

the potential conflicts of interest and 

potential distortions that may 

accompany them. We then discuss the 

potential to produce additional 

information regarding the impact of 

exchange fees and rebates absent the 

Pilot. 

While a number of studies attempt to 

document the relation between 

transaction-based fees, order routing 

decisions, and execution quality, these 

studies and available data sources are 

limited in ways that are likely to reduce 

the strength of conclusions that relate to 

the impact of transaction-based fees and 

rebates on order routing decisions and 

the existence or magnitude of potential 

conflicts of interest between brokerdealers and their customers. This 

section details these limitations. 

a. Limitations of Existing Studies 

Multiple commenters submitted 

empirical evidence that they argued was 

consistent with conflicts of interest. For 

example, one Commenter cited evidence 

that trade execution algorithms that are 

fee sensitive tend to have lower 

execution quality than algorithms that 

are not fee sensitive.569 Another 

Commenter cited existing academic, 

industry, and government sources 

suggesting the existence of conflicts of 

interest, or of the investing public’s 

perception that there exist conflicts of 

interest.570 Another commenter 

suggested evidence existed that routing 

decisions were not always in the best 

interest of investors by arguing that 

adverse selection differs by exchange, 

and that this difference can be observed 

using TAQ data.571 Another commenter 

presented their study arguing that 

5248 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

572See IEX Letter IV, at 9 

573See AGF Letter, at 1 

574See CBOE Letter I, at 5 See also Nasdaq Letter 

I, at II–12 

575Over the last five years, the exchanges, on 

average, have made 34 revisions, or approximately 

6.7 revisions per year, to their transaction-based 

fees and rebates. See infra Section IV.B.2.b. 

576The method of instrumental variables is used 

to estimate causal relationships when controlled 

experiments or exogenous shocks are not feasible. 

An ‘‘instrument’’ changes the explanatory variable 

but has no independent effect on the dependent 

variable, allowing a researcher to uncover the 

causal effect of the explanatory variables on the 

dependent variable of interest. 

577See Harris Letter, at 10. 

578The Battalio Equity Market Study’s abstract of 

the paper states: ‘‘We identify retail brokers that 

seemingly route orders to maximize order flow 

payments by selling market orders and sending 

limit order to venues paying large liquidity 

rebates. . . . [W]e document a negative relation 

between limit order execution quality and rebate/ 

fee level. This finding suggests that order routing 

designed to maximize liquidity rebates does not 

maximize limit order execution quality. . . .’’ See 

Battalio Equity Market Study, supra note 5307, at 

2193. 

579See Battalio Equity Market Study, supra note 

5307. See also supra Section IV.A.2, for an 

overview of the potential conflicts of interest that 

emerge. 

580Rule 606 requires broker-dealers to provide 

quarterly reports that provide an overview of their 

routing practices. See Securities Exchange Act 

Release No. 51808 (November 27, 2000), 65 FR 

75414, (December 1, 2000) (hereinafter ‘‘Disclosure 

of Order Execution and Routing Practices’’). See 

also supra note 310 and accompanying text and 

infra Section IV.B.1.b.i, ‘‘Rule 606 Data.’’ 

581The Battalio Equity Market Study, however, 

does not specify whether the limit orders are 

marketable or non-marketable limit orders, as Rule 

606 disclosures do not segment these orders. See 

Battalio Equity Market Study, supra note 530. 

582Estimates based on data from Form 1 of the 

X–17A–5 filings. As of December 31, 2017, 3,860 

broker-dealers that filed form X–17A–5. See infra 

Section IV.B.2.a. 

longer queues lead to increased 

transaction costs, and connected longer 

queues with the practice of paying 

rebates.572 Another Commenter 

referenced a study suggesting that 

trading costs vary across exchanges.573

Although the above listed 

commenters all felt that the evidence 

did suggest that fees and rebates led to 

conflicts of interest, other commenters 

did not come to the same conclusion. 

One commenter felt that there was ‘‘no 

evidence that fee practices are harming 

investors or interfering with fair 

competition’’ and consequently felt that 

a Pilot was not justified.574 The studies 

and analysis presented by Commenters 

and the studies discussed below have 

significant limitations with regard to 

establishing causal links between fees 

and rebates and order routing decisions. 

These limitations fall primarily into two 

categories: (1) The results of the studies 

may not be representative, and (2) the 

results of the studies cannot make a 

causal connection needed to inform on 

potential conflicts of interest. 

When a study’s results are 

representative, the results can be 

applied across a broadly defined group. 

Drawing broad inferences from limited 

samples could be problematic because 

the results might be specific to specific 

securities, broker-dealers, or trading 

venues. In the context of regulatory 

decision-making, representative results 

should inform on the potential effects 

over the scope of the market covered by 

the decision. When results are not 

representative of the full scope of a 

regulatory decision, that regulatory 

decision may have an unpredictable 

effect over the part not represented by 

the results. For example, if the results of 

a study cover only certain types of 

issuers, the results may not apply to all 

types of issuers and therefore, any 

regulatory changes based on such 

studies may have unanticipated effects 

on the types of issuers not included in 

the study. 

In addition to limitations in how 

representative results may be, existing 

studies cannot test for causal 

relationships between transaction fees 

and order routing decisions, even 

around fee revisions. Because 

transaction-based fees and order routing 

decisions could be jointly determined, 

researchers cannot readily disentangle 

the direction of causality, and therefore 

cannot determine the extent that 

potential conflicts exist. The 

identification of causal relations 

between fees and order routing 

decisions becomes increasingly complex 

because exchanges frequently modify 

their fees.575 In practice, researchers 

attempt to identify and measure causal 

relations in two ways: (1) Exogenous 

shocks and (2) econometric techniques, 

such as an instrumental variables 

approach.576

The Commission disagrees with one 

commenter who felt that sufficient data 

existed to move forward with regulation 

prohibiting rebates because ‘‘the theory 

is well-accepted, and no prior evidence 

contradicts it.’’ 577 In the absence of 

causal data, regulators can use theory— 

and their best judgment based on their 

expertise—to guide their decision 

making. However, in this case, for the 

reasons discussed throughout this 

release, the Commission believes that 

empirically assessing the various 

theories, causal impacts, and effects of 

the transaction fee-and rebate pricing 

model is appropriate. 

i. Battalio Equity Market Study 

According to the Battalio Equity 

Market Study, broker-dealers appear to 

trade execution quality of customer 

orders, as measured by the likelihood of 

and time to execution (and not price), 

for the rebates obtained by providing 

liquidity to maker-taker venues.578 By 

routing orders to exchanges that pay 

high rebates, broker-dealers may engage 

in rebate capture at the expense of client 

execution.579 Using data obtained from 

mandatory Rule 606 disclosures over a 

two-month window,580 the Battalio 

Equity Market Study also identified that 

four of the ten broker-dealers included 

in the analysis route limit orders 

exclusively to market makers or to 

exchanges that offered the largest 

liquidity rebates (and charged the 

highest access fees). A number of tests 

in the Battalio Equity Market Study also 

show that low-fee venues provide better 

execution quality for limit orders, as 

measured by the likelihood of an order 

fill, the speed of execution, and realized 

spreads, relative to high-fee venues, 

suggesting that order routing decisions 

to high rebate venues are likely to be 

suboptimal from a customer’s 

perspective, and may be indicative of 

potential conflicts of interest. 

Although the Battalio study provides 

evidence suggestive of conflicts of 

interest, the study has a number of 

limitations which render the 

Commission unable to use this study to 

robustly determine that rebates cause 

costly conflicts of interest for brokerdealers. First, the Battalio Equity Market 

Study uses order level data from a single 

broker-dealer to determine the relation 

between maker-taker fees and limit 

order execution quality.581 Analysis 

based on observation of a single brokerdealer may not provide representative 

results because the relation between 

transaction-based fees and potential 

conflicts of interest may not be 

generalizable to other broker-dealers. 

For example, over 400 broker-dealers 

maintain membership with at least one 

U.S. equities exchange.582 If the single 

broker-dealer examined in the Battalio 

Equity Market Study has significantly 

different order routing behavior than the 

average broker-dealer that routes orders 

to exchanges, the information obtained 

from examining the relation between 

transaction-based fees and order routing 

decisions of that broker-dealer would 

not be representative of the entire 

market and therefore would provide an 

incomplete representation of potential 

conflicts of interest. 

The Battalio Equity Market Study also 

relies on a sample of Rule 606 order 

routing reports obtained directly from 

the reporting entities’ websites from a 

limited sample of ten well-known 

national retail brokers from a single 

quarterly reporting cycle (October and 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5249 

583The Nasdaq study lowered access fees to 

$0.0005 and rebates to $0.0004 simultaneously for 

a set of 14 securities, half of which identified 

Nasdaq as the primary listing exchange, the other 

half which identified the NYSE as the primary 

listing exchange. Nasdaq released two reports see 

infra note 584 (examining the changes to a number 

of metrics related to market quality). 

584The first report provided by Nasdaq can be 

found on their webpage http://qnasdaqomx.com/ 

AccessFeeExperiment (‘‘Nasdaq’s first report’’, or 

the ‘‘first Nasdaq report’’). The second report 

provided by Nasdaq can be found at http://

people.stern.nyu.edu/jhasbrou/SternMicroMtg/ 

SternMicroMtg2015/Supplemental/ (‘‘Nasdaq’s 

second report’’, or the ‘‘Second Nasdaq report’’). 

585See Swan Letter which submitted the paper: 

Yiping Lin, Peter Swan, & Frederick Harris, Why 

Maker-Taker Fees Improve Exchange Quality: 

Theory and Natural Experiment Evidence, Working 

Paper, (2018), https://papers.ssrn.com/sol3/ 

papers.cfm?abstract_id=3034901 (hereinafter 

‘‘Swan study’’); Nasdaq’s Second Report, at 1. 

586Cum fee indicates that the computation of 

spreads included the fee or rebate charged. It is a 

measure of the total cost of transacting. 

587The effective spread is the cost to transact and 

is defined as two times the absolute difference 

between the price of a trade and the prevailing 

midpoint at the time of trade. The effective spread 

can be decomposed into two components, the 

realized spread and price impact of the trade. The 

price impact is generally viewed as the portion of 

the effective spread that compensates market 

makers for adverse selection losses. The realized 

spread is the portion of the spread that market 

makers ‘realize’ after adverse selection costs are 

taken into account. Raw realized spreads are 

realized spreads that do not take into account the 

all-in cost of trading, i.e., they exclude rebates from 

the calculations 

588Raw effective spreads are effective spreads that 

do not take into account the all-in cost of trading, 

i.e., they exclude fees from the calculations. 

589The interpretation of the price efficiency 

results is difficult because it is unclear what price 

efficiency on one exchange means in the absence 

of the other exchanges. Usually price efficiency is 

measured across all exchanges trading a given 

security. 

November 2012). As discussed above, 

approximately 400 broker-dealers are 

members of at least one national 

securities exchange. The ten retail 

brokers analyzed in the Battalio Equity 

Market Study make up approximately 

2.1% of the broker-dealers with 

exchange memberships, and less than 

0.3% of broker-dealers overall. 

Although these are well-known retail 

brokers, due to the lack of 

representativeness of the sample (e.g., 

the majority of the broker-dealers 

represented in the Battalio Equity 

Market Study are online broker-dealers), 

these broker-dealers may be more (or 

less) likely than the average brokerdealer to route customer orders in ways 

that benefit themselves at the expense of 

their customers. The findings in the 

Battalio Equity Market Study, therefore, 

may not be representative of a broader 

sample of broker-dealers. Moreover, the 

Commission is unable to determine if 

the Battalio Equity Market Study’s 

analyses of the Rule 606 disclosure data 

has statistical power because the 

authors did not provide any statistical 

analyses beyond the percentage of 

market or limit orders routed to a 

particular exchange. 

In sum, the absence of an exogenous 

shock to access fee caps or rebates 

outside the control of exchanges leaves 

the authors unable to definitively 

determine the causes of broker-dealers’ 

order routing decisions. Consequently, 

the authors are unable to disentangle 

whether fees and rebates drive brokerdealer order routing decisions or order 

routing decisions determine fees and 

rebates chosen by exchanges. 

ii. The Nasdaq Experiment 

Nasdaq independently conducted an 

experiment, whereby it lowered access 

fees and rebates for a sample of 14 

stocks over a period of four months in 

2015, providing an exogenous shock to 

the transaction-based pricing model on 

the exchange. The Nasdaq experiment 

lowered both the access fees charged 

and the liquidity rebates paid on the 

securities included in their study.583

Nasdaq produced two reports on the 

experiment 584 and an academic study 

examining the experiment was 

submitted as a comment.585 Both 

Nasdaq’s first study report and the Swan 

study indicate that when Nasdaq 

lowered fees and rebates they lost 

market share in the stocks with lower 

fees and rebates. According to analysis 

in the Swan study, the market share that 

Nasdaq lost appeared to migrate to other 

make-take venues with higher fees and 

rebates. Additionally, both Nasdaq’s 

analysis as well as the Swan study find 

that the experiment led to a decrease in 

the fraction of time that Nasdaq quoted 

at the NBBO. The Swan study also 

estimated a variety of additional tests to 

measure the impact of the experiment 

on various aspects of market quality. 

The results of these tests are mixed. The 

Swan study found that the Nasdaq 

experiment improved market quality on 

Nasdaq in terms of improved fill rates 

and fill times as well as narrower cumfee effective spreads and cum-fee 

realized spreads.586

While cum-rebate effective spreads, 

fill rates and fill times improve on the 

Nasdaq during the experiment, the 

Swan study finds that the experiment 

diminished market quality in terms of 

quoted spreads and raw realized spreads 

which both increase during the 

experiment.587 Additionally, the Swan 

study shows that some measures of 

market quality were unchanged by the 

Nasdaq experiment, namely, the Swan 

study finds no change in raw effective 

spread.588 In Nasdaq’s second report on 

the experiment they examine various 

market quality measures and find no 

impact on effective spread, relative 

effective spread, quoted spread, relative 

quoted spread, displayed dollar depth at 

the NBBO, time between quote updates 

on the consolidated tape, and time 

between price changes in the NBBO on 

the consolidated tape. 

In examining the impact of the 

experiment on price efficiency, the 

Swan study finds mixed evidence that 

prices quoted on Nasdaq become less 

efficient during the experiment. First, 

the Swan study finds that global price 

impact declines during the experiment. 

Price impact is commonly employed as 

a measure of the informativeness of 

trades. The Swan study explains the 

decline in price impact with a 

theoretical model which suggests that 

rebates subsidize market makers for the 

adverse selection costs that they bearthereby allowing them the ability to bear 

additional adverse selection which 

induces informed traders to trade more 

aggressively in the presence of rebates. 

Consequently, their model predicts that 

informed trades will congregate on 

exchanges with high rebates. 

Additionally, the Swan study finds 

using variance ratios that price 

efficiency declines on Nasdaq during 

the experiment. However when using 

autocorrelation of trades as a measure of 

price efficiency, the tests indicate a 

decrease in autocorrelation—suggesting 

more efficient stock prices on 

Nasdaq.589 Additional analysis on price 

efficiency comes from Nasdaq’s second 

report which explores the impact of 

their experiment on market wide price 

efficiency and finds no change in price 

impact, autocorrelation of trades, or 

variance ratios. 

The Swan study also empirically 

examines how the Nasdaq experiment 

impacted the trading behavior of high 

frequency traders (‘‘HFTs’’) and nonHFTs and finds that as a result of the 

experiment HFTs added liquidity less 

often and took liquidity more often 

while non-HFTs did the opposite. 

Nasdaq also examined trading behavior 

and found that there was a shift in the 

composition of the top five liquidity 

providers for the securities that 

occurred as a result of the experiment. 

The top five liquidity providers prior to 

the start of the pilot significantly 

reduced their liquidity provision from 

44.5% of the liquidity provided prepilot to 28.7% in the pilot period. 

However, the top five liquidity 

providers from the pilot period had a 

significant increase in their liquidity 

provision from 29.7% pre-pilot to 

41.5% in the pilot period. 

5250 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

590See Nasdaq Letter I, at 10. 

591Only common stocks were included in the 

Nasdaq study, while the proposed Pilot will include 

NMS stocks, which includes common stocks as well 

as ETPs. 

592Market capitalizations are computed from 

CRSP shares outstanding and stock price, as of 

December 31, 2014. See also Themis Trading Letter 

I, at 2; NorthWestern Letter, at 1 and IEX Letter III, 

at 6. 

593Nasdaq acknowledges this limitation in their 

second report analyzing the experiment. See supra 

note 584 See also Themis Trading Letter I, at 2 and 

IEX Letter III, at 6 for commenters expressing 

similar concerns about the representativeness of 

Nasdaq’s sample. 

594See Swan Letter, at 3; Themis Trading Letter 

I, at 2; Credit Suisse Commentary, at 2, Larry Harris 

Letter, at 9, and IEX Letter III, at 6. 

595This point was acknowledged in Nasdaq’s 

second report. See supra note 584. This point was 

also brought up by multiple commenters. See Swan 

Letter, at 3; Credit Suisse Commentary, at 2; and 

Larry Harris Letter, at 9. 

596See Amber Anand, Jian Hua, & Tim 

McCormick, Make-Take Structure and Market 

Quality: Evidence from the U.S. Options Markets, 

62 Mgmt. Sci. 3085, 3217–90 (2016), https://

pubsonline.informs.org/doi/abs/10.1287/ 

mnsc.2015.2274 (hereinafter ‘‘Anand, Hua, & 

McCormick’’); Robert Battalio, Todd Griffith, & 

Robert Van Ness, Make-Take Fees versus Order 

Flow Inducements: Evidence from the NASDAQ 

OMX PHLX Exchange, 12th Ann. Mid-Atlantic Res. 

Conf. in Fin. (2017), http://www1.villanova.edu/ 

content/dam/villanova/VSB/assets/marc/ 

marc2017/SSRN-id2870000.pdf (hereinafter 

‘‘Battalio, Griffith, and Van Ness’’); Robert Battalio, 

Andriy Shkilko, & Robert Van Ness, To Pay or Be 

Paid? The Impact of Taker Fees and Order Flow 

Inducements on Trading Costs in U.S. Options 

Markets, 51 J. Fin. & Quantitative Analysis (Oct. 

2016) 1637, 1637–62 https://www.cambridge.org/ 

core/journals/journal-of-financial-and-quantitativeanalysis/article/div-classtitleto-pay-or-be-paid-theimpact-of-taker-fees-and-order-flow-inducementson-trading-costs-in-us-options-marketsdiv/ 

0782CE3E9679C29BB910A66192D27201 

(hereinafter ‘‘Battalio, Shkilko & Van Ness’’). 

Anand, Hua, & McCormick explores the transition 

from a payment for order flow model to a makertaker model on NYSE ARCA, while Battalio, 

Griffith, and Van Ness as well as Battalio, Shkilko, 

& Van Ness examine the shift on NASDAQ OMX 

PHLX (‘‘PHLX’’) from a maker-taker model to a 

payment for order flow model. 

597 Id. 

598 Id. 

599See Battalio, Shkilko & Van Ness, supra note 

596, at 1637–62. 

600See STANY Letter, at 2; Nasdaq Letter I, at 11– 

12; NYSE Letter I, at 17; and Nasdaq Letter III, at 

1–2. 

601See Era Letter, at 1. But cf. IEX Letter II, at 9. 

602Battalio Equity Market Study, supra note 530, 

relies on Rule 606 disclosures to identify order 

routing for a small sample of broker-dealers, 

proprietary broker-dealer data from a single smartorder routing system to capture limit order 

execution quality for this broker-dealer’s orders, 

and the TAQ data to measure execution quality as 

a function of each venue’s taker fee or rebate. 

While Nasdaq believes that the results 

from their study do not support the 

need for a pilot,590 the Commission 

disagrees because the Nasdaq 

experiment and the subsequent analysis 

suffers from the following limitations. 

First, the Nasdaq experiment may not be 

representative of the broader market. 

Nasdaq selected 14 stocks to be part of 

the analysis, which represent 0.3% of 

all NMS stocks. The sample is unlikely 

to be representative of the universe of 

NMS securities for two reasons: (1) The 

sample included a small number of 

stocks (and no ETPs),591 and (2) less 

than one-third of these stocks were 

small or mid-capitalization at the time 

of the analysis, although most had 

market capitalizations close to $3 billion 

immediately prior to the study.592 The 

small number of stocks makes 

interpretation of the results more 

difficult because a change to such a 

small number of stocks may not be 

significant enough for traders to alter 

their behavior.593

Additionally, the Commission is not 

able to make inference about the effect 

of a market wide change to fees and or 

rebates from the Nasdaq experiment 

because, as noted by multiple 

commenters, the effects of the 

experiment apply to a single exchange: 

Nasdaq.594 As the other equities 

exchanges did not have similar changes 

to transaction-based fees and rebates, 

any inferences drawn from the Nasdaq 

study may not be valid under different 

circumstances in which all equities 

exchanges were subject to consistent 

revisions to transaction-based fees. 595

Lastly, none of the analysis of the 

Nasdaq study analyzes the impact of 

potential conflicts of interest on order 

routing decisions. Further, even if the 

Nasdaq study had analyzed a causal 

relationship between transaction-based 

fees and rebates and potential conflicts 

of interest, the limited 

representativeness of the Nasdaq sample 

would limit the generality of the study. 

iii. Options Market Studies 

Three studies have examined 

exogenous shifts between maker-taker 

and payment for order flow pricing 

models on U.S. options exchanges.596

These studies found that the movement 

from a payment for order flow model to 

a maker-taker model led to a decrease in 

execution costs for option classes 

affected by the shift, improved quoted 

spreads, and altered broker-dealer order 

routing behavior to account for the 

fees.597 However, the change to a 

payment for order flow model from a 

maker-taker model yielded better 

execution quality, but a reduction in the 

number of orders and order volume.598

With respect to the transition between 

forms of pricing models that occurred 

on the option exchanges, discussed 

above, the key limitation is the 

comparison of maker-taker pricing 

models with payment for order flow 

pricing models. For example, studies 

that explore these regime shifts between 

maker-taker to payment for order flow 

models are not comparing situations in 

which one regime could theoretically 

have lower conflicts of interest than the 

other. Each of these models is likely to 

create potential conflicts of interest that 

could affect how broker-dealers route 

their customer orders,599 although 

evidence does not suggest that one form 

of pricing model is more or less prone 

to conflicts than another. Moreover, the 

change from one form of pricing model 

to another could introduce new 

conflicts of interest or impacts on 

market and execution quality that did 

not previously exist. Therefore, the 

Commission believes that exchangedriven transitions between maker-taker 

and payment for order flow pricing 

models are not likely to provide 

information about potential conflicts of 

interest and impacts on market and 

execution quality driven by the makertaker and taker-maker models or to 

inform the Commission about future 

regulatory decisions regarding 

transaction-based fee models. 

Additionally, these studies lack 

causality. Specifically the decision to 

invert an exchange from a taker/maker 

to a maker/taker exchange, which these 

studies are based on, is an endogenous 

decision, and therefore these studies 

lack the ability to make causal inference 

further hindering the Commission’s 

ability to draw inference from these 

studies. 

b. Limitations of Existing and 

Anticipated Data 

Some Commenters suggested that 

existing data sources could be employed 

in lieu of a Pilot to study the 

Commissions objectives.600 Another 

Commenter argued that enhancing 

existing data would be sufficient.601 To 

this end, the Commission considered 

whether a number of existing data 

sources could be used independently or 

in combination to relate transactionbased fees to order routing and 

execution quality. This section 

discusses these data sources. For 

instance, in the Battalio Equity Market 

Study and the Nasdaq study discussed 

above, the authors employed some 

combination of Rule 606 data, 

proprietary broker-dealer data, the 

Trade and Quote (TAQ) database,602 and 

proprietary exchange data. In addition, 

while not employed in previous studies, 

CAT data, OATS data, Rule 605 data, 

Form ATS–N data, and exchanges’ Form 

19b–4 fee filings and fee schedules 

available from each exchange’s website, 

could provide insights into the relation 

between transaction-based fees, order 

routing, and execution quality, and fees 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5251 

603See Section III.B.3 of Amendments to Order 

Handling Disclosure, supra note 310. 

604See Cboe letter I, at 26; FIA Letter, at 3; 

STANY Letter, at 2; Nasdaq Letter I, at 1–2, 4; NYSE 

Letter I, at 18. 

605See STANY Letter, at 2; Nasdaq Letter I, at 11– 

12; ERA Letter, at 1. 

606See also IEX Letter I, at 9. 

607See, e.g., ICI Letter II at 3. 

608Not every fee schedule revision pertains to 

transaction fees or rebates. To focus only on these 

revisions, each Form 19b–4 fee filing was evaluated 

to determine that revisions to fees or rebates were 

pertinent to this baseline. 

609Multiple commenters expressed views similar 

to this and urged the Commission to adopt 606 

amendments prior to the adoption of the Pilot. See, 

e.g., Citadel Letter, at 3; OMERS Letter, at 3; ICI 

Letter I, at 5–6; Fidelity Letter, at 2; IEX Letter II, 

at 9. 

610See supra Section II.E.3.vi. 

611See Nasdaq Letter I, at 4. 

612See Verret Letter I, at 4. 

and other arrangements. As noted 

above, several data sources provide 

information on order routing and 

execution quality. While researchers 

could use these data sources to produce 

some representative results regarding 

the relation between transaction-based 

fees, order routing, and execution 

quality, the Commission believes that 

available data has several limitations, 

which include: Granularity, 

completeness, periodicity, format, and 

availability. 

i. Rule 606 Data 

Rule 606 requires broker-dealers to 

make publicly available quarterly 

reports that provide an overview of their 

routing practices on certain orders in 

NMS securities. As amended, brokerdealers must provide information for the 

ten venues to which the largest number 

of total non-directed orders were routed 

for execution and for any venue to 

which five percent or more of nondirected orders were routed for 

execution. Rule 606 disclosures also 

require broker-dealers to disclose in a 

standardized format material aspects of 

their relationships with trading venues 

to which they route orders, including a 

description of, among other things, the 

payment for order flow and any profit 

sharing relationships, which, like 

rebates, could influence the brokerdealer’s order routing decision and 

potentially lead to potential conflicts of 

interest for broker-dealers when routing 

orders.603 Researchers and other 

analysts interested in order routing data 

can download these forms quarterly 

directly from broker-dealer websites. 

Some commenters believed that the 

amendments to the Rule 606 data would 

render the Pilot unnecessary.604 Indeed, 

a few commenters suggested that Rule 

606 data, perhaps combined with other 

existing data, would be sufficient to 

study conflicts of interest among brokerdealers.605 The Commission disagrees 

that this type of analysis would serve 

the purposes of the Pilot.606 Such an 

approach would not adequately advance 

the Pilot’s broader purpose to study the 

effects that exchange transaction feeand-rebate pricing models may have on 

order routing behavior, execution 

quality, and market quality, in addition 

to conflicts of interest between brokers 

and their customers that are presented 

when exchanges pay rebates.607 Further, 

disclosure alone would not provide an 

exogenous shock that generates 

measurable responses capable of 

providing insight into the effects of fees 

and rebates on the markets and market 

participant behavior. 

In addition, the quarterly frequency of 

the public Rule 606 reports by brokerdealers is different from the frequency 

of changes in fee schedules by 

exchanges (e.g., as presented in Table 2, 

over a recent five-year measurement 

period, the average exchange updated 

its fees schedule approximately 6.7 

times per year).608 Further, while the 

Rule 606 data provides order routing at 

the broker-dealer level, such 

information is not granular enough to 

thoroughly study potential conflicts of 

interest. Specifically, the 606 data is 

aggregated at the quarterly level. This 

frequency will not enable researchers to 

look at the full picture of how a brokerdealer responds to fees because 

exchanges on average revise their fee 

schedules 6.7 times per year. With 13 

exchanges this amounts to 87 fee 

changes per year. Consequently, the fees 

that exchanges charge in a given quarter 

relative to the other exchanges will 

likely change multiple times within a 

quarter. Consequently, Rule 606 data is 

limited in how it can be employed to 

evaluate comprehensively the impact of 

order flow responding to fees and 

rebates. 

The value of Rule 606 disclosures for 

identifying possible conflicts of interest 

resulting from transaction-based fees 

would be limited for a number of 

additional reasons. First, each brokerdealer discloses data for only its top ten 

order routing venues. Second, because 

broker-dealers disclose data at a 

quarterly frequency, a five-year sample 

of Rule 606 data for a single brokerdealer, would include only 20 

observations, limiting statistical power. 

In sum, the Commission believes that 

the amended Rule 606 data will provide 

useful information to complement the 

Pilot; however it is insufficient by itself 

to determine the impact of exchange 

transaction fees and rebates on brokerdealer order routing decisions, or inform 

the Commission of the impact of 

exchange pricing on market and 

execution quality.609

ii. CAT Data and OATS Data 

Once the CAT Phase 1 becomes 

operational,610 the Commission and 

SROs will have information on all 

exchange routing and exchange 

executions for all NMS securities. In 

CAT Phase 1, exchanges would record 

and report order events on every order 

they receive for NMS securities. Order 

events include order receipt, order 

routes, order modifications, order 

cancellations, and order executions. 

Likewise, the Order Audit Trail Systems 

(OATS) data could inform on order 

routing decisions.611 The OATS data 

tracks customer orders from the receipt 

of the order through execution or 

cancellation. Information in the OATS 

data reflects the terms of the order, 

including the security, price, shares, 

account type, handling instructions, and 

side of the market for which the order 

was placed; where the order was routed 

for execution; modifications to the 

order; and execution information, 

including the capacity in which the firm 

acted in the trade. 

Although the CAT and OATS data 

could feasibly be used to produce order 

routing data similar to that required by 

the Pilot, as indicated by one 

commenter, without the corresponding 

‘‘randomized trial,’’ the use of OATS 

data alone would be insufficient to 

determine causality in the effect of fees 

and rebates on order routing decisions 

because it would not be possible to 

determine from the data whether fees 

respond to changes in order routing 

decisions or whether order routing 

decisions respond to changes in fees. 

Consequently, in the absence of an 

exogenous shock to fees, CAT and 

OATS data cannot provide the 

Commission with robust evidence about 

how access fees impact order routing 

decisions.612

iii. Proprietary Broker-Dealer Data 

Proprietary data from broker-dealers 

or exchanges could also provide 

information about order routing 

decisions. Broker-dealer data include 

information on the orders received and 

routed by that broker-dealer, including 

where the broker-dealer routed orders, 

whether the orders execute, and the 

price, size, and time of execution. 

Exchange data include information on 

the orders received by an exchange, 

including which members routed orders 

to the exchange, whether the orders 

execute, and the price, size, and time of 

5252 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

613See Nasdaq Letter I, at 11–12 and FIA Letter, 

at 3. 

614See STANY Letter, at 2 and Nasdaq Letter I, 

at 11–12. 

615See Disclosure of Order Execution and 

Routing Practices, supra note 580, at 75417–25. 

616See Securities Exchange Act Release No. 

61358 (January 14, 2010), 75 FR 3594 (January 21, 

2010) (hereinafter ‘‘Concept Release’’). 

617See, e.g., Jennifer Conrad & Sunil Wahal, The 

Term Structure of Liquidity Provision (August 8, 

2018) (unpublished manuscript) https://

papers.ssrn.com/sol3/papers.cfm?abstract_

id=2837111. 

618See Securities Exchange Act Release Nos. 

83663 (July 18, 2018), 83 FR 38768 (August 7, 

2018). 

execution. Indeed, several commenters 

stated that if 606 data were not 

sufficient to answer the Commission’s 

questions about broker dealer routing 

decisions, then the Commission could 

request routing tables and information 

directly from broker-dealers or request 

other Transaction Cost Analysis (TCA) 

data to supplement the 606 data.613

While these data would provide 

potentially more granular data about 

order routing, as proprietary datasets, 

there is no standard format that 

exchanges or broker-dealers use to 

aggregate this data, which makes cross 

broker-dealer or cross exchange 

comparison difficult. Even if a dataset of 

proprietary data could be produced 

from data obtained directly from 

exchanges or broker-dealers, the data 

would still lack an exogenous shock to 

fees which is necessary to determine a 

causal link between order routing 

decisions and exchange fees. 

iv. Rule 605 Data 

A few commenters suggested that 

Rule 605 data used in conjunction with 

other data such as Rule 606 data, could 

provide information about broker dealer 

conflicts of interest.614 Rule 605 data 

provides information about execution 

quality by market center, including 

exchanges, ATSs, and broker-dealers 

that execute orders, by requiring 

standardized reports of statistical 

information regarding order execution, 

and was designed to improve the public 

disclosure of order execution practices 

by exchanges.615 These data are 

available monthly from market center 

websites or data vendors, and provide 

information on execution quality 

statistics such as transaction costs, 

execution speed, and fill rates reported 

separately for marketable and nonmarketable orders. 

While Rule 605 data is available to 

researchers and may provide 

information about execution quality, it 

too has a number of limitations. For 

example, Rule 605 data provides 

execution quality information for both 

marketable and non-marketable orders; 

however, the methodologies for 

estimating measures of the speed of 

execution of non-marketable orders are 

outdated.616 For instance, Rule 605 

measures realized spreads based on 

quotations five minutes after the time of 

order execution and recent research 

suggests using quotations that more 

closely follow a trade, because any 

temporary price impact of a trade goes 

away within seconds, not minutes, of 

the trade.617 Finally, Rule 605 data is 

limited in that it covers only held orders 

and orders of less than 10,000 shares. 

v. TAQ Data 

Beyond Rule 605 data, researchers 

could also use the TAQ database as a 

means of measuring order execution 

quality or estimating market share to use 

as a measure for order routing decisions. 

The TAQ database is publicly available 

(for a fee) from NYSE and provides 

access to all trades and top of the book 

quotes for NMS securities, from which 

researchers and other analysts can 

estimate trade-based measures of 

execution quality such as effective 

spreads. 

While TAQ data are available to 

academic researchers, TAQ has a 

number of limitations in its precision in 

the measurement of order routing and 

execution quality. An exchange’s market 

share can differ significantly from its 

share of orders received because 

exchanges reroute orders they cannot 

execute at the best prices and some 

exchanges reroute more orders than 

others. In addition, TAQ doesn’t 

provide information on the brokers or 

dealers underlying the trades or quotes, 

so TAQ cannot tell us about the 

decisions of individual brokers. While 

TAQ facilitates the estimation of trade 

and quote-based measures of execution 

and market quality, it does not facilitate 

the estimation of order-based measures 

of execution quality, which are more 

precise than trade-based measures. In 

particular, order-based measures allow 

for the consideration of order size, 

which can be different and often larger 

than trade size. Order-based measures 

also consider the costs of latency 

whereas trade-based measures do not. 

Additionally, since TAQ only provides 

data on trades it does not provide a 

means of estimating execution quality 

for limit orders. 

vi. Information From Exchange 19b–4 

Filings 

Finally, researchers both in and 

outside of the Commission, who wish to 

link fees and rebates to various 

outcomes, can manually create datasets 

of exchange fees and rebates from the 

information that exchanges provide on 

their websites and release in their 

Notice of Filing of Proposed Rule 

Changes, which would capture 

information contained in exchanges’ 

Form 19b–4 fee filings. The Form 19b– 

4 fee filings record changes to the 

existing exchange fee schedules with 

the Commission. At any point that an 

exchange chooses to make a change to 

any aspect of its fees and rebates, the 

exchange must provide notice to the 

Commission that it is filing a proposed 

rule change to amend its existing fee 

and rebate schedule. Exchanges may file 

their revisions to fees and rebates for 

immediate effectiveness upon 

submitting the Form 19b–4 fee filings 

with the Commission. 

A key limitation to this data, 

particularly for researchers outside the 

Commission, is that exchanges use 

bespoke terminology to classify their 

fees and rebates. Consequently, 

identifying comparable fees across 

exchanges is difficult. For example, 

identifying the base or top-tier fees 

across exchanges could be difficult for 

researchers. As shown in Table 2 below, 

the average exchange has 24 different 

access fee categories and 21 different 

rebate categories. Further, exchanges do 

not disclose per share average or median 

fees charged and rebates earned on any 

report or filing, so such information is 

unavailable to the public. To add to the 

impediments to fee data aggregation and 

comparison, Form 19b–4 fee filings are 

available only as PDF files 

downloadable from the Commission’s 

website, thereby increasing the costs of 

aggregation across exchanges over time 

by researchers. 

Lastly, even if a comprehensive 

dataset of fee changes were created, it 

would not be sufficient by itself to study 

the link between order routing decisions 

and fees because the dataset can only 

tell when and how an exchange revised 

fees, and not why the fee changed or if 

the fee change affected order routing 

behavior. In essence the data still lacks 

the ability to establish a causal 

connection between fee changes and 

order routing decisions. 

vii. Form ATS–N 

Following implementation in January 

2019, the public will have more 

information on ATS conflicts of interest 

and fees. In particular, in June 2018, the 

Commission adopted amendments to 17 

CFR 242.300 through 242.303 

(Regulation ATS) and 17 CFR 240.3a1– 

1 (Rule 3a1–1 under the Exchange 

Act).618 As part of these amendments, 

NMS Stock ATSs will be required to 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5253 

619 IEX charges a flat fee of $0.0009 for trades 

against non-displayed liquidity on both sides of the 

market, and charges $0.0003 for trade execution 

against displayed liquidity. See IEX, Investors 

Exchange Fee Schedule (August 1, 2018), https://

iextrading.com/trading/fees (last visited September 

18, 2018). As of March 2018, EDGA is no longer 

operating as a taker-maker market, but is also 

operating as a flat-fee venue. See Cboe, Cboe US 

Equities (2018) http://markets.cboe.com/us/ 

equities/ (last visited September 18, 2018). 

620While the number of exchanges was eight, 

there were other non-exchange trading venues in 

2005 (i.e., ECNs), which were displayed markets 

that utilized a standard price-time-priority market 

model similar to exchanges. Although 13 U.S. 

equities exchanges currently operate as of March 

2018, the majority of these exchanges are part of 

exchange families. For instance, NYSE, NYSE Arca, 

NYSE American, and NYSE National, are all part 

of the NYSE Group, which is wholly owned by the 

Intercontinental Exchange (ICE), while Nasdaq, 

Phlx, and BX, are owned by Nasdaq. BATS, BATS– 

Y, EDGA, and EDGX, which all operated as ATSs 

in 2005, are all subsidiaries of Cboe Global Market, 

Inc. IEX became a registered exchange in 2016. 

Further, NSX (NYSE National) existed as an 

exchange in 2005, but halted operations in 2016. It 

was acquired by NYSE/ICE in January 2017 and was 

re-opened for trading in May 2018. See 

Intercontinental Exchange, NYSE Finalizes 

Acquisition of National Stock Exchange, Bus. Wire: 

News (Jan. 31, 2017, 6:28 p.m.) https://

www.businesswire.com/news/home/ 

20170131006474/en/. Researchers can adequately 

control for exchanges that are subsidiaries of the 

same parent when conducting analyses of the effect 

of changes in transaction-based fees on order routes. 

621See, e.g., Angel, Harris, & Spatt, supra note 

530; Harris, supra note 530. 

publicly report on new Form ATS–N 

information about the manner in which 

the ATS operates and activities of the 

broker-dealer operator and its affiliates, 

as well as potential conflicts of interest 

within the NMS Stock ATSs. While 

Form ATS–N will contain high level 

information on operations and affiliates 

of the ATS, it will not contain detailed 

information, such as ATS routing tables. 

Therefore, it would not contain detailed 

information on how fees and rebates 

affect the order routing decisions of the 

ATS. 

Form ATS–N also will require ATSs 

to provide public disclosures about the 

different types of fees they charge, along 

with the ranges of those fees and 

whether they are bundled with any 

other services. However this 

information would not be nearly as 

granular as the exact fee disclosures that 

would be required by the Pilot. Nor do 

they provide as much information as the 

fee disclosures that exchanges are 

currently required to disclose. These 

limitations make it difficult to use the 

ATS–N data to make causal inference 

about the impact of fees and rebates on 

order routing decisions. 

c. The Potential To Study the Causal 

Link Between Fees, Rebates, and 

Conflicts of Interest Absent a Pilot 

Absent a Pilot, the Commission does 

not believe it would have 

comprehensive, empirical evidence to 

study the effects on the market that the 

Pilot is intended to study. In particular, 

as indicated above, the Commission 

does not believe the theoretical 

evidence on incentives and potential 

other effects are indicative of brokerdealers actually acting on those 

incentives. Further, even if the data 

sources above did not suffer from their 

limitations, researchers would struggle 

to identify the causality necessary to 

robustly link fee and rebate effects on 

order routing to order execution quality. 

Indeed, this link requires two steps: 

First establishing a causal link between 

fees and rebates and order routing and 

then between fee-based order routing 

and order execution quality. Even with 

perfect data, any study linking fees and 

rebates to order routing would suffer 

from an inability to draw conclusions 

about causality. While such a study 

might find a correlation between fees/ 

rebates and order routing decisions, the 

researchers would be unable to 

conclude which event was driving 

which. In particular, since exchanges 

compete for market share, it is 

reasonable to expect that exchanges 

change their fees and rebates in 

response to changes in order routing 

decisions by broker dealers. If this is the 

case it would be the order routing 

decisions that drive the exchange fees. 

The data alone do not allow researchers 

to distinguish whether order routing 

determines fees or whether fees 

determine order routing. 

Similarly, existing data, even if it 

didn’t have the limitations above, would 

not enable researchers to infer the 

causal impact of fee-based order routing 

on order execution quality. If fees and 

execution quality are linked, then 

exchanges may change their fees in 

response to changes in execution 

quality. For example, raising rebates 

might attract more liquidity providers 

and induce additional order flow to the 

exchange. An exchange that is 

experiencing low execution quality 

might raise rebates to address this 

problem. Under these circumstances, an 

empirical analysis that lacks an 

exogenous shock to fees/rebates might 

erroneously conclude that increased 

rebates cause a conflict of interest 

because they are correlated with low 

execution quality and increased order 

flow. Such a conclusion might lead the 

Commission to draw incorrect 

conclusions. 

2. Current Market Environment 

This section provides an overview of 

the competitive landscape that could be 

affected as a result of revisions to the 

transaction-based fee structure required 

by the Pilot. Where information is 

currently available to the Commission, a 

description of the current practices of 

exchanges along dimensions that are 

relevant to the Pilot (e.g., summary 

information on their current fee 

schedule or the frequency of fee 

revisions) are included. The 

Commission requested that commenters 

provide additional information to 

inform the baseline as part of the 

proposal. Where available, the baseline 

has been supplemented to reflect 

additional baseline information that was 

received from commenters. 

a. Market for Trading Services 

The market for trading services, 

which is served by exchanges, ATSs, 

and other liquidity providers 

(internalizers and others), relies on 

competition to supply investors with 

execution services at efficient prices. 

These trading venues, which compete to 

match traders with counterparties, 

provide platforms for price negotiation 

and the dissemination of trading 

information. The market for trading 

services in NMS stocks currently 

consists of 13 national equity market 

exchanges and 34 operational ATSs. 

Other off-exchange venues include 

broker-dealer internalizers and 

wholesalers, which execute a 

substantial volume of retail order flow. 

The remainder of this section discusses 

the current competitive landscape for 

exchanges, ATSs, and others relevant to 

our economic analysis of the Pilot. 

Since the adoption of Regulation NMS 

in 2005, the market for trading services 

has become more fragmented and 

competitive. Of the 13 exchanges, seven 

are maker-taker exchanges and four are 

taker-maker pricing exchanges, as 

shown in Table 1; the NYSE American 

and IEX operate as flat-fee exchanges.619

Since Regulation NMS was adopted in 

2005, the market for trading services has 

become significantly more competitive 

as measured by the decline in market 

share of individual exchanges, 

discussed in more detail below. The 

number of U.S. equities exchanges has 

increased by over 60%, as the number 

of exchanges increased from eight 

exchanges in 2005 to 13 exchanges 

operating today.620 Several studies have 

suggested that transaction-based fee 

pricing partially drove the increase in 

the number of U.S. equities exchanges 

since 2005.621

Execution services are a lucrative 

business, which encourages new trading 

centers to enter the market in the hopes 

of capturing rents associated with order 

5254 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

622See, e.g., Angel, Harris, & Spatt, supra note 

530; Harris, supra note 530. 623See Proposing Release, supra note 2, at 13042. 

See also ICI Letter II at 4. 624See supra notes 3 and 4. 625Shares are computed based on trading volume 

in August 2018. Market shares for the exchanges 

reported do not add up to 100%, because 

approximately 34% of trading volume is executed 

off-exchange on over-the-counter venues. These 

market share figures differ slightly from the ones in 

footnote 9 of Cboe Letter I, which provided market 

share for May 2018. While these differences could 

result from the focus on more recent data, the 

Commission is not sure if the differences could also 

be driven by differing methodologies. Nonetheless, 

the figures in Cboe Letter I are consistent with the 

conclusions in this release. Also, the off-exchange 

share differs slightly from the 39% share in Nasdaq 

Letter I, at 2. Note that the off-exchange share in the 

Proposing Release was 40%. 

626Since July 2017, NYSE American has not been 

a purely maker-taker market as only certain types 

of market participants (electronic Designated 

Market Makers) are eligible for rebates. See NYSE 

American Equities Price List (July 26, 2018), https:// 

www.nyse.com/publicdocs/nyse/markets/nyseamerican/NYSE_America_Equities_Price_List.pdf. 627NYSE acquired NSX in January 2017, and the 

exchange is now known as NYSE National. The 

exchange was re-opened for trading in May 2018 as 

taker-maker exchange. 628See Angel, Harris, & Spatt, supra note 5307, 

Figures 2.17 and 2.18. Although less evident than 

for NYSE-listed securities, the effect is similar for 

the Nasdaq market. 629See, e.g., CBOE Letter I, at 2; NASDAQ Letter 

I, at 11–13. One commenter suggested that in the 

Proposal, the Commission made the assumption 

that exchange groups had market power without 

providing evidence to support the assumption. This 

commenter also argued that no exchange group 

controls even 25 percent of market share and that 

competition is robust between and among equities 

exchanges. See NASDAQ Letter I, at 12–13. 

630One commenter suggested that in the 

Proposal, the Commission failed to account for the 

two-sided nature of exchange platforms when 

assessing the competitive impact of the Proposal. 

See NASDAQ Letter II, at 4–5. In the Proposal, the 

Commission separately discussed the potential 

impact of the Pilot on the competition for trading 

volume, see the Proposal, supra note 2, at 13068. 

The Commission also discussed some ways the 

Pilot could potentially impact marketable and 

nonmarketable order flow, see the Proposal, supra 

note 2, at 13057. Additionally, in Section IV.D.2.a, 

the Commission separately discusses the potential 

effects of the Pilot on marketable and nonmarketable order flow. 

631A number of commenters said exchanges use 

rebates to compete to attract limit orders to supply 

liquidity. See, e.g. NASDAQ Letter I, at 12; Virtu 

Letter, at 3; State Street Letter, at 2. 

632One commenter also suggested that exchanges 

also compete to attract to liquidity using many 

costly features, including rebates, incentive 

programs, superior execution systems, regulatory 

quality, and customer service. See NASDAQ Letter 

I, at 12. 

execution.622 As discussed in the 

proposing release, liquidity 

externalities, where the more liquid 

venues attract more interest and 

therefore more liquidity, could result in 

a single venue (or very limited number 

of venues) being the preferred trading 

location for any given stock because all 

traders could optimally route orders to 

the venue with the highest liquidity for 

a given stock.623 But if rebates offered 

by exchanges are large enough, they 

provide incentives for market 

participants to route orders to those 

venues, in order to capture the rebates, 

and possibly despite the liquidity 

profile or execution quality of those 

venues. Rebates offered by exchanges, 

therefore, may ‘‘break’’ the liquidity 

externality. 

TABLE 1—U.S. NATIONAL EQUITIES EXCHANGES

Exchange Market fee 

type 624

Exchange 

in 2005? 

Market share 625

(%) 

Cboe BZX: https://markets.cboe.com ..................................................... Maker-Taker ................................... 6.14 

Cboe BYX: https://markets.cboe.com ..................................................... Taker-Maker ................................... 4.86 

Cboe EDGA: https://markets.cboe.com .................................................. Taker-Maker ................................... 1.26 

Cboe EDGX: https://markets.cboe.com .................................................. Maker-Taker ................................... 5.58 

BX: www.nasdaqtrader.com .................................................................... Taker-Maker ................................... ✓ 3.00 

Phlx (PSX): www.nasdaqtrader.com ....................................................... Maker-Taker ................................... ✓ 0.70 

Nasdaq: www.nasdaqtrader.com ............................................................ Maker-Taker ................................... ✓ 15.76 

NYSE Arca: https://www.nyse.com/markets ........................................... Maker-Taker ................................... ✓ 8.87 

NYSE American 626: https://www.nyse.com/markets .............................. Flat Fee .......................................... ✓ 0.32 

NYSE: https://www.nyse.com/markets .................................................... Maker-Taker ................................... ✓ 12.16 

NYSE National 627: https://www.nyse.com/markets ................................ Taker-Maker ................................... ✓ 0.64 

CHX: www.chx.com ................................................................................ Maker-Taker ................................... ✓ 0.57 

IEX: www.iextrading.com ........................................................................ Flat-fee ........................................... 6.14 

Total ................................................................................................. ........................................................ ........................ 66.00 

Table 1 highlights that the market 

share of trading volume among 

exchanges is not very concentrated. 

Although NYSE and Nasdaq have the 

largest market share of approximately 

12% and 16%, respectively, among the 

exchanges, as of July 2018, these two 

exchanges collectively account for less 

than 30% of the total market share of 

trading volume for NMS stocks, 

indicating that the market for trading 

services has become decentralized, and 

has become more so over time. For 

instance, between 2004 and 2013, the 

NYSE’s market share of NYSE-listed 

stocks declined from approximately 

80% to 20%, while market share of 

other exchanges and off-exchange 

trading centers has increased.628 This 

decentralization provides market 

participants with a choice among 

venues when they route orders, and may 

also encourage exchanges to compete to 

attract order flow. 

A number of commenters suggested 

that exchanges compete intensely with 

each other to attract order flow.629

Transaction-based fees represent one 

means by which national securities 

exchanges may compete for order flow, 

and exchanges may adopt business 

models that focus on attracting order 

flow by offering large rebates or 

charging competitive fees. Exchanges 

may also develop different business 

models to attract different types of order 

flow.630 For example, maker-taker 

venues may offer large rebates to attract 

liquidity supplying orders.631 They may 

then rely on this liquidity to attract 

marketable orders, to which they charge 

a high transaction fee in order to both 

offset the cost of the large rebates and 

to ensure a profitable transaction pricing 

model. Alternatively, inverted 

exchanges offer higher rebates to 

compete to attract marketable orders. 

Exchanges may also compete for order 

flow on other dimensions as well, by 

offering better execution quality, better 

technology, and innovations in order 

types and other trading mechanisms.632

In addition to competing with other 

U.S. equities exchanges, exchanges also 

compete for order flow with offexchange trading centers, including 

ATSs, internalizers, and others. One 

way exchanges compete with offexchange trading venues is through the 

use of rebates. For example, a number 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5255 

633See e.g., FIA Letter, at 3–4; NYSE Letter I, at 

6; Grasso Letter, at 4. 

634See e.g., IEX Letter I, at 3; Credit Suisse 

Commentary, at 2. 

635See NYSE Letter I, at 6. 

636 Data on off-exchange market share are 

available from Cboe http://markets.cboe.com/us/ 

equities/market_share/ (last visited November 8, 

2018). 

637The estimates of ATSs that trade NMS stocks 

and ATS trade volume share was developed using 

weekly summaries of trade volume collected from 

ATSs pursuant to FINRA Rule 4552. See also 

Securities Exchange Act Release No. 76474 

(November 18, 2015), 80 FR 80998, 81109 

(December 28, 2015) (hereinafter ‘‘Regulation of 

NMS Stock Alternative Trading Systems’’). The 

estimates in this release were calculated in the same 

manner as in the cited release. See also OTC (ATS 

& Non-ATS) Transparency, FINRA: Reg. Filing & 

Reporting (2018), http://www.finra.org/Industry/ 

Compliance/MarketTransparency/ATS/. 

638Total market share is collected from Cboe 

http://markets.cboe.com/us/equities/market_share/ 

(last visited November 8, 2018). ATS weekly market 

share is collected from FINRA, https://

otctransparency.finra.org (last visited November 8, 

2018). 

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

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

641See NYSE Letter II at 8 for more concrete 

factors considered by liquidity providers. 

642See Securities Exchange Act Release No. 

63241 (November 3, 2010), 75 FR 69791, 69822 

(November 15, 2010) (hereinafter ‘‘Risk 

Continued 

of commenters argued that one way 

exchanges compete with off-exchange 

trading venues is by using liquidity 

rebates to attract liquidity and narrow 

the displayed spread, which makes it 

more expensive for off-exchange trading 

venues to either match or improve upon 

the NBBO.633 Exchange transaction fees 

may also affect competition between 

exchanges and off-exchange trading 

venues. For example, commenters 

suggested that broker-dealers may opt to 

route order flow off-exchange in order to 

avoid higher transaction fees charged by 

exchanges.634 Off-exchange trading 

venues may also compete with 

exchanges to attract order flow by 

offering more flexibility in how they 

execute orders. One commenter noted 

that ‘‘market participants choose to send 

orders to off-exchange venues for 

reasons other than avoiding fees,’’ 

including ‘‘investors anonymity, the 

ability to trade in more granular tick 

sizes, the flexibility to segment the 

treatment of different types of clients, 

the ability to choose trading 

counterparties, and the ability to 

accommodate customer errors.’’ 635

Off-exchange trading makes up a 

substantial fraction of total volume, as 

approximately 34% of all transaction 

reports are routed using the NYSE and 

Nasdaq Trade Reporting Facilities as of 

August 2018.636 Of that off-exchange 

NMS share volume, approximately 14% 

was attributable to ATSs, of which 34 

traded NMS securities as of August 

2018.637 The remaining 21% of offexchange share volume is routed to 

other off-exchange trading centers, such 

as internalizers.638

In aggregate, broker-dealers and other 

market participants have a large and 

varied set of options as to where they 

route orders, whether to exchanges or to 

off-exchange trading centers. Moreover, 

empirical evidence suggests that 

traditional exchanges, such as NYSE 

and Nasdaq, are losing market share to 

off-exchange trading centers and newer 

exchanges,639 which may provide 

different incentives to broker-dealers in 

order to attract this order flow, 

including transaction fees and rebates. 

We discuss the current levels of 

transaction-based fees in Section 

IV.B.2.e below. 

b. Market for Liquidity Provision 

Several commenters discussed the 

importance of liquidity providers to an 

exchange’s ability to compete in the 

market for trading services.640 Within 

the exchange framework, liquidity 

providers, such as market makers, other 

proprietary traders, and investors, 

compete to supply liquidity to liquidity 

demanders. They compete by posting 

displayed limit orders on exchanges, or 

by posting undisplayed limit orders on 

exchanges or ATSs. Liquidity providers 

profit by buying at a price lower than 

the price at which they sell and/or by 

collecting rebates that are greater than 

the fees they pay. Hence, an execution 

is a necessary means of profiting from 

liquidity provision, whether the 

liquidity provider seeks to profit from 

price changes or rebates. 

Liquidity providers, and traders more 

generally, seek to manage their trading 

profits by managing the tradeoff 

between the price they get in an 

execution, the certainty of execution, 

and any adverse selection resulting from 

the execution.641 When a liquidity 

supplier more aggressively prices their 

limit order, they increase the chance 

that their order will execute, but they 

trade this off against their order 

executing at a worse price and increased 

chance of their order being adversely 

selected if it does execute. 

To get an execution, the limit orders 

need to be at the top of a queue at a 

given price and venue and placed on a 

venue able to attract liquidity 

demanders. Displaying a limit order 

attracts liquidity demanders to the 

venue displaying the limit order, and 

thus improves the probability of 

execution, but could also increase the 

risk of being adversely selected, which 

reduces profits. For example, an 

algorithm that is skilled at identifying 

short-term price movements may be 

programmed to hit displayed limit buy 

orders at a price following a signal that 

the price is about to go down. In such 

a situation, the liquidity provider is 

unlikely to quickly sell at a price higher 

than the recent purchase, and therefore, 

these situations are costly for the 

liquidity provider. One way to attempt 

to reduce adverse selection costs is to 

not display the limit order. When the 

order is not displayed, the traders with 

the price signals may not see it and, as 

a result, would be less likely to pick it 

off. On the other hand, an undisplayed 

limit order also risks not getting 

executed when an execution would be 

profitable. For example, an undisplayed 

limit buy order is less likely to execute 

than a displayed limit buy order just 

prior to an increase in the price because 

marketable sell orders that do not 

anticipate the price increase are likely to 

route to venues with competitively 

priced limit buy orders and would not 

be able to identify which venues have 

undisplayed limit buy orders. 

Rebates and fees can also affect where 

liquidity providers choose to supply 

liquidity. Maker-taker exchanges, which 

pay rebates to liquidity suppliers, 

provide them with extra revenue when 

trades are executed. This could 

encourage liquidity suppliers to post at 

more aggressive prices for some 

securities, subject to the fact that 

displayed quotes on stock exchanges 

must be priced in one-cent increments. 

However, competition among liquidity 

suppliers to earn rebates could lead to 

longer queues in an order book, which 

could decrease the chance that a 

liquidity supplier’s order executes 

unless they are at or near the front of the 

queue. In contrast, inverted exchanges, 

which charge liquidity suppliers a fee 

when they supply liquidity and offer a 

rebate to takers of liquidity, usually 

have shorter queue lengths and an 

economic incentive to take liquidity, 

which increases the chance that a 

liquidity supplier’s order executes. 

c. Market for Broker-Dealer Services 

The Commission considered the 

potential for the Pilot to affect 

competition among broker-dealers that 

route institutional and retail orders. 

These broker-dealers compete in a 

segment of the market for broker-dealer 

services. The market for broker-dealer 

services is highly competitive, with 

most business concentrated among a 

small set of large broker-dealers and 

thousands of small broker-dealers 

competing in niche or regional segments 

of the market.642 Large broker-dealers 

5256 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

Management Controls for Brokers or Dealers with 

Market Access’’). 

643See id. Larger brokers, or those with more 

order flow, also benefit from the economies of scale 

that accompany the tiering structure typically 

provided by exchanges. Accordingly, the brokers 

with the most liquidity-providing orders may 

benefit disproportionately from rebates because 

they generally receive higher rebates within the 

various tiered pricing models of exchanges. 

644Not all ETPs are pooled investment vehicles. 

For example, exchange traded notes (‘‘ETNs’’), 

which are a subset of ETPs, are unsecured, 

unsubordinated debt securities that trade in the 

secondary market on exchanges. 

645 Investment companies can also earn revenue 

from other activities such as lending securities. 

646Actively managed investment vehicles also 

rely on their historical performance when 

competing to attract investor funds. 

647See, e.g. JPMorgan Letter, at 4; STANY Letter, 

at 4; Healthy Markets Letter II, at 8; Morgan Stanley 

Letter, at 3–4. 

648The results are based on data collected from 

Bloomberg and Morningstar as of September 30, 

2018 for US-domiciled ETPs. 

649ETFs operate under exemptive orders that 

allow them to register as investment companies 

under the Investment Company Act. See 15 U.S.C. 

80a–3(a)(1). Non-ETF ETPs are other ETPs that are 

not registered under the Investment Company Act. 

Some are pooled investment vehicles with shares 

that trade on a securities exchange, but they are not 

‘‘investment companies’’ under Investment 

Company Act because they do not invest primarily 

in securities. Such ETPs may invest primarily in 

assets other than securities, such as futures, 

currencies, or physical commodities (e.g., precious 

metals). Others are not pooled investment vehicles. 

For example, ETNs are senior, unsecured, 

unsubordinated debt securities that are linked to 

the performance of a market index and trade on 

securities exchanges. See fn. 10 and accompanying 

text in the ETF Proposal, infra note 651, at 37333. 

ETMFs are exchange traded managed funds. ETMFs 

also operate under exemptive orders that allow 

them to register as investment companies under the 

Investment Company Act, but they have different 

disclosure requirements than ETFs. See, e.g. Eaton 

Vance Management, et al., Investment Company Act 

Rel. Nos. 31333 (Nov. 6, 2014) (notice) and 31361 

(Dec. 2, 2014) (order). 

650The Investment Company Act defines 

‘‘redeemable security’’ as any security that allows 

the holder to receive his or her proportionate share 

of the issuer’s current net assets upon presentation 

to the issuer. See 15 U.S.C. 80a–2(a)(32). While 

closed-end fund shares are not redeemable, certain 

closed-end funds may elect to repurchase their 

shares at periodic intervals pursuant to rule 23c– 

3 under the Investment Company Act (‘‘interval 

funds’’). Other closed-end funds may repurchase 

their shares in tender offers pursuant to rule 13e– 

4 under the Exchange Act. 

651The Commission’s exemptive orders typically 

contain a representation by the applicant that an 

authorized participant will be either: (a) A broker 

or other participant in the continuous net 

settlement system of the National Securities 

Clearing Corporation, a clearing agency registered 

with the Commission and affiliated with the 

Depository Trust Company (‘‘DTC’’), or (b) a DTC 

participant, which has executed a participant 

agreement with the ETF’s distributor and transfer 

agent with respect to the creation and redemption 

of creation units. See, e.g., Emerging Global 

Advisors, LLC, et al., Investment Company Act 

Release Nos. 30382 (February 13, 2013), 78 FR 

11909 (February 20, 2013) (notice) and 30423 

(March 12, 2013) (order) and related application. In 

June 2018, the Commission proposed a new rule 

under the Investment Company Act of 1940 that 

would permit ETFs that satisfy certain conditions 

to operate without obtaining an exemptive order. In 

connection with the proposed exemptive rule, the 

Commission proposed to rescind certain exemptive 

orders that have been granted to ETFs and their 

sponsors. See Securities Exchange Act Release No. 

10515 (June 28, 2018), 83 FR 37332 (July 31, 2018) 

(‘‘ETF Proposal’’). 

typically enjoy economies of scale over 

small broker-dealers and compete with 

each other to service the smaller brokerdealers, who are both their competitors 

and their customers.643 As of December 

31, 2017, approximately 3,860 brokerdealers filed Form X–17a–5. These firms 

vary in size, with median assets of 

approximately $800,000, average assets 

of nearly $1 billion, and total assets 

across all broker-dealers of 

approximately $4 trillion. The twenty 

largest broker-dealers held 

approximately 72% of the assets of 

broker-dealers overall, with total assets 

of $2.89 trillion, indicating the high 

degree of concentration in the industry. 

Of the 3,860 broker-dealers that filed 

Form X–17a–5, 397 are members of U.S. 

equities exchanges. Broker-dealers that 

are members of equities exchanges had, 

on average, higher total assets than other 

broker-dealers, with median assets of 

$25.5 million, average assets of $9.2 

billion, and total assets across all 

broker-dealers that are members of 

exchanges of $3.65 trillion. 

d. Market for Assets Under Management 

Many commenters expressed concern 

about the impact of the Pilot on the 

market for assets under management, 

particularly on exchange-traded 

products (‘‘ETPs’’). Asset management 

firms compete with each other in a 

segment of the market for assets under 

management. They offer different types 

of investment vehicles, such as mutual 

funds, close-end funds, and ETPs,644

which compete with each other to 

attract investor funds. Investor funds in 

an investment vehicle are pooled 

together and invested in financial assets, 

with investors sharing any profits or 

losses incurred by the investment 

vehicle according to each investor’s 

interest in the vehicle. Asset 

management firms generally earn 

revenue by charging fees based on the 

value of the assets they manage on 

behalf of investors in their investment 

vehicles.645

Investment vehicles compete with 

other investment vehicles that follow 

similar investment strategies to attract 

investor funds. They often rely on 

differences in expense ratios, tracking 

error, and redemption and trading 

characteristics when competing to 

attract investor funds.646

One subset of investment vehicles are 

ETPs. ETPs differ from other investment 

vehicles in their trading and redemption 

characteristics. ETPs are investment 

vehicles that issue shares that can be 

bought or sold throughout the day on 

securities exchanges in the secondary 

market at a market-determined price. 

ETPs provide investors with a diverse 

set of investment options. While the 

first ETPs held portfolios of securities 

that replicated the component securities 

of broad-based domestic stock market 

indexes, some ETPs now track more 

specialized indexes, including 

international equity indexes, fixedincome indexes, or indexes focused on 

particular industry sectors such as 

telecommunications or healthcare. 

Some ETPs seek to track highly 

customized or bespoke indexes, while 

others seek to provide a level of 

leveraged or inverse exposure to an 

index over a fixed period of time. 

Investors also have the ability to invest 

in ETPs that do not track a particular 

index and are actively managed. 

A number of commenters noted that 

ETP issuers face strong competition 

within similar investment strategies and 

that small differences in fees and 

trading characteristics, such as spreads, 

daily volume, and intraday volatility, 

may be meaningful to market 

participants when deciding which ETPs 

to trade or invest in.647

As of September 2018,648 there were 

2,003 ETPs categorized as exchange 

traded funds (‘‘ETFs’’), 223 ETPs 

categorized as non-ETF ETPs, and 18 

ETPs categorized as ETMFs.649 As of 

this date, ETPs had total net assets of 

$3.74 trillion. The ten largest ETPs 

accounted for 28.0% of total ETP net 

assets and 27.8% of the average dollar 

trading volume on secondary markets. 

As the statistics above indicate, ETFs 

represent the majority of ETPs, they 

possess characteristics of both mutual 

funds, which issue redeemable 

securities, and closed-end funds, which 

generally issue shares that trade at 

market-determined prices on a national 

securities exchange and are not 

redeemable.650 Similar to mutual funds, 

ETFs continuously offer their shares for 

sale. Unlike mutual funds, however, 

ETFs do not sell or redeem individual 

shares. Instead, ‘‘authorized 

participants’’ that have contractual 

arrangements with the ETF (or its 

distributor) purchase and redeem ETF 

shares directly from the ETF in blocks 

called ‘‘creation units.’’ 651

An authorized participant that 

purchases a creation unit of ETF shares 

directly from the ETF deposits with the 

ETF a ‘‘basket’’ of securities and other 

assets identified by the ETF that day, 

and then receives the creation unit of 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5257 

652An ETF may impose fees in connection with 

the purchase or redemption of creation units that 

are intended to defray operational processing and 

brokerage costs to prevent possible shareholder 

dilution (‘‘transaction fees’’). 

653The basket might not reflect a pro rata slice 

of an ETF’s portfolio holdings. Subject to the terms 

of the applicable exemptive relief, an ETF may 

substitute other securities or cash in the basket for 

some (or all) of the ETF’s portfolio holdings. 

Restrictions related to flexibility in baskets have 

varied over time. See the ETF Proposal, supra note 

651, at 37354–58. 

654Non-ETF ETPs also offer creation and 

redemption processes. Some Non-ETF ETPs that are 

organized as pooled investment vehicles may offer 

creation and redemption processes similar to ETFs. 

Other Non-ETF ETPs may offer creations or 

redemptions on a less frequent basis. For example, 

some ETNs may only be redeemed weekly. 

655An authorized participant may act as a 

principal for its own account when purchasing or 

redeeming creation units from the ETF. Authorized 

participants also may act as agent for others, such 

as market makers, proprietary trading firms, hedge 

funds or other institutional investors, and receive 

fees for processing creation units on their behalf. 

See Abner, D.J. The ETF Handbook: How to Value 

and Trade Exchange Traded Funds, 2nd ed., Wiley 

Finance (2016) (‘‘ETF Handbook’’). 

656See, e.g., Antoniewicz, R. & Heinrichs, J. 

(2014). ‘‘Understanding Exchange-Traded Funds: 

How ETFs Work.’’ ICI Research Perspective, Vol. 

20(5) (available at: https://www.ici.org/pdf/per20- 

05.pdf) (‘‘Antoniewicz’’). 

657NSCC is the sole provider of clearing services 

for ETF primary market transactions. Whether a 

creation or redemption order is eligible to be 

processed through NSCC depends on the eligibility 

for NSCC processing of the securities in the ETF’s 

basket. See id. 

658 It is possible for both the ETF’s NAV per share 

and its market price to deviate from the intrinsic 

value of the ETF’s underlying portfolio. In addition, 

there may be cases in which the ETF’s market price 

is closer to the intrinsic value of the ETF’s portfolio 

than its NAV per share. See, e.g., Madhavan, A. & 

Sobczyk, A. (2016) ‘‘Price Discovery and Liquidity 

of Exchange-Traded Funds.’’ Journal of Investment 

Management, Vol 14(2) (available at: https://

www.joim.com/price-dynamics-and-liquidity-ofexchange-traded-funds-2/). 

659See the ETF Proposal, supra note 651, at 

37384. 

660ETFs also operate under several conditions 

designed to facilitate an efficient arbitrage 

mechanism. For example, ETFs are required to 

provide some degree of transparency regarding their 

portfolio holdings by disclosing their holdings prior 

to the commencement of trading each business day 

(i.e., portfolio transparency). 

661This redemption would also cause the ETF’s 

assets under management to decline. 

662As part of this arbitrage process, authorized 

participants are likely to hedge their intraday risk. 

For example, when ETF shares are trading at a 

discount to an estimated intraday NAV per share of 

the ETF, an authorized participant may short the 

securities composing the ETF’s redemption basket. 

After the authorized participant returns a creation 

unit of ETF shares to the ETF in exchange for the 

ETF’s baskets, the authorized participant can then 

use the basket assets to cover its short positions. 

663Market participants also can engage in 

arbitrage activity without using the creation or 

redemption processes by buying/shorting shares in 

the ETF while simultaneously shorting/buying the 

ETF’s underlying assets. 

664As discussed above, authorized participants 

can also hedge the intraday risk associated with the 

arbitrage process. See supra note 662. 

665See, e.g., Virtu Letter, at 7; Cboe Letter I, at 

17–18. 

666See 17 CFR 240.19b–4(m)(1), which requires 

each SRO to post and maintain a current and 

complete version of its rules, including those 

related to transaction-based fees and rebates, on its 

website. 

667As discussed supra Section IV.B.1.b.vi, fee 

information, such as that included in exchange fee 

schedules or Form 19b–4 fee filings, does not have 

standardization or formatting requirements. 

668The transaction fee and rebate ranges in Table 

2 are collected from recent fee schedules (as of July 

31, 2018) available from each individual exchange’s 

website (listed in Table 1). Table 2 provides the 

date from which these fee schedules were reported. 

Continued 

ETF shares in return for those assets.652

The basket is generally representative of 

the ETF’s portfolio 653 and, together 

with a cash balancing amount, equal in 

value to the aggregate NAV of the ETF 

shares in the creation unit.654 After 

purchasing a creation unit, the 

authorized participant may hold the 

individual ETF shares, or sell some or 

all of them in secondary market 

transactions. The redemption process is 

the reverse of the purchase process: The 

authorized participant redeems a 

creation unit of ETF shares for a basket 

of securities and other assets.655 While 

the Commission currently lacks data on 

authorized participants, a 2015 surveybased study of fifteen fund sponsors, 

which together offer two-thirds of all 

existing ETFs (covering 90% of all ETF 

assets), finds that the average ETF has 

34 authorized participant agreements.656

The study further reports that creation 

and redemption transactions occurred 

only on between 10% to 20% of trading 

days and that only 10% of the daily 

activity in all ETF shares (by volume) 

are creations or redemptions.657

Investors can purchase individual 

ETF shares in the secondary market at 

prices that may deviate from the ETF’s 

NAV. As a result, ETF investors may 

trade shares at prices that do not 

necessarily reflect the intrinsic value of 

the underlying ETF assets.658

As discussed in the ETF Proposal,659

the combination of the creation and 

redemption process with secondary 

market trading in ETF shares provides 

arbitrage opportunities that are designed 

to help keep the market price of ETF 

shares at or close to the NAV per share 

of the ETF.660 For example, if ETF 

shares are trading on national securities 

exchanges at a ‘‘discount’’ (a price 

below the NAV per share of the ETF), 

an authorized participant can purchase 

ETF shares in secondary market 

transactions and, after accumulating 

enough shares to compose a creation 

unit, redeem them from the ETF in 

exchange for the more valuable 

securities in the ETF’s redemption 

basket.661 The authorized participant’s 

purchase of an ETF’s shares on the 

secondary market, combined with the 

sale of the ETF’s basket assets, may 

create upward pressure on the price of 

the ETF shares, downward pressure on 

the price of the basket assets, or both, 

bringing the market price of ETF shares 

and the value of the ETF’s portfolio 

holdings closer together.662

Alternatively, if ETF shares are trading 

at a ‘‘premium’’ (i.e., a price above the 

NAV per share of the ETF), the 

transactions in the arbitrage process are 

reversed and, when arbitrage is working 

effectively, keep the market price of the 

ETF’s shares close to its NAV.663

However, authorized participants, 

other market participants, and 

arbitrageurs acting in secondary markets 

may incur costs and be exposed to risk 

when engaging in arbitrage. The costs 

include bid-ask spreads and transaction 

fees associated with the arbitrage trades. 

In addition, during the time it takes 

arbitrageurs to execute these trades, they 

are exposed to the risk that the prices of 

the basket assets and the ETF shares 

change. As a consequence, arbitrageurs 

may decide to wait for any mispricing 

between the market price of ETF shares 

and NAV per share to widen until the 

expected profit from arbitrage is large 

enough to compensate for any 

additional costs and risks associated 

with engaging in the transaction.664

A number of commenters noted that, 

in order to promote liquidity in thinlytraded ETPs, exchanges offer market 

makers who meet certain quoting 

requirements enhanced rebates when 

supplying liquidity in certain less 

actively traded ETPs.665

e. Transaction-Based Fees and Rebates 

Exchanges are required to disclose 

their current fee schedules, which 

include transaction-based fees and 

rebates, connectivity fees, membership 

fees, among others.666 When exchanges 

update their fees, they are required to 

file Form 19b–4 with the Commission; 

fee changes are permitted to take effect 

upon filing under Section 19(b)(3)(A) of 

the Exchange Act.667 Although these fee 

schedules and Form 19b–4 fee filings 

contain information about fees beyond 

transaction-based fees and rebates, in 

this baseline, the discussion is limited 

to only transaction-based fees and 

rebates and any changes thereto. 

Table 2 reports the range of minimum 

and maximum transaction fees and 

rebates, as well as the number of 

categories for each (in parentheses 

below the fee ranges), by exchange, as 

reported by each exchange on their 

recent fee schedules.668 On average, 

5258 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

The ranges in fees are the minimum and maximum 

fees and rebates reported by each exchange. 

669This average does not include the IEX 

exchange as the fee structure is a flat one. See also, 

e.g., RBC Letter II (attaching a report titled 

‘‘Complexity of Exchange Pricing and 

Corresponding Challenges to Transparency and 

Routing’’ in which they identify ‘‘1,023 separate 

pricing ‘paths’—i.e., separate fees or rebates—across 

these exchanges.’’). 

670See, e.g., CFA Letter, at 6. 

671The median number of revisions to fee and 

rebate schedules by exchanges is 41 over the fiveyear period. 

672NYSE acquired NSX in January 2017, and the 

exchange is now known as NYSE National. As of 

May 2018, the exchange re-opened for trading and 

began submitting new fee schedules periodically. 

673See Nasdaq Form 10–K filings (2017), 

available at https://www.sec.gov/Archives/edgar/ 

data/1120193/000112019318000003/ 

ndaq1231201710-k.htm. Transaction-based 

revenues for equity securities accounted for 

approximately 59% of total operating income net of 

rebates and 25% net of rebates and brokerage, 

clearing, and exchange fees. The Commission has 

revised the revenue number for Nasdaq for 2017 

revenue per the correction provided in the Nasdaq 

Letter II. 

674See Intercontinental Exchange Form 10–K 

filings (2017), available at https://www.sec.gov/ 

Archives/edgar/data/1571949/0001571949

18000003/ice2017123110k.htm. For the 

Intercontinental Exchange, net cash equity 

transaction-based revenues were approximately 

8.2% of operating income for 2016. 

675See Cboe Form 10–K filings (2017), available 

at https://www.sec.gov/Archives/edgar/data/ 

1374310/000155837018000953/cboe20171231x10k.htm. Cboe’s acquisition of BATS 

Global Markets became effective on March 1, 2017. 

For the year ending December 31, 2017, the net 

transaction-based revenues were 41% of Cboe 

operating profits. 

U.S. exchanges have 18 access fee 

categories and 21 rebate categories 

associated with these fee schedules.669

For the maker-taker exchanges, access 

fees do not exceed the Rule 610(c) cap 

at $0.0030, but are as little as zero in 

some fee categories for some exchanges; 

taker-maker exchanges, because they are 

not restricted in the amount they can 

charge to non-marketable limit orders, 

have fees that range as high as $0.0033. 

Seven exchanges have some categories 

of rebates that exceed the maximum 

access fees charged by exchanges.670

Table 2 also provides the number of 

fee revisions for the exchanges as 

reported in their Form 19b–4 fee filings 

to the Commission in the last five years 

(August 1, 2013–July 31, 2018). 

Exchanges, on average, have changed 

their fee schedules 34 times in the last 

five years,671 indicating that the average 

exchange revises its transaction-based 

fee schedules about seven times per year 

(approximately every 7.4 weeks). 

TABLE 2—SUMMARY OF TRANSACTION-BASED FEE SCHEDULES FOR U.S. NATIONAL EQUITIES EXCHANGES AS OF JULY

2018 

Exchange Fee model 

Number of 

revisions 

(5 years) 

Date of fee 

schedule 

Fees 

(# of categories) 

Rebates 

(# of categories) 

Cboe BZX ................................................ Maker-Taker ........... 54 8/16/2018 $0.0000–$0.0033 ....

(29) .........................

($0.0010)–($0.0032) 

(18) 

Cboe BYX ................................................ Taker-Maker ........... 51 8/9/2018 $0.0000–$0.0033 ....

(40) .........................

($0.0005)–($0.0022) 

(12) 

Cboe EDGA ............................................. Taker-Maker ........... 41 8/1/2018 $0.0000–$0.0032 ....

(48) .........................

($0.0004)–($0.0027) 

(14) 

Cboe EDGX ............................................. Maker-Taker ........... 53 8/16/2018 $0.0000–$0.0032 ....

(37) .........................

$0.000–($0.0032) 

(20) 

BX ............................................................ Taker-Maker ........... 29 7/20/2018 $0.0005–$0.0030 ....

(13) .........................

$0.0000–($0.0021) 

(12) 

Phlx (PSX) ............................................... Maker-Taker ........... 24 5/21/2018 $0.0028–$0.0030 ....

(3) ...........................

$0.00–($0.0030) 

(8) 

Nasdaq ..................................................... Maker-Taker ........... 54 7/25/2018 $0.0000–$0.0030 ....

(4) ...........................

$0.0000–($0.00325) 

(36) 

NYSE Arca ............................................... Maker-Taker ........... 51 8/1/2018 $0.0005–$0.0035 ....

(68) .........................

($0.0002)–($0.0035) 

(65) 

NYSE American ....................................... Flat .......................... 9 7/26/2018 $0.0002–$0.0030 ....

(12) .........................

$0.0000–($0.0045) 

(4) 

NYSE ....................................................... Maker-Taker ........... 42 8/10/2018 $0.0003–$0.0030 ....

(20) .........................

$0.0000–($0.0045) 

(41) 

NYSE National 672 .................................... Taker-Maker ........... 11 7/26/2018 $0.0003–$0.0025 ....

(16) .........................

($0.0002)–($0.0020) 

(2) 

CHX .......................................................... Maker-Taker ........... 8 4/26/2018 $0.0007–$0.0040 ....

(5) ...........................

($0.0009)–($0.0020) 

(2) 

IEX ........................................................... Flat .......................... 10 8/1/2018 $0.0009 ................... $0.0009 

For several of the exchange families, 

information about revenues and costs 

attributed to transaction-based fees and 

rebates is available in aggregate from 

Form 10–K filings. Using the statements 

of income from Form 10–K filings for 

2017 capturing the net (of rebates) 

transactions-based fee revenues, the 

Nasdaq exchanges (Nasdaq, BX, and 

PSX) earned $253 million.673 Based on 

the same measure the NYSE-affiliated 

exchanges (NYSE, NYSE Arca, NYSE 

American, and NYSE National) earned 

$196 million in transaction-based fees 

net of rebates,674 while the BATS Global 

Markets (now, Cboe BZX, Cboe BYX, 

Cboe EDGA, and Cboe EGDX), for the 

year ended December 31, 2017, earned 

$153 million in transaction-based fees 

net of rebates.675 Neither CHX (which 

became a NYSE-affiliated exchange in 

2018) nor IEX or their affiliates are 

publicly traded, meaning that these 

exchanges do not file an annual Form 

10–K with the Commission. As a result, 

public information regarding the 

revenues or profits associated with 

transaction-based fees does not exist for 

these exchanges. 

Information on the net transactionsbased revenues for each individual 

exchange, as opposed to the amounts 

reported for exchange groups in Form 

10–K filings, is not currently publicly 

available, making it difficult to analyze 

the fees and rebates for an individual 

exchange. To estimate the net 

transactions-based revenues for each 

individual exchange, Table 3 reports the 

maximum and median net transactionbased fees based on each exchange’s 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5259 

676The share volume is obtained from Cboe, 

available at http://markets.cboe.com/us/equities/ 

market_share/ (last visited September 18, 2018). To 

compute the maximum profit attainable, staff took 

the difference between the highest possible 

transaction fee and the lowest possible rebate and 

multiplied it by the monthly share volume. For a 

midpoint profit, the median of the transaction fees 

less the median of the rebates is computed and 

multiplied it by share volume. In order to make the 

results comparable to those reported above from 

Form 10–K filings, the monthly profits are 

annualized by multiplying each monthly profit 

amount by 12. 

677Monthly share volume obtained from Cboe for 

July 25, 2017 through August 24, 2017, Cboe, U.S. 

Equities Market Volume Summary, available at 

http://markets.cboe.com/us/equities/market_share/ 

(last visited September 18, 2018). 

678 In contrast, one commenter opined that the 

primary benefit of the Pilot would be ‘‘the ‘better 

fills’ that institutional investors will get after the 

pilot is introduced.’’ Nasdaq Letter III, at 9. This 

commenter asserted that the Commission had not 

done a proper cost benefit analysis because its 

analysis of benefits did not account for the 

‘‘opportunity costs’’ inherent in order routing 

decisions, or other factors which would impact 

institutional orders. See id. Consequently, the 

commenter asserted that the Commission overstated 

the benefit of the Pilot. See id. However, the 

Commission does not agree that ‘‘better fills’’ will 

be a certain result of the Pilot. Furthermore, the 

Commission disagrees that it has not adequately 

analyzed the costs of the Pilot. As noted above, the 

Commission has quantified the likely economic 

effects of the Pilot where possible; however, the 

Commission is unable to quantify all of the 

economic effects because it lacks the information 

necessary to provide reasonable estimates. The 

Commission agrees with the commenter that 

quantifying benefits using existing data is difficult, 

thus underscoring the need for a Pilot. A more 

detailed analysis of the Pilot’s impact on trading 

costs can be found in Section IV.C.2.b. 

679See Proposing Release, supra note 2, at 

Section V. 

most recently reported fee schedule and 

the share volume of each exchange for 

July 25, 2018 through August 24, 

2018.676 As evidenced by the significant 

differences between the sum of net of 

rebate revenues for entities reporting to 

the same exchange group obtained from 

Table 3 and the total net of rebate 

revenues for each exchange family 

reported on the Form 10–K or 10–Q 

filings, this approach does not yield 

reliable results, highlighting the 

limitations on the data currently 

available to researchers. 

TABLE 3—ESTIMATES OF ANNUALIZED PER-EXCHANGE NET TRANSACTION-BASED FEE REVENUES FROM TRANSACTIONBASED FEES AND MONTHLY EXCHANGE SHARE VOLUME

[For July 25, 2018–August 24, 2018] 

[In millions] 

Exchanges Share volume 

(millions) 677

Annualized 

midpoint 

difference 

Per share 

profit 

(median) 

Annualized 

maximum 

difference 

Per share 

profit 

(maximum) 

Cboe BZX ............................................................................ 9,014 ($486.75) ($0.00450) $248.78 $0.0023 

Cboe BYX ............................................................................ 7,136 25.69 0.00030 239.76 0.0028 

Cboe EDGA ......................................................................... 1,853 1.11 0.00005 62.26 0.0028 

Cboe EDGX ......................................................................... 8,165 (4.90) (0.00005) 205.77 0.0021 

BX ........................................................................................ 4,389 36.87 0.00070 158.02 0.0030 

Phlx (PSX) ........................................................................... 1,035 16.15 0.00130 37.27 0.0030 

Nasdaq ................................................................................. 23,087 (34.63) (0.00013) 831.14 0.0030 

NYSE Arca ........................................................................... 13,024 23.44 0.00015 515.75 0.0033 

NYSE American ................................................................... 473 (3.69) (0.00065) 17.03 0.0030 

NYSE ................................................................................... 17,823 (128.33) (0.00060) 641.63 0.0030 

NYSE National ..................................................................... 920 3.31 0.00030 25.40 0.0023 

CHX ...................................................................................... 830 8.96 0.00090 30.87 0.0031 

IEX ....................................................................................... 3,757 N/A 0.00000 N/A 0.0000 

C. Analysis of Benefits and Costs of 

Transaction Fee Pilot 

1. Benefits of Transaction Fee Pilot 

The Commission expects that the 

benefits of the Pilot will fall into two 

categories: (1) More informed policy 

decisions, including more information 

about the economic impact of 

transaction-based fees and rebates, and 

(2) other benefits that may accrue to 

market participants for the duration of 

the Pilot. In this section we discuss each 

of the categories of benefits as well as 

potential limitations to the applicability 

of information to be drawn from the 

Pilot. 

a. Benefits of More Informed Policy 

Decisions 

The Commission expects that the 

primary benefit of the Pilot will be to 

inform the Commission and public of 

the economic impact of exchange 

transaction-based fees and rebates.678 As 

a result, the Commission will have data 

to better inform its regulatory 

consideration of exchange transactionbased fee-and-rebate pricing models and 

fee changes, and the potential effects of 

changes to its regulatory approach 

concerning the same. In general, more 

informed regulatory decisions are more 

likely to result in regulatory approaches 

that better balance costs and benefits 

relative to regulatory decisions based on 

less precise information. In other words, 

many of the economic benefits derive 

from subsequent decisions that the 

Commission can neither predict nor 

commit to at this time. Indeed, the 

Commission cannot predict at this time 

whether the results of the Pilot will 

suggest any particular policy direction 

and recognizes that the results could 

suggest that existing exchange 

transaction-based fee caps and related 

rebates may be more beneficial to 

investors than the policy alternatives 

examined in the Pilot. 

i. Expected Analysis From the Pilot 

The Proposing Release discussed the 

theoretical impact of exchange 

transaction-based fees and rebates on 

several potential effects such as 

conflicts of interest, fragmentation, 

complexity, liquidity, and off-exchange 

competition and explained that certain 

components of the Proposed Pilot 

would facilitate the study of these 

effects.679 As noted above, the 

Commission believes that little 

empirical evidence currently exists 

regarding these effects. 

More specifically, the Pilot will 

provide information on the direct effects 

of exchange transaction fee and rebate 

levels on execution quality and market 

quality and will facilitate studies of the 

impact of fees and rebate levels on 

market participant behavior and 

competition, including potential 

conflicts of interest. Sections IV.C.2 and 

IV.D. discuss many potential economic 

effects for which this economic analysis 

5260 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

680See e.g., Cboe Letter I, at 12; NYSE Letter I, 

at 9; Nasdaq Letter I, at 2, 5 (suggesting that the 

Pilot may impact competitive dynamics between 

exchanges and ATSs). 

681See, e.g., Nasdaq Letter III at 1. 

682As discussed in the baseline, the number of 

exchanges has increased since 2005, and market 

share has become less concentrated over the same 

time period. The majority of the U.S. equities 

exchanges belong to three exchange groups. The 

Commission believes that any analyses of the effects 

of transaction-based fees on order routing decisions 

can appropriately control for exchange groups. 

683See, e.g., ICI Letter II at 2. 

684See, e.g., Fidelity Letter, at 9. 

685Equilibrium refers to conditions of a system in 

which all competing influences are balanced. For 

instance, with respect to the Test Group 2, this 

could be the level of transaction fees charged by 

exchanges from which no exchange has any 

incentive to increase or decrease that fee outside of 

a constrained competitive margin. This will be the 

equilibrium transaction fee. See also, discussion in 

Section II.C.7.e. An important potential benefit of 

the Pilot could result if the no rebate Test Group 

were able to demonstrate a set of conditions 

wherein regulatory fee caps might not be 

necessitated in an environment in which natural 

competitive forces could effectively cap access fees. 

This would occur if in the no-rebate Test Group the 

equilibrium fee charged during the Pilot was lower 

than the fee cap—implying that the fee cap was not 

binding in this situation. 

686 If Linked Pricing were not prohibited, market 

participants could potentially circumvent the 

prohibition on rebates through Linked Pricing 

mechanisms. Therefore, including prohibitions on 

rebates or Linked Pricing could provide information 

to the Commission and the public about potential 

conflicts of interest associated with rebates or 

substitutes for rebates, such as Linked Pricing, as 

well as the equilibrium fee that emerges in the 

absence of rebates or Linked Pricing. 

687See, e.g., Fidelity Letter, at 9; Citadel Letter, 

at 5. In addition to removing rebates or Linked 

Pricing in Test Group 2, the Commission could also 

temporarily suspend limitations on access fee caps 

imposed by Rule 610(c). Implementing multiple 

changes within a single test group, however, could 

prevent researchers and others from clearly 

determining the effect of the prohibition of rebates 

on order routing decisions of broker-dealers from 

the effect resulting from the removal of access fee 

caps if Rule 610(c) restricted access fees during the 

Pilot. 

688See, e.g., ICI Letter II at 3 (noting that the Pilot 

could facilitate the study of how access fees and 

rebates affect liquidity, including quoted spreads). 689See. Academic studies suggest that the 

majority of retail orders are executed off-exchange 

at prices based on the NBBO, thereby providing 

retail investors with better prices in the presence of 

rebates. If, however, large rebates provide 

incentives for broker-dealers to route retail orders 

to these exchanges instead of to off-exchange 

venues, retail customers may not be fully aware of 

the total cost associated with their orders. See, e.g., 

Angel, Harris, & Spatt, supra note 530. 

690See, e.g., Nasdaq Letter I at 9. 

691See supra Section II.C.5 (discussing statistical 

power) and infra note 695. 

is unable to draw unambiguous 

conclusions. For example, many 

commenters disagreed on how reducing 

exchange fees and rebates affects the 

competitive landscape between 

exchanges and off-exchange venues in 

the market for trading services,680 and 

the analysis here recognizes that many 

competitive forces can drive order flow 

in either direction. The Pilot will 

provide insight into the impact of 

transaction fees and rebates on this 

competitive landscape and can perhaps 

even shed light into the mechanism 

behind any observed changes. Further, 

one commenter argued that this 

economic analysis ‘‘does not accurately 

account for the actual level of orders 

impacted by conflicted broker 

routing.’’ 681 The Commission believes 

that it cannot establish the actual level 

of orders impacted by potentially 

conflicted broker routing with current 

data and has designed the Pilot in part 

to gather more data on the extent to 

which rebates impact order routing 

decisions, as explained in the section 

that follows. The Commission also notes 

that the Pilot seeks to study the effects 

of exchange pricing models on market 

quality and execution quality, which 

could affect all orders. The Pilot will 

facilitate the study of order flow among 

different venues, which could provide 

insights into whether changes in 

exchange transaction-based fees and 

rebates affect, for example, the level of 

fragmentation. Existing literature 

suggests that transaction-based pricing 

has contributed to an increase in the 

number of venues competing for order 

flow over time.682 By offering rebates or 

Linked Pricing, start-up maker-taker and 

taker-maker exchanges have been able to 

attract order flow from exchanges such 

as NYSE and Nasdaq, thereby reducing 

liquidity externalities, or concentration 

of order flow to a preferred venue, and 

leading to increased fragmentation of 

the market for trading services.683 By 

altering the access fee and rebate 

structures for exchanges, researchers 

may be able to identify whether these 

changes lead to more (or less) 

concentration of liquidity and how they 

affect competition for order flow among 

exchanges, which could lead to less (or 

more) market fragmentation.684

Test Group 2 will provide insight into 

the natural equilibrium level of access 

fees, within the current regulatory 

structure, in the absence of rebates and 

Linked Pricing.685 As discussed above, 

prohibiting exchanges from offering 

Linked Pricing in Test Group 2 is 

intended to complement and reinforce 

the prohibition on rebates.686 Although 

Rule 610(c) caps the maximum access 

fee for exchanges at $0.0030, in the 

absence of rebates and Linked Pricing, 

competition among exchanges could 

drive the average access fee to an 

amount substantially below $0.0030.687

As noted in Section IV.A.2, exchanges 

have a reduced competitive incentive to 

reduce fees because doing so would 

require reducing the rebates that attract 

order flow to the exchange. Test Group 

2 will allow competition among 

exchanges, in the absence of pressure to 

offer high rebates or Linked Pricing, to 

determine the level of access fees, 

which the Commission and others can 

observe during the Pilot. Like the other 

examinations the Pilot can facilitate, the 

results of an analysis of the equilibrium 

access fees are not currently predictable 

with much certainty. 

The Pilot will facilitate studies of the 

impact of exchange transaction-based 

fees and rebates on liquidity by studying 

metrics such as the quoted spreads.688

The width of the quoted spread is 

considered to be an indicator of a 

stock’s liquidity, with narrower spreads 

generally indicating more liquid 

securities. The analysis below is Section 

IV.C.2.b.iv identifies several reasons 

that reducing fees and rebates could 

increase or decrease quoted spreads. 

The Pilot could provide information on 

whether exchange fees and rebates affect 

the liquidity of securities, as measured 

by the quoted spreads, across different 

test groups.689

The Commission disagrees with 

commenters who said that the Pilot was 

inappropriate because of a one-size-fitsall approach.690 In selecting the number 

of securities for each Test Group, the 

Commission staff divided NMS 

securities into three common stock 

strata and three ETP strata by liquidity 

to determine how many stocks each 

stratum requires to achieve statistical 

power.691 The staff also separately 

examined ETPs to determine how many 

ETPs would be required to achieve 

statistical power. Having statistical 

power within each Test Group, and 

within each Test Group by liquidity 

strata, helps to ensure that researchers 

will be able to use Pilot data to inform 

the Commission regarding the issue of 

whether different securities should have 

the same regulatory treatment. 

ii. How the Pilot Facilitates Study 

The Pilot will simultaneously create 

different fee environments, each of 

which restricts transaction-based fees 

differently to allow for the comparison 

of securities that are simultaneously in 

different regulatory regimes. The study 

of these comparisons will inform the 

Commission about economic distortions 

that may arise as a result of transactionbased fees. Because of the size and 

length of the Pilot, the Commission 

believes that the different fee 

environments over representative 

subsamples of NMS securities, even 

though implemented temporarily, will 

produce effects on market participant 

behavior that are identical or similar to 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5261 

692As designed, the Pilot will exclude NMS 

securities that have prices below $2.00 per share as 

of the date of pilot selection and NMS securities 

with average daily volume of less than 30,000 

shares. As detailed above, the data will also be 

produced for a six-month pre-Pilot Period and a sixmonth post-Pilot Period. 

693See, e.g., Brandes Letter, at 2 (supporting 

applying the Pilot to the ‘‘widest range of stocks 

possible’’); Spatt Letter, at 1–2. 

694See, e.g., Battalio Equity Market Study, supra 

note 5307. 

695The supplemental analysis made several 

improvements over the analysis used to identify the 

proposed test group sizes in an attempt to refine the 

analysis to respond to commenters’ desire for 

smaller test groups while preserving statistical 

power. First, the supplemental analysis used more 

refined methodology that more directly controlled 

for time series and cross-sectional dependencies. 

Second, the supplemental analysis considered three 

quoted spread strata instead of two market 

capitalization stratum. The market capitalization 

strata was originally necessary to control for any 

overlap with the Tick Size Pilot, but quoted spread 

strata more directly align with the potential 

economic significance of fees and rebates relative to 

anticipated transaction costs and the Tick Size Pilot 

has ended. Third, the supplemental analysis 

eliminated stocks that trade below 30,000 shares 

per day. See also supra Section II.C.6. See supra 

note 175 (citing commenters that favored smaller 

test groups). 696See Proposing Release, supra note 2, at 13019. 697See, e.g., Battalio Equity Market Study, supra 

note 5307; Harris, supra note 5307; RBC Letter I, at 

5–6. 

those that would arise under a similar 

permanent change. 

As explained below, three distinct 

features of the Pilot’s design will 

facilitate analyses of the relationship, if 

any, between fees and potential 

economic distortions. Specifically, the 

Pilot is designed to provide (1) 

representative results; (2) more direct 

access to data that is currently 

unavailable or requires lengthy and 

labor-intensive effort to compile and 

process; and (3) sufficient information 

to determine causality. The following 

sections discuss in detail how each of 

these aspects of the Pilot could facilitate 

studies of the issues described above. 

(1) Representative Results 

In the context of the Pilot, 

representative results mean that the 

impact of the Pilot’s terms on a Test 

Group during the Pilot Period is likely 

to be consistent with the impact of the 

results on the Test Group if the Pilot’s 

terms were permanent (as opposed to 

temporary). Representative results are 

desirable for researchers and policy 

makers because it ensures that 

inferences drawn from the results of 

analysis of Pilot data are likely to be 

similar to those that would emerge if the 

terms were permanent. As discussed in 

the baseline, current analyses are 

limited by some combination of the 

following: Data from a single brokerdealer, a small sample of securities, a 

single exchange, or a short sample 

period. By contrast, the Commission 

believes that the Pilot, as designed, will 

produce more representative results. 

Specifically, as discussed in detail 

below, the Pilot will cover a large 

stratified sample of NMS stocks 

(including ETPs), both maker-taker and 

taker-maker exchanges, and transaction 

fee caps as well as a prohibition on 

rebates and Linked Pricing, and will 

have a two-year duration with an 

automatic sunset at the end of the first 

year unless the Commission determines, 

at its discretion, that the Pilot shall 

continue for up to one additional 

year.692

The Commission believes that the 

Pilot will produce representative 

results, presenting a significant 

improvement on existing studies, 

because the Pilot applies to a large 

stratified sample of NMS stocks 

(including ETPs) with prices of at least 

$2.00 per share at the date of the Pilot 

Securities selection, with average daily 

volume of 30,000 shares or more, and 

with no restrictions on market 

capitalization.693 In particular, the 

Commission recognizes that any 

possible conflicts of interest related to 

transaction-based fees could vary across 

securities such that the results of a pilot 

focused only on large capitalization 

stocks may not provide information 

relevant to small capitalization stocks or 

ETPs.694 Including a broad sample of 

NMS stocks allows the results to inform 

policy choices across subsets of these 

securities. The stratification of the 

stocks selected for each Test Group is 

designed to ensure that each Test Group 

and the control group have a similar 

composition within a given stratum, 

facilitating a comparison of Test Groups 

and the Control Group, which further 

supports the representativeness of 

results. If, for instance, the Test Groups 

and Control Group had a different 

composition within strata, researchers 

outside the Commission might not be 

able to distinguish whether differences 

across Test Groups and the Control 

Group stem from different fee 

environments or different sample 

composition, rendering the results less 

representative. In addition, the 

Commission believes that the sample 

sizes in the Test Groups are sufficient to 

provide the statistical power necessary 

to identify differences across the 

samples, even within strata. 

The Commission notes that while the 

adopted Pilot will be able to provide 

representativeness within strata, 

changes since the Proposal affect the 

representativeness of the Test Groups as 

a whole. In particular, in response to 

commenters who called for fewer stocks 

to be included in the Pilot, Commission 

staff conducted a supplemental analysis 

of Test Group sizes needed to achieve 

statistical power.695 In contrast to its 

analysis in the Proposal,696 the 

Commission analyzed the sample sizes 

in each stratum rather than using the 

lowest power stratum to determine the 

ratio of test group stocks to control 

stocks. As a result, the ratio of test group 

stocks to control group stocks is lower 

for some strata. In other words, the 

Commission was able to reduce the 

number of securities in test groups by 

weighting the composition of the test 

groups relative to the control group 

more heavily toward securities in 

certain strata in which more data would 

be needed to achieve statistical power. 

While analyses of the Pilot that do not 

consider the strata may fail to provide 

representative results, the addition of 

the stratum identifier to the Exchange 

Lists will allow researchers in and 

outside the Commission to consider the 

strata in their analyses. 

The Commission believes that the 

inclusion of a broad sample of NMS 

stocks, including small and midcapitalization stocks, ensures 

representative results from the Pilot. 

Although previous studies, as discussed 

above, suggest that any possible 

conflicts of interest are likely to be the 

greatest for small-capitalization 

securities,697 the Commission believes 

that it is important to the design of the 

Pilot to include these small and midcapitalization stocks (including ETPs). 

In particular, including these securities 

in the Pilot will allow the results of the 

Pilot to inform policy choices across any 

subset of these securities. 

Representativeness of results of the 

Pilot will also be promoted by the 

choice of the Pilot Security selection 

date. Rule 610T(b) and (c) contemplate 

that the Commission will select and 

announce the Pilot Securities prior to 

the Pilot start date. As noted in the 

Proposal, the Commission anticipates 

that it will assign and designate by 

notice each Pilot Security to one Test 

Group or the Control Group 

approximately one month prior to the 

start of the Pilot. By assigning securities 

close to the start of the Pilot, each Test 

Group and the Control Group are likely 

to be more comparable during the Pilot. 

Because stratification criteria (e.g., 

market capitalization and liquidity) vary 

naturally over time, the closer the 

assignments occurs to the Pilot start 

date, the more comparable the Test 

Groups will be during the Pilot. 

Selection of securities close to the start 

of the Pilot also will be more likely to 

5262 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

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

699See, e.g., Joint Asset Managers Letter, at 2. 

Other commenters agreed that the Pilot duration 

will be sufficient but for other reasons. See, e.g., 

Fidelity Letter at 9 and CFA Letter at 6. 

700See, e.g., Citi Letter, at 5 and Larry Harris 

Letter, at 11. Also, see infra Section IV.C.2.b.ii for 

a discussion of the costs broker-dealers could incur 

during the Pilot. 

701See, e.g., Babelfish Letter at 3 and Healthy 

Markets Letter at 19. 

702See Babelfish Letter at 3. 

703See Healthy Markets Letter I at 19. 

704Specifically, the supplemental analysis 

compared the distributional characteristics of all US 

listed stocks (including Canadian interlisted stocks) 

to the distributional characteristics of the subset of 

US listed stocks that excludes Canadian interlisted 

stocks to determine whether distributional 

characteristics of the subset differs statistically 

significantly from the distributional characteristics 

of all US listed stocks. The analysis finds that the 

distribution of the subset that excludes Canadian 

interlisted securities is statistically similar to the 

distribution of all US listed stocks. 

include the intended universe of 

securities, by avoiding securities that 

exit between the adoption of the Rule 

and the start of the Pilot, while also 

capturing new securities that enter the 

market during this period. Further, to 

the extent that market participants 

would change their behavior in 

anticipation of the Pilot, setting the 

selection period close to the Pilot 

effective date could reduce the effect of 

such behavior on pre-Pilot data. 

The results of the Pilot will be further 

representative because the Pilot applies 

to all U.S. equities exchanges regardless 

of fee structure. Broker-dealers 

potentially face transaction-fee related 

conflicts of interest regardless of 

whether those fees are on maker-taker 

exchanges or taker-maker exchanges, 

and rebates on either the make or take 

side can both impact market quality and 

execution quality. Further, a pilot that 

addresses only a single fee structure 

would not produce results relevant for 

policy choices that also would apply to 

another fee structure. 

Applying the Pilot to all exchanges 

also improves upon the existing analysis 

of the limited fee experiment conducted 

by Nasdaq,698 which only covered a 

single exchange, as explained in Section 

IV.B.1.a.ii. While the results from that 

study are suggestive that broker-dealers 

routed customer orders to other 

exchanges that did not change their 

transaction-based fees and rebates, 

reasons other than potential conflicts of 

interest could have impacted the 

changes in order routing decisions. The 

Commission believes that the Pilot will 

achieve representativeness by requiring 

transaction-fee changes for all U.S. 

equities exchanges, which will allow 

researchers in and outside the 

Commission to identify how these 

revisions affect order routing decisions 

across exchanges. As discussed above, 

excluding non-exchange trading centers 

does not forfeit the representativeness of 

the results to be obtained from the Pilot, 

as including them would expand the 

Pilot to dissimilarly situated trading 

centers whose fee models and regulatory 

treatment are incomparable to 

exchanges. Further, the Pilot will 

require that changes to fees or rebates 

are applied at the security level, which 

means that for any given security, the 

limitation on access fees or rebates is 

ubiquitous across all exchanges. 

In addition, the Pilot achieves 

representativeness by imposing a fee 

cap and a prohibition on rebates and 

Linked Pricing. The existing literature 

suggests that the potential distortive 

effects arising from access fees could 

induce behavior that would be different 

from the distortions arising from rebates 

or Linked Pricing. Therefore, the 

inclusion of caps on both fees and 

rebates or Linked Pricing allows for a 

more comprehensive analysis of any 

possible conflicts of interest than could 

be achieved by focusing solely on fees 

or rebates. 

The Commission further believes that 

the duration of the Pilot will produce 

sufficiently representative results. If 

broker-dealers incorporate transaction 

fees and rebates into their order routing 

decisions, a two-year duration for the 

Pilot, with an automatic sunset at the 

end of the first year, unless the 

Commission publishes a notice 

determining that the Pilot shall continue 

for up to a second year, would likely 

make it economically worthwhile for 

broker-dealers to change their routing 

behavior during the Pilot by making it 

costly to avoid the Pilot.699 Specifically, 

as discussed below, the Commission 

recognizes that broker-dealers will incur 

costs to incorporate new fee schedules 

that are consistent with the Pilot’s 

requirements into their order routing 

decisions.700 Broker-dealers could 

ignore the Pilot to avoid these costs. If 

enough broker-dealers ignore the Pilot, 

the Pilot might not produce results that 

provide the Commission a sense of the 

likely impact of permanent changes to 

fee caps or rebates. However, to the 

extent that broker-dealers incorporate 

transaction-based fees and rebates into 

their order routing decisions, ignoring 

the Pilot will also impose costs on 

broker-dealers, and these costs increase 

with the duration of the Pilot. The 

Commission believes that the Pilot 

duration, even with a one-year sunset, is 

long enough to produce representative 

results because, as discussed below in 

Section IV.C.2.b.ii, broker-dealers that 

incorporate transaction-based fees and 

rebates into their routing decisions will 

find it economically worthwhile to 

adapt their behavior in response to the 

Pilot. Further, the provision to suspend 

the automatic sunset facilitates 

representative results because it 

provides the Commission with 

flexibility as the data from the Pilot 

develops. For example, the Commission 

could suspend the sunset if, for 

example, it believed that additional time 

would help ensure that market 

developments are fully reflected in the 

data with sufficient statistical power for 

analysis, recognizing that such market 

developments are uncertain. Therefore, 

the sunset provides flexibility to the 

Commission to observe developments 

during the Pilot to determine whether to 

allow the sunset to occur. 

Some commenters disagreed that one 

year will be sufficient to achieve a 

representative sample.701 One 

commenter said that ‘‘robust data . . . 

should take two years’’ and that 

‘‘technological changes . . . to routing 

and algorithmic logic for some firms are 

a hurdle that could require significant 

time to implement.’’ 702 Another 

commenter noted the ‘‘complexities of 

the pilot and the opportunities for 

significant market evolutions.’’ 703 The 

Commission notes that it will consider 

these and other concerns, as noted 

above, in deciding whether or not to 

suspend the automatic sunset. 

The Commission believes that the 

Pilot will produce representative results 

despite the Pilot’s treatment of stocks 

cross-listed on Canadian exchanges 

during the Pilot and the exclusion of 

stocks with average daily volume of less 

than 30,000 shares. A supplemental staff 

analysis found that the exclusion of the 

interlisted Canadian stocks from the 

selection of securities for test group 

inclusion would not materially impact 

the representativeness of the remaining 

sample.704 Second, the exclusion of 

securities with average trading volume 

of less than 30,000 shares per day 

should not materially affect the 

representativeness of the results because 

the trading in these stocks generates less 

than $100 per day in fees or rebates. 

Additionally, low trading volume stocks 

tend to have wider spreads rendering a 

rebate of $.0030 a significantly smaller 

incentive relative to the size of the 

spread than it would be for higher 

volume tighter spread securities. 

Because of these two factors, the 

Commission believes fees and rebates 

are economically much less meaningful 

inducements to provide liquidity for 

these stocks. Because of the diminished 

economic significance of rebates in 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5263 

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

Letter I, at 4. 

706See Section IV.C.1.a. For commenter 

statements supporting the usefulness of the data to 

be obtained from the Pilot See, e.g., Clark-Joseph 

Letter, at 1, AJO Letter, at 1, CII Letter, at 3, 

NYSTRS Letter, at 1, Barnard Letter, at 1; ICI Letter 

I, at 1–2; MFS Letter, at 1; Nuveen Letter, at 2; 

Better Markets Letter, at 2; RBC Letter I, at 2; 

Invesco Letter, at 2; CFA Letter, at 1; State Street 

Letter, at 2; Wellington Letter, at 1; Joint Pension 

Plan Letter, at 2; Oppenheimer Letter, at 2; Angel 

Letter I, at 1. Some commenters suggest that the 

data will not be useful because it excludes data 

from ATSs and doesn’t account for other forms of 

remuneration that broker dealers receive which may 

also impact order routing decisions. See NYSE 

Letter 1 at 1,8–10; ProAssurance Letter, at 2; Cboe 

Letter I, at 15; Nasdaq Letter I, at 2. 

707The aggregation and availability of the data 

gathered by the Pilot is one of the primary benefits 

of the Pilot and provides much of the value of the 

data collected. See, e.g., NYSE Letter II, at 13; Cboe 

Letter I, at 3. 

708See, e.g., Battalio Equity Market Study, supra 

note 530. 

709See NYSE Letter II, at 13 suggesting that the 

proposing release did not provide an illustration for 

how the data could be used to study the 

Commission’s objectives. 

these extremely low volume stocks, the 

Commission believes that there is a 

lower risk of applying a suboptimal 

transaction-based fee regulatory regime 

in these stocks. In other words, because 

rebates are economically less 

meaningful for these securities the 

benefits of the Pilot in informing policy 

decisions regarding transaction-based 

fees in these securities are likely low. In 

addition, the supplemental staff analysis 

found that excluding these securities 

increased the potential statistical power 

of the Pilot. 

Some commenters suggested that the 

exclusion of ATSs from the data 

gathering hinders the representativeness 

of the data obtained from the Pilot.705

The Commission understands that ATSs 

often negotiate bespoke agreements with 

individual subscribers for a bundle of 

services for which rebates may or may 

not play a significant role. Even if the 

Commission obtained detailed 

information on all of these agreements, 

it may not be possible to identify the 

fees or rebates they pay for order flow 

from the fees for the other bundled 

services the ATS offers the subscriber in 

a manner sufficient for inclusion in the 

Exchange Transaction Fee Data. Also, as 

discussed in section IV.D.2.a it is 

uncertain whether the Pilot will lead to 

exchanges to be in an improved or 

diminished competitive position with 

ATSs. Further, without including ATSs 

in the Pilot, ample public data exists to 

assess the market share of ATSs relative 

to exchange market share to observe and 

measure off-exchange order flow 

changes. 

(2) Expansion of Readily Available Data 

The Commission also expects the 

Pilot to provide data that would 

otherwise require lengthy and laborintensive collection. Having a 

representative source of data is critical 

for the production of research and 

analyses about the impact of 

transaction-based fees on potential 

distortions. If more data becomes 

available, that data will assist the 

Commission in analyzing potential 

conflicts of interest. 

The Commission believes that the 

data produced by the Pilot will improve 

upon existing data,706 as is discussed in 

more detail below. The ready 

availability of the Exchange Transaction 

Fee Summaries will facilitate the study 

of distortions and the equilibrium level 

of fees and rebates by reducing the 

cumbersome nature of collecting fee 

data. Further, the Pilot will make 

information on order routing decisions 

available to the Commission on a more 

granular level than current readily 

available data and will improve the 

feasibility of Commission staff analysis 

of order routing data during the Pilot.707

The Pilot will enable Commission 

staff to gain improved access to order 

routing data and will provide access to 

fee data in a simplified and 

standardized form, which will improve 

the quality of the analyses produced as 

a result of the Pilot. Although certain 

order routing data and exchange fee 

schedules are publicly available through 

a combination of Rule 606 disclosures 

and exchange websites, respectively, the 

Pilot will resolve a number of 

limitations associated with using 

currently available data to study the 

effect of transaction-based fees on 

potential conflicts of interest and their 

impact on market quality and execution 

quality. 

The order routing data that 

Commission staff will obtain as a result 

of the Pilot will provide superior 

information to that readily available 

today. Data will be available for a 

representative sample of NMS stocks, 

across all broker-dealers, and exchanges, 

at the daily frequency, which will 

provide sufficient data for analyses, 

while providing more statistical power 

than the Rule 606(a) public reports can 

provide. Relative to the data that some 

studies have acquired from brokerdealers and exchanges,708 the order 

routing data will also allow Commission 

staff to observe a time series of order 

routing data across broker-dealers and 

exchanges. Further, more granular order 

routing data (e.g., daily order routing 

statistics that separate principal and 

agency trading as well as auction, post 

only, and other orders) than that 

available publicly will facilitate more 

targeted analysis. Together, these 

characteristics of the data will facilitate 

Commission staff research on issues 

such as potential conflicts of interest, 

which will improve the quality of the 

information available to the 

Commission for policy decisions. 

The following discussion illustrates 

how the data obtained from the Pilot 

could be used to study the 

Commission’s objectives.709 The key 

components in the order routing data 

that facilitate studies of the impact of 

transaction-based fees and rebates on 

order routing and execution quality are 

daily volume information at the 

exchange, stock, and broker-dealer level, 

the separation of liquidity taking and 

liquidity making orders, the Order 

Capacity, the Order Designation, the 

time to execution for liquidity-providing 

orders, and the ability to estimate fill 

rates. The routing volume allows 

Commission researchers to measure 

how much volume each broker-dealer 

sends to each exchange each day in 

individual securities, which can be 

combined with the Pilot Securities 

Exchange List and the Exchange 

Transaction Fee Summary to observe 

patterns in routing and correlate those 

patterns with fees and Test or Control 

Group membership. The exchange level 

is required to match the order routing 

data with the fee data; the broker level 

is required to allow for different routing 

strategies across broker-dealers; and the 

daily level in the data facilitates 

statistical power. The separation of 

liquidity taking and liquidity making 

orders allows researchers to match the 

order routing volume to the potential fee 

or rebates in the Exchange Transaction 

Fee Summary. Order Capacity allows 

Commission researchers to compare 

order routing and execution quality 

statistics for Agency Orders to Principal 

Orders, which are less subject to 

conflicts of interest concerns than 

Agency Orders and, thus, provides an 

added means of obtaining causal 

identification. Order Designation allows 

researchers to exclude auction orders 

and to separately analyze Post Only 

orders because these orders types are 

subject to different fee structures 

(auction orders do not get rebates) or 

exist for the purpose of capturing 

rebates (Post Only). Excluding or 

separately analyzing these orders types 

provides for cleaner tests that are better 

able to measure the impacts consistent 

with the objectives of the Pilot. Finally, 

the time to execution and ability to 

estimate fill rates (using orders received, 

executed, canceled or rerouted) 

5264 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

710The Commission recognizes that many tradebased execution quality statistics are readily 

estimated from publicly available data. See Section 

IV.E.5.g infra for a discussion of an alternative to 

require order-based execution quality statistics 

during the Pilot. 711The standardized fee data, as would be 

required by the proposed Pilot, is discussed supra 

Section III.E.2. 712Rule 610(T) requires each exchange to 

publicly post on its website downloadable files 

containing the Exchange Transaction Fee Summary 

and update them on a monthly basis. Similarly, 

each exchange will be required to publicly post on 

its website downloadable files containing daily 

aggregated and anonymized order routing statistics, 

updated monthly. Each exchange will also be 

required to provide daily on its website 

downloadable files containing the List of Pilot 

Securities and the Pilot Securities Change List. 

713As an open standard, XML is widely available 

to the public at no cost. As an open standard, XML 

is maintained by an industry consensus-based 

organization, rather than the Commission, and 

undergoes constant review. As updates to XML or 

industry practice develop, the Commission’s XML 

schema may also have to be updated to reflect the 

updates in technology. In those cases, the supported 

version of the XML schema will be published on 

the Commission’s website and the outdated version 

of the schema will be removed in order to maintain 

data quality and consistency with the XML 

standard. The Commission’s XML schema will also 

incorporate certain validations to help ensure data 

quality. 

714As discussed in the baseline, analysis of 

causality can be accomplished through either 

exogenous shocks or econometric methods, such as 

instrumental variable analysis. 

715Other econometric techniques, such as 

instrumental variables methodology, are used when 

an exogenous shock (or other controlled 

experiment) cannot be established. 

provides Commission researchers with 

execution quality information not 

readily available for liquidity providing 

or liquidity taking orders.710

An additional requirement of the Pilot 

is that the exchanges will be required to 

provide a standardized dataset of fees, 

the Exchange Transaction Fee 

Summary, to the public. In particular, 

this information will allow researchers 

in and outside the Commission to create 

proxies for which exchanges are likely 

to be more or less expensive and which 

offer the highest rebates. For instance, 

within Test Group 1, the maximum 

allowable access fee is $0.0010; 

however, each exchange may have 

different base and top-tier fees. Thus, 

only knowing that a security is in Test 

Group 1 will be incomplete information 

about the impact of transaction-based 

fees and rebates. Moreover, the 

Exchange Transaction Fee Summary 

will provide researchers in and outside 

the Commission with historical 

(realized) average and median per share 

fees and rebates to enable an ex post 

analysis of how actual fees affected past 

order routing decisions, which is not 

available from any data source today. 

Exchanges will construct Exchange 

Transaction Fee Summaries according 

to an XML schema to be published on 

the Commission’s website, and 

exchanges will update this information 

monthly.711 These data will be 

standardized and consistently 

formatted, which will ease the use of 

these data for researchers in and outside 

the Commission, as each exchange will 

have to report the Base, Top Tier, 

average and median fees, as detailed 

above in Section III.E. Each month, 

exchanges will be required to report 

realized average and median per share 

fees, as well as any ‘‘spot’’ revisions to 

fees associated with Form 19b–4 fee 

filings to the Commission. These fee 

data will be publicly posted on each 

exchange’s website.712

The Exchange Transaction Fee 

Summary released during the Pilot will: 

(1) Ease aggregation across exchanges, 

which affords researchers in and outside 

the Commission an opportunity to 

obtain representative results; (2) 

replicate across studies, which will 

provide validation of findings; and (3) 

reduce burdens associated with fee data 

collection, which could encourage more 

research on the impact of fees and 

rebates on routing behavior. Thus, the 

Commission believes that a 

standardized reporting of summary data 

on fees by the exchanges will facilitate 

analysis of the effect of transactionbased fees. 

The rule will require that the 

Exchange Transaction Fee Summary be 

structured using an XML schema to be 

published on the Commission’s 

website.713 Data that are structured in a 

standard format can result in lower 

costs to analysts and higher quality data. 

An additional key benefit of structured 

data is increased usability. If, for 

instance, the Exchange Transaction Fee 

Summary were not standardized across 

the exchanges, researchers would have 

to manually rekey the data, a timeconsuming process which has the 

potential to introduce a variety of errors, 

such as inadvertently keying in the 

wrong data or interpreting the filings 

inconsistently, thereby reducing 

comparability. With the data in the 

reports structured in XML, researchers 

in and outside the Commission could 

immediately download the information 

directly into databases and use various 

software packages for viewing, 

manipulation, aggregation, comparison, 

and analysis. This will enhance their 

ability to conduct large-scale analysis 

and immediate comparison of the fee 

structures of exchanges. The 

Commission believes that requiring 

these reports to be made available in an 

XML format will provide flexibility to 

researchers in and outside the 

Commission and will facilitate 

statistical and comparative analyses 

across exchanges, test groups, and date 

ranges. 

(3) Causality 

In addition to providing 

representative results, the Commission 

expects the Pilot to achieve the benefits 

identified above because it will, among 

other things, provide insight into the 

degree to which exchange transactionbased fees and rebates cause economic 

distortions that either harm or benefit 

investors. Such causal information is 

especially useful when considering 

policy choices aimed at reducing any 

possible harmful distortions. As 

detailed in the baseline, exogenous 

shocks are a means by which 

researchers may analyze a causal 

relationship between changes to 

transaction-based fees and rebates and 

changes to order routing decisions of 

broker-dealers.714 This Pilot facilitates 

the analysis of causality through an 

exogenous shock that simultaneously 

creates several distinct fee 

environments, each of which restricts 

transaction-based fees or rebates 

differently, enabling synchronized 

comparisons to the current 

environment. 

The Commission believes that the 

Pilot is able to facilitate the examination 

of causality because the Pilot will 

produce a single exogenous shock that 

differentially impacts either fees or 

rebates on both maker-taker and takermaker exchanges. Exogenous shocks, 

such as those in the Pilot provide 

researchers with data to analyze the 

direction of causality.715 For example, a 

researcher seeking to study the impact 

of the rebates on transaction costs could 

estimate a difference-in-differences test 

that compares transaction costs during 

the Pilot to the transaction costs before 

the Pilot and then compare the changes 

in Test Group securities to the changes 

in Control Group securities. It also will 

allow investors who receive 606(b)(3) 

data from their broker-dealers to directly 

test with their own 606(b)(3) data 

whether, in the absence of rebates in the 

most actively traded stocks, they are 

better able to compete for queue priority 

and thereby capture the quoted spread 

when posting liquidity. More generally, 

the Pilot will allow researchers, 

including Commission staff and others, 

to run difference-in-difference tests on 

many measures of execution quality and 

market quality based on publicly 

available data to examine the causal 

impact of transaction-based fees and 

rebates on execution and market quality. 

As discussed above, the Pilot will 

produce a single exogenous shock that 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5265 

716See Healthy Markets Letter I, at 19. 

717See supra. Section II.D.3. 

718See, e.g., Cboe 15–16; NYSE at 9–10; Nasdaq 

I at 7; RBC Letter I, at 4; ProAssurance at 2. 

719For instance, a pilot could be designed where 

the information obtained from the Pilot would only 

be valuable if certain market conditions, such as 

high market volatility or a recessionary period 

occurred. If, however, markets experience low 

volatility or are in an expansionary period, the Pilot 

may either not be sufficiently long enough to 

capture the events that it requires to be useful or 

would have to be extended to ensure that those 

market conditions could occur. 

720For example, one study provided evidence 

suggesting that trading behavior may not have 

completely adjusted to the Regulation SHO pilot. 

See Ekkehart Boehmer, Charles Jones, & Xiaoyun 

Zhang, Unshackling Short Sellers: The Repeal of the 

Uptick Rule, Colum. U. (2008), https://

www0.gsb.columbia.edu/mygsb/faculty/research/ 

pubfiles/3231/UptickRepealDec11.pdf. Despite this 

effect, the study found evidence consistent with the 

evidence gathered from the Regulation SHO pilot. 

See Securities Exchange Act Release No. 50103 

(July 28, 2004), 69 FR 48008 (Aug. 6, 2004) 

(hereinafter ‘‘Regulation SHO’’). 

721 If broker-dealers have smart order routing 

systems that use algorithms that maximize rebate 

capture, as suggested in the Battalio Equity Market 

Study, supra note 530, then for at least some subset 

of securities, broker-dealers would not be able to 

pursue rebates from those exchanges, so it would 

be suboptimal for broker-dealers to not reconsider 

their order routing choices. If broker-dealers, 

however, already have order routing decisions that 

are optimal from a customer’s perspective (e.g., 

based on execution quality) and are not driven by 

potential conflicts of interest (e.g., maximizing 

rebates), then for at least some broker-dealers, their 

order routing decision process may be unchanged. 

It is also possible that for broker-dealers with 

algorithms that dynamically route based upon realtime market metrics, including liquidity metrics, 

expected fill rates, and current queue length, 

routing logic may not change, however, routing 

choices may dynamically adjust based upon 

changes in those variables that result from altered 

fee schedules that broker-dealers may implement in 

conjunction with the Pilot. 

differentially affects multiple Test 

Groups at the same time. The 

simultaneity of the exogenous shock 

across Test Groups facilitates 

examinations of causality, particularly 

in the presence of any confounding 

effects. For instance, if some marketwide event were to result in deviations 

in order routing behavior during the 

Pilot, the event would likely affect 

stocks in each Test Group as well as the 

Control Group. The simultaneity allows 

researchers in and outside the 

Commission to control for the impact of 

the market-wide event, because the 

impact would likely affect the Test 

Groups and the Control Group similarly. 

For example, in the difference-indifferences test of transaction costs 

mentioned above, any market-wide 

effect would result in changes to fill 

rates in both the Control Group and Test 

Group 2. Therefore, the comparison of 

the changes in Test Group 2 to the 

changes in the Control Group subtracts 

the market-wide effect from the total 

effect, thus isolating the effect of the 

Pilot. 

In addition, to facilitate causal 

analysis of data during the Pilot Period, 

the Commission believes that it is 

important to collect sufficient data 

during a pre-Pilot Period.716 The prePilot data can then be compared with 

the data that will be produced during 

the Pilot Period, which will permit 

analysis of any changes to order routing 

behavior, execution quality, and market 

quality between the two for the Pilot 

Securities in each of the Test Groups. To 

make this comparison informative, the 

length of the pre-Pilot Period needs to 

be long enough to obtain sufficient 

statistical power to permit analysis of 

the stocks and ETP Pilot Securities. In 

turn, sufficient statistical power in tests 

that compare the pre-Pilot data to the 

Pilot data would allow all researchers to 

more easily use the information 

obtained from the Pilot to inform future 

regulatory consideration of exchange 

transaction fees and rebates and their 

impact on the markets. The Commission 

believes that at least six months of prePilot data may be required to obtain the 

necessary statistical power to permit 

analysis of the Pilot Securities during 

the Pilot, particularly ETPs.717

The Commission further believes that 

the combination of the representative 

sample, data from the Pilot, and the 

exogenous shock will facilitate analysis 

by Commission staff (or institutions 

who receive 606(b)(3) reports from their 

broker-dealers) of the degree to which 

transaction-based fee- and rebatemotivated order routing harms order 

execution quality. In particular, with the 

exogenous shock, the Order Routing 

Data, the Exchange Transaction Fee 

Summaries, and publicly available data, 

researchers at the Commission can 

identify both the degree to which 

transaction fees and rebates impact 

order routing and, the impact of 

transaction fee- and rebate-motivated 

order routing impacts execution quality. 

Several commenters seemed to state 

that the Pilot would produce flawed 

causal results because the Pilot does not 

include all forms of remuneration.718

While the Commission acknowledges 

that other forms of remuneration may 

impact routing decisions, the results 

will still be informative. Even if some 

order flow migrates between exchanges 

and off-exchange venues, Commission 

staff should still be able to identify the 

impact of exchange fees and rebates on 

exchange routing. 

The Pilot Securities Exchange List 

and the Pilot Securities Change List 

further enhance the ability for 

researchers both inside and outside of 

the Commission to analyze the effects of 

transaction-based fees on order routing 

decisions. By requiring daily updates to 

the Pilot Securities Change List, the 

Pilot will provide broker-dealers with 

the information they need to track the 

exact securities in each Test Group in 

real-time and when securities exit the 

Pilot. This information will be crucial 

for broker-dealers that choose to adjust 

their routing behavior during the Pilot. 

If broker-dealers are unable to track 

which securities are in which Test 

Groups, the Pilot results could provide 

misleading causal information. 

iii. Potential Limitations on the Benefits 

The Commission recognizes that 

pilots are unpredictable and as such 

considered whether possible limitations 

associated with pilots generally, as well 

as certain issues presented by the design 

of this Pilot in particular, would limit 

the benefits of the Pilot. This section 

discusses, in greater detail below, issues 

associated with pilots in general and the 

potential concerns with resultant 

research and analyses. 

Pilots may face limitations related to 

the unpredictable nature of market 

conditions and confounding events. 

Even if a pilot lasted several years, not 

all of the market conditions of interest 

could be experienced. Depending on the 

requirements of pilots, such limitations 

might reduce the usefulness of the 

information obtained.719 The 

Commission believes, however, that the 

value of the information obtained from 

the Pilot is not dependent upon having 

variation in market conditions over 

time, and that the duration of the Pilot 

will provide sufficient information to 

inform policy decisions. 

In addition, pilots also face the 

limitation that market participants, 

knowing that a pilot is underway, may 

not act as they would in a permanent 

regime.720 In the context of this pilot, 

broker-dealers could choose to retain 

their current order-routing decisions for 

the duration of the Pilot, which could be 

costly to such broker-dealers.721 Brokerdealers, when deciding whether to 

adjust any order routing behavior that 

currently depends on fees and rebates, 

would likely trade off the costs of 

retaining strategies that are no longer 

profitable because of the restrictions 

imposed by the Pilot against the costs of 

adjusting the algorithms for their smart 

order routing systems. Alternatively, 

broker-dealers could substantially 

change their business model in order to 

5266 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

722 It could be costly for broker-dealers to 

completely alter their business models because they 

may not find it worthwhile to do so for a temporary 

pilot. 

723See, e.g., FIA Letter, at 3; Citadel Letter, at 4. 

724The Commission does not believe that the 

Hawthorne effect will cause ‘‘good’’ behavior in the 

baseline because broker-dealers would need to 

implement system changes similar to those 

described in Section IV.B.2.c prior to the pre-Pilot. 

725As noted above, the Commission encourages 

market participants to disclose what sources of data 

they used for their analyses and describe the 

methodology they used, and to make those reports 

publicly and freely available. 

726See James Angel Letter I, at 2. 

727See supra Section IV.A.1 (Market Failure at 

the Broker Dealer Level) and Section IV.A.2 (Market 

Failure at the Exchange Level). 

728See, e.g., Nasdaq I, at 1. 

729See infra Section IV.C.2.b.iv 

avoid the Pilot.722 In addition, the 

Commission recognizes that the 

anticipated analysis of order routing 

data from the Pilot could cause brokerdealers to improve execution quality. 

This could reflect the ‘‘Hawthorne 

effect,’’ which refers to the idea that 

people will often improve their behavior 

if they believe that they are observed. 

These outcomes could lead to results 

that would not represent the effects of 

a permanent rule change. If that were to 

occur, a few commenters suggested that 

this could lead the potential benefits of 

the Pilot to not justify the costs or risks 

that the pilot imposes.723

The Commission believes that the 

Pilot is designed to obtain empirical 

information about how fees and rebates 

affect order routing decisions because 

the size and length of the Pilot render 

it unlikely that broker-dealers that 

currently focus their routing on rebates 

would maintain existing order routing 

decisions or alter their business models 

to avoid the Pilot as suggested by some 

commenters. In particular, the 

Commission believes that the Pilot 

duration is likely to make it 

economically worthwhile for brokerdealers to adjust their order routing 

behavior. The costs of ‘‘waiting out’’ the 

Pilot increase with the duration of the 

pilot, whereas the costs of adjusting the 

algorithms of the smart order routers, 

discussed below in Section IV.C.2.b.ii 

do not. 

In addition, the potential compromise 

of the data due to the Hawthorne effect 

is limited by at least two factors. First, 

this is not the Commission’s first pilot 

study. Market participants are relatively 

accustomed to the Commission 

collecting data for analysis. Second, the 

analysis of pre-Pilot data will allow for 

a baseline observation of unaffected 

broker-dealer order routing activity. If 

broker-dealers do not act on conflicts of 

interest during the baseline period, the 

Hawthorne effect is irrelevant unless it 

causes that good baseline behavior.724 If, 

on the other hand, broker-dealers do act 

on conflicts of interest during the 

baseline and the Hawthorne effect 

results in good behavior during the 

Pilot, the Pilot should facilitate the 

measurement of the conflicts. As a 

result, the Commission believes that the 

Pilot will produce useful data despite 

the possible influence of the Hawthorne 

effect. 

The Commission recognizes that not 

all objectives of the Pilot would be 

straightforward to study. For example, 

the changes in fees or rebates imposed 

by the Pilot may change transaction 

costs in a way that results in changes to 

order routing decisions by brokerdealers, even absent potential conflicts 

of interest. Studying how order routing 

changes during the Pilot, without jointly 

studying why it changes, would not be 

sufficient to understand any possible 

conflicts of interest. Researchers can 

carefully study the data to distinguish 

the proportion of changes in order 

routing decisions resulting from 

execution quality considerations from 

those resulting from potential conflicts 

of interest. Nonetheless, this 

complication could reduce the number 

and/or quality of studies of the Pilot. 

Another limitation on the benefits 

from the Pilot is that the Pilot will not 

require that the order routing data be 

released to the public. As a result, fewer 

independent analyses of the Pilot’s 

order routing datasets are likely to be 

performed, compared to the analysis 

that might have been obtained if the 

data were publicly released. However, 

the Commission believes that sufficient 

analysis will be produced to yield 

credible and reliable results without 

public dissemination of the order 

routing data. In addition, institutions, 

including broker dealers, asset 

managers, and transaction cost analysis 

(TCA) providers, may produce their 

own analyses using proprietary data and 

information. To the extent that 

interested parties prepare their own 

analyses, they may submit them to 

tradingandmarkets@sec.gov with the 

words ‘‘Transaction Fee Pilot Analysis’’ 

in the subject line, and the Commission 

will post those reports on its public 

website.725

Additionally, only NMS stocks with 

prices of at least $2 prior to the start of 

the Pilot are eligible for inclusion in the 

Pilot. One commenter suggested that 

NMS stocks with prices between $1 and 

$2 also be included in the Pilot, as the 

commenter believed that the impact of 

fees and rebates are likely to be greatest 

for these securities.726 The Commission 

agrees with the commenter who stated 

that the initial Test and Control Groups 

in the Pilot would be more 

representative if they contained 

securities with prices below $2. 

However, excluding securities with 

prices below $2 helps to keep the 

sample of stocks more stable across the 

Pilot. This occurs because if a stock’s 

price falls below $1 it is subject to 

different regulations, such as a different 

tick size, and thus would be excluded 

from the Pilot. By excluding stocks 

below $2 the Pilot mitigates the risk that 

the representativeness of the sample 

may diminish over time as Pilot stocks 

are removed due to their stock prices 

falling below $1. The Commission 

believes that the data obtained from the 

Pilot will be sufficient to obtain data on 

the effects to changes in fees and rebates 

on small, low-priced securities (those 

with prices close to $2, or any Pilot 

security that drops below $2 per share, 

but exceeds $1 per share, after the start 

of the Pilot). 

b. Other Benefits of the Transaction Fee 

Pilot 

Other benefits may emerge that could 

affect markets and market participants 

for the duration of the Pilot, such as 

potentially reduced conflicts of interest 

for some Test Groups, lower all-in costs 

of trading, or improved market quality. 

The Commission believes that many of 

the benefits discussed below will be 

temporary in nature and affect markets 

and market participants only for the 

duration of the Pilot. Because the 

Commission lacks information on the 

extent to which the impact of exchange 

fee-and-rebate pricing models affect 

investors,727 the Commission is unable 

to quantify many of the temporary 

benefits of the Pilot discussed below. 

Some commenters stated their belief 

that the Pilot would not help investors 

and issuers.728 As discussed in Sections 

IV.C.2.b and IV.D.1 the Commission 

acknowledges that the Pilot could harm 

execution quality and/or market quality, 

but the impacts of the Pilot are 

uncertain. The Pilot could also improve 

execution quality and/or market quality 

for the reasons explained in those same 

sections. For example, as discussed in 

detail below,729 the Commission is 

uncertain about whether, or among 

which securities, the Pilot will result in 

increases or decreases in quoted spreads 

and investor transaction costs. A 

decrease in quoted spreads and/or 

investor transaction costs during the 

Pilot in some or all stocks in test groups 

would benefit investors. Likewise, the 

Commission is uncertain about how the 

Pilot will affect price efficiency—the 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5267 

730See infra Section IV.D.1. 

731 17 CFR 242.612 (Rule 612 of Regulation NMS) 

prohibits traders from submitting sub-penny 

quotations on securities trading at prices over $1.00. 

The purpose of the sub-penny quotation prohibition 

was two-fold: (1) To prevent high frequency traders 

from front-running standing non-marketable limit 

orders and (2) to reduce the complexity of trading 

systems. See NMS Adopting Release, supra note 10, 

at 37550–57. 

732See, e.g., Angel, Harris, & Spatt, supra note 

530; Harris, supra note 530. One study noted that 

as a result of the Tick Size Pilot test group with the 

trade-at provision, taker-maker markets have seen a 

significant increase in market share, in part due to 

this quotation issue. See Carole Comerton-Forde, 

Vincent Gregoire, & Zhuo Zhong, Inverted Fee 

Venues and Market Quality 1 (August 10, 2018) 

(unpublished manuscript) (forthcoming J. Fin. 

Econ.) https://papers.ssrn.com/sol3/ 

papers.cfm?abstract_id=2939012&download=yes. 733See infra Section IV.C.2.a i. 734See infra Section IV.C.2.a ii. 735See infra Section IV.C.2.a iii. 

736See infra Section IV.C.2.a iv. 

737The primary listing exchanges are NYSE, 

Nasdaq, NYSE American, NYSE ARCA, BATS and 

IEX. 

738See NYSE Letter I, at 15. 

739See id. 

740The Commission notes that the Tick Size Pilot 

required the exchanges and FINRA to also select the 

Pilot securities whereas the Transaction Fee Pilot 

does not. Therefore, the Transaction Fee Pilot could 

result in lower costs than the Tick Size Pilot. 

Nonetheless, the Commission believes it is 

reasonable to rely on this commenter’s estimate 

because this commenter has expertise on these costs 

likely to result in incorporating relatively precise 

information into the cost estimates. 

Pilot could plausibly improve or 

degrade price efficiency in certain test 

group stocks.730 Any improvements 

would benefit issuers and investors. 

The Commission believes that another 

temporary benefit of the rule will be that 

the Pilot could prevent some traders 

from indirectly quoting in subpennies.731 Rebates have the practical 

effect of reducing the minimum tick size 

by the size of the rebate, and in effect 

allow trading centers to offer quotations 

superior to the existing quote. Several 

studies suggested that the use of 

exchange fees and rebates to effectively 

undercut quotations by sub-pennies is 

particularly severe in taker-maker 

markets.732 The Pilot would, in some 

test groups, reduce or eliminate rebates, 

which could stem this indirect 

reduction of tick sizes, and could 

provide the Commission and the public 

with information currently unavailable 

about this issue. 

2. Costs of the Pilot 

This section describes the compliance 

costs associated with the Pilot, followed 

by the additional costs, some of which 

are temporary, that could affect issuers, 

investors, broker-dealers, exchanges, 

and other market participants resulting 

from the Pilot. 

a. Exchange Compliance Costs of the 

Pilot 

The Pilot will impose costs on 

exchanges to comply with the Pilot’s 

requirements to collect, calculate, and 

publicly post data certain required by 

the Pilot on their websites, transmit the 

order routing datasets to the 

Commission, as well as to implement 

fee changes, if required in order to 

comply with the Pilot’s restrictions. 

Table 4 provides a summary of the costs 

discussed in this section. 

TABLE 4—SUMMARY OF COMPLIANCE COSTS FOR EXCHANGES

Pilot securities 

exchange 

list 733

Exchange 

transaction fee 

summary 734

Order 

routing 

data 735

Fee filings 736 Total 

Exchange type 

Listing All All 

All Listing Non-listing 

Per exchange 

Implementation .......................................................................... 15,400 26,100 24,000 96,800 162,000 147,000 

Periodic: 

—2-yr Pilot ......................................................................... 83,500 55,000 103,800 148,400 391,000 307,000 

—1-yr Pilot ......................................................................... 50,100 36,600 69,200 74,200 230,000 180,000

Total (implementation + periodic): 

—2-yr Pilot ......................................................................... 98,900 81,000 127,800 245,200 553,000 454,000 

—1-yr Pilot ......................................................................... 65,500 62,700 93,200 171,000 392,000 327,000 

Total across exchanges 

Implementation .......................................................................... 92,000 339,000 311,000 1,258,000 2,001,000 

Periodic: 

—2-yr Pilot ......................................................................... 501,000 714,000 1,350,000 1,929,000 4,494,000 

—1-yr Pilot ......................................................................... 301,000 476,000 900,000 964,000 2,641,000 

Total (implementation + periodic): 

—2-yr Pilot ......................................................................... 593,000 1,054,000 1,661,000 3,187,000 6,495,000 

—1-yr Pilot ......................................................................... 393,000 815,000 1,211,000 2,223,000 4,642,000 

i. Updating the Pilot Securities 

Exchange List and Pilot Securities 

ChangeList 

During the Pilot, the primary listing 

exchanges will maintain and make 

public prior to the start of each trading 

day the Pilot Securities Exchange List of 

the securities included in each test or 

control group on its website. Further, 

each primary listing exchange will 

publicly post on its website the updated 

Pilot Securities Change List prior to the 

start of each trading day, which will list, 

separately, changes to applicable Pilot 

Securities. Additional details of what 

will be included in each list are 

provided in Section II.E.1. 

Upon the initial publication of the 

List of Pilot Securities by notice by the 

Commission, the primary listing 

exchanges 737 will need to determine 

which of those securities are listed on 

their market, and then compile a list of 

those securities and publicly post on 

their websites that list as a 

downloadable file in pipe-delimited 

ASCII format. The Commission initially 

estimated that the costs associated with 

the initial compilation of the Pilot 

Securities Exchange List would cost 

$2,060 per exchange based on an 

estimated burden of 8 hours. However, 

one commenter stated that it 

‘‘anticipates it could take as many as 44 

hours’’ to compile the initial Pilot 

Securities Exchange List.738 The 

commenter stated that its estimates of 

the costs associated with the Pilot are 

based on its ‘‘prior experience 

implementing the Tick Size Pilot.’’ 739 In 

light of this comment, the Commission 

is increasing its estimate.740

Accordingly, the Commission estimates 

that each primary listing exchange 

would incur, on average, a one-time 

5268 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

741This estimate is based on the following: 

[(Compliance Manager (22 hours) × $298) + 

(Programmer Analyst (22 hours) × $232)] = $11,660 

≈11,700 per exchange, or $11,660 × 6 primary 

listing exchanges = $69,960 ≈ 70,000 in aggregate. 

The burden hours are obtained from supra Section 

III.D.1. The Commission estimates the wage rate 

associated with these burden hours based on salary 

information for the securities industry compiled by 

the Securities Industry and Financial Markets 

Association (SIFMA). The estimated wage figure for 

attorneys, for example, is based on published rates 

for attorneys, modified to account for a 1,800- hour 

work-year and multiplied by 5.35 to account for 

bonuses, firm size, employee benefits, and 

overhead, yielding an effective hourly rate for 2013 

of $380 for attorneys. See Securities Industry and 

Financial Markets Association [SIFMA], 

Management & Professional Earnings in the 

Securities Industry—2013 (October 7, 2013), 

available at https://www.sifma.org/resources/ 

research/management-and-professional-earningsin-the-securities-industry-2013/. These estimates are 

adjusted for inflation based on Bureau of Labor 

Statistics data on CPI–U between January 2013 

(230.280) and January 2017 (242.839). Therefore, 

the 2017 inflation-adjusted effective hourly wage 

rates for attorneys are estimated at $401 ($380 × 

242.839/230.280). The Commission discusses other 

costs of compliance with the rule below. 

742The Commission notes that the primary listing 

exchanges maintained public web pages containing 

similar lists with respect to the recently concluded 

Tick Size Pilot. The systems to produce lists for the 

Tick Size pilot should be adaptable to meet the 

requirements of the Transaction Fee Pilot. 743This estimate is based on the following: 

[(Attorney (4 hours) × $401) + (Compliance Manager 

(4 hours) × $298) + (Programmer Analyst (4 hours) 

× $232)] = $3,724 per exchange, or $3,724 × 6 

exchanges = $22,344 ≈ 22,300 in aggregate. The 

burden hours are obtained from supra Section 

III.D.1. 744 If the Pilot were to automatically sunset at the 

end of the first year, the total number of days that 

the exchanges would need to provide the Pilot 

Securities Exchange List and the Pilot Securities 

Change Lists would be up to 630 business days (504 

business days for the two-year Pilot horizon (252 

business days per year × 2 years), and up to 126 

business days for the six-month post-Pilot Period). 

The cost estimate for providing these lists for the 

entire period is based on the following: 

[(Compliance Manager (0.25 hour × 630 trading 

days) × $298) + (Programmer Analyst (0.25 hour × 

630 trading days) × $232)] = $83,475 ≈ 83,500, or 

$83,475 × 6 exchanges = $500,850 ≈ 501,000, in 

aggregate. The burden hours are obtained from 

supra Section III.D.1. One commenter provided an 

estimate of 300.5 burden hours for providing these 

lists, but the Commission continues to believe its 

own higher burden estimates are reasonable. See 

Section III.D.6, supra. 

745 If the Pilot were to automatically sunset at the 

end of the first year, the total number of days that 

the exchanges would need to provide the Pilot 

Securities Exchange List and the Pilot Securities 

Change Lists would be up to 378 business days (252 

business days for the one-year Pilot horizon, and 

126 business days for the six-month post-Pilot 

Period). The cost estimate for providing these Lists 

for the entire period is based on the following: 

[(Compliance Manager (0.25 hour × 378 trading 

days) × $298) + (Programmer Analyst (0.25 hour × 

378 trading days) × $232)] = $50,085 ≈ $50,100, or 

$50,085 × 6 exchanges = $300,510 ≈ $301,000, in 

aggregate. The burden hours are obtained from 

supra Section III.D.1. 

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

747The estimate is based on the following: 

(Compliance Manager (2 hours) × $298) + (Senior 

Business Analyst (2 hours) × $265) = 1,126 ≈ $1,130, 

or $1,126 × 13 equities exchanges = $14,638 ≈ 

14,600 in aggregate. The burden hours are obtained 

from Section III.D.2, supra. 

748This estimate is based on the following: 

(Compliance Manager (1 hours) × $298) + 

(Programmer Analyst (1 hours) × $232) = $530 per 

exchange, or $530 × 13 U.S. equities exchanges = 

$6,890 ≈ 7,000 in aggregate. The burden hours are 

obtained from supra Section III.D.2. 

burden of approximately 44 burden 

hours per primary listing exchange to 

compile and publicly post their initial 

Pilot Securities Exchange List. 

Consequently, the Commission now 

estimates a cost of approximately 

$11,700 per listing exchange to compile 

the initial list of securities.741 The 

Commission understands that each 

primary listing exchange has existing 

systems to monitor and maintain the 

Pilot Securities Exchange List and the 

Pilot Securities Change List as a result 

of certain corporate actions.742 While 

these systems can be used to collect the 

data required to be made public for the 

Pilot Securities Exchange List and the 

Pilot Securities Change List, these 

systems would have to be adapted to 

conform to the requirements of the Pilot. 

The Commission estimates that it would 

cost each primary listing exchange 

approximately $3,720 to develop 

appropriate systems for the Pilot, or 

about $22,300 in aggregate across the six 

U.S. primary listing exchanges.743 Once 

these systems are established, the 

Commission estimates that it would cost 

each listing exchange approximately 

$83,500 for the entire duration of the 

Pilot, or approximately $501,000 across 

the six primarily listing exchanges,744 to 

publicly post on each exchange’s 

website the Pilot Securities Exchange 

List and Pilot Securities Change List 

prior to the start of each trading day in 

pipe-delimited ASCII format. If the 

Commission determined that the Pilot 

shall automatically sunset at the end of 

the first year, the Commission estimates 

that the costs to each exchange would 

be $50,100 for a one-year Pilot duration 

and the six-month post-Pilot Period, or 

approximately $301,000 across the six 

primarily listing exchanges.745

In sum, the Commission estimates a 

total cost for each listing exchange of 

approximately $98,900, or $593,000 in 

aggregate across exchanges, to comply 

with the requirement to update and post 

on its website at the beginning of each 

trading day the list of its listed 

securities in each of the Test Groups. 

This includes an estimated $15,400 in 

one-time implementation costs and 

$83,500 in ongoing costs. This estimate 

is based on one provided by a 

commenter who, based on their 

experience with the Tick Size Pilot, 

estimated that it would take up to 44 

hours to compile. 746 Accordingly, the 

Commission continues to believe its 

burden estimates are reasonable. 

iii. Producing the Exchange Transaction 

Fee Summary in XML Format 

In addition to the Pilot Securities 

Exchange List provided by the primarily 

listing exchanges, all U.S. equities 

exchanges would also need to publicly 

post on their websites the Exchange 

Transaction Fee Summary, which are 

downloadable files containing the initial 

set of fees at the outset of the 

Transaction Fee Pilot as well as monthly 

updates to include both changes to fees 

and rebates reported in Form 19b–4 fee 

filings and realized average and median 

per share fees and rebates, as discussed 

in Section II.E.2. The Exchange 

Transaction Fee Summary would need 

to be updated in response to any 

changes to its fee schedule following the 

beginning of each calendar month from 

the pre-Pilot Period through the postPilot Period. The exchanges would be 

required to provide information on any 

transaction-based fee and rebate 

changes, according to Rule 610T(e), that 

they make during the Pilot, including 

the effective dates of fee revisions. The 

rule also requires that each exchange 

calculate numerous statistics relating to 

their fees as discussed in more detail in 

Section II.E.2. 

A requirement at the outset of the 

Pilot is that exchanges would need to 

report their base and top-tier fees and 

rebates, which the Commission 

estimates would cost each exchange 

$1,130, or about $14,700, in aggregate 

across the 13 U.S. equities exchanges.747

The reported base and top-tier fees and 

rebates would be mandatory elements of 

the Exchange Transaction Fee 

Summary. Concurrent with the 

submission of the Form 19b–4 fee filings 

to the Commission at the outset of the 

Transaction Fee Pilot, the exchanges 

also would be required to publicly post 

on their websites downloadable files 

containing the initial Exchange 

Transaction Fee Summary, using an 

XML schema to be published on the 

Commission’s website. The Commission 

estimates that it will cost exchanges 

$530 each to post this summary dataset 

to their websites.748

The rule would also require that 

exchanges compute the monthly average 

and median realized per share fees and 

rebates, as detailed in Section II.E.2. 

These data will provide the Commission 

and the public with aggregated data on 

the actual per share levels of fees and 

rebates assessed in the prior month, 

which the Commission believes is 

critical for estimating the effects of fees 

and rebates on order routing decisions. 

The Commission believes that the costs 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5269 

749This estimate is based on the following, which 

reflects the Commission’s experience with and 

burden estimates for SRO systems changes: 

[(Attorney (20 hours) × $401) + (Compliance 

Manager (20 hours) × $298) + (Programmer Analyst 

(20 hours) × $232) + (Senior Business Analyst (20 

hours) × $265] = 23,920 ≈ $24,000 per exchange, or 

$23,920 × 13 exchanges = $310,960 ≈ 311,000 in 

aggregate. The burden hours are obtained from 

supra Section III. D.2. 

750This estimate is based on the following, which 

reflects the Commission’s experience with and 

burden estimates for SRO systems changes: 

[(Attorney (10 hours) × $401) + (Compliance 

Manager (10 hours) × $298) + (Programmer Analyst 

(10 hours) × $232) + (Senior Business Analyst (10 

hours) × $265] = $11,960 ≈ $12,000 per exchange, 

or $11,960 × 13 exchanges = $155,480 ≈ $155,000 

in aggregate. The burden hours are obtained from 

supra Section III.D.2. 

751This estimate of updates to the Exchange 

Transaction Fee Summary is the aggregation of 

updates from the pre-Pilot Period (6), the two-year 

pilot period if the Commission determines that an 

extension of up to an additional year was needed 

(24), and the post-pilot period (6), for a total 

number of 36 updates. 

752This estimate is based on the following: 

[(Compliance Manager (1 hours) × $298) + 

(Programmer Analyst (1 hours) × $232)] = $530 per 

exchange, or $530 × 36 fee changes per exchange 

= $19,080 ≈ $19,000. The 36 fee changes for the 

exchange encompass six updates during the sixmonth pre-Pilot Period, 24 updates during the twoyear Pilot Period, assuming that the Commission 

determines that the additional year is required, and 

six updates during the six-month post-Pilot Period. 

In aggregate, updates to the Exchange Transaction 

Fee Summary are estimated to cost $19,080 × 13 

U.S. equities exchanges = $248,040 ≈ $247,000. The 

burden hours are obtained from supra Section III. 

D.2. 

753This estimate of updates to the Exchange 

Transaction Fee Summary is the aggregation of 

updates from the pre-Pilot Period (6), the one-year 

pilot period with an automatic sunset at the end of 

the first year (12), and the post-pilot period (6), for 

a total number of 24 updates. 

754This estimate is based on the following: 

[(Compliance Manager (1 hours) × $298) + 

(Programmer Analyst (1 hours) × $232)] = $530 per 

exchange, or $530 × 24 fee changes per exchange 

= $12,720 ≈ $12,700. The 24 fee changes for the 

exchange encompass six updates during the sixmonth pre-Pilot Period, 12 updates during the oneyear Pilot Period, assuming that the Commission 

determines that the additional year is not required 

and the Pilot is automatically sunset at the end of 

the first year, and six updates during the six-month 

post-Pilot Period. In aggregate, updates to the 

Exchange Transaction Fee Summary are estimated 

to cost $12,720 × 13 U.S. equities exchanges = 

$165,360 ≈ $165,000. The burden hours are 

obtained from supra Section III.D.2. 

755The Financial Information eXchange (FIX) 

protocol is an electronic communications protocol 

that provides a non-proprietary, free and open XML 

standard for international real-time exchange of 

information related to the securities transactions 

and markets. See Fix Trading Community, available 

at https://www.fixtrading.org/. 

756FpML (Financial products Markup Language) 

is an open source XML standard for electronic 

dealing and processing of OTC derivatives. It 

establishes the industry protocol for sharing 

information on, and dealing in, financial derivatives 

and structured products. See Financial products 

Markup Language [FpML], available at http://

www.fpml.org/. 

757Most of the exchanges have at least some 

portion of their data available through XML 

formats. For instance, the NYSE Group of exchanges 

provides daily closing prices, among other data, in 

XML, Excel, and pipe-delimited ASCII, while the 

Nasdaq exchanges (Nasdaq, BX, and PHLX) and 

Cboe exchanges (Cboe BZX, Cboe BYX, Cboe EDGA, 

and Cboe EDGX), provide daily share volume data, 

among other data, in XML. Information on the use 

of XML by exchanges is available for the NYSE, 

www.nyse.com, Nasdaq, www.nasdaqomx.com, and 

Cboe, www.cboe.com, exchange groups, 

respectively, and was obtained from a staff review 

of information on publicly available exchange 

websites. The Commission was unable to obtain 

information from CHX or IEX on their use of XML 

from information available on their publicly 

available websites. 

758This estimate is based on the following, which 

reflects the Commission’s experience with and 

burden estimates for systems changes to map to an 

XML schema: [(Programmer Analyst (1 hours) × 

$232) + (Senior Business Analyst (1 hours) × $265] 

= $497 ≈ $500 per exchange, or $500 × 13 exchanges 

= $6,461 ≈ $6,500 in aggregate. See Securities 

Continued 

associated with computing these 

summary data on fees and rebates are 

likely to be larger than the costs 

associated with updating the Exchange 

Transaction Fee Summary, discussed in 

detail below, and would likely require 

new systems by the exchanges to track 

the average and median fees. 

The Commission estimates that each 

exchange would have a one-time cost of 

about $24,000, or approximately 

$311,000 in aggregate across the 13 U.S. 

equities exchanges, associated with the 

development and implementation of 

systems tracking realized monthly 

average and median share fees pursuant 

to the rule.749 The Commission further 

anticipates that it would cost an 

additional $12,000 annually, or 

$155,000, in aggregate, per year, to 

ensure that the system technology is up 

to date and remains in compliance with 

the rule.750

Moreover, as discussed above, 

exchanges would be required to produce 

monthly updates to the Exchange 

Transaction Fee Summary to capture 

realized average and median per share 

fees as well as any revisions to fee 

schedules made by the exchanges, 

which would be reflected in changes to 

Base or Top-Tier fees and rebates, 

detailed in Section II.E.2. The 

Commission estimates that each month 

it would cost each exchange $530 to 

update the dataset of summary fees to 

reflect the updates to historical realized 

average and median per share fees and 

changes to the Base and Top-Tier fees. 

This would require each exchange to 

make a total of 36 updates to the 

Exchange Transaction Fee Summary 

from the pre-Pilot Period through the 

post-Pilot Period, if the Commission 

determined that the Pilot should 

continue for up to a second year and not 

automatically sunset at the end of the 

first year.751 Each exchange would have 

total costs of updates to the Exchange 

Transaction Fee Summary of 

approximately $19,000 per exchange, or 

$248,000 among the 13 exchanges over 

the pilot duration, including pre- and 

post-periods.752 If the Pilot were to 

automatically sunset at the end of the 

first year, without the Commission 

determining that an extension for up to 

an additional year was needed, this 

would decrease the total number of 

updates to the Exchange Transaction 

Fee Summary to 24.753 Under an 

automatic sunset at the end of the first 

year, each exchange would have total 

costs of updates to the Exchange 

Transaction Fee Summary of 

approximately $12,700 per exchange, or 

$169,000 among the 13 exchanges over 

the pilot duration, including pre- and 

post-periods.754 As detailed above, the 

Commission estimates that the costs 

associated with the monthly updates to 

the Exchange Transaction Fee Summary 

would be a small fraction of the costs 

associated with the initial allocation of 

fees required at the outset of the Pilot. 

As discussed in Section II, the rule 

will require that the Exchange 

Transaction Fee Summary be published 

on the exchanges’ websites using an 

XML schema to be published on the 

Commission’s website. The Commission 

understands that there are varying costs 

associated with varying degrees of 

structuring. The Commission believes 

that most of the exchanges already have 

experience applying the XML format to 

market data. For example, the exchanges 

and market participants regularly use 

the FIX protocol 755 and FpML 756 to 

exchange information on highly 

structured financial instruments and 

related market data.757

The Commission anticipates that 

implementation of the Pilot’s XML 

schema would draw upon exchange 

resources and experiences previously 

used to implement other supply chain 

information standards, like those 

discussed above, that were developed 

by industry consensus-based 

organizations. Costs generally associated 

with the implementation may include 

those for: Identifying the data required 

by the Pilot within the exchange source 

systems; mapping the relevant fields in 

the exchanges’ data source systems to 

the Commission’s XML schema; 

implementing, testing and executing the 

validation rules; and developing the 

website posting processes as required by 

the rule. The initial costs to exchanges 

of complying with the Commission’s 

XML schema in order to publicly post 

the Exchange Transaction Fee Summary 

in this format would be $500 per 

exchange, or $6,500 in aggregate across 

the 13 exchanges.758 For all updates to 

5270 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

Exchange Act Release No. 78309 (July 13, 2016), 81 

FR 49431, 49475 (July 27, 2016) (‘‘Disclosure of 

Order Handling Information’’). The estimate is 

lower than that for proposed Rule 606 disclosures 

because the costs for those disclosures 

encompassed many additional requirements beyond 

the mapping to an XML schema. 

759This estimate is based on the following, which 

reflects the Commission’s experience with and 

burden estimates for SRO systems changes: 

[(Attorney (20 hours) × $401) + (Compliance 

Manager (20 hours) × $298) + (Programmer Analyst 

(20 hours) × $232) + (Senior Business Analyst (20 

hours) × $265] = $23,920 ≈ $23,900 per exchange, 

or $23,920 × 13 exchanges = $310,960 ≈ $311,000 

in aggregate. The burden hours are obtained from 

supra Section III.D.3. 

760This estimate is based on the following, which 

reflects the Commission’s experience with and 

burden estimates for SRO systems changes: 

[(Attorney (10 hours) × $401) + (Compliance 

Manager (10 hours) × $298) + (Programmer Analyst 

(10 hours) × $232) + (Senior Business Analyst (10 

hours) × $265] = $11,960 ≈ $12,000 per exchange, 

or $11,960 × 13 exchanges = $155,480 ≈ $156,000 

in aggregate. The burden hours are obtained from 

supra Section III.D.3. 

761This estimate is based on the following: 

[(Compliance Manager (4 hours) × $298) + 

(Programmer Analyst (3 hours) × $232)] = $1,888 

per exchange, or $1,888 × 36 fee changes per 

exchange = $67,968 ≈ $68,000. The burden hours 

are obtained from supra Section III.D.3. The 36 

updates to the order routing data for each exchange 

encompass six updates during the six-month prePilot Period, 24 updates during the two-year Pilot 

Period, assuming that the Commission determines 

at the end of the first year that it shall continue the 

proposed Pilot for up to an additional year, and six 

updates during the six-month post-pilot period. In 

aggregate, updates to the order routing data are 

estimated to cost $67,968 × 13 U.S. equities 

exchanges = $883,584 ≈ $884,000. 

762This estimate of updates to the order routing 

data is the aggregation of updates from the pre-Pilot 

Period (6), the one-year Pilot Period assuming that 

the Commission allows the Pilot to automatically 

sunset at the end of the first year (12), and the postPilot Period (6), for a total number of 24 updates. 

763This estimate is based on the following: 

[(Compliance Manager (4 hours) × $298) + 

(Programmer Analyst (3 hours) × $232)] ≈ $1,888 

per exchange, or $1,888 × 24 fee changes per 

exchange = $45,312 ≈ $45,300. The burden hours 

are obtained from supra Section III.D.3. The 24 

updates to the order routing data for each exchange 

encompass six updates during the six-month prePilot Period, 12 updates during the first year of the 

Pilot Period, assuming that the Commission 

determines at the end of the first year that it shall 

automatically sunset the proposed Pilot, and six 

updates during the six-month post-pilot period. In 

aggregate, updates to the order routing data are 

estimated to cost $45,312 × 13 U.S. equities 

exchanges = $589,056 ≈ $589,000. 

764See NYSE Letter I, at 15. 

765However, it is unclear exactly how the 

commenter aggregated the data in the Proposing 

Release to arrive at 160 hours because they did not 

provide details of their calculation. 

766See Proposing Release, supra note 2, at 13061. 

Discussion of comments on these estimates is 

presented in Section III.D.3 supra. 

the Exchange Transaction Fee 

Summary, the Commission estimates 

that any burden associated with making 

those available using the XML schema 

is included in the costs of the updates 

discussed above. 

In sum, the Commission estimates the 

total cost of the pilot associated with 

producing the exchange transaction fee 

summary in XML format to be 

approximately $81,000 per exchange if 

the Pilot runs for 2 years and $62,700 

per exchange if the Pilot sunsets at the 

end of the first year. These costs 

comprise of approximately $26,100 in 

one time implementation costs and 

$55,000 in ongoing costs if the Pilot 

runs for two years, or $36,600 if the 

Pilot sunsets at the end of the first year. 

These costs aggregate to approximately 

$1,054,000 in total costs across all 

exchanges if the Pilot runs for the entire 

two years, and $815,000 if the Pilot 

sunsets at the conclusion of the first 

year. 

iv. Producing the Order Routing Data 

The rule also will require as part of 

the Pilot that exchanges prepare, in 

pipe-delimited ASCII format, and 

transmit to the Commission, order 

routing data, updated monthly, 

containing aggregated broker-dealer 

order routing information. As discussed 

in Rule 610T(d) and in Section II.E.3, 

the datasets would contain separate 

order routing data for liquidityproviding and liquidity-taking orders 

aggregated by day, by security, by 

broker-dealer, and by exchange. 

The Commission believes that as long 

as the CAT Phase 1 data are available at 

the implementation of the Pilot, the 

exchanges would be able to use that 

data to construct the order routing data 

required by the rule. In particular, the 

CAT data will include records for every 

order received by an exchange that 

indicate the member routing the order to 

the exchange and details regarding the 

type of security. The CAT data will also 

include other information necessary to 

create the order routing data such as 

order type information, special handling 

instructions, and execution information. 

In the event that the CAT Phase 1 data 

were not available, the exchanges would 

have to use existing systems to collect 

the required order routing data. 

Regardless of which system exchanges 

use for the order routing data, the 

Commission anticipates they would 

incur costs in producing the 

downloadable files containing 

aggregated monthly order routing data 

to be transmitted to the Commission. 

The Commission estimates that each 

exchange would have a one-time cost of 

approximately $23,900, or 

approximately $311,000 in aggregate 

across the 13 exchanges, associated with 

the development and implementation of 

systems needed to aggregate the order 

routing information, as well as store the 

data, in the pipe-delimited ASCII format 

specified by the rule and as detailed in 

Rule 610T(d).759 The Commission 

anticipates that it will cost each 

exchange an additional $12,000 per 

year, or approximately $156,000 in 

aggregate per year, to ensure that the 

system and storage technology is up to 

date and remains in compliance with 

the rule.760

The rule will require that exchanges 

produce monthly updates of the order 

routing data, and transmit them to the 

Commission in pipe-delimited ASCII 

format by the end of the month, as 

detailed in Section II.E.3 and Rule 

610T(d). The Commission estimates that 

the transmittal and updates of the order 

routing datasets would cost $1,888 each 

month. This will require each exchange 

to make a total of 36 updates to the 

order routing data from the pre-Pilot 

Period through the post-Pilot Period (if 

the core Pilot lasts for a full two years). 

Each exchange would have recurring 

costs of updates to the order routing 

data of approximately $68,000 per 

exchange, or $884,000 among the 13 

exchanges over the entire duration of 

the Pilot, and the pre-Pilot and postPilot periods.761 If the Commission were 

to allow the Pilot to automatically 

sunset at the end of the first year, this 

would decrease the total number of 

monthly updates to the order routing 

data by 12 to 24.762 Under the automatic 

sunset, each exchange would have 

recurring costs of updates to the order 

routing data of approximately $45,300 

per exchange, or $589,000 among the 13 

exchanges over a one-year Pilot, and the 

pre-Pilot and post-Pilot periods.763

One commenter stated that the 

Commission underestimated the 

number of burden hours required to 

produce the order routing data required 

by the Pilot.764 This commenter 

indicated that the Commission allocated 

160 burden hours to compile and 

produce the order routing data, while 

the commenter estimates that it would 

take approximately 400 burden 

hours.765 Over the entire Pilot duration, 

including the six-month pre and postPilot periods, the Commission estimates 

that exchanges would have initial 

systems burden hours of 80 hours, an 

additional annual burden of 40 hours to 

update and maintain those systems, 

plus 84 burden hours per year to 

produce and publicly post order routing 

data monthly.766

In sum the Commission estimates the 

costs of producing the order routing 

data to include a one-time cost of 

approximately $23,900 per exchange to 

set up the data gathering process, 

$12,000 per year to maintain the data 

gathering systems, and $1,888 per 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5271 

767The estimate is based on the following: 

[(Attorney (40 hours) × $401) + (Compliance 

Attorney (40 hours) × $352) + (Assistant General 

Counsel (25 hours) × $449) + (Director of 

Compliance (15 hours) × $470)] = $48,395 ≈ 

$48,400, or $48,395 × 13 equities exchanges = 

$629,135 ≈ $629,100 in aggregate. See OMB Control 

No. 3235–0045 (August 19, 2016), 81 FR 57946 

(August 24, 2016) (Request to OMB for Extension 

of Rule 19b–4 and Form 19b–4 Filings). 

768The Commission believes that the inclusion of 

Linked Pricing prohibitions for Test Group 2 should 

not increase the complexity of Form 19b–4 filings 

for exchanges because many exchanges already 

report non-cash incentives, such as tiered pricing or 

volume discounts, as part of their standard filings. 

Further, the Commission does not believe that 

many exchanges currently use Linked Pricing 

mechanisms and instead most rely on rebates. 

769Maintaining the current average frequency of 

7 19b–4 filings per year would mean that the 

average exchange would file a total of 14 19b–4 

filings during the two-year pilot (7 filings × 2 year 

duration). If the Commission were to allow the Pilot 

to automatically sunset at the end of the first year, 

then the total number of 19b–4 filings could 

decrease by 7 filings. Annually, across all 13 

exchanges, the Commission estimates that there 

will be 91 19b–4 filings (7 filings × 13 exchanges). 

If the Commission determines that the Pilot shall 

continue for a second year, in aggregate, the 13 

exchanges could file a total of 182 19b–4 filings (91 

× two-year Pilot duration). 

770The estimate is based on the following: 

[(Attorney (8 hours) × $401) + (Compliance 

Attorney (8 hours) × $352) + (Assistant General 

Counsel (6 hours) × $449) + (Director of Compliance 

(4 hours) × $470)] =$10,598 ≈ $10,600, or $10,598 

× 182 fee changes in aggregate across 13 exchanges 

over the two-year pilot duration = $1,928,836 ≈ 

$1,929,000 in aggregate, assuming that the 

Commission determines that the Pilot shall 

continue for up to an additional year. If the Pilot 

were to automatically sunset after the first year, the 

Commission believes that the costs associated with 

91 19b–4 filings (13 exchanges × 7 filings) would 

be approximately $964,000 ( ∼$10,598 × 91 filings). 

See Request to OMB for Extension of Rule 19b–4 

and Form 19b–4 Filings, supra note 767. 

month to publish the data. Specifically, 

the Commission estimates initial onetime implementation costs of 

approximately $23,900 and ongoing 

costs of approximately $103,800 per 

exchange if the Pilot lasts two years or 

$69,200 if the Pilot lasts one year. These 

costs total approximately $127,800 per 

exchange if the Pilot lasts two years— 

or approximately $1,661,000 in 

aggregate. These costs decline to 

approximately $93,200 per exchange— 

or $1,211,000 in aggregate—if the Pilot 

sunsets after one year. 

v. Fee-Related Costs to Exchanges 

When exchanges alter their fees they 

are required to submit a Form 19b–4 

filing with the Commission. 

Consequently, the Commission expects 

most exchanges to file two 19b–4 Forms 

that they would not have otherwise 

done. Additionally, the Commission 

expects that the pilot may increase the 

complexity of these filings. This section 

provides estimates for the costs 

associated with the submission of 19b– 

4 Forms by the exchanges during the 

Pilot. 

At the outset of the Pilot, each 

equities exchange if their fees do not at 

that time comply with the Pilot’s pricing 

restrictions, would need to file with the 

Commission a comprehensive Form 

19b–4 fee filing reflecting all of the 

applicable fees and rebates applicable to 

each of the Pilot Groups, as well as the 

Control Group—to reflect the temporary 

changes to transaction-based fees and 

rebates as a result of the Pilot. The 

Commission anticipates that exchanges 

will incur costs associated with and 

devote time to optimally assign fees and 

rebates across Test Groups, within the 

parameters allowed by the Pilot, 

including any incentives, tiers, caps, 

and discounts available. The 

Commission estimates that it would cost 

$48,400 per-exchange for the initial 

Form 19b–4 fee filing or $629,100 in 

aggregate.767 The Commission further 

anticipates that exchanges would bear 

similar costs upon the completion of the 

Pilot to prepare Form 19b–4 fee filings 

for filing with the Commission to reflect 

changes in fees at the conclusion of the 

Pilot, should they wish to change their 

fees or revert to their former pricing 

models after the Pilot concludes. 

In addition to the initial production of 

the Form 19b–4 fee filing at the outset 

of the Pilot, exchanges may also choose 

to make periodic updates to their fee 

and rebate schedules, and file Form 

19b–4 fee filings to effectuate those 

changes and thereby notify the 

Commission and the public of those 

updates. As noted in the baseline, the 

average exchange makes approximately 

seven changes to its fee schedules per 

year. While recognizing the possibility 

that as a result of the Pilot, exchanges 

may revise their fee schedules more or 

less often during the Pilot, the 

Commission has no basis to expect an 

increase in the number of Form 19b–4 

fee filings other than at the beginning or 

end of the Pilot and has no basis to 

expect a decrease. 

The Commission also recognizes that 

as an outcome of the Pilot, the 

complexity of the Form 19b–4 fee filings 

could increase if exchanges seek to 

impose different fees within Test 

Groups 1, Test Group 2, and the Control 

Group, thereby increasing the overall 

costs for exchanges to revise their fee 

and rebate schedules.768 As discussed 

above, the Pilot may require exchanges 

to design new fee structures to comply 

with the Pilot’s Test Groups, which 

would then translate into additional 

information in each Form 19b–4 fee 

filing submitted during the Pilot. These 

costs are likely to increase because the 

exchanges could take more time to 

design and describe fee structures in 

each filing than they do designing fee 

structures today. As discussed above in 

the baseline, the average fee schedules 

of exchanges are complex, with many 

different categories of fees or rebates 

assessed to NMS stocks. Assuming the 

frequency remains constant, then the 

Pilot could increase the incremental 

costs incurred by exchanges to file the 

expected Form 19b–4 fee filings during 

the Pilot.769 The additional costs would 

only be relevant for Form 19b–4 fee 

filings that occur during the Pilot 

Period, and would not apply to Form 

19b–4 fee filings in the pre-Pilot or postPilot Periods, as the Commission does 

not believe that there will be any 

incremental costs associated with 

increased complexity of these filings 

during these periods. The Commission 

estimates that each exchange would 

bear an incremental cost of $10,600 per 

Form 19b–4 fee filing to account for the 

increased complexity associated with 

the requirements of the Pilot, or 

approximately $1,929,000 for the 

anticipated 182 Form 19b–4 fee filings 

for fee and rebate revisions across the 13 

U.S. equities exchanges during the twoyear pilot duration.770 If the Pilot were 

to automatically sunset at the end of the 

first year, the Commission estimates that 

exchanges would bear costs of 

approximately $964,000 for the 

anticipated 91 Form 19b–4 filings for fee 

and rebate revisions across the 13 U.S. 

equities exchanges during the first year 

of the Pilot duration. 

In sum, the Commission expects the 

pilot to impose on each exchange a onetime cost of $48,400 at the beginning 

and end of the pilot for the additional 

19b–4 filings required by the pilot, as 

well as an ongoing cost of 

approximately $10,600 per additional 

19b–4 filing to account for increased 

complexity in 19b–4 filings caused by 

the Pilot. If we assume that exchanges 

continue to file 19b–4 filings at an 

average rate of 7 per year and if the pilot 

lasts for 2 years, these incremental costs 

sum to approximately $148,400 per 

exchange—which declines to $74,200 if 

the pilot ends after the first year. 

Combining the cost of the two 

additional 19b–4 filings with the cost of 

potential increased complexity provides 

an estimated cost of the pilot associated 

with 19b–4 filings of approximately 

$245,200 per exchange—or $3,187,000 

in aggregate—if the pilot lasts two years, 

or $171,000 per exchange—or 

$2,223,000 in aggregate—if the pilot 

expires after the first year. 

5272 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

771On a given trade, an exchange earns the 

margin between fees and rebates. For example, if an 

exchange charges a take fee of $.0030 per share and 

offers a make rebate of $.0025 per share then the 

margin captured by the exchange is $.0005 per 

share traded. 

772A number of commenters expressed concern 

that the Pilot would lead to decreased exchange 

revenue largely through decreased trading volume. 

See, e.g., Cboe Letter I, at 7; NYSE Letter I, at 3 and 

15–16. 

773See Proposing Release, supra note 2, at 13063. 

774See Proposing Release supra 1 at 13067. 

775This was the case in Canada when in January 

2017 the Canadian Securities Administrators (CSA) 

approved the lowering of the fee cap for noninterlisted Canadian stocks from $0.0030 to 

$0.0017. In response to this regulation, the Toronto 

Stock Exchange retained its $0.0004 margin per 

trade for continuous trading—high priced securities 

($1.00 and over) by lowering both fees and rebates 

by $0.0008. Fees for taking liquidity on noninterlisted securities reduced from $0.0023 to 

$0.0015 whereas rebates provided to liquidity 

providers declined from $0.0019 to $0.0011. Fees 

and rebates for inter-listed securities remained 

unchanged. See https://www.tsx.com/resource/en/ 

1501. 

776See Section IV.D.2.a. See also Section 

IV.C.2.b.iv 777See, e.g., Leaf Letter, at 1–2; Ennis Letter, at 

2. 

778T. Rowe Price Letter, at 4–5. 

779See, e.g., TD Ameritrade Letter, at 7. Other 

commenters also either expressed their belief that 

the Pilot would not reduce trading volumes (see, 

e.g., IEX Letter II, at 8; T. Rowe Price Letter, at 5) 

or expressed uncertainty about the outcome of the 

Pilot on trading volume (see, e.g. Credit Suisse 

Commentary, at 5). 

vi. Other Costs to Exchanges 

The Pilot may result in more 

complicated fee structures that could 

also increase an exchange’s processing 

costs of tracking and calculating 

monthly invoices for its members 

during the Pilot; however, the 

Commission does not have any 

information on the costs to exchanges 

for tracking and calculating monthly 

member invoices and therefore cannot 

provide estimates of quantified costs 

and no commenters provided such 

information. 

b. Other Costs Associated With the Pilot 

This section considers additional 

costs that may occur as a result of the 

Pilot. Specifically, this section discusses 

how the Pilot may impact exchanges’ 

fee revenue, broker-dealer compliance 

costs, brokerage commissions, liquidity, 

and issuers. 

i. Loss of Exchanges’ Fee Revenue 

The Commission analyzed whether 

exchanges could experience a change to 

their fee revenues associated with 

transaction-based fees and rebates for 

either of two reasons: A decline in the 

margin between fees and rebates,771 or 

a decline in overall trading volume on 

an exchange as a result of the Pilot.772

In the Proposing Release the 

Commission stated its belief that only 

stocks in the test group with a cap of 

$0.0005 (former Test Group 2) would 

experience narrower margins and 

estimated that these narrower margins 

could result in exchanges incurring 

revenue losses of up to $7,650,000 per 

month.773 With the removal of the 

former Test Group 2 the Commission 

now believes that the Pilot may not have 

a significant effect on Exchange 

revenue, at least not because of 

narrower margins between fees and 

rebates. 

For stocks in Test Group 1 (the Test 

Group with a fee cap of $0.0010) the 

Commission does not believe that the 

Pilot will result in narrower margins 

earned by the exchanges because the fee 

cap in this group is double the current 

typical average net capture (i.e., margin) 

that exchanges earn which is 

approximately $0.0005.774

Consequently, the exchanges can 

maintain current margins by reducing 

the rebate offered at the same level as 

fees charged are reduced.775 For stocks 

in Test Group 2, the Commission also 

does not believe that the Pilot is likely 

to shrink margins. For these stocks the 

fee cap remains at $0.0030, while 

exchanges are prohibited from paying 

rebates and offering Linked Pricing. 

Consequently, the prohibition of rebates 

for securities in this Test Group would 

conceivably allow the exchanges to 

reduce fees to as low as $0.00025—if 

charged to both parties in a 

transaction—without reducing the 

exchange’s average net capture per 

trade. While less likely given 

competitive dynamics, if the exchanges 

wanted to increase their net capture, it 

is possible under the pilot terms for 

total net capture in group one to be as 

high as $0.002 (if both side were 

charged the maximum of $0.001), and in 

group two to be $0.003, both of which 

are far in excess of the average net 

capture that exchanges receive today. 

For these reasons, the Commission now 

expects the effects of the Pilot on 

exchange revenue through impacting 

per-trade margins to be minimal. 

In addition, the Commission believes 

that the impact of the Pilot on exchange 

revenues through changes in trading 

volume are difficult to determine in 

advance, but recognizes that the 

magnitude of such changes could be 

significant and some potential lost 

revenue could be in a transfer to 

investors or among exchanges. The 

Commission considered whether 

individual exchanges could experience 

a decline in trading volume for four 

reasons, as multiple commenters 

suggested: If exchanges lose volume to 

off-exchange venues, if volume declines 

because of increased transaction costs, if 

the Pilot reduces excessive 

intermediation, or if volume shifts 

among exchanges. The Commission 

recognizes that the Pilot presents a risk 

that the Pilot could result in less fee 

revenue for exchanges due to lower 

trading volumes. However, the 

Commission believes that decreased 

trading volume, while one possible 

outcome of the Pilot, is not the only 

reasonable outcome, and that the ex 

ante effect of the Pilot on trading 

volume is difficult to determine. 

First, several commenters stated that 

reducing or eliminating the ability for 

exchanges to pay rebates may cause 

exchanges to become less competitive 

relative to off-exchange venues like 

ATSs, which would not be so 

constrained. The analysis in Section 

IV.D.2.a identifies significant 

uncertainty in the potential for 

exchanges to be less competitive relative 

to off-exchange venues such as ATSs, 

and identifies conditions in which they 

could actually be more competitive.776

Consequently, the Commission cannot 

determine in advance of the Pilot 

whether exchanges will lose volume to 

off-exchange venues. 

Second, total trading volume, and 

consequently exchange revenue, could 

decline if the Pilot increases transaction 

costs. A number of issuers expressed the 

concern via comment letters that the 

Pilot would lead to lower levels of 

trading volume because of their 

experience with the Tick Size Pilot.777

However, not all issuers felt that the 

Pilot would result in lower trading 

volumes. One issuer ‘‘welcome[d] the 

opportunity for [its] stock to be included 

in the Pilot’’ and did not ‘‘expect that a 

reduction or outright removal of rebates 

will have any significant or harmful 

effects on . . . [its] stock’s trading 

volume.’’ 778 On the other hand, if the 

Pilot decreases the cost of trading on the 

exchanges, then the Pilot could increase 

trading volumes on the exchanges. This 

view was expressed by one commenter 

who stated their belief ‘‘the Pilot will 

reduce the costs of trading on 

exchanges, which may increase trading 

volumes on the exchanges.’’ 779 Lower 

costs of trading, caused by the reduction 

in fees, might increase trading volume 

on exchanges for at least two reasons. 

First, lower trading costs may induce 

trades that would otherwise not have 

occurred by allowing investors the 

ability to trade on smaller increments of 

information. Lower trading costs may 

also induce the participation of new 

traders, such as short-term traders for 

whom transaction costs are of greatest 

concern, to transact in a given stock 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5273 

780NYSE Letter I, at 17. 

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

782See NYSE Letter I, at 15–16. 

783See State Street Letter, at 2. 

784See Section IV.C.1.a.iii, supra. 

785See Section III.A. See also, e.g., Fidelity Letter, 

at 8. 

who would not otherwise participate. 

Consequently, if the Pilot leads to 

decreased trading costs, then trading 

volumes in those stocks may increase— 

increasing exchange revenue. In Section 

IV.C.2.b.iv below, the Commission 

discusses its belief that the effect of the 

Pilot on liquidity and transaction costs 

is not clear and could either increase or 

decrease. Given this uncertainty in the 

impact on liquidity, the Commission 

cannot determine in advance whether 

the Pilot will result in a reduction in 

liquidity that would reduce trading 

volume. 

Third, the Pilot may decrease trading 

volume, and thus exchange revenues, if 

it results in a reduction in 

intermediation by market makers for 

two reasons, but this would be a transfer 

to investors. The first reason is that 

market makers from time to time will 

use marketable orders to balance 

inventory. If these market makers 

decline to participate due to reduced 

rebate incentives, then their marketable 

orders will not arrive—diminishing 

trading volume. The second reason 

decreased intermediation may lead to 

lower volumes is that non-market 

makers might begin to execute their 

trades via non-marketable orders. Nonmarket makers may submit marketable 

orders because of an inability to achieve 

high fill rates with non-marketable limit 

orders due to significant competition 

from market makers. The reduction in 

intermediation may result in situations 

where two traders with offsetting trades, 

who would have generated two separate 

trades with market makers as the 

counterparty instead execute their trade 

with each other resulting in one trade. 

This could occur, for example, if the 

Pilot reduces queue lengths for investors 

as discussed in Section IV.C.2.b.iv.(2) 

below. While this effect would result in 

a loss in revenue to exchanges that 

would collect margin on a smaller 

number of trades, it would be a net gain 

for investors because executions on a 

smaller proportion of marketable orders 

would mean that the investors pay less 

in transaction fees and would more 

often capture, or earn, the spread where 

previously they would have paid the 

spread to transact. 

Fourth, even if overall trading volume 

does not decline or shift to off-exchange 

venues during the Pilot, individual 

exchanges may experience a decline in 

trading volume if the Pilot leads to a 

change in market share among the lit 

exchanges. This mechanism is 

discussed in Section IV.D.2.a. This 

section also highlights the difficulties in 

determining the expected redistribution 

of market share among the existing 

exchanges due to potentially 

countervailing economic effects. To this 

point, one commenter noted that the 

loss in revenue estimated above relied 

on ‘‘exchanges’ existing market share 

percentages’’ which ‘‘assumes that 

exchanges would remain equally 

competitive for order flow.’’ 780 The 

Commission agrees that the Pilot may 

impact the level and distribution of 

trading volume on lit exchanges but 

notes that such a redistribution would 

be a transfer among exchanges rather 

than an economic cost. 

The Commission acknowledges that 

the reduction or elimination of rebates 

may particularly affect smaller 

exchanges due to the liquidity 

externality, especially if their primary 

competitive differentiation is based 

upon a modified fee model. As 

discussed in the Proposing Release 

liquidity tends to consolidate.781 Thus, 

the restrictions on rebates resulting from 

the Pilot could harm smaller exchanges 

that may be competing by paying large 

rebates rather than by producing better 

prices or execution quality. In the short 

run, this could lead to lost revenue for 

these exchanges. It could also have 

longer-term effects if smaller exchanges 

consolidate or exit as a result of the 

Pilot. However, the Commission does 

not believe that consolidation or exit is 

likely during the pilot because only 

about a quarter of NMS stocks will be 

included in test groups. 

The Pilot could also impact 

exchanges’ fee revenue after the 

conclusion of the Pilot if as a result of 

the Pilot broker-dealers permanently 

alter their order routing decisions after 

the Pilot is completed. One commenter 

argued that this may be the case and 

suggested that the Commission’s claim 

that the Pilot’s effect on broker-dealers’ 

routing decisions would be temporary 

‘‘[was] contradicted by the 

Commission’s own finding that brokerdealers would not change their behavior 

unless the Transaction Fee Pilot lasts for 

at least one year.’’ 782 To this point, 

given the competitive nature of financial 

markets, the Commission does not 

expect that it would take most brokerdealers up to one year to alter their 

behavior. Indeed, this commenter 

supports this belief by stating that 

exchange and non-exchange trading 

centers vigorously compete for trading 

volume, and that market participants are 

sensitive to revisions in transactionbased pricing models.783 Given this 

competition, the Commission believes 

market participants will likely adjust 

their behavior quickly both upon the 

implementation and conclusion of the 

Pilot, and that the Pilot duration will 

incentivize broker-dealers not to ‘‘wait 

out’’ the Pilot who could be otherwise 

inclined to do so if the duration were 

not sufficiently long.784

If the Pilot results in a decline in fee 

revenue for exchanges, then this could 

lead to other costs borne by investors as 

a result. Exchanges could promote 

additional order types and may even 

initiate new types of markets as a result 

of the Pilot, which would only serve to 

further fragment markets and add to 

their complexity, the costs of which 

could be borne by investors.785 In 

particular, the Commission recognizes 

the remote possibility that an exchange 

holding company could attempt to 

optimize its overall performance during 

the Pilot by further diversifying with 

other exchange models. The 

Commission believes, however, that a 

new equity exchange registered in direct 

response to the Pilot would be unlikely 

to become operational before the 

conclusion of the Pilot. In addition, the 

Commission believes that it is unlikely 

that exchanges will promote additional 

order types as a result of the Pilot. 

In sum, the Commission believes that 

the costs to the exchanges due to 

narrower margins earned per trade are 

likely to be minimal—if any—due to the 

removal of the proposed Test Group 

with the fee cap of $0.0005. However, 

the Commission does expect that there 

could be a change in trading volume or 

a redistribution of market share among 

exchanges as market participants reoptimize their order routing systems as 

a result of the Pilot. However, due to the 

reasons discussed in this section, the 

Commission cannot determine in 

advance of the Pilot whether these 

market share/trading volume changes 

will increase or decrease exchange 

revenue. Consequently, the Commission 

acknowledges that the Pilot may lead to 

lower trading volume/market share for 

exchanges, which would impose a cost 

in terms of lost transaction fee revenue, 

but is unable to quantify the expected 

magnitude of this potential cost and no 

commenter provided an estimate of the 

amount of the lost transaction fee 

revenue. 

While the Commission cannot 

determine in advance of the Pilot its 

impact both in terms of direction and 

magnitude, the Commission has 

attempted to estimate the costs should 

volume decline. Using data from Table 

3 in section IV.B.2.e the Commission 

5274 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

786See, e.g., Larry Harris Letter, at 10–11; STANY 

Letter, at 2; FIA Letter, at 3; Nasdaq Letter I, at 10; 

Nasdaq Letter III, at 9. 

787See, e.g., Vanguard Letter, at 3; Healthy 

Markets Letter I, at 34. 

788One commenter stated that the Commission 

did not consider implementation and coding costs. 

See STANY Letter at 2. However, the commenter 

does not elaborate on why the Proposing Release 

estimates of $3,741,000 implementation costs for 

broker-dealers to adjust their order routing systems 

at the beginning and end of the Pilot and the 

$20,726,000 costs for broker-dealers to update their 

order routing systems for fee changes during the 

Pilot failed to consider implementation and coding. 

See Proposing Release, supra note 2, at 13063– 

13064. 

789See Bacidore, Jeff, Hernan Otero, and Alak 

Vasa, 2011, Does smart routing matter ?, Journal of 

Trading 6, 32- 37. (available at http://

jot.iijournals.com/content/6/1/32), which found 

that smart-order routers designed to maximize 

rebates delivered worse execution quality to their 

clients. 

790See FIF Letter at 8. See also FIA Letter at 3; 

Nasdaq Letter I at 10. 

791Even in the absence of smart-order routers, 

broker-dealers could still adjust their execution 

determinations to take advantage of the changes 

implemented during the Pilot and these 

adjustments would incur costs. While the 

Commission does not estimate these particular 

costs, the assumption that all broker-dealers have 

automated order routing systems is reasonable and 

is necessary to enable the estimation of cost 

estimates. The Commission believes, however, that 

the costs to adjusting manual systems could be 

lower than the costs to adjust automated routing 

systems. If any broker-dealers still route orders 

manually, they likely do so because setting up and 

maintaining manual systems is not economical for 

them. It is likely that such firms utilize exchange 

routing services. 

792See sections IV.C.1.a.iii and IV.E.5.a for 

additional discussion. 

793See Table 2 in Section IV.B.2.f supra. 

794 In addition, the Commission recognizes the 

potential costs to exchanges of this complexity 

above in Section IV.C.2.a. 

795See Larry Harris Letter, at 10–11. 

796This estimate is based on the following, which 

reflects the Commission’s experiences with and 

burden estimates for broker-dealer systems changes: 

[(Attorney (5 hours) × $401) + (Compliance Manager 

(10 hours) × $298) + (Programmer Analyst (10 

hours) × $232) + (Senior Business Analyst (5 hours) 

× $265)] ≈ $9,000 per broker-dealer that is a member 

of at least one exchange. As of December 31, 2016, 

estimates an annualized upper bound 

on the profit earned from transaction 

fees for each exchange. Aggregated 

across all exchanges this number equals 

approximately $3 billion per year. 

However, only about 1/4th of NMS 

securities will be in a test group subject 

to the Pilot, so the Commission 

estimates the Pilot could affect the 

approximately $750 million per year 

across all exchanges, depending on how 

much volume changes. Consequently, if 

the Pilot were to cause a 10% reduction 

in trading volume on exchanges then 

this change could reduce fee revenue on 

the exchanges by approximately $150 

million over two years or $75 million if 

the Commission were to allow the Pilot 

to automatically sunset at the end of the 

first year. However, the Commission 

does not believe that the 10% reduction 

in trading volume is a reasonable 

assumption. While the Swan Study 

shows that Nasdaq lost 10% of its 

volume using one volume measure, it 

lost only 200,000 shares in another. In 

addition, the Swan Study finds no 

change in overall volume or in offexchange volume, just a migration from 

Nasdaq to other exchanges. Therefore, 

the Commission does not believe that 

either the 10% volume reduction or, 

consequently, the estimate of $150 

million revenue reduction is reasonable. 

ii. Broker-Dealer Systems Costs 

Although the costs of compliance 

with the Pilot will primarily affect the 

exchanges, broker-dealers and other 

market participants are also likely to 

incur costs as a result of the Pilot. 

Commenters provided mixed 

information on the magnitude of these 

costs. While some commenters stated 

that the costs to broker-dealers of the 

Pilot would be substantial,786 other 

commenters stated that the costs for 

broker-dealers associated with the Pilot 

would not be significant or expensive 

because exchange fee schedules change 

regularly and broker-dealers are used to 

adapting their order routing algorithms 

to new and changed fee schedules.787

This section provides the Commission’s 

estimates for broker-dealer compliance 

costs associated with the Pilot.788

In response to the Pilot, market 

participants might have a one-time cost 

at the onset and the conclusion of the 

Pilot to adjust their systems to reflect 

the shocks and potential additional 

complexity of transaction-based fees. In 

addition, there may be additional 

modifications to routing strategies that 

are made in subsequent months to 

adjust to changing liquidity dynamics as 

behavior changes associated with the 

pilot settle in. Many broker-dealers have 

smart-order routing systems that use 

algorithms to route orders based on 

certain criteria, such as fill rates, time to 

execution, lowest fees, or highest 

rebates.789 One commenter agreed, 

stating that such systems changes 

‘‘should primarily consist of 

modifications to the routing tables and 

other associated operational 

activities.’’ 790 The Commission 

understands that some of the associated 

changes and modifications may already 

be coded into the smart order router 

(SOR) algorithms such that changes to 

associated liquidity shifts may be 

dynamic and automated, i.e., in need of 

little additional modification. 

To estimate these costs, the 

Commission assumes (1) that all brokerdealer members of exchanges will adjust 

their systems for the pilot and (2) that 

all broker-dealer members of exchanges 

have automated order routing 

systems.791 While the Pilot does not 

directly require broker-dealers to adjust 

their systems, the Commission expects 

broker-dealers who do not update their 

systems may incur significant costs 

relative to those who do in terms of 

potential impacts on execution quality 

and in their ability to manage fees and 

rebates. Broker-dealers might choose to 

adjust their systems for the Pilot for 

many reasons, including to recognize 

that the Pilot could affect execution 

quality for investors and/or to better 

manage fees and rebates.792 Therefore, 

the cost estimates assume that brokerdealers will adjust to their existing 

systems to capture changes in fees and 

rebates associated with each Test Group 

of securities, rather than bearing start-up 

costs associated with implementing new 

order routing systems. 

In its estimates, the Commission 

recognizes that the costs associated with 

adjusting the execution algorithms by 

broker-dealers for the Pilot are likely to 

be more costly than the periodic 

updates that broker-dealers may make to 

incorporate changes to fee schedules 

implemented by exchanges or to fine 

tune their strategies. The additional 

expected costs may occur because 

changes for the Pilot are likely to require 

more complex programming that 

segments stocks into different fee 

regimes (assuming exchanges 

implement fees customized to each Test 

Group), rather than just altering codes or 

inputs. As of July 2017, exchanges have 

18 fee categories and 21 rebate 

categories, on average.793 If exchanges 

maintain the same level of complexity 

in their fee schedules during the Pilot, 

up to a two-fold increase in the number 

of fee and rebate categories could occur, 

which would increase complexity for 

broker-dealers who incorporate fees into 

their order routing decisions.794

Additionally, the Commission agrees 

with the commenter who stated that, to 

the extent that broker-dealers’ order 

routing algorithms are programmed to 

the exchange, and not the individual 

security, the Pilot will increase 

complexity by requiring an adjustment 

to this methodology.795 The 

Commission estimates that the costs to 

broker-dealers that are members of 

exchanges to make the initial 

adjustment to their order routing 

systems at the outset of the Pilot would 

be approximately $9,000 per brokerdealer, or $3,573,000 in aggregate across 

the 397 broker-dealers that are currently 

members of equities exchanges.796 The 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5275 

397 unique broker-dealers were members of 

exchanges (Form X–17a–5). The aggregate costs of 

updating order routing systems to reflect the 

Transaction Fee Pilot requirements would cost 

$9,000 × 397 ≈ $3,573,000. Note that smaller broker 

dealers will often use the smart order router of 

larger broker dealers or those offered by exchanges, 

and will therefore benefit indirectly from the work 

done by the providers of their smart order routing 

services. 

797Several commenters made similar statements. 

See, e.g., Vanguard Letter, at 3; Healthy Markets 

Letter I, at 34. 

798The Commission cannot estimate and 

commenters provided no insight into the degree to 

which the number of fee and rebate revisions by 

exchanges will increase or decrease during the 

Pilot. 

799This estimate is based on the following, which 

reflects the Commission’s experiences with and 

burden estimates for broker-dealer systems changes: 

[(Compliance Manager (0.5 hours) × $298) + 

(Programmer Analyst (0.5 hours) × $232)] = $265 

per broker-dealer that is a member of at least one 

exchange. The aggregate costs updating order 

routing systems to reflect the periodic fee and 

rebate revisions would cost $265 × 397 ≈ $105,000. 

800 If 182 total fee and rebate changes were to 

occur over the duration of the Pilot (13 equities 

exchanges × 7 revisions per year × 2 years = 182), 

each broker-dealer would bear costs of updating its 

order routing systems of $265 × 182 ≈ $48,000, or 

$19,056,000 ($48,000 × 397) in aggregate across all 

broker-dealers over the first year of the Pilot. The 

Commission estimates that costs would be 

$9,528,000 ($265 × 13 exchanges × 7 updates × 397 

broker-dealers) if the Commission determined that 

Pilot automatically sunset at the end of the first 

year. 

801These costs reflect the estimated cost of $9,000 

at the outset of the Pilot to update the order routing 

system to reflect the changes to the fee structure for 

securities in the test groups, $48,000 to reflect the 

incremental costs of the estimated 182 revisions to 

fee schedules during the Pilot ($265 per revisions 

× 7 revisions per year × 2 years × 13 exchanges), 

and $9,000 at the conclusion of the Pilot to unwind 

changes to the order routing systems, for a total of 

$66,000 per broker-dealer. If the Pilot were to 

automatically sunset at the end of one year, then 

these costs would be approximately $42,000 ($265 

× 7 revisions × 13 exchanges+2*$9,000) per brokerdealer. 

802See, e.g., Angel, Harris, & Spatt, supra note 

530. 

803See Regulation NMS Subcommittee 

Recommendation for an Access Fee Pilot (June 10, 

2016), available at https://www.sec.gov/spotlight/ 

emsac/emsac-regulation-nmsrecommendation61016.pdf (‘‘June 

Recommendation’’). See also Shawn O’Donoghue, 

2015, ‘‘The Effect of Maker-Taker Fees on Investor 

Order Choice and Execution Quality in U.S. Stock 

Markets’’, Working Paper, available at https://

papers.ssrn.com/sol3/papers.cfm?abstract_

id=2607302. 

804Several commenters made similar statements. 

See, e.g., NYSE Letter I, at 13; ASA Letter, at 2. 

805The Commission acknowledges differing 

effects on brokerage commissions could occur as a 

result of the Pilot depending on whether the client 

is a retail customer versus an institutional 

customer. For instance, some brokerage accounts 

charge per-transaction commissions to retail clients. 

Institutional commissions, on the other hand, are 

highly negotiated and may be based on something 

other than a per trade or per share basis, such as 

a flat fee for use of a broker’s order routing 

algorithm; however, data on the structure or 

magnitude of institutional commissions is not 

publicly available. 

806There are approximately 8,000 NMS securities 

and just under 800 will be included in Test Group 

2. 

Commission further estimates that 

broker-dealers would bear a similar cost 

to adjust their order routing systems at 

the conclusion of the Pilot. 

Additionally, the Commission expects 

that broker-dealers would update their 

order routing systems with changes to 

fees or rebates submitted by exchanges 

through Form 19b–4 fee filings to the 

Commission during the Pilot. As 

discussed in the baseline, exchanges, on 

average, make changes to fees or rebates 

approximately seven times per year; 

therefore, broker-dealers are likely to 

have experience in updating the order 

routing systems to reflect these routine 

changes to fees and rebates.797 As in the 

estimates of the costs of the initial and 

final adjustments, broker-dealers are 

likely to face higher costs per update as 

a result of the Pilot because of the added 

complexity of having to update multiple 

modules within their order routing 

systems. The Commission’s estimates of 

these updates assume that exchanges 

update their fees schedules as often 

during the pilot as at present. Therefore, 

the costs to broker-dealers associated 

with the Pilot are the additional costs 

associated with the complexity of the 

updates and not the total cost of the 

updates.798 In other words, brokerdealers would have updated their 

systems (or routing tables) anyway in 

the absence of the Pilot to reflect the 

same number of exchange fee and rebate 

changes. The Commission estimates 

described below reflect the additional 

cost of the Pilot (‘‘additional costs’’), 

which is how much more an update 

might cost during the Pilot compared to 

a scenario without the Pilot. 

The Commission believes that the perupdate additional costs associated with 

these changes are likely to be a small 

fraction of the costs associated with the 

initial costs of adjusting the routing 

systems to reflect the required fee and 

rebate revisions at the outset of the 

Pilot. The Commission estimates that 

the additional costs to broker-dealers 

that are members of exchanges to make 

periodic adjustments to their order 

routing systems to reflect changes in 

fees and rebates would be $265 per 

adjustment, or approximately $105,000 

in aggregate across the 397 brokerdealers that are members of U.S. 

equities exchanges.799 As shown above, 

the Commission expects that exchanges, 

if submitting changes to fees and rebates 

at the same rate as they have in the last 

five years, would submit 182 total 

revisions to fees and rebates over the 

two-year pilot duration. Therefore, the 

aggregate costs of updating order routing 

systems would be $48,000 per brokerdealer, or $19,056,000 in total across all 

broker-dealers.800 If the Pilot were to 

automatically sunset at the end of the 

first year, the aggregate costs of updating 

order routing systems would be $24,000 

per broker-dealer, or $9,528,000 in total 

across all broker-dealers. 

In sum the Commission believes that 

the all in costs to broker-dealers of 

updating their order routing systems as 

a result of the Pilot will average 

approximately $66,000 per brokerdealer to update their systems over the 

entire Pilot Period. If the Pilot 

automatically sunsets at the end of the 

first year, the costs associated with these 

updates will be approximately $42,000 

per broker-dealer.801 The Commission 

notes that these estimates may be 

overstated. Not all broker-dealers are 

members of all exchanges, which would 

reduce the total number of changes to 

the order-routing systems that they 

would implement. Additionally, the 

exchanges could resort to more 

simplified fee schedules relative to the 

current baseline, which would reduce 

broker-dealers’ costs of updating their 

systems for the Pilot. 

iii. Temporary Increase in Brokerage 

Commissions 

Beyond the implementation and 

compliance costs for exchanges and 

broker-dealers associated with the Pilot, 

the changes to the exchange transactionbased fee and rebate structure could 

lead to temporary increases in brokerage 

commissions charged to their 

customers. Several studies show, and 

several commenters concurred, that 

brokerage commissions today are at 

historically low levels.802 Brokerage 

clients may have a preference for low 

commissions with services provided by 

broker-dealers, and in turn, may allow 

broker-dealers to capture rebates (and 

bear the costs of access fees), either 

through explicit contracts or implicit 

agreements.803 As a result, the Pilot 

could lead to higher overall 

commissions as rebates obtained by 

broker-dealers fall,804 thereby 

temporarily reducing the overall welfare 

of retail brokerage clients as a result of 

increased commissions.805

For instance, the elimination of 

rebates and Linked Pricing in Test 

Group 2 could result in a transfer from 

broker-dealers to exchanges. Assuming, 

as discussed above, the margin between 

fees and rebates is approximately 

$0.0002 per share,806 with transaction 

fees of $0.0030 per share and rebates of 

$0.0028 per share, Test Group 2 could 

result in a transfer of $0.0028 from 

broker-dealers to the exchanges with 

5276 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

807Although the Commission believes that 

competition among exchanges would drive 

transaction fees down for Test Group 2 as a result 

of the elimination of rebates, exchanges could 

charge transaction fees as high as the current cap 

of $0.0030. 

808As designed, the Pilot would allocate an equal 

number of securities to the two test groups and the 

control group (e.g., the test groups combined would 

have approximately 25% of the NMS securities and 

the control group would have 75%). Each test group 

will have one-half of the combined test group 

allocation, thereby, in total leaving each test group 

with 12.5% of NMS securities included in the pilot. 

Assuming that the allocation of share volume 

would be similar due to the stratification of the 

sample discussed above, each test group would 

have approximately 12.5% of total share volume 

each month. 

809Table 2 in the baseline shows aggregate 

exchange share volume for July 2017 was 91.7 

billion shares, of which 12.5% would be 11.5 

billion shares. Further, the Commission estimates 

that these volume figures would be similar across 

all months, assuming no seasonality in share 

volume. 

810 If Test Group 2 has monthly share volume of 

11.5 billion shares, and the margin would increase 

by $0.0028 ($0.0030—$0.0002), the revenue 

increase per month is estimated to be 11.5 billion 

× $0.0028 ≈ $32,200,000. 

811As discussed in section IV.B.2.d, the net of 

rebate revenue for NYSE (NYSE, NYSE Arca, NYSE 

American, and NYSE National), Nasdaq (Nasdaq, 

BX, and PSX), and Cboe (Cboe BZX, Cboe BYX, 

Cboe EDGA, and Cboe EGDX), was $602 million 

during 2017 ($196M + $253M + $153M). If the 

estimated margin increased by $386.4 million, then 

the percentage increase in this margin would be 

$386.4 million/$602 million ≈ 64.1%. 

812Consistent with this idea one commenter 

suggested that, any benefits or costs accruing to 

broker-dealers as a result of changes in fees and 

rebates are likely to be passed onto their customers. 

See Decimus Letter, at 2. 

813See supra Section IV.B.2. and IV.D.2. 

(discussing the competitive environment for brokerdealer services). But cf. Decimus Letter, at 2–4; 

NYSE Letter I, at 13; ASA Letter, at 2 (noting the 

possibility that commissions would increase). 

814See Decimus Letter, at 2–4. 

815See, e.g., Angel Letter II, at 3. 

816See, e.g., Citigroup Letter, at 3; Credit Suisse 

Letter, at 1; Decimus Letter, at 4; MFS Letter, at 1. 

817See, e.g., IEX Letter II, at 5; Credit Suisse 

Commentary, at 3. 

818See Angel, Harris, & Spatt, supra note 530. 

819See also TD Ameritrade Letter, at 3 

(concurring with the view that the Pilot is less 

likely to affect highly liquid securities). 

respect to their passively posted nonmarketable orders, particularly because 

exchanges would be prohibited from 

offering Linked Pricing mechanisms that 

could act as substitutes for cash 

rebates.807 The estimates of the potential 

increased revenue to exchanges are as 

follows. 

Assuming that the share volume in 

Test Group 2 would be approximately 

12.5% of the total share volume across 

all securities,808 using data from Table 

2 in the baseline, Test Group 2 would 

have share volume of approximately 

11.5 billion each month.809 If the margin 

between fee revenue and rebate cost is 

$0.0002, as discussed above, then under 

the assumption that exchanges reduce 

fees to $0.0002 in Test Group 2, the 

Commission anticipates no change in 

revenue for exchanges, and no transfer 

from broker-dealers. If, instead, 

exchanges charged the maximum fees of 

$0.0030 while they are prohibited from 

paying rebates or Linked Pricing in Test 

Group 2, the Commission estimates a 

monthly aggregate increase in revenues 

across all exchanges of $32,200,000.810

If the volume on each exchange does not 

change, then the estimated annual 

average increase in revenues across all 

exchanges would be $386.4 million 

[$32,200,000 × 12 = $386.4M]. This 

transfer of rebates from the brokerdealers to exchanges could potentially 

increase exchange revenue by 

approximately 64.1%.811 Moreover, 

these costs could likely fall to investors 

in the form of higher commissions or 

fees charged to cover the decrease in 

broker-dealer revenue due to losses in 

rebates for securities in Test Group 2.812

The Commission further 

acknowledges that if brokerage 

commissions were to increase as a result 

of the Pilot, broker-dealers could 

continue to charge higher commissions 

even after the conclusion of the Pilot. 

However, due to competition among 

broker-dealers, including the 

proliferation of low-cost online brokerdealers, the Commission believes that 

broker-dealers would be unlikely to 

significantly increase brokerage 

commissions as a result of the Pilot.813

Lastly, the Commission acknowledges 

that brokerage commissions may 

decrease during the Pilot if the Pilot 

results in lower execution costs for 

some test groups, then those lower costs 

may be passed on to investors in the 

form of lower commissions. For 

example, if a broker-dealer pays the 

transaction fee more often than they 

earn the rebate, the reduction of fee caps 

would reduce the cost of transacting for 

this broker-dealer, which the brokerdealer may pass onto investors in the 

form of lower commissions.814

iv. Temporary Reduction in Liquidity 

The effect of the Pilot on liquidity is 

uncertain as there are reasons why the 

Pilot may increase as well as decrease 

liquidity. Several commenters expressed 

concern that the Pilot would reduce 

liquidity. These commenter statements 

largely focus on the impact of the 

reduction or elimination of rebates. In 

considering the comments, and as 

analyzed in the following sections, the 

Commission considered the impact of 

the direct effect of rebates on quoted 

spreads, the impact of a loss of liquidity 

provision on quoted spreads and depth, 

the impact of changes in adverse 

selection on transaction costs, and the 

impact of potential conflicts of interest 

on execution quality. In addition, the 

Commission analyzed estimates of the 

costs of a potential reduction in 

liquidity provided by commenters. 

The Pilot could result in a positive, 

negative, or neutral change in liquidity 

for the stocks in test groups. Adding to 

this uncertainty, some commenters felt 

that to the extent that there are liquidity 

effects, such effects would be 

minimal.815 Also, the impacts of the 

Pilot on liquidity may not be uniform 

across all securities and several 

commenters believed that widening of 

spreads would be limited to a small 

number of securities. Some commenters 

stated that the widening of spreads is 

unlikely to affect the most and least 

liquid securities, or will not adversely 

affect liquidity at all.816 Further, as 

some commenters explained, less liquid 

stocks tend to have wider spreads, and 

therefore, the impact of rebates as an 

incentive to provide liquidity may 

become less relevant for these 

securities.817

(1) Direct Impact of Fees and Rebates on 

Quoted Spreads 

The Commission believes the impact 

of the Pilot on liquidity and transaction 

costs through a direct adjustment of the 

quoted prices is uncertain. One study 

argues that transaction-based rebates 

may artificially narrow the quoted 

spread on make-take exchanges by the 

amount of the rebate.818 This effect 

would particularly impact retail 

investors whose orders are largely 

internalized at the best quoted prices. 

However, whether rebates can 

effectively narrow quoted spreads in a 

given stock depends on whether that 

stock’s natural quoted spread (without 

artificial narrowing) is constrained by 

the tick size. For example, if a stock has 

a natural quoted spread of less than one 

penny, which is the minimum tick size, 

then rebates cannot possibly artificially 

narrow the quoted spread. Many of the 

most active stocks have average quoted 

spreads very close to a penny and the 

Commission believes that the natural 

spread in some of these stocks could be 

at or less than a penny. Consequently, 

the Commission believes that rebates 

might not artificially narrow spreads in 

at least some of the most active stocks 

and, therefore, that the Pilot might not 

result in wider quoted spreads in all 

stocks.819

(2) Potential Reduction in Liquidity 

Provision 

The Commission recognizes that the 

Pilot could reduce the incentives to 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5277 

820See also Pragma Letter, at 2; Magma Letter, at 

2; STA Letter, at 3; STANY Letter, at 2; Morgan 

Stanley Letter, at 3–4; Energizer Letter, at 1. 

821See NYSE Letter II, at 2, 9. See also, Nasdaq 

Letter III, at 4–6 (presenting similar data suggesting 

that quote quality on make-take exchanges is better 

than on inverted exchanges). 

822See section IV.C.1.a.ii.(3) for a discussion on 

causality, See also Mulson Letter II, at 1. 

823See NYSE Letter II, at 4 (noting that ‘‘some 

institutions believe maker-taker pricing 

unnecessarily subsidizes quoting in sufficiently 

liquid securities, resulting in ‘excessive 

intermediation’ that crowds out long-term investor 

participation in the market.’’). See also T. Rowe 

Price Letter, at 2. 

824See, e.g., Mulson Letter. 

825See Pragma Letter, at 2; IEX Letter I, at 6; IEX 

Letter III, at 4–6. But cf. NYSE Letter II, at 11. 

826See Pragma Letter, at 2; Nasdaq Letter I, at 6. 

827See Nasdaq Letter I, at 8–9; Nasdaq Letter III, 

at 9. However another commenter suggested that 

the impact of the Pilot on small stocks would be 

mitigated by the fact that small stocks tend to have 

wider spreads, and thus rebates form a smaller 

fraction of total market making incentives. See 

Decimus Letter, at 4–5 

828See, e.g., ICI Letter I, at 4; BlackRock Letter, 

at 1–2; FIA Letter, at 4; SIFMA Letter, at 4; Issuer 

Network Letter I, at 3; Schwab Letter, at 3; Fidelity 

Letter, at 9; Invesco Letter, at 2; State Street Letter, 

at 3; Clearpool Letter, at 8; STA Letter, at 4; STANY 

Letter, at 4; Healthy Markets Letter II, at 8; Healthy 

Markets Letter I, at 11; Nasdaq Letter I, at 8; NYSE 

Letter I, at 7; Cboe Letter I, at 17; Credit Suisse 

Commentary, at 6; Morgan Stanley Letter, at 3–4. 

829See Virtu Letter, at 7. 

830See infra Section IV.D.1. 

831See IEX Letter II, at 7. 

provide liquidity, but believes that the 

impact of this reduced incentive on 

quoted spreads and transaction costs 

could be positive or negative and could 

vary across securities. In particular, the 

Commission believes that despite a 

potential reduction in liquidity 

provision, some investors could actually 

experience lower or higher transaction 

costs in some securities for several 

reasons. Generally, this section provides 

reasons to expect an increase in 

transaction costs as well as reasons to 

expect a decrease in transaction costs. 

Likely, several of these effects will offset 

to create a new equilibrium, but the 

Commission cannot predict whether 

investors will face higher or lower 

transaction costs in this new 

equilibrium. 

First, some commenters stated that 

the removal of rebates could cause some 

liquidity providers to stop providing 

liquidity, which would result in a 

temporary increase in transaction costs 

during the Pilot as the remaining 

liquidity providers would face less 

competition for their services and 

therefore could charge wider spreads to 

liquidity demanders.820 One 

Commenter suggested that this effect 

could be seen by comparing spreads on 

non-rebate exchanges like Cboe EDGA 

with the rebate paying exchange Cboe 

EDGX. The Commenter noted that 

average spreads on Cboe EDGX tend to 

be lower than those on Cboe EDGA.821

However, the Commission does not 

believe that this data point provides 

robust evidence that spreads will widen 

across all securities because EDGA and 

EDGX tend to trade securities with 

different characteristics, consistent with 

another commenter who stated that 

‘‘EDGA only traffics in the most liquid 

names’’ consequently comparing 

average spreads on EDGA and EDGX is 

not appropriate. Additionally this 

analysis does not establish a causal link 

between rebates and quote quality.822

The Commission notes that a 

reduction in liquidity provision might 

not result in wider quoted spreads and 

greater transaction costs, particularly in 

more active securities. In particular, as 

suggested by some commenters, if 

rebates result in excessive 

intermediation,823 or if ‘‘natural’’ buyers 

and sellers set quoted prices,824 a 

reduction in rebates need not widen 

quoted spreads and increase transaction 

costs and could actually reduce 

transaction costs to the benefit of 

investors. Excessive intermediation 

makes it more difficult for non-market 

makers to get passive orders to the front 

of the queue and could induce them to 

cross the spread to trade aggressively a 

greater fraction of the time. If a 

reduction in rebates can result in less 

excessive intermediation, then a 

reduction in liquidity provision by 

market makers might not adversely 

impact transaction costs but could 

instead decrease queue lengths faced by 

non-market maker liquidity providers 

such as institutional investors. This 

could allow investors trading test group 

stocks to potentially experience better 

execution quality because they could be 

able to obtain better queue priority on 

their passive orders. Better queue 

priority would both diminish adverse 

selection costs for passive orders and 

also decrease the fraction of time 

investors are required to pay the spread 

and potential take fee to execute a 

trade.825 The Commission does not have 

the data necessary to empirically 

analyze whether rebates indeed result in 

excessive intermediation, but expects 

the Pilot to facilitate such analysis. 

The Commission recognizes the risk, 

noted by some commenters, that the 

Pilot could increase the cost of 

transacting if the reduction of rebates 

leads to a reduction in quoted depth.826

If the reduction in rebates in test group 

securities results in liquidity providers 

such as market makers posting less 

displayed liquidity, quoted depth could 

decline even if quoted spreads does not 

decline. This lower depth could result 

in increased costs of transacting larger 

quantities. These effects could be more 

pronounced in small stocks if, as some 

commenters suggest, rebates are 

important to induce market makers to 

provide liquidity in small stocks either 

directly or through cross subsidization 

of liquidity.827

The Commission also recognizes the 

potential for a reduction in liquidity and 

an increase in transaction costs for ETPs 

and particularly less active ETPs. 

Multiple commenters expressed concern 

that the Pilot might particularly reduce 

liquidity in ETPs.828 These commenters 

noted that, unlike in stocks, the Pilot 

might affect liquidity for ETPs in one of 

two ways: It may affect liquidity in 

shares of the ETP, or it may affect 

liquidity in the underlying assets of the 

ETP. The Pilot may reduce liquidity in 

the shares of the ETP if the reduction of 

or elimination of rebates induces market 

makers to stop or reduce providing 

liquidity for shares of an ETP. Moreover, 

another commenter expressed concern 

that the Pilot is inconsistent with 

exchanges programs for ETP market 

makers, whereby incentives are made 

available to market makers to act as 

liquidity providers for small, less liquid 

ETPs and therefore the negative impact 

of the Pilot could be the most 

pronounced among illiquid ETPs.829

Additionally, the Pilot may affect the 

liquidity of ETPs if it impacts the 

liquidity of the underlying securities. If 

the Pilot affects liquidity in shares of an 

ETP or impacts the liquidity of the 

ETP’s underlying securities, it will also 

affect the costs to authorized 

participants of eliminating ETP 

mispricing by participating in the 

create-redeem process.830

Additionally, the Commission 

recognizes that the Pilot might result in 

other unforeseen changes to market 

dynamics,831 including improved or 

diminished execution quality by certain 

trading centers which could shift the 

level of market participation. Also, the 

Pilot may affect the ability of exchanges 

and ATSs to draw liquidity provision 

through innovative methods other than 

rebates. The effects of these changes 

may have a positive, neutral, or negative 

effect on liquidity. Consequently, the 

Commission believes that there is 

significant uncertainty surrounding the 

effects of the Pilot on liquidity. 

(3) Conflicts of Interest 

As noted above, the Commission is 

not certain of the extent to which some 

broker-dealers route investor orders to 

avoid fees or to capture rebates in such 

5278 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

832See Section III.A. 

833See TD Ameritrade Letter, at 3. 

834See id. 

835Cboe Letter I, at 3. 

836See NYSE Letter I, at 13 and NYSE Letter IV, 

at 4. The commenter estimated the $1 billion 

increase in expected costs by computing a new 

consolidated spread, equal to the current 

consolidated spread + (rebated reduction × 2), 

where the rebate reduction is the blended average 

fee change of $0.00082, and multiplied this rebate 

reduction by 2 as market makers on both sides of 

the quote will adjust to reflect the rebate reduction. 

The commenter indicated that this estimation 

results in a 1.1% increase in average spreads to 28.1 

bps. Id. at Addendum 4–5. For principal trades, the 

anticipated increase in costs as calculated by this 

commenter is the cost to cross the wider spread 

netted against lower access fees, while for agency 

trades, the costs equal the cost to cross the new 

wider spread. The commenter showed, ‘‘on net, an 

estimated cost of $1.08bn to the industry, of which 

$721MM would be incurred by agency flow.’’ Id. at 

Addendum 5. See also STANY Letter, at 2. 

837The Commenter adjusts their estimate to 

account for agency verses principle flow using the 

following formulas. Agency cost = Change in 

Spread*1/2 * Market Notional Value * Agency 

Share; Principal Cost = [Change in Spread*1/2 * 

Market Notional Value * Principal Share]—[Fee 

Reduction * Market Volume * Principal Share * 

Maker/Taker Venue Share]. 

838See IEX Letter II, at 6. ‘‘Given that institutional 

investor orders are typically far larger than [the 

quoted spread], and retail investor orders are 

generally executed off-exchange,’’ the quoted 

spread is ‘‘particularly relevant’’ in ‘‘cases where a 

a way that reduces execution quality. To 

the extent they do, the Pilot could 

improve execution quality. This would 

occur if, as many commenters and 

studies have argued, the offering of 

rebates produces a conflict of interest 

that induces orders to be routed to 

exchanges with sub-optimal execution 

quality.832 Consequently, the removal or 

reduction of rebates may cause orders to 

be routed to exchanges with better 

execution quality and the execution 

quality in the stocks in the Test Groups 

could improve. As noted above, 

commenters disagreed on whether 

broker-dealers act on such conflicts of 

interest and the Commission lacks 

sufficient information to determine the 

magnitude of any such conflicts. The 

Commission notes that the objective of 

the Pilot is, in part, to study such 

conflicts of interest. 

(4) Cost Estimates 

Multiple commenters provided 

quantitative cost estimates associated 

with expected changes in liquidity. The 

commenters’ estimates all rely on the 

assumption that a reduction in rebates 

will increase quoted spreads and 

transaction costs but took different 

approaches, resulting in a wide range of 

estimates from $24 million to $4 billion 

per year. Overall, while the Commission 

appreciates the cost estimates, the 

Commission reiterates that the Pilot 

could either increase or decrease 

investor transaction costs for the reasons 

explained above. However, for the 

reasons discussed below, the 

Commission believes that each of the 

commenters overestimated the potential 

costs to investors. Below, the 

Commission first describes each 

estimate, adjusts the estimate for the 

change in the structure of the Pilot and 

then discusses how the assumptions 

might affect the estimation. 

The first commenter estimated costs 

of $24 million per year. Across all three 

proposed test groups, this commenter 

calculated an anticipated reduction in 

the average rebate of $0.002267 per 

share, and that approximately 50% of 

all liquidity providers will be affected 

by the rebate reduction by ‘‘updating 

their quotes to less aggressive prices,’’ 

leading to an increased cost to cross the 

spread of $0.001134 per share.833

Assuming only stocks with an average 

quoted spread in excess of $0.02 will be 

adversely affected by the rebate 

reduction, this commenter estimated 

that the costs to its customers of a wider 

quoted spread would be $24 million 

annually.834

To account for the changes to the Pilot 

since the proposal, Commission staff 

estimate that this commenter’s approach 

would estimate a cost of $12.7 million 

per year. To arrive at this estimate, the 

Commission adjusted the average rebate 

reduction to 0.0024 to account for the 

change to the test groups and adjusted 

the average implied volume to account 

for the inclusion of less than half the 

number of stocks in test groups. 

Despite these adjustments, the 

Commission notes that the estimate is 

likely imprecise. In particular, this 

estimate relies on an assumption that 

the spreads will widen by 50% of the 

reduction in rebates but does not 

provide support for this assumption. 

The commenter does not explain why 

they expect this relation between 

rebates and liquidity or provide an 

explanation for why they feel that 50% 

is the appropriate adjustment to use. 

Further, this adjustment does not allow 

for some liquidity demanders to supply 

liquidity more often if queue lengths 

decline with rebates. Such a switch 

would reduce the impact on transaction 

costs. The commenter also does not 

explain whether the share volume used 

to estimate the costs was all share 

volume in securities with average 

quoted spreads of less than two cents or 

just that portion likely to be in a test 

group. If the commenter included all 

volume, the estimates would be closer 

to $6.34 million. 

A second commenter estimated that if 

effective spreads widened by 10% for 

the 100 top securities, ‘‘the Pilot could 

conservatively cost investors over $400 

million more in annual execution 

costs.’’ 835 The commenter does not 

provide an analysis, either quantitative 

or qualitative, to support their belief 

that a 10% increase is appropriate to use 

or explain their methodology. The 

commenter provided little information 

about its assumptions or underlying 

data that would allow the Commission 

to examine the robustness of the 

estimate or to adjust the estimate for the 

changes in the Pilot since the proposal. 

As such the best way for the 

Commission to adjust the estimate for 

the changes in the Pilot is to divide it 

by two, $200 million, because the 

changes reduced the number of 

securities in the Pilot by slightly more 

than half. However, because of 

uncertainties about methodology and 

assumptions, the Commission cannot 

adjust with any certainty the $400 

million estimate and does not believe 

that a $200 million estimate is reliable. 

The Commission recognizes that the 

changes to the Pilot could also change 

the commenter’s estimate of how much 

spreads widen. 

A third commenter provided an 

analysis that suggested that, due to 

wider spreads, the increased costs to 

investors would be at least $1 billion 

per year and potentially $4 billion.836

Like the first commenter, this $1 billion 

estimate assumes an adjustment to 

transaction costs based on the reduction 

in the rebate, except that this 

commenter doubled the rebate to adjust 

transaction costs. To compute their 

estimate, the commenter estimates the 

weighted reduction in rebates across all 

stocks, taking into account the fact that 

most stocks will see no change in 

rebates. The commenter then uses the 

expected weighted average reduction in 

rebates to compute their estimate for the 

Pilot’s impact on average spreads across 

all stocks. The commenter then 

multiplies the expected impact on 

spreads by total trading volume to arrive 

at a total of approximately $1 billion in 

estimated costs per year.837 Using the 

commenter’s method, the adopted rule 

would have an average rebate reduction 

of approximately $0.0004, which would 

widen spreads by $0.0009, or 

approximately half the prior increase, 

for a new cost estimate of $600 million 

per year. 

Other commenters responded to this 

commenter’s $1 billion estimate in 

various ways. One commenter criticized 

the use of quoted spreads to estimate 

costs.838 Likewise, several commenters 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5279 

market participant is attempting to buy or sell, on 

an exchange, fewer shares than the total amount 

displayed at the [NBBO][.]’’ Id. NYSE responded to 

this comment by noting that nearly all trading on 

exchange is for amounts smaller than the quoted 

depth, so the quoted spread is relevant. See NYSE 

Letter II, at 10. 

839See, e.g., IEX Letter II, at 4; Healthy Markets 

Letter II, at 2 (arguing that the NYSE cost estimate 

to investors of $1 billion has been ‘‘sufficiently 

debunked as purely fictional’’); Decimus Letter, at 

4 (arguing that the NYSE approach ignores potential 

indirect benefits to market participants of lower 

access fees (and possibly lower brokerage 

commissions), and that the Pilot would provide the 

information necessary to obtain meaningful analysis 

of changes to fees and rebates on order routing 

decisions and execution quality). 

840To determine if a stock is penny constrained, 

the Commission applied the simple filter: If the 

stock’s trade weighted quoted spread was less than 

1.1 cents, then the stock was considered penny 

constrained. This threshold yielded approximately 

50% of trading volume occurring in stocks that are 

penny constrained. If the threshold is lifted to 2 

cents (implying that at least some of the time the 

stock was penny constrained), then the fraction of 

trading volume in penny constrained stocks rises to 

70%. Note that the sample period for the 

supplemental analysis is during the Tick Size Pilot. 

As such, these figures could underestimate the 

percentage of volume in penny constrained 

securities. 

841See Section IV.2.b.iv.(1). 

842One assumption made by NYSE is that ‘‘a 

reduction in the average passive rebate. . .will 

result in both the bid and offer being backed off, 

on average, by the exact same amount as the rebate 

reduction.’’ However, as another commenter argued 

this ‘‘assumes that only rebate driven liquidity 

providers set the quote’’ when ‘‘in reality the quote 

is almost always set by natural investors, who have 

a view of fair price, that is informed by both 

fundamental and quantitative research as well as 

the likely impact of their own short term trading 

intentions. See Mulson Letter, at 1. As discussed 

earlier in this section, the many potential effects of 

rebates on quoted spreads create significant 

uncertainty. See also Decimus Letter, at 4; Mulson 

Letter, at 1; IEX Letter II, at 4. NYSE responded to 

these comments by noting that even if their volume 

estimates are overstated by 20%, the cost is still 

significant and suggesting that investors would not 

provide liquidity because doing so would increase 

leakage costs. See NYSE Letter II, at 10–11. 

843See Mulson Letter I, at 1 and IEX Letter II, at 

4. 

844See NYSE Letter I, at 3, 13–14; ASA Letter, at 

3; e.g., Level Brands Letter, at 1; Johnson Letter, at 

1; P&G Letter, at 1; Sensient Letter, at 1; Apache 

Letter, at 2; Ethan Allen Letter, at 1–2. 

845See NYSE Letter I, at 3 and section IV.D.3 for 

further discussion of NYSE’s cost of capital 

estimates. 

846See, e.g., Apache Letter, at 2; ACCO Letter, at 

1; NorthWestern Letter, at 2; Weingarten Letter, at 

1. 

847See section IV.D.3 

848See Nasdaq Letter I at 10. 

849See, e.g., FIA Letter, at 3; Virtu Letter, at 7– 

8; SIFMA Letter, at 6; FIF Letter, at 2; Citadel Letter, 

Continued 

suggested that the commenter’s 

estimates of potential harm are 

overstated by as much as 90%.839

The Commission views the 

commenter’s $1 billion estimate as 

likely overstating the realistic costs 

associated with the Pilot should it result 

in increased spreads. One reason the 

estimate may be overstated is that, as 

some commenters have noted, and as 

discussed in section IV.C.2.b.iv.(1), the 

Pilot might have a diminished impact 

on penny constrained securities. In a 

supplemental analysis using TAQ data 

from the last quarter of 2017 and the 

first two quarters of 2018, the 

Commission estimates that between 50– 

70% of share trading volume occurs in 

stocks that are penny constrained.840

Consequently, to the extent that rebates 

play a diminished or no role in 

determining the spread of penny 

constrained stocks the commenter’s 

estimates will significantly overstate the 

impact of increased spreads on 

transaction costs. Also, the commenter’s 

estimate assumes that spreads will 

widen by twice the reduction in rebates, 

an assumption that some commenters 

question and that the Commission views 

as a likely upper limit to the impact of 

the Pilot on quoted spreads.841 This 

assumption does not take into account 

that non-market makers may begin to 

provide liquidity more often during the 

Pilot in securities with lower or no 

rebates due to a potential decrease in 

intermediation by market makers, which 

may mitigate the impact of less 

intermediation by market makers as a 

result of lower rebates.842 Consequently, 

the Commission acknowledges that to 

the extent that the Pilot impacts spreads 

in a certain small number of test group 

stocks, this could engender costs to 

investors. However, as described above, 

the Commission believes that the 

estimate of $1 billion per year is likely 

a significant overstatement of the actual 

costs that would be incurred in such a 

scenario.843

The commenter’s $4 billion estimate 

is based on the comparison between the 

spreads on a maker-taker exchange 

compared to the spreads on a takermaker exchange described above in 

Section IV.C.2.b.iv(2), which the 

Commission views as even more 

imprecise than the $1 billion estimate 

for the reasons laid out above. Beyond 

the concerns expressed in Section 

IV.C.2.b.iv(2), the Commission notes 

that the difference between the spreads 

of a maker-taker exchange and a takermaker exchange would result from the 

difference between the fee paid to post 

an order and the rebate to post. As such, 

the implied impact of no rebates would 

be no more than 1⁄2 the spread 

difference. Thus, thus using the full 

spread difference overstates costs by a 

factor of 2. Further, to get the $4 billion 

estimate, the commenter applied the 

spread differential to all NMS securities. 

Because Test Group 2 will be only about 

12.5% of securities, applying the spread 

differential to all NMS securities 

overstates the cost by a factor of 8. In 

sum, using the commenter’s approach, 

but correcting for these issues, would 

yield a cost 16 times smaller than the 

commenter’s, or $125 million. 

v. Impact on Issuers 

Several commenters expressed 

concerns that adverse effects to liquidity 

could induce long-term costs, such as 

higher costs of capital for issuers subject 

to certain Test Groups where the 

incentives to provide liquidity are 

reduced, likely affecting small and midcapitalization issuers most severely.844

One commenter believed that issuers 

would have higher costs of capital as a 

result of wider spreads, making any 

attempts to raise capital more 

expensive, particularly for issuers in 

certain Test Groups of the Pilot.845

Additionally, a number of commenters 

also expressed concern that wider 

spreads due to a reduction in rebates 

could also adversely affect issuers that 

engage in share repurchase programs.846

The Commission addresses these 

comments in the capital formation 

analysis in Section IV.D.3 and 

concludes that the Pilot is not expected 

to have a large impact on issuer cost of 

capital. While the Commission 

acknowledges the risk that the Pilot may 

impact liquidity for some securities, as 

explained above, the Commission 

believes that the impact of such an 

effect on the cost of capital for such 

securities would likely be minimal.847

With the exception of the impact on 

cost of capital, one commenter stated 

that the Pilot will require burdensome 

expenditures by public companies at the 

start and conclusion of the Pilot.848 The 

Commission recognizes that some 

national securities exchanges and 

broker-dealers are public companies 

that could incur the costs described in 

Sections IV.C.2.a and IV.C.2.b.ii at the 

start and conclusion of the Pilot. 

However, the commenter did not 

provide details on what expenditures 

other public companies will incur as a 

result of the Pilot. The Commission does 

not know what such expenditures 

would be or what they would entail; 

nevertheless, we do not believe that 

there will be any such expenditures. 

vi. Costs to Broker-Dealers of Reverse 

Engineering Identities in the Order 

Routing Data 

Some commenters expressed concern 

that proposed public dissemination of 

order routing information would enable 

competitors to gain proprietary 

information regarding trading 

strategies.849 The commenters suggested 

5280 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

at 4; Citi Letter, at 6; TD Ameritrade Letter, at 5; 

STANY Letter, at 5; IEX Letter I, at 10; Credit Suisse 

Commentary, at 6; Morgan Stanley Letter, at 4. 

850Exchange Act Section 3(f) requires the 

Commission when engaging in rulemaking to 

consider or determine whether an action is 

necessary or appropriate in the public interest, and 

to consider, in addition to the protection of 

investors, whether the action will promote 

efficiency, competition, and capital formation. See 

15 U.S.C. 78c(f). 

851See supra Section IV.C.2.b.iv. 

852See Nasdaq Letter I, at 3, 8. This commenter 

expressed concern that the Proposal did not 

considered the effects on issuers and ETPs. See id., 

at 8. This commenter also stated that ‘‘the Proposal 

is a blunt tool lacking nuance that will negatively 

affect efficiency, competition, and capital 

formation—none of which have been adequately 

addressed by the Commission.’’ See id. 

853See NYSE Letter I, at 15–16. See also, e.g., 

Level Brands Letter, at 1; Johnson Letter, at 1; 

Knight-Swift Letter, at 1. 

854See supra Sections IV.C.2.b.i and IV.C.2.b.iv. 

855One commenter stated that it did not ‘‘expect 

that a reduction or outright removal of rebates will 

have any significant or harmful effects on the 

quality of prices displayed in the public lit market, 

interfere with genuine liquidity and price 

formation, or negatively impact [its] stock’s trading 

volume, spread or displayed size.’’ See T. Rowe 

Price Letter, at 5. 

856See supra Section IV.C.1.a.ii. 

857See supra Section IV.C.1.a.i for a discussion of 

the potential benefits from studying the Pilot data 

and supra Section IV.C.1.a.iii for a discussion of the 

potential limitations of studying the Pilot data. 

858See supra Section IV.B.1.b. 

859See supra Section IV.C.1.b. 

860See supra Section IV.C.2.b.iv. 

861See supra Section IV.C.2.b.iii. 

that, for example, market participants 

could learn the identities of individual 

broker-dealers by sending a specific 

broker-dealer an order for a relatively 

thinly-traded security and then study 

the order routing reports to identify 

which broker-dealers transacted that 

security on a given day. The concern is 

that if market participants can identify 

the primary venues that certain brokerdealers tend to rout to, then they may 

be able to use this information along 

with live market data to identify specific 

trading algorithms of individual brokerdealers. This could increase transaction 

costs for broker-dealers if the market 

participants are able to use this data to 

identify when a certain algorithm is 

being used to execute a trade in live 

time and then to opportunistically trade 

around the algorithm to profit from any 

price impact created by the trades. 

As described above, the Commission 

has modified its proposal in response to 

these comments. Consequently, the 

Commission is not adopting the 

requirement that exchanges publicly 

post the order routing datasets and 

instead the Commission will receive the 

order routing data. This change 

significantly reduces the risks identified 

by the commenters about reverse 

engineering, and the Commission is 

sensitive to the need to protect the data 

from unauthorized disclosure. 

D. Impact on Efficiency, Competition, 

and Capital Formation 

The Commission has considered the 

effects of the Pilot on efficiency, 

competition, and capital formation.850

As discussed in further detail below, the 

Commission believes that many of the 

direct effects of this rule on efficiency, 

competition, and capital formation 

would likely be temporary in nature and 

affect markets only for the duration of 

the Pilot. The Commission believes that 

the information obtained as a result of 

the Pilot could improve regulatory 

efficiency, because analyses of this data 

are likely to provide a more 

representative view of the effect of 

transaction-based fees on order routing 

decisions than would be available to the 

Commission in the absence of the Pilot. 

Further, the Pilot may have a number of 

temporary effects on price efficiency, 

the competitive dynamics between 

exchanges, exchanges and off-exchange 

trading venues, broker-dealers, and 

issuers, including ETPs. Although the 

Pilot may temporarily affect liquidity,851

the Commission does not believe that 

this will result in the Pilot having a 

significant effect on capital formation. 

One commenter believed that the 

Commission did not sufficiently address 

the impacts of the Pilot on efficiency, 

competition, and capital formation in 

the proposing release.852 Several other 

commenters stated that the Commission 

inadequately provided justification for 

the assertions in the proposing release 

that the effects on efficiency, 

competition, and capital formation 

would be temporary in nature and 

‘‘would affect markets only for the 

duration of the [proposed] Pilot.’’ 853

The Commission addresses below 

commenters’ concerns about issues 

stemming from efficiency, competition, 

and capital formation. 

1. Efficiency 

This section discusses the potential 

impact the Pilot could have on 

efficiency. The Commission believes 

that information learned from the Pilot 

could potentially improve future 

regulatory efficiency. Additionally, the 

Commission believes that the Pilot 

could have a number of temporary 

impacts on efficiency, including: The 

efficiency of capital allocation, price 

efficiency and price discovery, and the 

efficiency of fees and rebates. 

As discussed in detail above,854 the 

Commission believes that there is 

significant uncertainty regarding the 

effect, if any, that the Pilot will have on 

liquidity and trading volume on 

exchanges. Therefore, the Commission 

is unable to determine ex ante the 

overall effects the Pilot will have on the 

efficiency of capital allocation, price 

efficiency, or the efficiency of fees and 

rebates.855 However, the Commission 

believes that the Pilot will provide 

useful data that will better inform future 

policy recommendations of the effects of 

fees and rebates on price efficiency.856

The Pilot will provide the 

Commission with an opportunity to 

empirically examine the effects of an 

exogenous shock to transaction fees and 

rebates on order routing behavior, 

execution quality and market quality. 

Insofar as the data produced by the Pilot 

permits the Commission and the public 

to evaluate and comment upon the 

potential impacts of alternative policy 

options, the rule may promote 

regulatory efficiency.857 In the absence 

of the Pilot, the Commission would 

have to rely on currently available data 

to inform future policy decisions related 

to transaction-based fees and rebates 

and data limitations may impair the 

efficiency of policy decisions based on 

this information.858

The temporary efficiency impacts the 

Commission expects during the Pilot 

depend on how the Pilot fee and rebate 

restrictions for the two Test Groups 

balance the interests of different groups 

of market participants. For example, if 

during the Pilot, the lower fee cap and 

no-rebate restriction induced by the 

Pilot cause broker-dealers to be more 

likely to route customer orders to 

trading centers with better pricing, 

higher speed of execution, or higher 

probability of execution, rather than to 

trading centers with the largest 

rebates,859 the Pilot may temporarily 

improve the efficiency of capital 

allocation by lowering execution 

costs.860 Alternatively, the efficiency of 

capital allocation could be reduced if, as 

a response to the loss in revenue from 

rebates, broker-dealers increase 

commissions or fees charged to 

customers.861 Higher commissions or 

fees could reduce customers’ 

willingness to trade or could lead to a 

lower injection of capital into the 

markets by investors because a larger 

fraction of each investable dollar would 

go to compensate broker-dealers for the 

lost revenue. However, because rebates 

are generally accompanied by higher 

transaction fees, the overall costs to 

broker-dealers to route orders to 

exchanges could decline for some Test 

Groups, which could lead to a decrease 

in commissions or fees and temporarily 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5281 

862See supra Section IV.C.1.b. 

863As discussed in detail above, improvements in 

execution quality could present as better prices for 

execution, higher probability of execution, and 

faster time to execution. See supra Section 

IV.C.2.b.iv. 

864 See infra Section IV.D.2.b. 

865See supra Section IV.C.1.b. 

866Some commenters argued that transaction fees 

and rebates harm price transparency because the 

prices displayed by exchanges do not include fee 

or rebate information and therefore do not fully 

reflect net trade prices. See ICI Letter I, at 2; 

Goldman Sachs Letter, at 3; Invesco Letter, at 2; 

State Street Letter, at 2; Wellington Letter, at 1; 

Oppenheimer Letter, at 2; Capital Group Letter, at 

3; Citi Letter, at 2. A number of academic studies 

also made this argument. See, e.g., Angel, Harris, & 

Spatt, supra note 530, and Harris, id. 

867See supra Section IV.C.1.a.ii. 868See supra Section IV.C.2.b.iv. 869See infra Section IV.D.2.a. 870Some commenters argued that rebates 

improved price discovery by promoting displayed 

liquidity on exchanges and narrowing the NBBO. 

See, e.g., State Street Letter, at 2; Virtu Letter, at 3; 

Magma Letter, at 3; Schwab Letter, at 1; Fidelity 

Letter, at 3; Cboe Letter I, at 15–16. One commenter 

argues that the removal of rebates could harm price 

discovery by causing more market participants to 

route their orders to off-exchange venues, instead of 

lit exchanges, where they would be included in the 

price discovery process. See Nasdaq Letter I, at 2, 

4. 

871See supra Section IV.C.2.b.iv and infra Section 

IV.D.2.a. 

872See supra Section IV.C.2.b.iv. 

873See supra Section IV.C.2.b.i. 

874See Nasdaq Letter I, at 2, 5; Cboe Letter I, at 

7. 

increase the efficiency of capital 

allocation. 

For the duration of the Pilot, lower 

transaction fees could improve the 

liquidity of stocks and ETPs in some 

Test Groups by reducing the costs to 

execute marketable orders.862 As 

marketable orders become less costly, 

these orders are likely to be routed to 

exchanges with lower transaction fees, 

improving execution quality and 

possibly creating a liquidity 

externality,863 whereby lower 

transaction fee venues will become the 

preferred trading center for marketable 

and non-marketable orders.864 An 

increase in liquidity could improve 

informational efficiency by allowing 

securities prices to adjust more quickly 

to changes in fundamentals. 

As a result of the Pilot, price 

efficiency might also improve; quoted 

spreads also may more closely reflect 

the net cost of trading and could 

temporarily increase price transparency 

for securities in certain test groups.865

Currently, most broker-dealers do not 

relay information about amounts of fees 

paid or rebates received on trades to 

their customers, thereby limiting the 

transparency of the total costs incurred 

to execute a trade. The Pilot would not 

mandate disclosure by the exchanges or 

the broker-dealers of order-level 

transaction-based fees and, therefore, 

will not resolve the limitations to 

transparency of the total fees paid and 

rebates received by broker-dealers for 

particular orders. As fees decline or 

rebates are removed in some Test 

Groups, however, the deviation in the 

net cost of trading from the quoted 

spread could shrink, thereby at least 

partially improving price transparency 

for the duration of the Pilot, and 

temporarily improving pricing 

efficiency and price discovery.866

Therefore, as an additional benefit of the 

Pilot, the Pilot will allow an 

examination of the temporary effect of 

revisions to transaction fees and rebates 

on quoted spreads, to better inform 

future policy recommendations of the 

effects of exchange transaction-based 

fees and rebates on price efficiency.867

On the other hand, if the reduction in 

rebates and Linked Pricing harms 

liquidity,868 or causes more informed 

order flow to be routed to off-exchange 

trading venues,869 then the Pilot may 

temporarily impair price efficiency and 

the price discovery process.870 A 

reduction in rebates could cause 

informed traders to route more of their 

non-marketable orders to off-exchange 

trading venues, which could reduce 

price discovery, because these orders 

would no longer be included in 

displayed quotes or limit order book 

depth. If liquidity temporarily worsens, 

then it may lead to a temporary 

widening of the NBBO, which could 

lead to a decline in the overall 

informational efficiency of prices. If 

liquidity worsens, it could also cause 

informed traders to route more of their 

marketable orders off-exchange, which 

could harm price discovery by reducing 

the ability of market participants to 

discern the direction of their order flow. 

However, if spreads widen or queues 

shorten, it could attract informed nonmarketable orders onto exchanges, 

which could improve price discovery, 

because exchange quotes would be more 

informative. Because the Commission 

cannot ex ante predict the effects of the 

Pilot on liquidity and competition 

between exchanges and off-exchange 

trading venues for order flow,871 the 

Commission is unable to determine the 

overall effects of the Pilot on price 

efficiency and the price discovery 

process. 

Changes in liquidity could also 

impact the price efficiency of ETPs. A 

change in liquidly for either the ETP 

itself or the underlying securities could 

impact the create-redeem process for 

ETPs. This process is an important 

element in ETP price efficiency and 

helps to keep the price of the ETP in 

line with the value of its underlying 

securities. If there is a mispricing, 

authorized participants can trade on the 

mispricing by either purchasing the 

underlying shares to create a share of 

the ETP, or by redeeming a share of the 

ETP and selling the assets underlying 

the ETP. These actions affect the 

existing supply of ETP shares and help 

to eliminate mispricing. Consequently, 

if the Pilot impacts liquidity in either 

the underlying assets, or the ETP itself, 

it will impact the cost to authorized 

participants of eliminating mispricing 

by participating in the create-redeem 

process. Since the Commission does not 

ex ante know how the Pilot will impact 

liquidity,872 it cannot quantify the 

effects of the Pilot on ETP price 

efficiency. If the Pilot results in 

improved liquidity for the stocks in the 

various Test Groups, or for the ETP 

itself, then its impact on the createredeem process may be positive and 

ETP price efficiency may increase as its 

value may more closely track the value 

of their underlying assets through a 

lower cost create-redeem process. The 

opposite is true if the Pilot negatively 

affects liquidity in either the ETPs or the 

underlying securities. 

Finally, the Commission 

acknowledges that the fee caps and 

prohibition on rebates or Linked Pricing 

imposed on the Test Groups during the 

Pilot further constrain the exchanges’ 

abilities to strategically choose fee and 

rebate schedules and for some NMS 

stocks may restrict the fees and rebates 

further beyond the current levels, which 

could be less efficient from the 

exchanges’ perspective. The rule could 

temporarily result in more or less 

efficient fee and rebate schedules 

because the exchanges might not be able 

to optimize their pricing structure for 

some Test Groups of securities.873 While 

the Commission does not currently have 

information to determine the current 

level of efficiency of fees and rebates, 

the information that the Commission 

and the public receive from the Pilot 

could enable the analysis of market 

impacts stemming from changes to fees, 

potentially permitting the Commission 

to assess alternative requirements for 

transaction-based fees and rebates that 

may be more efficient. 

Several commenters asserted that fee 

and rebate restrictions proposed by the 

Commission would be government 

imposed price-controls that would 

increase inefficiencies and harm 

consumers.874 One of these commenters 

elaborated that ‘‘Government-imposed 

price controls are well understood to 

have a negative impact on competition 

and innovation’’ and that ‘‘they are only 

5282 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

875See Nasdaq Letter I, at 11–12. 

876See supra Section IV.A. 

877See supra Section IV.B.1. and Section 

IV.C.1.a.iii. 

878See supra Section IV.C.1.a. 

879See infra Section IV.D.2.b (Competition 

Between Exchanges). 

880See Proposing Release, supra note 2, at 13042, 

for a discussion of a liquidity externality. 

881See infra Section IV.D.2.b (Competition 

Between Exchanges). 

882See supra Section IV.C.2.b.iv. 

883See supra Section IV.B.2.a. 

884Commenters expressed concern that the Pilot 

would inhibit exchanges’ ability to compete with 

off-exchange trading centers, in part due to a 

reduced ability to innovate on changes to fees and 

rebates. See, e.g., Cboe Letter I, at 7, 16–17; Nasdaq 

Letter I, at 6; NYSE Letter I, at 1–2, 4–5; Magma 

Letter, at 2; FIA Letter, at 3–4; ASA Letter, at 3; P&G 

Letter, at 1; ACCO Letter, at 1; Johnson Letter, at 

1. 

885See supra note 47 and accompanying text. 

886 It might be difficult for an ATS to renegotiate 

these agreements with all of their clients in order 

to take advantage of the exchange price restrictions 

on a subset of securities (i.e., stocks in the Test 

Groups). 

887One commenter agreed and stated the Pilot 

could cause a shift in the balance of activity 

between exchanges and off-exchange trading 

centers, but that the direction of such a shift cannot 

be presupposed. See Decimus Letter, at 5. This 

commenter also noted that transaction-based fees 

are one of the drivers behind the current shift by 

market participants to off-exchange trading centers. 

Id. at 5–6. 

888See supra Section IV.B.1.b.vii. 

889See supra Section IV.C.2.b.iv. 

indicated where they overcome severe 

market imperfection such as monopoly 

ownership of a critical resource.’’ 875 As 

discussed in detail above,876 the 

Commission believes that the current 

fee and rebate system may have resulted 

in a number of market failures, 

including rebates incentivizing brokers 

to route orders to trading venues that 

pay the highest rebates, instead of the 

venues that offer better execution. 

However, the Commission currently 

lacks the data to estimate the extent of 

any existing market failures.877 While 

the Commission acknowledges that the 

Pilot’s restrictions on rebates and fees 

could potentially harm efficiency, if 

these market failures currently do exist, 

then the fee and rebate restrictions in 

Test Group stocks could temporarily 

improve efficiency for the duration of 

the Pilot. Additionally, the information 

the Commission learns from the Pilot 

could be used by the Commission in 

future rulemakings to inform future 

policy decisions.878

2. Competition 

This section discusses the potential 

effects of the Pilot on competition. The 

Commission believes that the Pilot 

could have a temporary effect on the 

competitive dynamics between 

exchanges, exchanges and off-exchange 

trading venues, broker-dealers, and 

issuers, particularly ETPs. Additionally, 

as discussed in detail below,879 the Pilot 

could potentially have competitive 

effects for smaller exchanges that last 

beyond the Pilot. This could occur if the 

Pilot attenuates the potentially 

distortive impact of transaction-based 

fees and rebates and causes brokerdealers to route orders to trading centers 

they perceive as more liquid. This could 

have a lasting effect on the order flow 

and revenue of smaller exchanges if it 

produces a liquidity externality that 

persists beyond the Pilot.880 However, 

the Commission believes that this is 

unlikely to occur, because the Pilot 

would be for a limited duration and the 

effects are unlikely to be significant 

enough to cause this result.881

Because the Commission is unable to 

determine ex ante the Pilot’s effects on 

liquidity,882 the Commission is unable 

to quantify many of the effects of the 

Pilot on competition. In the sections 

below the Commission offers a 

qualitative discussion of the effects of 

the Pilot on competitive. 

a. Competition Between Exchanges and 

Off-Exchange Trading Venues 

This section discusses the potential 

effects of the Pilot on competition 

between exchanges and off-exchange 

trading venues, including ATSs, which, 

as discussed in the baseline,883 execute 

approximately 14% of trading volume. 

Although the Pilot could temporarily 

affect the competition for order flow 

between exchanges and off-exchange 

trading venues, the Commission 

believes that the overall effects of the 

Pilot on this competition are unclear, 

because, as discussed in detail below, 

there are reasons why the Pilot may 

temporarily increase as well as decrease 

the order flow routed to off-exchange 

trading venues. 

A number of commenters argued that 

restricting exchange rebates and fees for 

stocks in the test Groups without 

placing similar restrictions on offexchange venues could place exchanges 

at a competitive disadvantage.884

Although the Commission 

acknowledges that the Pilot may 

potentially place exchanges at a 

competitive disadvantage relative to offexchange trading venues, the 

Commission believes that the overall 

effects of the Pilot on this competition 

would depend on how on-exchange 

liquidity is affected by the Pilot as well 

as the renegotiation costs that offexchange trading venues would incur in 

order to take advantage of the 

restrictions on exchange fees and 

rebates. For example, as discussed in 

detail above,885 ATSs sometimes 

negotiate bespoke agreements with 

individual subscribers for a bundle of 

services. If the costs of renegotiating 

these agreements are high, then offexchange trading venues may not be 

able to adjust their pricing models to 

take advantage of the exchange pricing 

restrictions, in which case competition 

between exchanges and off-exchange 

venues could be unaffected.886

Additionally, as discussed below, if offexchange renegotiation costs are high, 

some of the restrictions on transaction 

fees could give certain exchanges a 

competitive advantage relative to offexchange venues in attracting certain 

types of order flow. However, if offexchange renegotiation costs are small 

or the Pilot fee and rebate restrictions 

place certain exchanges at a 

disadvantage relative to the current 

pricing policies of some off-exchange 

trading venues, then the Pilot could 

affect competition between exchanges 

and off-exchange trading venues. 

Although the Commission 

acknowledges that the distribution of 

trading volume could change between 

exchanges and off-exchange trading 

venues, the Commission believes these 

changes are difficult to determine in 

advance and cannot predict ex ante 

whether these changes would increase 

or decrease exchange market share.887

As discussed above,888 the Commission 

lacks data on the current pricing 

schedules offered by off-exchange 

venues as well as information on how 

this affects the routing decisions of 

broker-dealers. The Commission also 

lacks information on how difficult it is 

for off-exchange trading venues to adjust 

their pricing schedules. Additionally, as 

discussed above,889 the Pilot’s effects on 

liquidity could be either positive or 

negative and vary across securities. 

Therefore, the Commission is unable to 

quantify or determine the overall effects 

that the Pilot will have on competition 

between exchanges and off-exchange 

trading venues. However, if competitive 

rebalancing among trading centers 

occurs as a result of the Pilot, it could 

provide information to the Commission 

about order routing decisions and 

execution quality to inform future 

policy actions. 

Commenter statements regarding the 

effects of the Pilot on competition 

between exchanges and off-exchange 

trading venues indicated that the Pilot 

could have different effects on the 

competition for marketable and nonmarketable order flow. In considering 

the comments, and as analyzed in the 

following sections, the Commission 

considered the differential impact 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5283 

890See Decimus Letter, at 5–6. 

891See supra Section IV.C.2.b.iv. 

892See supra Section IV.C.2.b.iv. 

893See id. 

894See, e.g., Magma Letter, at 2; Home Depot 

Letter, at 1. 

895See Securities Exchange Act Release No. 

76474 (Nov. 18, 2015), 80 FR 80998 (Dec. 28, 2015), 

81116–81117. See also Securities Exchange Act 

Release Nos. 83663 (July 18, 2018), 83 FR 38768 

(August 7, 2018), 38891–38892. 

896See supra Section IV.C.2.b.iv.2. 

897See id. 

898See supra Section IV.B.1.a and Section 

IV.B.1.b. 

899See, e.g., IEX Letter II, at 7, 8–9; TD 

Ameritrade Letter, at 7; Citi Letter, at 4; Decimus 

Letter, at 5–6. 

900See IEX Letter II, at 8. 

901See NYSE Letter II, at 12; NYSE Letter I, at 16. 

This commenter argued that market participants 

choose to send orders to off-exchange venues for 

reasons other than avoiding fees, such that simply 

lowering fees would not attract marketable order 

flow to exchanges. See NYSE Letter I, at 16. 

Another commenter noted that the Commission’s 

assertion that any potential degradation of the 

effective bid-ask spread due to lower or reduced 

rebates could be mitigated by lower access fees was 

‘‘not supported by empirical data or substantive 

analysis.’’ See Nasdaq Letter I, at 8–9. In response 

to these comments, the Commission notes that its 

belief is support by some theoretical studies that 

show that it is the net fees, i.e., the rebates plus fees, 

that affect trading costs. See e.g. Colliard, J.E. & 

Foucault, T. (2012). ‘‘Trading fees and efficiency in 

limit order markets.’’ Review of Financial Studies, 

Vol. 25 (11), 3389–3421 (available at: https://

academic.oup.com/rfs/article/25/11/3389/ 

1566107). Some empirical studies produce similar 

results. See, e.g. Malinova, K. & Park, A. (2015). 

‘‘Subsidizing Liquidity: The Impact of Make/Take 

Fees on Market Quality.’’ Journal of Finance, Vol 

Continued 

changes in exchange fees and rebates 

could have on the competition between 

exchanges and off-exchange trading 

venues for marketable and nonmarketable order flow. As the 

discussion above indicates, and as 

commenters point out, it is not clear 

how the Pilot will affect the competition 

for both marketable and non-marketable 

order flow.890 Additionally, since the 

impacts of the Pilot on liquidity may not 

be uniform across all securities,891 the 

effects of the Pilot on competition for 

marketable and non-marketable order 

flow may not be uniform across all 

securities. Therefore, as discussed 

above, the Commission is unable to 

quantitatively estimate how the Pilot 

could affect competition between 

exchanges and off-exchange trading 

venues to attract different types of order 

flow. In the sections below the 

Commission offers a qualitative 

discussion regarding how various effects 

of the Pilot could affect this 

competition. 

i. Marketable Order Flow 

The Pilot could increase or decrease 

the share of marketable order flow 

routed to off-exchange trading venues. 

This is reflected in the divergent views 

of commenters, who argue over the 

effects that reduced access fees and 

rebates could have on the share of 

marketable order flow routed to offexchange trading venues. In considering 

these comments, the Commission 

considered a number of ways the Pilot 

could potentially impact competition 

for marketable order flow, including: 

The impact of changes in liquidity, the 

direct impact of changes in access fees 

and rebates, the impact of changes in 

off-exchange fill rates, and the impact of 

the Order Protection Rule. 

Changes in liquidity caused by the 

Pilot could affect how much marketable 

order flow is directed to off-exchange 

trading venues. However, because the 

overall effects of the Pilot on liquidity 

could be positive or negative and vary 

across securities,892 the overall effects of 

changes in liquidity on the direction of 

marketable order flow are also unclear. 

Therefore, the Commission is unable to 

predict the overall effect that changes in 

liquidity caused by the Pilot will have 

on the competition for marketable order 

flow between exchanges and offexchange trading venues. 

A number of commenters argued that 

if the Pilot temporarily decreases 

liquidity in the test Groups due to the 

elimination or reduction of rebates,893

more order flow will likely be directed 

to off-exchange trading venues.894 As 

the Commission previously 

discussed,895 the competition between 

on and off exchange venues for order 

flow is characterized as providing a 

tradeoff between immediacy and 

execution quality. Off exchange venues 

tend to get better trade execution on 

average than lit exchanges, largely 

because they trade between the 

prevailing NBBO, but at the cost of not 

being able to guarantee that a 

transaction will occur. Thus, the impact 

of the Pilot on the competition between 

exchanges and off exchange venues for 

marketable order flow will depend on 

how the Pilot impacts execution quality 

and the cost of immediacy on exchanges 

compared to the potential for price 

improvement and the chance of filling 

an order at an off-exchange venue. 

If a reduction in rebates causes quoted 

spreads to widen,896 it could increase 

the attractiveness of off-exchange price 

improvement and would likely cause 

more institutional or proprietary 

marketable order flow to be directed to 

off-exchange ATSs. Additionally, if 

spreads widen, broker-dealers would 

likely be incentivized to internalize 

more marketable institutional order 

flow. If spreads do not widen, a 

decrease in quoted depth could also 

result in more marketable orders being 

routed off-exchange. If quoted depth 

decreases,897 and if market participants 

believe that off-exchange venues offer 

improved execution, it could cause 

more large marketable orders to get 

routed to ATSs or be internalized, in 

order to avoid the increased costs of 

walking up the book. Alternatively, if 

liquidity improves, it could reduce the 

cost of immediacy and the benefits of 

off-exchange price improvement, which 

could result in more marketable order 

flow being routed to exchanges. 

Changes in exchange access fees and 

rebates for stocks in the test groups 

could also directly affect whether some 

types of marketable order flow are 

routed to exchanges or off-exchange 

trading venues. However, as discussed 

in detail above,898 the Commission 

currently faces limitations in 

determining the effects that exchange 

transaction fees and rebates have on 

order routing decisions. The 

Commission is unable to quantify how 

changes in exchange transaction fees 

and rebates for stocks in the test groups 

will affect the routing decisions for 

marketable order flow between 

exchanges and off-exchange trading 

venues. Therefore, the Commission is 

unable to determine in advance what 

effect changes in exchange transaction 

fees and rebates caused by the Pilot will 

have on the competition for marketable 

order flow. One of the goals of the Pilot 

is to provide the Commission with data 

so that it can better evaluate these 

effects. 

If renegotiation costs are too high for 

off-exchange trading venues to adjust 

their pricing schedules, lower 

transaction fees on maker-taker 

exchanges could cause some marketable 

order flow that would be routed to ATSs 

and other off-exchange trading centers 

to instead be routed to these exchanges. 

For example, if the equilibrium 

transaction fee in Test Group 2 is below 

$0.0030 in the absence of rebates, 

exchanges may be able to draw order 

flow away from off-exchange trading 

centers. 

Several commenters agreed that lower 

access fees could induce some market 

participants to bring order flow back to 

exchanges.899 One of these commenters 

stated that ‘‘the potential that 

substantially lower take fees in test 

group securities will counter any 

potential loss of rebate-driven 

volume.’’ 900 One commenter disagreed 

and noted that lowering fees would not 

attract marketable order flow to 

exchanges.901 This commenter noted 

5284 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

70(5), 509–36 (available at: https://

onlinelibrary.wiley.com/doi/10.1111/jofi.12230). 

According to this literature, the effects of a 

reduction in rebates could potentially be offset by 

lower transaction fees. The Commission also notes 

that some commenters acknowledged this could be 

a potential effect of lower access fees. See supra 

note 23. However, other academic literature shows 

that in the presence of a fixed tick size, changes in 

fees and rebates can still affect trading volume, even 

in the absence of a change in the total fee. See e.g. 

Foucault, T., Kadan, O., & Kandel, E. (2013). 

‘‘Liquidity Cycles and Make/Take Fees in Electronic 

Markets.’’ Journal of Finance, Vol. 68(1), 299–341 

(available at: https://onlinelibrary.wiley.com/doi/ 

10.1111/j.1540-6261.2012.01801.x). According to 

this literature, a reduction in transaction fees may 

not fully offset the effects of an equal reduction in 

rebates. Given the mixed results from the academic 

literature and the disagreement among commenters, 

the Commission believes it is possible that lower 

transaction fees could potentially reduce some of 

the effects of an increase in effective bid-ask 

spreads caused by a reduction rebates, although the 

magnitude of this reduction is uncertain. The 

Commission believes that the Pilot would generate 

data and analysis that would help the Commission 

better understand the cumulative effects of changes 

in transactions fees and rebates on spreads and 

trading costs. See supra Section IV.C.1.a.i. 

902See NYSE Letter II, at 12. 

903See Decimus Letter, at 5–6. 

904See supra Section IV.A.1 (Market Failure at 

the Broker-Dealer Level). 

905See infra Section IV.D.2.a.ii (Nonmarketable 

Order Flow). 

906See Healthy Markets Letter, at 10. Another 

commenter also emphasized that exchanges have 

the advantage of a protected quote and that they 

have an advantage in receiving orders that require 

immediate execution. See IEX Letter II, at 8. 

907See supra Section IV.B.2.a. 

908See Battalio Equity Market Study, supra note 

530. 

909See supra Section IV.B.2.b. 

910See supra Section IV.C.2.b.iv. 

911See id. 

that if high access fees drove market 

participants to route orders to offexchange trading centers, then lower 

cost venues, such as NYSE American or 

EDGA would have larger market 

share.902 Another commenter disagreed 

and argued that ‘‘the cost of accessing lit 

markets in the form of access fees on 

securities exchanges has been one of the 

key drivers behind the continuing 

proliferation of non-exchange trading 

venues.’’ 903 Given the disagreement 

among commenters, the Commission 

believes it is possible that lower 

transaction fees could potentially result 

in more marketable order flow being 

routed to exchanges. However, as 

discussed above, the Commission faces 

limitations in quantifying the effects 

that lower exchange transaction fees 

will have on marketable order flow and 

is unable to determine how likely this 

is to occur. One of the goals of the Pilot 

is to provide the Commission with data 

so that it can better evaluate these 

effects. 

To the extent that conflicts of interest 

affect order routing,904 lower rebates on 

taker-maker venues could potentially 

increase the off-exchange share of 

trading volume by causing brokerdealers to increase the internalization of 

smaller marketable orders, even if onexchange liquidity or execution quality 

does not change. 

Changes in the fill rates of orders at 

off-exchange trading venues could also 

affect how much marketable order flow 

is directed to off-exchange trading 

venues. However, there are reasons the 

Pilot could increase or decrease the fill 

rates of orders at off-exchange trading 

venues. Therefore, the effect these 

changes will have on the competition 

for marketable order flow is uncertain. 

As discussed below,905 there are 

reasons the Pilot could cause an 

increase or decrease in the nonmarketable order flow routed to offexchange trading venues. If there is an 

increase in the non-marketable order 

flow routed to off-exchange trading 

venues, then the fill rates of marketable 

orders routed to off-exchange trading 

venues would increase, which could 

cause more marketable order flow to be 

directed to off-exchange trading venues. 

Alternatively, a decrease in the nonmarketable order flow routed to offexchange trading venues would cause a 

decrease in the fill rate for marketable 

orders, which would cause less 

marketable order flow to be directed to 

off-exchange trading venues. 

One factor that could reduce the 

chance of marketable orders being 

routed away from exchanges is that 

exchanges have a protected quote. One 

commenter believed that any offexchange shifts are likely to be limited 

because these trading centers do not 

have a protected quote, and any shifts 

that would occur would still need to be 

consistent with best execution and not 

just redistribution to account for market 

participants’ cost considerations.906

However, given that 34% of all 

transaction volume occurs off-exchange 

at trading venues without a protected 

quote, it is unclear how much effect a 

protected quote will have on this 

competition.907

The Commission does not expect the 

Pilot will have a significant effect on the 

competition for retail marketable orders. 

Normally, these orders are internalized 

by off-exchange wholesale brokerdealers who pay retail broker-dealers for 

the order flow.908 Since the Pilot does 

not restrict these rebates, the 

Commission does not expect the Pilot to 

affect the routing of marketable retail 

order flow. 

ii. Nonmarketable Order Flow 

The Pilot could increase or decrease 

the share of non-marketable order flow 

routed to off-exchange trading venues. 

This is reflected in the divergent views 

of commenters, who argue over the 

effects that reduced rebates could have 

on the share of non-marketable order 

flow routed to off-exchange trading 

venues. In considering these comments, 

and as discussed below, the 

Commission considered factors that 

could affect the decision to supply 

liquidity on exchanges or at offexchange trading venues. Furthermore, 

in considering comments, the 

Commission also considered a number 

of ways the Pilot could potentially 

impact competition for non-marketable 

order flow, including: The impact of 

changes in rebates, the impact of 

changes in liquidity, and the impact of 

changes in off-exchange fill rates. 

The decision to submit a nonmarketable order on-exchange or route it 

to an off-exchange trading venue is a 

trade-off between the profits earned 

from providing liquidity on-exchange 

compared to the expected execution 

price and probability of having the order 

filled off-exchange. Higher exchange 

rebates, wider spreads, higher onexchange fill rates (shorter on-exchange 

queue lengths), and lower off-exchange 

fill rates would all increase the chance 

of a trader deciding to provide liquidity 

on-exchange compared to routing an 

order to an off-exchange venue.909 The 

impact of the Pilot on the competition 

between exchanges and off-exchange 

venues for non-marketable order flow 

will depend on how the Pilot affects 

these dimensions. 

The Commission believes that the 

overall effect on the competition 

between exchanges and off-exchange 

venues for non-marketable order flow 

from a reduction in rebates for stocks in 

the test groups is unclear, because a 

reduction in rebates could result in 

either an increase or decrease in 

liquidity.910 In theory, a reduction in 

exchange rebates without any changes 

in liquidity or fill rates would likely 

cause more non-marketable order flow 

to be routed to off-exchange trading 

venues. However, the Commission 

believes that this event is unlikely, 

because a reduction in exchange rebates 

and transaction fees could also affect 

liquidity. Since a reduction in exchange 

rebates and transaction fees could cause 

liquidity to increase or decrease,911 it 

could also cause the share of nonmarketable order flow routed to offexchange trading venues to increase or 

decrease. 

Several commenters voiced concerns 

that reduced rebates could cause 

liquidity to migrate from exchanges to 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5285 

912See, e.g., Cboe Letter I, at 7–8; Themis Trading 

Letter I, at 1; MFS Investment Letter, at 2; 

Wellington Management Letter, at 1; FIA Letter, at 

3–4; ASA Letter, at 3; Era Letter, at 2; Knight-Swift 

Letter, at 2. One of the commenters suggested the 

Commission should evaluate how disparate 

treatment of liquidity provision between exchanges 

and non-exchange trading centers could affect 

market participants’ incentives to compete for 

displayed liquidity. See Mastercard Letter, at 2. 

Another of the commenters also noted that the 

competitive balance between exchanges and offexchange trading centers is uneven due to 

differences in regulatory oversight, including filings 

of fee changes; the ability to assess different fees to 

different customers; and the ability to offer subpenny price improvements. See Cboe Letter I, at 8. 

913See IEX Letter II, at 8. One commenter 

disagreed and noted that although ‘‘few ATSs 

currently use maker-taker fee structures, but they 

have done so in the past and would be incentivized 

to do so in the future’’ and that ‘‘restricting fee 

structures on exchanges only would encourage 

those off-exchange venues to expand their use of 

order-routing incentives to gain a competitive 

advantage.’’ See NYSE Letter I, at 4–5 

914 It could also result in market makers reducing 

their overall submission of non-marketable orders 

to supply liquidity, if it is the case that rebates 

encourage market makers to engage in excessive 

intermediation. This in turn could result in a 

reduction in trading volume. See supra note 823 

and accompanying text. 

915See supra Section IV.C.2.b.iv. 

916 It could incentivize institutional or proprietary 

traders to substitute their marketable orders with 

nonmarketable limit orders on maker-taker 

exchanges. 

917See supra Section IV.C.2.b.iv. 

918See supra Section IV.D.2.a.i. 

919See id. 

920As discussed in detail below, the Commission 

believes retail non-marketable orders for securities 

in Test Group 1 will still be routed to maker-taker 

exchanges. The restrictions on rebates in Test 

Group 2 may cause some of these orders to be 

routed to taker-maker venues, if they result in better 

execution quality. See infra Section IV.D.2.b. 

921See supra Section IV.C.2.b.i. 

922One commenter agreed with this view and 

suggested that even though the fee cap for the 

Proposed Test Group 1 was half of the current level, 

‘‘there was still significant enough differentiation 

available in the fee structure that trading may not 

appear materially different than the control group.’’ 

See Credit Suisse Commentary, at 3. However, 

another commenter argued that the fee cap in 

Proposed Test Group 1 would reduce the 

exchange’s ability to compete on fees by 50%. See 

Cboe Letter I, at 16. 

non-exchange trading centers, because 

exchanges will be restricted from 

providing rebates as incentives for 

liquidity provision, whereas nonexchange trading centers could freely 

offer rebates and other incentives to 

draw orders away from exchanges.912 In 

contrast, several commenters disagreed 

and noted that ATSs generally do not 

pay rebates and tend to charge lower 

fees than the large exchanges,913 and 

that such a pricing model would make 

it challenging for ATSs to start 

providing rebates sufficiently large 

enough to draw volume from exchanges. 

If rebates incentivize liquidity provision 

by providing extra revenue to liquidity 

providers, a reduction in rebates for 

stocks in the Test Groups could 

incentivize them to divert some of their 

non-marketable liquidity providing 

orders from maker-taker exchanges to 

off-exchange trading venues.914

However, this decision could also be 

affected by how the rebate reductions 

impacted other dimensions of liquidity, 

so the overall effect is difficult to 

determine. 

As discussed above, changes in 

liquidity could also affect the decision 

regarding where to route nonmarketable limit orders. Since the 

effects of the Pilot on liquidity could be 

either positive or negative, The 

Commission is uncertain how these 

changes will affect the competition for 

non-marketable order flow between 

exchanges and off-exchange trading 

venues. If on-exchange liquidity 

worsens and bid-ask spreads widen or 

quoted depth decreases,915 then 

institutional traders could direct more 

of their non-marketable orders to supply 

liquidity on maker-taker exchanges, 

either because realized spreads 

increased or because the queue position 

and fill rates of their on-exchange 

nonmarketable orders increased.916

Alternatively, if liquidity improves and 

either bid-ask spreads tighten or quoted 

depth increases,917 institutional traders 

could direct more their non-marketable 

orders to off-exchanges venues, because 

the profits earned from providing 

liquidity decreased. 

Change in the rate that orders are 

filled off-exchange could also cause 

changes in the routing of nonmarketable orders between exchanges 

and off-exchange trading venues. 

However, as discussed below, the effect 

of the Pilot on the fill rate of offexchange non-marketable orders is 

unclear. Therefore it is difficult to 

determine the Pilot’s effect on the 

routing of non-marketable orders. 

Changes in the rates at which nonmarketable orders are filled offexchange depend on how the routing of 

marketable order flow to off-exchange 

trading venues changes. If a reduction in 

fees causes more marketable orders to be 

routed to exchanges 918 it could reduce 

the fill rate of off-exchange orders, 

which could cause institutions or 

proprietary traders to substitute some of 

their off-exchange orders with nonmarketable orders to supply liquidity on 

maker-taker exchanges. Alternatively, if 

the Pilot causes more marketable orders 

to be routed to off-exchange trading 

venues,919 it could increase offexchange fill rates, which could cause 

more orders that would have supplied 

liquidity on exchange to be routed to 

off-exchange venues. However, as 

discussed above, the Commission is 

unclear whether the share of marketable 

order flow routed to off-exchange 

trading venues will increase or decrease. 

The Commission does not expect the 

Pilot will have a significant effect on the 

competition between exchanges and offexchange trading venues for retail nonmarketable orders. Often, these orders 

are routed by retail broker-dealers to 

maker-taker exchanges or to wholesale 

broker-dealers who pay retail brokerdealers for the order flow. The 

Commission believes that, despite the 

reduction in rebates, these orders will 

still be routed to exchanges or to 

wholesale broker-dealers who pay them 

for their order flow.920

b. Competition Between Exchanges 

This section discusses the potential 

effects of the Pilot on competition 

between exchanges that use transactionbased fee and rebate pricing models. 

Although the Pilot could temporarily 

affect the competition for order flow 

between exchanges, the Commission 

believes that many of the effects of the 

Pilot on this competition, including the 

expected redistribution of market share 

among the existing exchanges, are 

unclear and difficult to determine in 

advance. This is reflected in the 

divergent views of commenters, who 

disagree about the effects that reduced 

rebates and transaction fees could have 

on competition between different types 

of exchanges. 

Exchanges that pay fees and remit 

rebates frequently revise their fee 

schedules in order to remain 

competitive and to attract order flow. 

The impact of the rule on competition 

depends on the extent to which the fee 

cap and prohibition on rebates or 

Linked Pricing restrict exchanges’ 

transaction-based fee strategies. As 

discussed in detail above,921 the 

Commission believes that the Pilot, 

while changing either transaction fees or 

rebates on certain subsets of securities, 

could leave the margins that exchanges 

obtain from transaction-based pricing 

models unchanged. On the one hand, 

this could preserve the current state of 

competition among exchanges in the 

market for those securities. For instance, 

it may be possible for exchanges to 

modify fee structures in a way that 

leaves margins unchanged and does not 

impact competition between 

exchanges.922

On the other hand, the restrictions on 

fees and rebates could also alter the 

competitive dynamics between different 

exchanges. For example, the restrictions 

on fees and rebates could make 

5286 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

923See supra Section IV.C.2.b.i. 

924See id. 

925See Credit Suisse Commentary, at 4. 

926See supra note 823 and accompanying text. 

927See supra Section IV.D.2.a. 

928See supra Section IV.C.2.b.iv. 

929See id. 

930See supra Section IV.C.1.b. 

931See supra Section IV.D.2.a. 

932See, e.g., Healthy Markets Letter I, at 27 

(noting that exchanges use fees collected to pay 

rebates). 

933For NMS stocks included in Test Group 2 

order flow incentives would be substantially 

reduced, particularly any new inducements that 

provide a discount or incentive on one side of the 

market that is linked to activity on the opposite side 

of the market. 

934See supra Section IV.B.2.a. 

935See the discussion of a liquidity externality in 

the Proposing Release, supra note 2, at 13042. 

936See id. 

937One commenter suggested that the effects of 

the Pilot may be permanent. See NYSE Letter I, at 

4, 8. 

938Academic studies suggest a number of new 

exchanges emerged specifically to take advantage of 

maker-taker and taker-maker pricing models. See, 

e.g., Angel, Harris & Spatt, supra note 530. 

However, some commenters suggested that the loss 

of fee differentiation would lead to an increase in 

venues as exchanges try to make up for lost revenue 

through other means. See, e.g., Fidelity Letter, at 8; 

Cboe Letter I, at 16–17. 

939One commenter said that restricting 

transaction fees would disproportionally hurt small 

exchanges because ‘‘large exchanges have 

diversified revenues away from transaction fees.’’ 

See Magma Letter, at 2. 

940One commenter believed that the loss in fee 

differentiation could lead to consolidation and 

fewer venues overall. See Credit Suisse 

Commentary, at 5. 

941See supra Section IV.C.2.b.i (Loss of 

Exchanges’ Fee Revenue). 

exchanges more similar in Test Group 

stocks.923 This could alter competition 

between exchanges by causing market 

participants to focus less on differences 

in fees and rebates and more on other 

metrics, such as execution quality when 

deciding to which exchanges to route 

order flow. 

As discussed in detail above,924 the 

Commission cannot ex ante predict 

whether the Pilot will increase or 

decrease trading volume on certain 

exchanges. Consequently, the 

Commission acknowledges significant 

uncertainty with respect to the effect of 

the Pilot on exchange competition. 

One commenter suggested that 

‘‘inverted venues would likely increase 

market share as maker rebates disappear 

and the fee differential between venues 

declines for market makers, lowering 

the relative cost for queue priority.’’ 925

The Commission acknowledges that it is 

possible that a reduction in rebates in 

Test Group stocks could make makertaker exchanges less competitive for 

non-marketable orders and cause 

liquidity provision to migrate to 

inverted venues. However, if a 

reduction in rebates reduces excessive 

intermediation,926 causes market makers 

to shift their liquidity provision offexchange,927 or worsens liquidity,928

then institutional or proprietary traders’ 

non-marketable orders could get better 

queue position and have higher fill rates 

on maker-taker venues, which could 

attract non-marketable order flow from 

taker-maker venues, where maker 

participants pay fees for better queue 

positions and fill rates. 

If the Pilot causes changes in liquidity 

between exchanges in Test Group 

stocks,929 it could affect the decision 

where to route marketable order flow. If 

an exchange experiences an 

improvement/decline in liquidity it may 

also experience an increase/decline in 

marketable order flow, especially since 

lower differences in fees/rebates 

between exchanges could reduce brokerdealer conflicts of interest and make 

them rely more on execution quality 

when deciding where to route 

marketable orders.930 Additionally, it is 

also possible that lower transaction fees 

on maker-taker venues could make these 

venues more competitive and better able 

to attract marketable order flow in Test 

Group stocks from inverted venues. 

The Pilot could also alter competition 

between exchanges by causing 

exchanges to choose to compete less 

intensively for order flow in one Test 

Group, and instead focus on stocks and 

ETPs in the other Test Group. Some of 

the shortfall in the competition for order 

flow for this subset of securities could 

be filled by off-exchange trading 

centers.931 Alternatively, exchanges may 

revise pricing strategies for stocks in 

other groups, choosing to implicitly 

subsidize rebates for stocks in Test 

Group 1 using fees from Control Group 

stocks.932 This may increase 

competition for order flow in one Test 

Group while reducing it in the other. In 

the presence of tighter restrictions on 

transaction-based fees during the Pilot 

Period, exchanges could also compete in 

other ways to attract trading volume 

(e.g., discounts on connectivity fees or 

increased volume discounts), although 

the Commission believes that for Test 

Group 1 the ability to offer meaningful 

volume discounts would be limited in 

light of the $0.0010 fee cap in that 

group.933

The Pilot also could affect 

competition between large and small 

exchanges. The restrictions on rebates 

resulting from the Pilot could harm 

smaller exchanges that may be 

competing by paying large rebates rather 

than by producing better prices or 

execution quality.934 As discussed in 

the Proposal,935 liquidity tends to 

consolidate. Therefore, if smaller 

exchanges are unable to pay larger 

rebates in test stocks, they may lose 

order flow to larger, more liquid 

exchanges. To the extent that increased 

order flow in a security directed to a 

particular venue encourages brokerdealers to route more orders for that 

security to the venue, a liquidity 

externality may develop, making the 

venue the preferred routing destination 

for all orders.936 Although these effects 

would likely last only for the duration 

of the Pilot, depending on the extent of 

the liquidity externalities, smaller 

exchanges could experience long-lasting 

competitive effects, such as a reduction 

in trading volume that continues after 

the expiration of the Pilot.937 The Pilot 

also could temporarily discourage entry 

of new exchanges that might otherwise 

emerge to take advantage of the makertaker and taker-maker pricing 

models.938

While the consolidation of liquidity 

may benefit market participants, it may 

also make it difficult for trading centers 

with low volumes in particular 

securities to compete with trading 

centers that represent liquidity centers 

in these securities.939 In theory, this 

could lead to consolidation or exit by 

small exchanges as a result of the 

Pilot.940 However, the Commission 

believes that either of those events is 

unlikely because the anticipated 

revenue shortfall, as discussed above,941

would be for a limited duration and 

would not be significant enough to 

cause this result. 

The Commission recognizes that the 

potential temporary competitive 

impacts stemming from the Pilot would 

generally depend on the exposure of 

each trading center to each Test Group 

and the Control Group of NMS stocks, 

because the constraints on fees and 

rebates apply differently to each group. 

For instance, if a high portion of an 

exchange’s volume was derived from 

stocks in Test Group 2, it may be at a 

particular competitive disadvantage 

relative to an exchange that served 

markets across all groups, because the 

prohibition on rebates and Linked 

Pricing applicable to Test Group 2 

would apply to a higher proportion of 

its trading volume. However, the 

Commission believes that, given its aim 

of producing representative groups of 

stocks and ETPs for the purposes of the 

Pilot, trading centers are not likely to be 

substantially more exposed to NMS 

stocks in any one group. 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5287 

942See ASA Letter, at 2. 

943 Id. at 2–3. 

944See supra Section V.C.2.b.ii (Broker-Dealer 

Systems Costs). 

945See id. 

946See supra note 805. 

947See, e.g., Anixter Letter, at 1; STANY Letter, 

at 2; NYSE Letter, at 2; Johnson Letter, at 1; Cott 

Letter, at 1; P&G Letter, at 1; Nasdaq Letter I, at 8– 

9. One of these commenters ‘‘urge[d] the 

Commission to further analyze and study the 

potential impact of the Transaction Fee Pilot on 

issuers and their securities (as well as investors in 

those securities), including the impact on 

competition between issuers in the pilot test groups 

and those in the control group.’’ See Anixter Letter, 

at 1. Another commenter argued that the 

Commission was ‘‘treating all issuers the same 

without consideration for the very significant 

differences in how the securities of different sized 

and priced companies trade.’’ See Nasdaq Letter I, 

at 8. 

948See infra Section IV.D.3 (Capital Formation). 

949See id. 

950See Nasdaq Letter I, at 10; Invesco Letter, at 

2 (discussing the competitive effects for ETPs). 

951See NorthWestern Letter, at 2. 

952See Ethan Allen Letter, at 1. See also 

McDermott Letter, at 1; ProAssurance Letter, at 1; 

Era Letter, at 2; Avangrid Letter, at 1–2. 

953See NYSE Letter I, at 6–7; Apache Letter, at 

2; Mastercard Letter, at 2; Era Letter, at 2. 

954See Nasdaq Letter I, at 8–9. 

955See supra Section IV.C.2.b.iv. 

956See infra Section IV.D.3 (Capital Formation). 

957See, e.g., Maksimovic, V. (1995). ‘‘Financial 

Structure and Product Market Competition.’’ Ch. 27 

in Handbooks in Operations Research and 

Management Science, Vol. 9, 887–920 (available at: 

https://www.sciencedirect.com/science/article/abs/ 

pii/S0927050705800714) and Campello, M. (2006). 

‘‘Debt Financing: Does It Boost or Hurt Firm 

Performance in Product Markets?’’ Journal of 

Financial Economics, 82(1), 135–172 (available at: 

https://www.sciencedirect.com/science/article/pii/ 

S0304405X05001777) (hereafter ‘‘Campello 

(2006)’’). 

958See supra Section IV.C.2.b.iv. 

959See infra Section IV.D.3 (Capital Formation). 

960One commenter agreed and argued that ‘‘there 

simply is no evidence that the Pilot will cause any 

imminent danger to any issuer’s stock price or 

liquidity.’’ See Better Markets Letter, at 3. 

c. Competition Between Broker-Dealers 

The Pilot also could affect 

competition between broker-dealers. 

One commenter believed that, due to 

differences in broker-dealer business 

models, any reduction in rebate 

incentives or other forms of payment for 

order flow will increase transaction 

costs, and that large broker-dealers 

would be better able to adapt to 

increased trading costs and rebate 

reductions than small or middle-market 

broker-dealers.942 The commenter 

believed that the Pilot would 

disproportionately advantage large 

broker-dealers who specialize in low 

touch execution or own ATSs because 

more customers and order flow would 

migrate to the largest brokers, and that 

the ‘‘Commission should and is required 

to undertake a rigorous cost-benefit 

analysis to justify any policy that favors 

one group of Brokers over another.’’ 943

The Commission believes that the 

Pilot could differentially affect small 

and large broker-dealers, but differences 

in the potential compliance costs they 

face make it unclear whether the Pilot 

will disproportionately advantage large 

broker-dealers over small or middlemarket broker-dealers. Although larger 

broker-dealers may possess economies 

of scale which may enable them adapt 

better to changes in fees and rebates, 

they are also more likely to be members 

of exchanges and subject to the 

compliance costs of adjusting their 

systems due to changes in exchange fee 

and rebate schedules discussed 

above.944 As of December 2017, of the 

approximately 3,860 broker-dealers 

registered with the Commission, only 

397 are listed as having memberships 

with at least one exchange and would 

encompass the set of executing brokerdealers that would be most affected by 

the Pilot. Therefore, it is likely that 

many small or middle-market brokerdealers will not have to bear the 

compliance costs discussed above.945

Additionally, since larger brokerdealers are more likely to be subject to 

these compliance costs, they may need 

to increase their commission rates more 

than smaller broker-dealers to 

compensate for these increased costs. 

This could potentially offset any 

advantage that larger broker-dealers may 

possess in being able to absorb any 

revenue loss caused by a reduction in 

payment for order flow, such as by 

being able to offer smaller increases in 

commissions compared to smaller 

broker-dealers. However, the 

Commission cannot quantify this 

difference, because it lacks sufficient 

data on the differences in commission 

rates between large and small brokerdealers.946

d. Competition Between Issuers 

A number of commenters noted that 

the Commission, in the Proposing 

Release, did not discuss the competitive 

effects to issuers (common stocks) from 

inclusion in various Test Groups of the 

Pilot.947 While the Pilot could 

potentially affect product market 

competition between issuers that 

compete in the same product market by 

affecting their ability to raise capital,948

the Commission does not believe that 

this is likely to occur. Since the 

Commission does not believe that the 

Pilot will have a significant effect on the 

ability of issuers to raise capital,949 the 

Commission does not believe the Pilot 

will have a significant effect on product 

market competition between issuers. 

Some commenters argued that the 

Pilot could inadvertently pick ‘‘winners 

and losers’’ through the selection of 

securities to Test Groups.950 One 

commenter believed that issuers in 

certain Test Groups could become ‘‘less 

attractive investments than control 

group issuers’’ 951 while another thought 

this could ‘‘skew the competitive 

dynamic between issuers and impact 

the ability of the affected issuers to raise 

capital.’’ 952 They argue that among 

securities with similar characteristics, 

securities that can offer higher rebates 

will attract more liquidity and trading 

volume at the expense of securities with 

lower rebates. Several commenters 

argued that issuers included in the test 

groups with reduced access fees or 

rebates would experience wider 

spreads, which would put them at a 

competitive disadvantage compared to 

peer firms in the control group by 

making it more expensive for them to 

engage in secondary offerings or 

conduct share repurchase programs.953

One commenter argued that this would 

disproportionately affect ‘‘small to 

medium issuers’’ where ‘‘[l]iquidity 

rebates can be critical . . . to motivate 

market makers to support the stock with 

aggressive and actionable 

quotations.’’ 954 Although some 

securities may experience changes in 

liquidity as a result of the Pilot,955 as 

discussed in detail below,956 the 

Commission does not believe that 

issuers, including small and midcapitalization issuers, will experience 

significant increases in the cost of 

capital as a result of the Pilot. 

However, if the Pilot does 

differentially affect the cost of firms in 

the same product market to raise capital, 

it could affect product market 

competition by making it more difficult 

for the firms that experienced an 

increase in capital costs to compete. 

While the Commission acknowledges 

that theoretical and empirical studies 

suggest that an increase in costs of 

capital can affect product market 

competition,957 the Commission does 

not believe the Pilot will have such an 

effect on product market competition 

between issuers. While the Commission 

acknowledges that some issuers may 

observe a widening of spreads and 

possible reductions in liquidity 

provision,958 as discussed below,959 the 

Commission does not believe that the 

Pilot will have a significant effect on 

capital formation for issuers.960

Therefore, the Commission does not 

believe the Pilot will have a significant 

effect on product market competition 

between issuers. Furthermore, the Pilot 

will allow the Commission to obtain 

data to be able to analyze the impact of 

5288 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

961A number of commenters stated concerns that 

the Commission had not fully considered the 

competitive effects on ETPs resulting from the Pilot. 

See, e.g., NYSE Letter I, at 7; ICI Letter I, at 4; State 

Street Letter, at 3; STA Letter, at 4; Schwab Letter, 

at 3; STANY Letter, at 4; Clearpool Letter, at 7–8; 

Cboe Letter I, at 17–18; Nuveen Letter, at 1,3; 

BlackRock Letter, at 1–2; Fidelity Letter, at 9; 

SIFMA Letter, at 4–5; Credit Suisse Commentary, at 

6; Healthy Markets Letter II, at 8; Oppenheimer 

Letter, at 3; ICI Letter II, at 5; Nasdaq Letter I, at 

8. 

962See supra Section IV.C.2.b.iv.2. 

963For example, three ETFs that track the S&P 

500 Index have expense ratios of 9 bps (SPY), 5 bps 

(IVV), and 4 bps (VOO). On a $10,000 holding over 

a year, this results in fees of $9, $5, and $4, 

respectively, whereas on a 100-share trade, a 

widening of spreads by one tick would result in a 

cost of $1. 

964See supra Section IV.C.2.b.iv. 

965A decline in an ETP’s liquidity could also 

cause demand to migrate to another type of 

investment vehicle, such as a mutual fund, that 

follows the same investment strategy. 

966One commenter noted that ETPs in test groups 

with significant rebate reductions or restrictions 

could be disadvantaged competitively to similar 

ETPs not subject to changes to rebates, and because 

of the nature of ETPs, may lose market share to their 

competitors. See Nasdaq Letter I, at 8. Many 

commenters agreed with this argument. See ICI 

Letter I, at 4; MFS Letter, at 1; Nuveen Letter, at 2; 

FIA Letter, at 4; SIFMA Letter, at 4–5; Issuer 

Network Letter I, at 3; Schwab Letter, at 3; Fidelity 

Letter, at 9; Invesco Letter, at 2; State Street Letter, 

at 3; Oppenheimer Letter, at 3; Clearpool Letter, at 

7–8; Angel Letter I, at 2; STANY Letter, at 4; 

Healthy Markets Letter I, at 11; Cboe Letter I, at 17; 

NYSE Letter I, at 7; Morgan Stanley Letter, at 3–4; 

BlackRock Letter, at 1–2. One commenter believed 

that the Pilot could ‘‘unintentionally advantage 

ETFs in the lower fee group.’’ Credit Suisse 

Commentary, at 6. 

967See supra Section IV.B.2.d (Market for Assets 

Under Management). 

968See Vanguard Letter, at 2. Many commenters 

believed that ETPs should only be included in the 

Pilot if an alternative design was implemented for 

ETPs, such a placing similar ETPs in the same 

group or rotating ETPs between groups. See supra 

Section II.B.3.b and infra Section IV.E.5.h for a 

summary of these comments and discussions of the 

costs and benefits of alternative Pilot designs for 

ETPs. 

969See Nasdaq Letter I, at 8. 

970See id. One commenter noted that 477 ETPs 

trade less than 2,000 shares per day, while 234 

trade between 2,000 and 5,000 shares per day. In 

aggregate, these ETPs have approximately $32 

billion in AUM, and the Pilot could adversely 

impact liquidity provision to these names leading 

to unintended investor harm. See Virtu Letter, at 7. 

971See supra Section IV.C.2.b.iv. 972See id. 973ETPs might not hold all of the securities in the 

index that they track. ETPs that track similar 

indexes may hold different underlying securities in 

their representative portfolios. 

changes to fees and rebates and how 

those changes affect a myriad of issues, 

including their impact on competition 

between issuers. 

e. Competition Between ETPs 

The Pilot may also impact the 

competitive dynamics between ETPs.961

Although some ETPs could potentially 

be harmed by the Pilot’s effect on this 

competition, there is uncertainty 

regarding the Pilot’s effect on the 

liquidity of ETPs and therefore on 

competition between ETPs.962

Unlike common stocks, whereby 

trading and investing in those securities 

is likely driven by firm-specific 

characteristics, ETPs with similar 

investment strategies may be more 

substitutable. For example, some ETPs 

may follow the same underlying index, 

and only differ in expense ratios, 

trading characteristics, and in some 

cases, tracking error. Although some of 

these characteristics may be meaningful 

distinctions for long-term investors, 

such as expense ratios, other 

characteristics, such as trading 

characteristics, including transaction 

costs, are likely to be meaningful to 

market participants that trade rather 

than invest in some ETPs.963 One 

concern is that changes in liquidity 

between similar ETPs in different Pilot 

groups could have an impact on 

competition by harming ETPs that 

experience a decline in liquidity.964 A 

decline in ETP liquidity could affect 

competition by causing trading volume 

(demand) to migrate from an ETP that 

experienced a decline in liquidity to a 

nearly identical ETP in another Pilot 

group that might have experienced an 

improvement in liquidity.965 For 

example, ETPs that are subject to higher 

rebates may benefit and attract more 

liquidity and trading volume at the 

expense of similar ETPs in different Test 

Groups that are restricted to offering 

lower rebates.966 A decrease/increase in 

secondary market demand for an ETP 

could cause a decrease/increase in the 

total assets under management of the 

ETP’s sponsor by causing authorized 

participants to redeem/create creation 

units of ETP shares in order to take 

advantage of arbitrage opportunities in 

the secondary market.967 However, one 

commenter (itself an ETP sponsor) 

noted that the competitive effects for 

ETPs would likely be temporary and 

minimal, and would have little effect on 

investor behavior; therefore, the benefits 

of including ETPs in the Pilot outweigh 

the potential costs of competitive 

impacts for ETPs.968

One commenter stated that these 

competitive effects are likely to be more 

challenging for small or less liquid ETPs 

that rely on ‘‘market maker support and 

require those same firms to provide seed 

capital (e.g., capital investments).’’ 969

These commenters raised concerns that 

reductions or prohibitions on rebates in 

certain Test Groups could exacerbate 

the anticompetitive effects for the small, 

less liquid ETPs in these programs by 

causing degradation in liquidity 

provision for these ETPs.970

The Commission acknowledges that 

the Pilot could potentially alter the 

competitive dynamics between and 

demand for similar ETPs that are placed 

in different Test and Control groups. 

The Pilot could inadvertently create 

‘‘winners and losers’’ among ETPs 

through both competitive shifts and the 

potential exit of liquidity providers, and 

for some ETPs if these costs are severe, 

could lead to exit by certain ETPs from 

the market. However, as discussed in 

detail above,971 since the Commission 

does not know ex ante how the Pilot 

will impact the liquidity of ETPs, it is 

unable to quantify the effects that the 

Pilot will have on competition between 

ETPs. One of the goals of the Pilot is to 

provide the Commission with data so 

that it can better evaluate these effects. 

In addition to affecting ETP 

competition through changes in ETP 

liquidity, the Pilot could also affect ETP 

competition through its effects on ETPs 

underlying securities. As discussed in 

detail above,972 if the Pilot impacts the 

liquidity of the underlying securities, it 

could impact the create-redeem process 

for ETPs. This could affect the price 

efficiency of the ETP by impacting the 

cost to authorized participants of 

eliminating mispricing by participating 

in the create-redeem process. For 

example, if the majority of an ETP’s 

underlying securities are placed in the 

same Test Group and experience a 

decline in liquidity, it could cause the 

deviation between the ETPs price and 

its NAV to increase, i.e., the price of the 

ETP could deviate more from the price 

of its underlying securities. This could 

cause demand for the ETP to decline 

and trading volume to migrate to a 

similar ETP with a lower deviation 

between its price and NAV, whose 

underlying securities might not have 

experienced a decrease in liquidity.973

However, because of the random nature 

of the assignment of securities to Pilot 

groups and the fact that similar ETPs 

may experience similar liquidity 

changes in their underlying securities, 

the Commission does not believe that 

this will have a significant impact on 

competition between ETPs. 

3. Capital Formation 

The Commission does not expect the 

Pilot to have a substantial permanent 

impact on capital formation because the 

Pilot is limited in duration and because 

it is not expected to have a large impact 

on issuer cost of capital. However, many 

of the implementation costs associated 

with the Pilot would require exchanges 

to expend resources that they may have 

otherwise invested elsewhere or 

distributed to shareholders in order to 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5289 

974The costs associated with implementation and 

compliance with the Pilot are discussed in more 

detail above. See supra Section IV.C.2.a. 

975See supra Section IV.C.2.b.iv. 

976See id. 

977One commenter argues that ‘‘the current 

system increases transaction costs to the public and 

. . . increases the issuer capital costs.’’ See Larry 

Harris Letter, at 9. 

978See Chacko, G.C., Jurek, J.W., & Stafford, E. 

(2008). ‘‘The Price of Immediacy.’’ Journal of 

Finance, Vol. 63(3), 1253–1290 (available at: 

https://onlinelibrary.wiley.com/doi/epdf/10.1111/ 

j.1540-6261.2008.01357.x). According to Chacko et 

al., liquidity has three important dimensions: Price, 

quantity, and immediacy. A market for a security 

is considered ‘‘liquid’’ if an investor can quickly 

execute a significant quantity at a price at or near 

fundamental value. See also supra Section 

IV.C.2.b.iv. 

979See supra Section IV.C.2.b.iv. 

980See supra Section IV.C.2.b.v. 

981Another commenter asserted that the Pilot 

could harm thinly traded stocks and the IPO 

market. See Nasdaq Letter III, at 9. With respect to 

thinly traded securities, the Commission notes that 

the Pilot will exclude NMS stocks that trade less 

than 30,000 shares per day. The Commission notes 

that the Pilot will exclude new publicly traded 

companies whose IPO occurs after the Pilot 

Securities are selected, and therefore the Pilot 

should not harm the market for new IPOs. See 

Section II.C.6. supra (discussing the exclusion of 

certain thinly traded securities); see also Section 

IV.C.2.b.v. supra (discussing the potential impact of 

the Pilot on issuers). 

982See e.g., Nasdaq Letter I, at 2; ASA Letter, at 

3; ACCO Letter, at 1; NorthWestern Letter, at 2.; 

Unitil Letter, at 1–2; McDermott Letter, at 1; 

Weingarten Letter, at 1; ProAssurance Letter, at 1; 

SMP Letter, at 1; Halliburton Letter, at 1; Era Letter, 

at 2; Newpark Letter, at 1; Knight-Swift Letter, at 

1; Avangrid Letter, at 1–2; NYSE Letter I, at 3, 6– 

7, 13–14; e.g., Level Brands Letter, at 1; Johnson 

Letter, at 1; P&G Letter, at 1; Sensient Letter, at 1; 

Apache Letter, at 2; Ethan Allen Letter, at 1–2. See 

also the discussion in supra Section IV.C.2.b.v 

(Impact on Issuers). 

983See Nasdaq Letter I, at 2; ASA Letter, at 4. 

984While the Commission acknowledged this 

possibility in the Proposing Release, it did not 

suggest that such effects were likely. Rather, the 

Commission stated that it did not ‘‘expect the 

proposed Pilot to have a substantial permanent 

impact on capital formation . . . .’’ See Proposing 

Release, supra note 2, at 13068–69. 

985See IEX Letter II, at 3–4; Healthy Markets 

Letter II, at 2; ICI Letter II at 4–5; T. Rowe Price 

Letter, at 4–5. 

986Allocative efficiency in the context of 

investment choice is optimized when there are no 

restrictions on the set of investment opportunities 

available to an investor. See, e.g., Nielsen, N.C. 

(1976). ‘‘The Investment Decision of the Firm under 

Uncertainty and the Allocative Efficiency of Capital 

Markets.’’ Journal of Finance, Vol. 31(2), 587–602 

(available at: https://onlinelibrary.wiley.com/doi/ 

abs/10.1111/j.1540-6261.1976.tb01908.x) If the Pilot 

potentially leads some broker-dealers to alter the 

investment opportunity set to avoid securities that 

do not pay rebates, then allocative efficiency for 

those investors would likely be impaired since the 

opportunity set is restricted. 

987See NYSE Letter I, at 3. 

988One commenter agreed that there is no 

evidence that ‘‘issuer costs of capital are caused by 

quoted spreads.’’ See IEX Letter II, at 4. 

989 Depending on how exchanges measure 

discounts (a proxy measure for the cost of capital), 

whether from the bid price or the midpoint, there 

could be mechanical variation imposed simply by 

differences on how data vendors measure 

Continued 

maintain the List of Pilot Securities and 

any changes to those lists, as well as the 

maintenance of the Exchange 

Transaction Fee Summary and the order 

routing data.974

As discussed above,975 the 

Commission is unable to determine ex 

ante the overall temporary impact of the 

Pilot on liquidity and total transaction 

costs, because the Pilot’s effects on 

liquidity could be positive or negative 

and vary across securities. As a result, 

it is unclear to what degree the Pilot 

will temporarily promote or harm 

capital formation. On one hand, the 

Pilot could temporarily reduce total 

transaction costs for many market 

participants by consolidating liquidity 

and improving execution quality.976 To 

the extent that such cost reductions are 

realized, they may, for instance, permit 

market participants to more efficiently 

deploy financial resources by reducing 

the cost of hedging financial risks.977 As 

a result, the Pilot may marginally and 

temporarily promote capital formation. 

Improvements in both liquidity and 

price efficiency could make capital 

markets more attractive, at least for the 

duration of the Pilot. 

On the other hand, the temporary 

reduction in rebates to certain Test 

Groups as a result of the 

implementation of the Pilot could 

widen quoted spreads, thereby 

potentially leading to worse execution 

prices and subsequently reducing 

liquidity for the duration of the Pilot.978

This would have similar indirect 

impacts on capital formation but in the 

opposite direction, by increasing the 

cost of hedging financial risks. 

Potentially, if the Pilot leads to a 

significant deterioration in liquidity for 

some listed issuers,979 longer term, it 

could affect capital formation for these 

securities by increasing the costs for 

them to raise capital.980 Further, the 

Pilot could lead to a delay by some 

issuers to raise additional capital during 

the Pilot’s duration.981 A number of 

commenters agreed with these 

assessments and expressed concern that 

random assignment to certain Test 

Groups could adversely affect issuers’ 

ability to raise capital or manage their 

capital structure, by increasing the cost 

of secondary offerings or the costs 

associated with share repurchase 

programs.982

Several commenters argued that these 

effects would be worse for small and 

medium sized companies.983 In theory, 

if the temporary impacts on liquidity 

acutely impact some firms, it could lead 

to the potential exit of these issuers 

from the capital markets, either through 

acquisition or delisting. These risks 

could be greater for smaller issuers, 

because they may not possess enough 

capital to ride out negative liquidity 

shocks. However, the Commission does 

not believe that this is likely to occur 

because smaller issuers tend to have 

high transaction costs relative to fee and 

rebates.984

Alternatively, a number of 

commenters disagreed and did not think 

the Pilot would have a significant 

impact on issuers’ ability to raise 

capital.985 The Commission agrees with 

these commenters. As discussed in 

detail below, due to the limited 

magnitude of the effects of the Pilot 

study, and the uncertain impacts on 

liquidity, the Commission does not 

expect the Pilot will have significant 

effects on the ability of firms to raise 

capital. 

The Pilot may also affect capital 

formation through its impact on 

discretionary accounts. A number of 

broker-dealers have discretionary 

agreements with their clients, wherein 

the broker can transact in the client’s 

account without the client’s consent. 

For the duration of the Pilot, some 

broker-dealers may alter the 

composition of their clients’ portfolios 

to trade and hold greater proportions of 

the accounts in high-rebate NMS stocks 

(including ETPs) in the Control Group. 

Such revisions to portfolio composition 

as a result of the Pilot are not 

necessarily efficient from an investor’s 

perspective and could have a 

detrimental impact on capital formation 

insofar as they increase the riskiness of 

client portfolios or decrease client 

portfolios’ expected returns.986 This 

behavior would temporarily distort the 

market for high-rebate stocks and ETPs, 

creating a higher demand for these 

securities and potentially leading to an 

inefficient allocation of capital based on 

signals that are unrelated to firm 

fundamentals. 

One commenter analyzed secondary 

offerings from its listed issuers during 

2017 and found that lower liquidity was 

associated with a higher cost of 

capital.987 The Commission points out 

that the analysis performed by this 

study merely examines associations 

between spreads and capital costs and 

does not establish that wider quoted 

spreads cause higher costs of capital.988

To supplement this comment, 

Commission staff analyzed the same 

secondary offerings and found that after 

controlling for fundamental issuer 

characteristics, such as size, book-tomarket, and analyst coverage, the size of 

the quoted spread was not positively 

related to issuers’ costs of capital.989

5290 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

discounts. Staff analyses relied on SDC measures of 

discounts to approximate issuers’ costs of capital, 

and observed that using the same spread 

breakpoints, discounts were approximately 3.6% 

for issuers with spreads below 20 bps, and 7.6% for 

issuers with spreads above 20 bps, indicating 

differences in methodologies of how discounts are 

computed can affect magnitudes. Regardless of the 

difference in magnitudes of the discounts, lowspread issuers, on average, had lower discounts 

than high spread issuers, consistent with NYSE’s 

spread-discount relationship. See NYSE Letter I, at 

3. 

990See e.g., Hu, E., Hughes, P., Ritter, J., Vegella, 

P., & Zhang, H. (2018). ‘‘The Tick Size Pilot Plan 

and Market Quality.’’ SEC White Paper (available 

at: https://www.sec.gov/dera/staff-papers/whitepapers/dera_wp_tick_size-market_quality). 

991See Pachare, S. & Rainer, I. (2018). ‘‘Does the 

Tick Size Affect Stock Prices? Evidence from the 

Tick Size Pilot Announcement of the Test Groups 

and the Control Group,’’ SEC White Paper 

(available at: https://www.sec.gov/dera/staffpapers/white-papers/dera_wp_does_the_tick_size_

affect_stock_prices). See also fn. 13 in Albuquerque, 

R.A., Song, S., & Yao, C. (2018). ‘‘The Price Effects 

of Liquidity Shocks: A Study of SEC’s Tick Size 

Experiment.’’ Working Paper (available at: https:// 

papers.ssrn.com/sol3/papers.cfm?abstract_

id=3081125), reporting on their finding that the 

stock prices did not react to the announcement of 

which stocks were in the pilot. 

992The results were similar when they limit the 

analysis to stocks with pre-Pilot quoted spreads 

smaller than $0.05. 

993See NYSE Letter V, at 1. 

994See id. at 2. 

995See id. at 3. 

996See Verret Letter II, at 1. 

997See id. at 2. 

998See id. 

999See id. at 3. 

1000See supra Section IV.C.2.b.iv. 

1001See Verret Letter II, at 2. 

1002See Albuquerque et al. (2018), supra note 

991. 

1003The list of stocks assigned to the Tick Size 

Pilot test and control groups was announced on 

September 3, 2016. The rollout of the Tick Size 

Pilot was implemented on a staggered basis over 

October 2016. See Hu et al. (2018), supra note 990. 

The Commission notes that a 

temporary effect on transaction costs 

may not have the same impact on cost 

of capital as a permanent effect on 

liquidity and does not believe that any 

temporary increase in transaction costs 

resulting from the Pilot could be 

significant enough to affect issuers’ 

costs of capital. Indeed, the experience 

with the recent Tick Size Pilot provides 

an example of a temporary change in 

liquidity that did not affect cost of 

capital. While several studies found that 

the Tick Size Pilot increased transaction 

costs,990 the findings of a DERA white 

paper suggest that the market did not 

expect the Pilot to affect stock prices of 

companies in the Test Groups.991

Specifically, the paper finds that the 

announcement of the assignment of 

stocks to the Test Groups and the 

Control Group did not generate 

significant abnormal returns for stocks 

in the Test Groups, either in absolute 

terms or relative to stocks in the Control 

Group.992 Under the standard 

assumption that the market’s 

expectations about the effects of the 

Pilot were correct, this result indicates 

that the increase in quoted spreads and 

transaction costs during with the Pilot 

had no impact on stock prices. Thus, 

these findings cast doubt on the idea 

that temporary changes in transaction 

costs affected the cost of capital of small 

capitalization companies. In addition, 

because the Tick Size Pilot enacted a 

500% increase in the tick size, that pilot 

could arguably have a bigger direct 

impact on transaction costs than the 

Transaction Fee Pilot, which would 

reduce rebates by 30% of a tick. 

One commenter disagreed and 

believed that the findings of the DERA 

white paper were flawed.993 This 

commenter argued that the DERA study 

‘‘relies on a selective, narrow, and 

irrelevant data set’’ and that ‘‘focusing 

on a few days around the time when 

stocks were assigned to test groups 

within the Tick Pilot, and not a 

materially longer period of time during 

which the Tick Pilot’s quoting and 

trading restrictions were in effect, is a 

clear indication that DERA narrowly 

tailored its study to reach a specific and 

flawed conclusion.’’ 994 This commenter 

stated that it ‘‘does not believe that the 

White Paper supports any conclusion 

regarding the impact of the Tick Pilot on 

investors or the potential impact of the 

Transaction Fee Pilot on issuers.’’ 995

However, another commenter noted 

that ‘‘DERA’s event study is informative 

to a central criticism’’ raised by some 

commenters that ‘‘upon implementation 

of the [Pilot], spreads will widen in 

stocks chosen for the ‘low rebate’ or ‘no 

rebate’ buckets and that wider spreads 

will harm issuers of the impacted 

stocks.’’ 996 This commenter found the 

‘‘lack of price impact . . . telling,’’ 

because ‘‘the price of . . . stock is the 

primary measure’’ of ‘‘potential harm to 

issuers . . . .’’ 997 This commenter 

explained that, ‘‘if liquidity diminishes, 

or expected returns of the stock decline, 

this would be reflected in the value of 

the stock—and no such statistically 

significant decline in value was 

found.’’ 998 The commenter believed 

that the short duration of DERA event 

study was appropriate because ‘‘markets 

rapidly incorporate new information’’ 

into stock prices.999 The Commission 

agrees with this commenter and believes 

that the DERA white paper used an 

appropriate methodology to study how 

the increase in quoted spreads and 

transaction costs from the Tick Size 

Pilot affected the stock prices and cost 

of capital of firms in the Test groups. 

The Commission believes that the DERA 

white paper did not rely on a ‘‘selective, 

narrow, and irrelevant data set’’ and 

instead picked the appropriate time 

period, the few days surrounding 

publication of the list of which stocks 

would be included in the test and 

control groups, to examine how the 

market reacted to the information about 

which stocks would have their spreads 

widen as a result of the Tick Size Pilot. 

This approach is standard in the 

academic literature because information 

is quickly incorporated into stock prices 

at the time it is made public. The 

Commission believes that the DERA 

white paper is relevant to this Pilot 

because it examines how a firm’s cost of 

capital is affected by a temporary 

widening of the firm’s spreads, which is 

a potential effect of this Pilot.1000 As 

discussed above and noted by the 

commenter,1001 if a firm’s cost of capital 

increased as a result of the wider 

spreads caused by the Tick Size Pilot, 

we would expect that stock’s price to 

decline during the announcement of test 

and control groups. 

The Commission recognizes that 

another paper comes to the opposite 

conclusion regarding the impact of the 

Tick Size Pilot on costs of capital, but 

does not find the paper convincing. This 

paper compares the stock price 

reactions of stocks in the test and 

control groups around the time the Tick 

Size Pilot was implemented.1002 They 

find that stocks in the test groups that 

experienced a decrease in liquidity 

when the tick size widened also 

experienced a decrease in prices, 

relative to stocks in the control group, 

around the time the Tick Size Pilot was 

implemented.1003 However, it is unclear 

exactly what the return differences 

documented in the study are measuring. 

If investors expected that test group 

stocks would experience a temporary 

reduction in liquidity during the Tick 

Size Pilot and that this would make it 

more costly for those stocks to raise 

capital, then standard economic 

assumptions would expect to see a 

negative stock price reaction for test 

group stocks around the announcement 

of the Tick Size Pilot test and control 

group stocks, not during the time period 

following the Tick Size Pilot 

implementation. 

Given the results of the DERA study 

and the uncertainty surrounding the 

Albuquerque et al (2018) results, 

combined with the fact that the average 

trading cost increase, i.e. decrease in 

liquidity, during the Tick Size Pilot is 

greater than the expected potential 

effects on liquidity during the 

Transaction Fee Pilot, the Commission 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5291 

1004See IEX Letter II, at 3–4. 

1005See supra Section II.C.8(g) and (h) and 

Section IV.E.4. 

1006Morgan Stanley Letter, at 2. 

1007See supra note 104 and accompanying text. 

1008 Id. at 2–3. 

1009 Goldman Sachs Letter, at 1–4. 

1010Larry Harris Letter, at 9. 

1011See Nasdaq Letter, at 1, 3. 

1012Morgan Stanley Letter, at 2. 

1013 Id. at 2. 

1014Cboe Letter I, at 12, 21–22. See also Nasdaq 

Letter I, at 2 (referring to the Pilot as a ‘‘risky 

experiment’’). 

1015 Goldman Sachs Letter, at 1, 3. 

1016 Id. at 1–3. 

1017 Id. at 4. 

1018Larry Harris Letter, at 9–11. See also 

Goldman Sachs Letter, at 4 (stating there is ‘‘broad 

support in favor of lowering the Fee Cap today,’’ 

and the Pilot ‘‘will not yield a different 

conclusion.’’). 

believes that the costs of capital are 

unlikely to significantly increase for 

Test Group stocks due to a temporary 

decrease in liquidity during the 

Transaction Fee Pilot. Because the Tick 

Size Pilot was conducted on firms with 

small market capitalizations, this should 

also help alleviate concerns for small to 

mid-capitalization issuers about 

temporary decreases in liquidity 

increasing the costs related to raising 

capital. One commenter agreed that, 

although some issuers may have 

temporary widening of spreads over the 

Pilot duration, any changes to liquidity 

caused by the Pilot are unlikely to affect 

the costs to firms when raising 

capital.1004 Therefore, the Commission 

does not believe that issuers, including 

small and mid-capitalization issuers, 

will experience significant increases in 

the cost of capital as a result of the Pilot. 

E. Alternatives 

The Commission considered several 

alternatives to the Pilot, including: (1) 

Proceed to propose rule amendments 

without first conducting a Pilot; (2) 

expand the Pilot to include off-exchange 

venues, including ATSs; (3) include a 

trade-at provision; (4) conduct 

alternative pilots; and (5) adjust the 

design of the Pilot (e.g., including a 

number of alternatives proposed by 

commenters). 

1. Propose Rulemaking Without 

Conducting a Pilot 

Several commenters suggested that 

the Commission should proceed with 

rulemaking rather than first conducting 

the Pilot. For example, as discussed 

elsewhere in this release,1005 as an 

alternative to conducting the Pilot, one 

commenter suggested that the 

Commission impose a ‘‘gradual 

reduction of the current fee cap across 

all stocks periodically.’’ 1006 Such an 

approach would address the concerns 

raised by a number of commenters, 

discussed above, about the potential 

impact on largely identical ETPs and 

listed issuers that are placed in different 

test groups, without the added cost and 

complexity of rotating stratified samples 

through the Pilot.1007 In addition, such 

an approach could provide data on 

successive reductions in the current fee 

cap, which could be useful to the 

Commission if it considers future policy 

making to reduce the Rule 610(c) fee 

cap. 

However, depending on the number 

of fee caps to be tested, this alternative 

would increase instability in the 

markets in terms of the fee regime that 

markets are subject to. This would occur 

because the cap would be reduced 

successively and linearly and each 

tranche would need to be in place for a 

sufficient amount of time in order to 

obtain statistical power. Further, 

without a control group, researchers 

would be unable able to conduct a 

differences-in-differences analysis as the 

data would be subject to the impact of 

events across time, which would 

frustrate the ability of researchers to 

compare groups to one another over 

time. The Commenter was open to 

having a control group not subject to the 

decline in fees, which would allow for 

identifying causality. However, even 

with the inclusion of a control group, 

this alternative would still increase the 

time in which markets are subject to 

instability in fees and rebates and the 

time needed to understand the impact of 

fees and rebates because at each 

different fee level the Commission 

would need to test that fee level for a 

sufficient time to gain statistical power. 

Further, including a control group in 

this alternative could potentially result 

in different treatment for largely 

identical ETPs, as in the adopted Pilot, 

but with an increase in the potential 

time needed for study. 

Alternatively, this commenter 

suggested that the Commission 

implement ‘‘dynamic, stock specific 

ticks with transaction fees capped at, for 

example, 10% of the tick size (e.g. 

$0.0010 per share if a penny tick; 

$0.0050 per share if a nickel tick.)’’ 1008

Another commenter suggested that, 

rather than pursuing the Pilot, the 

Commission should amend Rule 610(c) 

to reduce the access fee cap to $0.0010 

and also conduct ‘‘an abbreviated study 

of the effects of eliminating rebates’’ 

similar to the ‘‘no-rebate’’ Test 

Group.1009 One commenter 

recommended that the Commission 

‘‘ban maker-taker and inverted 

transaction fee pricing as well as all 

volume-based discounts that are not 

clearly and directly related to cost 

savings’’ 1010 while another suggested 

that the Commission enhance the duty 

of best execution in lieu of a pilot.1011

Several commenters opined on the 

potential benefits and reduced costs of 

these alternatives as compared to 

proceeding with the Pilot. For example, 

according to one commenter, a gradual 

‘‘walk down’’ approach would be 

preferable to the Pilot because it would 

allow the Commission to ‘‘observe order 

routing behavior changes, while 

applying the same economics to all 

stocks uniformly’’ and would ‘‘eliminate 

concerns about issuers being subject to 

disparate treatment.’’ 1012 According to 

this commenter, it also would 

‘‘eliminate[ ] concerns that the Pilot 

results will not reflect the actual 

outcome if such changes are applied 

more broadly to stocks outside of the 

Pilot.’’ 1013 Similarly, another 

commenter noted that it would be 

‘‘more effective and less damaging to the 

equities market to strengthen and better 

articulate the broker-dealers’ Duty of 

Best Execution’’ than proceeding with 

the Pilot, which the commenter believed 

would impost ‘‘tremendous costs’’ to 

investors and potentially ‘‘upend[ ] the 

existing economics and framework 

around equity executions.’’ 1014 Further, 

one commenter noted that because 

‘‘there is broad recognition’’ that the 

access fee cap should be reduced, there 

is no need to incur the costs associated 

with the Pilot and the Commission 

should simply reduce the fee cap to 

$0.0010 to ensure that displayed prices 

reflect the actual economic costs of an 

execution, while also allowing 

exchanges to continue to offer rebates to 

incentivize liquidity provision if they 

chose to do so, while also maintaining 

their net capture rates.1015 This 

commenter believed that lowering the 

fee cap to $0.0010 would provide 

‘‘immediate benefits to the equities 

markets with respect to price 

transparency and addressing conflicts of 

interest’’ 1016 and would be ‘‘better 

calibrated with today’s market 

pricing.’’ 1017 Another commenter 

argued that ‘‘the effects of maker-taker 

and inverted transaction fee pricing on 

the markets are well understood’’ and 

therefore concluded that it was very 

unlikely that ‘‘we will learn anything of 

value about the economics of exchange 

transaction fee pricing’’ from the 

Pilot.1018 Consequently, this commenter 

believed that the Commission should 

mandate that the exchanges return to a 

traditional transaction fee pricing 

5292 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

1019 Id. 

1020RBC Letter I, at 2. 

1021Spatt Letter, at 4. 

1022Babelfish Letter, at 3. 

1023See Section II.A.4 for a summary of these 

comments. Some commenters believed that nonexchange trading centers should only be subject to 

the rebate prohibitions of the no-rebate Test Group. 

See, e.g., Capital Group Letter, at 3; AJO Letter, at 

1; Nasdaq Letter III, at 9. 

1024NYSE Letter I, at 9. See also, e.g., Cboe Letter 

I, at 12, 19; Nasdaq Letter I, at 2, 5; ViableMkts 

Letter, at 1–2. 

1025Wellington Letter, at 2. See also, e.g., 

Oppenheimer Letter, at 3. One commenter also 

believed that the Pilot could affect the way that 

securities are traded off-exchange and confound the 

Commission’s ability to understand the baseline for 

remuneration occurring off-exchange or the impact 

that the Pilot has on that baseline. Nasdaq Letter I, 

at 7. The Commission does not believe that its 

ability to analyze the impact of changes to 

transaction-based fees and rebates will be unduly 

limited, due to information that is now available 

from Regulation ATS–N and Rule 606. 

1026See, e.g., Morgan Stanley Letter, at 3 n.5; 

BIDS Letter, at 1–2; AJO Letter, at 2. 

1027See, e.g., AJO Letter, at 2–3. It is possible that 

non-exchange trading venues might respond to the 

Pilot by choosing to change their existing fee 

structures to align with the maker-taker (or takermaker) pricing models employed by exchanges, 

which could lead to additional costs for such 

venues. See, e.g., Virtu Letter, at 6; SIFMA Letter, 

at 5; Clearpool Letter, at 4; Healthy Markets Letter 

I, at 9–10. 

model, which the commenter believed 

would not result in much cost to market 

participants.1019

However, other commenters strongly 

supported the Pilot as a first step 

because it ‘‘should provide data to 

enable the Commission to determine the 

impact of transaction-based fees and 

rebates on order routing behavior, on 

execution quality and on market 

quality’’ and believed the data collected 

would ‘‘support appropriate reforms to 

U.S. equity market structure.’’ 1020

Among those who supported 

conducting the Pilot before considering 

rulemaking, one commenter noted the 

lack of information regarding the rebates 

paid by each exchange to each broker 

and stated that such lack of disclosures 

‘‘reinforce the difficulty in assessing the 

impact of the structure of a[cc]ess fees 

on distorting best execution, conflict[s] 

of interest and competitiveness of 

exchange pricing.’’ 1021 Still another 

commenter opined that the Pilot ‘‘is a 

necessity’’ to provide a ‘‘quantitative 

approach to which stocks require 

liquidity support and how much a 

rebate should be to incent support.’’ 1022

The diversity of opinion and lack of 

consensus among the commenters 

regarding the impact of fees and rebates 

on market quality and order routing 

behavior support the view that further 

study in this area is warranted before 

permanently adopting any changes 

through rulemaking. As discussed 

above, there was sharp disagreement 

between commenters about the potential 

impacts of reductions in fees and 

rebates, yet there is little data available 

to evaluate these claims on a broad 

scale. As discussed above, the 

Commission believes that there is no 

need to delay proceeding with the Pilot 

in order to pursue other potential equity 

market structure initiatives. Equity 

market structure issues have been 

considered for a number of years and, as 

a result of several initiatives in this area, 

the Commission has developed the 

Pilot, which is focused on and is 

intended to gather empirical evidence 

on the impact of exchange transaction 

fees and rebates. Similarly, the 

Commission does not believe that it 

needs to complete the Pilot before 

proceeding to consider all other equity 

market structure initiatives. The 

Commission expects that it will 

continue to evaluate the need for other 

changes to equity market structure 

during the pending of the Pilot. 

2. Expand Transaction Fee Pilot To 

Include Non-Exchange Trading Centers 

The Transaction Fee Pilot would not 

require ATSs or other non-exchange 

trading venues to comply with the 

limits to transaction fees or rebates 

imposed by the Pilot. Some commenters 

believed that non-exchange trading 

centers should be included in the Pilot 

and that the representativeness of the 

data obtained from the Pilot would be 

impaired by the exclusion of ATSs and 

other off-exchange trading centers.1023

For example, one commenter stated that 

the Pilot ‘‘would not gather any insight 

into the trading patterns at those 

centers’’ because the Commission would 

be unable to ‘‘follow order flow across 

all trading venues in the market, leaving 

it with an incomplete picture of the 

issue it seeks to study.’’ 1024 Another 

commenter believed that excluding nonexchange trading centers could skew the 

results of the Pilot, as broker-dealers 

could shift order flow away from 

exchanges in response to the Pilot, 

thereby limiting the Commission’s 

understanding of the overall impact of 

changes to transaction-based fees and 

rebates.1025

An alternative design that includes 

non-exchange trading centers like ATSs 

would be broader than the Pilot—not 

only because such a design would 

include more trading venues, but also 

because such a design would have to 

account for the fact that non-exchange 

trading centers like ATSs use other 

inducements, besides transaction-based 

fees and rebates, to incent order 

flow.1026 The inclusion of non-exchange 

trading centers could, therefore, supply 

information about a more complete set 

of order routing decisions, increase the 

representativeness of the results 

obtained, and provide a deeper 

understanding regarding the ways in 

which exogenous shocks to transactionbased fees and rebates (and other 

inducements) affect order routing 

decisions. For example, a pilot that 

included non-exchange trading centers, 

and regulated the inducements used by 

such centers, might impact payment for 

the internalization of retail order flow, 

which would allow researchers to 

evaluate how these inducements affect 

retail order routing. A pilot that 

addressed payment for order flow on 

non-exchange trading centers could, in 

turn, result in more retail order flow 

being routed to lit exchanges, which 

also could increase displayed liquidity 

and potentially improve price 

efficiency. 

However, the inclusion of nonexchange trading venues may be 

difficult to implement. First, nonexchange trading venues charge 

idiosyncratic and individuallynegotiated fees to market participants, 

and often bundle fees for ATS usage 

with other broker-dealer fees, such that 

it would be exceptionally difficult to 

create and then impose a uniform fee 

regime on such venues.1027 For 

example, it is unclear how an ATS that 

charges an ‘‘all in’’ flat fee for service 

and does not charge individually for 

executions would be able to comply 

with a transaction-based fee cap. To 

comply with the Pilot’s transactionbased pricing restrictions, non-exchange 

venues may be required to entirely 

restructure their customer relationships 

to move to a transaction-based pricing 

model for the duration of the Pilot, 

which would impose notable costs on 

those venues. Further, any alternative 

design would address other 

inducements provided by non-exchange 

trading centers aside from transactionbased fees and rebates, in order to 

produce a fully accurate analysis of the 

impact of fees and inducements on 

order routing behavior, market quality, 

and execution quality. Such a design 

would be much more complex that the 

current Proposal. Finally, an alternative 

design that included non-exchange 

trading centers also would impose costs 

on such venues that would be higher 

relative to the costs imposed on 

exchanges under the current design, 

because the Pilot would require nonexchange trading venues to track and 

report more detailed information than is 

currently required by the 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5293 

1028Although Form ATS–N requires ATSs to 

provide public disclosures about the different types 

of fees they charge, along with the ranges of those 

fees and service bundling, these disclosures do not 

provide as much information as the fee disclosures 

that will be required by the Pilot. 

1029By combining the FINRA volume data 

executed by ATSs for a given security with other 

data, such as TAQ, which would provide total share 

volume for a given security, a researcher would be 

able to estimate the fraction of ATS trading as a 

percentage of total trading in NMS securities over 

the same time period. 

1030See, e.g., Adorney Letter, at 1; Birch Bay 

Letter, at 1; NYSE Letter II, at 5. 

1031See, e.g., See Citadel Letter, at 6; Fidelity 

Letter, at 10; Citigroup Letter, at 3; SIFMA Letter, 

at 4; TD Ameritrade Letter, at 7; Virtu Letter, at 5; 

ICI Letter I, at 2. 

1032See Tick Size Pilot Approval Order at 27538– 

42. As discussed above in Section IV.D.2, a number 

of commenters have expressed similar concerns 

with respect to the Transaction Fee Pilot, whereby 

a reduction in rebates could widen spreads and lead 

to a migration of order flow to off-exchange trading 

centers. In the Tick Size Pilot, the trade-at provision 

applied when the tick size was increased and only 

smaller, less liquid stocks were included in that 

pilot. The Transaction Fee Pilot, on the other hand, 

also will include more liquid stocks and does not 

test the wider tick increments that were the subject 

of the Tick Size Pilot, so the effects of trade-at may 

or may not be the same between the two pilots. 

1033See Birch Bay Capital Letter, at 1. Other 

commenters that supported the inclusion of a tradeat test group. See, e.g., C&C Letter, at 1. But see 

Citadel Letter, at 6 (noting that there was no 

evidence of improvement in market quality in the 

trade-at test groups in the Tick Size Pilot). 

1034 Id. at 990. See also Farley, Ryan and Eric 

Kelley and Walter Puckett, Dark Trading Volume 

and Market Quality: A Natural Experiment (April 3, 

2018) available at https://papers.ssrn.com/sol3/ 

papers.cfm?abstract_id=3088715. 

1035See Comerton-Forde, Carole and Gregoire, 

Vincent and Zhong, Zhuo, Inverted Fee Structures, 

Tick Size, and Market Quality (August 10, 2018), 

Journal of Financial Economics (JFE), Forthcoming, 

available at SSRN: https://ssrn.com/ 

abstract=2939012 or http://dx.doi.org/10.2139/ 

ssrn.2939012. 

1036See NYSE Letter III, at 3; see also Issuer 

Network Letter II, at 4. 

1037See id. 

Commission.1028 As discussed above, 

exchanges are required to file each fee 

change with the Commission on Form 

19b–4 and to disclose the entirety of 

their schedule of fees on their website, 

while non-exchanges venues are not 

subject to those requirements. Thus, 

including non-exchange trading venues 

in an alternative version of the Pilot 

would likely increase the costs of the 

Pilot because it would require a 

dramatic shift in the disclosure regime 

for these trading centers. 

Although the Pilot excludes nonexchange trading centers, the 

Commission will still be able to obtain 

information regarding the proportion of 

trades executing on such platforms from 

several sources. First, several 

transaction datasets, including trade 

reporting facility (TRF) data and TAQ 

data, provide information on offexchange trades, including ATS trades. 

Further, FINRA produces periodic 

(weekly) data on the total shares of NMS 

securities executed on individual 

ATSs.1029 Thus, researchers would 

obtain information from the Pilot to 

identify whether exogenous shocks to 

transaction-based fees on exchanges 

have an effect on order routing 

decisions, including whether brokerdealers alter their routing of order to 

ATSs during the Pilot. 

3. Trade-At Test Group 

The Commission considered an 

alternative in which the Transaction Fee 

Pilot would include a ‘‘trade-at’’ 

provision in conjunction with the 

changes to the fees and rebates currently 

in the Pilot. The trade-at alternative 

would require that orders be routed to 

a market with the best displayed price 

or are executed at a materially improved 

price. 

Some commenters supported 

including a trade-at subgroup to provide 

supplemental information to the 

Commission about how a combination 

of trade-at provisions coupled with 

revisions to transaction-based fees and 

rebates affect broker-dealer order 

routing decisions.1030 Some other 

commenters, however, asserted that 

including a trade-at requirement could 

compromise the results of the Pilot as it 

would introduce an additional variable 

to one or more treatment groups.1031 To 

address this concern, the Pilot could 

include separate test subgroups that also 

include a trade-at requirement, in 

addition to requirements regarding 

transaction fees and/or rebates. 

Such an approach would require 

including more stocks in the Pilot. If the 

amount of securities in each Test Group 

were too small, the Pilot results would 

not achieve statistical power. 

Accordingly, in order to provide 

information on the impacts of an 

exogenous shock to transaction fees and 

rebates while also providing additional 

information on the effects of a trade-at 

requirement, the Pilot either would 

need to increase the number of Pilot 

securities or add to its duration. 

The expected impact on liquidity of 

the inclusion of a trade-at test group is 

unclear. The recently concluded Tick 

Size Pilot included a trade-at test group. 

The Tick Size Pilot included a trade-at 

group because exchanges were 

concerned that, in the current market 

environment, a significantly larger tick 

size could induce order flow to go off 

exchange.1032 For the Transaction Fee 

Pilot, commenters were split on whether 

marketable order flow will be more or 

less likely to flow to off-exchange 

trading centers, with some believing 

that as access fees for some test groups 

decline, order flow could be drawn back 

to exchanges. However, in considering 

the Tick Size Pilot, it is important to 

note that it only considered the impacts 

of trade-at when the tick size was 

increased and only for smaller, less 

liquid stocks. The effects might not be 

the same with 1 cent tick size and more 

liquid stocks that are included in the 

Pilot. One commenter noted that in the 

trade-at test group for the Tick Size 

Pilot, the number of shares displayed at 

the NBBO increased and quote volatility 

was reduced in the trade-at test group 

relative to the other test groups.1033

Nevertheless, analysis of the Tick Size 

Pilot data does not reveal significant 

execution quality or market quality 

effects of a trade-at rule. Specifically, 

the data suggests there was no change in 

effective spreads or price efficiency due 

to the trade-at requirement.1034 Results 

from the Tick Size Pilot also suggest that 

trade-at impacts trade location. 

Specifically, off-exchange share of 

trading volume decreased and onexchange market share increased, 

particularly at inverted exchanges. 

However, volume for midpoint crossing 

off-exchange venues increased, but this 

could be the result of the midpoint 

exception to the Tick Size Pilot’s tradeat requirements.1035 This shift in trading 

volume may occur because a trade-at 

provision increases incentives to 

display prices because off-exchange 

trading centers would no longer be able 

to match the best price offered 

elsewhere, but instead would have to 

provide significant price improvement 

or start displaying their quotes at the 

NBBO. These findings suggest that the 

inclusion of a trade-at test group may 

benefit exchanges, which may 

experience increased trading volumes, 

but be costly for off-exchange venues, 

which may lose trading volume. 

4. Alternative Pilot 

One commenter suggested an 

alternative to the Pilot that would 

involve directly lowering the Rule 

610(c) access fee cap to $0.0010 and 

establishing a moratorium on fee 

increases for existing market data, 

connectivity, and co-location 

services.1036 The commenter believed 

its alternative would allow a direct test 

of the ‘‘anachronistic’’ 610(c) fee cap 

level and make exchange fees more 

competitive with non-exchange 

venues.1037 In addition, similar to the 

other alternative discussed directly 

above, it would impose a lower cap on 

5294 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

1038See id. The commenter also suggested that 

avoiding this ‘‘new class of restrictions’’ would 

limit the ‘‘likelihood of court challenge’’ to the 

Pilot. Id. 

1039See id. 

1040See supra Section II.D. for a summary and 

discussion of the commenters discussing the Pilot’s 

proposed duration. 

1041See NYSE Letter I, at 16. 

1042See infra Section IV.C.1.a.iii, which discusses 

the potential limitations associated with pilots, 

including a discussion that some market 

participants could choose to not alter their behavior 

if the Pilot had a short duration. 

1043To address commenter concerns about the 

size of the Pilot, the Commission performed a 

supplemental analysis that refined the power 

analysis included in the Proposing Release. Based 

on this refined power analysis, the Commission 

estimates that it would require a minimum Pilot 

duration of 12 months to achieve sufficient 

statistical power to detect whether an effect is 

actually present; therefore, any Pilot duration 

shorter than 12 months would have diminished 

ability to detect the effect of transaction-based fees 

and rebates on order routing decisions, execution 

quality, and market quality. See Section 

IV.C.1.a.ii.(1) and supra note 695 for further 

information on this supplemental analysis. 

all NMS stocks simultaneously and 

thereby address the potential 

competitive impact on largely identical 

ETPs and listed issuers. The commenter 

suggested this alternative would reduce 

the complexity of implementation and 

would avoid ‘‘introducing new classes 

of restrictions’’ including prohibition on 

payment of transaction-based 

rebates.1038 Further, in linking 

transaction fees to market data and 

connectivity fees, the commenter 

suggested that its alternative would 

address commenters’ desire ‘‘to reduce 

their cost to trade’’ without banning 

rebates for liquidity provision, which it 

argued could negatively impact 

displayed quotes.1039

However, the combined fee cap and 

moratorium would not feature a control 

group. While the commenter suggested 

the Commission could ‘‘use 

comparisons to the preceding period to 

evaluate its efficacy,’’ the absence of a 

control group could frustrate 

researchers’ ability to detect changes as 

the results could be influenced by shortterm external events. This alternative 

also does not directly test the absence of 

rebates. 

Further, the direct link between 

transaction fees and market data and 

connectivity fees is unclear in the 

context of the Pilot’s objectives. In 

particular, the potential distortions that 

can accompany fee-and-rebate pricing 

models are unique to exchange 

transaction fee-and-rebate pricing 

models and do not directly result from 

market data and connectivity services. It 

is therefore unclear how the moratorium 

on market data fees would impact the 

objective of the Pilot to study how 

rebates and fees affect order routing 

decisions and market quality. 

Finally, the commenter’s suggested 

moratorium would only apply to 

‘‘existing’’ market data and connectivity 

and would therefore preserve current 

fee levels for those services and would 

seem to not restrict an exchange’s ability 

to offer new and improved market data, 

connectivity, and co-location services 

potentially at higher fee levels. While a 

moratorium on market data and 

connectivity fees during a transaction 

fee experiment could be beneficial to 

the extent it holds steady a separate 

variable that can have a marginal impact 

on order routing, those costs are fixed 

and therefore the impact, if any, would 

be slight. Further, to the extent that 

exchanges were free to introduce new 

products at different price points, the 

moratorium could be easily 

circumvented. Accordingly, with the 

exception of the moratorium on market 

data fees, the suggested alternative is 

substantively similar to the alternative 

discussed above to not conduct any 

pilot and instead proceed to 

immediately lower the 610(c) fee cap. 

5. Adjustments to the Transaction Fee 

Pilot Structure 

The alternatives described above 

provide significant revisions to the 

approach or the representativeness of 

the Transaction Fee Pilot. This section 

complements and expands on the 

discussion in Section II.C., above, to 

discuss a number of alternatives and 

adjustments to the basic structure of the 

Pilot. These include an alternative time 

frame for the Pilot duration or the preand post-Pilot Periods, a zero access fee 

test group, alternative access fee caps, 

and the inclusion of non-displayed 

liquidity or depth-of-book provisions in 

Test Group 1. 

a. Length of the Core Pilot 

The core Pilot would last for two 

years with an automatic sunset at the 

end of the first year unless the 

Commission publishes a notice 

determining that the Pilot shall continue 

for up to one additional year.1040

Alternatively, the Pilot could feature an 

earlier or later Pilot sunset or a longer 

or shorter Pilot duration. As discussed 

above in Section II.D., a number of 

commenters discussed the proposed 

Pilot duration, with some believing the 

proposed duration would incentivize 

participation and disincentivize 

‘‘waiting out’’ the Pilot, with others 

believing that a shorter duration would 

be sufficient to produce results and still 

others recommending that the Pilot run 

for a full two year period with no 

automatic sunset. Further, one 

commenter questioned the 

Commission’s statement that the market 

reacts quickly to pricing changes 

implemented by exchanges, but that 

some market participants might not 

change their behavior unless the Pilot 

was in place for at least a year.1041

As alternatives to the Pilot’s duration, 

the Commission considered an earlier 

Pilot sunset that would shorten the 

anticipated Pilot duration, reducing the 

time period during which potential 

negative (or positive) temporary effects 

resulting from the Pilot could occur. 

However, if the anticipated duration of 

the Pilot were too short, some brokerdealers could choose to not alter their 

current order routing behavior and wait 

out the length of the Pilot, which would 

limit the usefulness of the information 

obtained by the Pilot.1042 In other 

words, in response to the comment 

noted above, while many market 

participants may quickly adopt their 

order routing in response to fee and 

rebate changes, others may take longer 

to respond. A shorter anticipated 

duration also could reduce the 

usefulness of the information and the 

benefits provided by the Pilot, if it 

reduced the statistical power of any 

analyses, because it would make it more 

difficult for researchers to detect 

whether an effect actually exists.1043

Conversely, as the anticipated Pilot 

duration increases so too would the 

costs for exchanges, as this would 

extend the duration of the changes to 

their revenue models and the costs of 

compliance with the Pilot requirements. 

However, all else being equal, 

increasing the duration beyond the 

automatic sunset at one year, or up to 

the maximum two years, is unlikely to 

provide any significant increases in the 

benefits identified above, unless some 

event occurs during the first year that 

impacts the Pilot study in a way that 

potentially could make the results 

unrepresentative, in which case an 

extension of the Pilot for additional time 

(up to two years) could increase the 

benefits. As discussed in Section 

IV.C.1.a.i, the Commission believes that 

the Pilot duration with a one-year 

sunset would make it economically 

worthwhile for broker-dealers to alter 

their order-routing decisions, because it 

would likely be costly for broker-dealers 

to sit out the full duration of the Pilot 

or retain pre-Pilot order routing 

decisions for its duration. Further, a 

longer Pilot duration would increase the 

exposure of market participants to the 

uncertain outcomes of the pilot in terms 

of liquidity, trading volume, market 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5295 

1044See IEX Letter I, at 4; FIA Letter, at 4. But cf. 

FIF Letter, at 9; Health Markets Letter I, at 19. 

1045The Commission staff estimates that with the 

given number of stocks in the Pilot, that the Pilot 

would need to produce approximately six months 

of pre and post Pilot data to detect changes unique 

to ETPs and stocks, The power tests determined the 

number of days of data that would be required to 

detect a 10% change in the daily volume of various 

subgroups of securities for stocks and a 10% change 

in quoted spreads for ETPs. 

1046See, e.g., Healthy Markets Letter I, at 8; 

OMERS Letter, at 2. 

1047The maximum access fee caps under the 

EMSAC recommendation would be $0.0020 (Test 

Group 1), $0.0010 (Test Group 2), and $0.0002 (Test 

Group 3). 

1048See, e.g., Angel Letter II, at 2; Cboe Letter I, 

at 28 

share, competition etc. that are 

discussed above. 

The Commission could alternatively 

adopt a pilot with a fixed two-year 

duration. A two-year pilot without the 

possibility of an automatic sunset at the 

end of the first year would have the 

same maximum costs as a pilot with a 

sunset, but would not have the potential 

to reduce costs in the event that the 

sunset occurs. On the other hand, 

broker-dealers could perceive higher 

expected costs of not adapting to the 

Pilot under the alternative because they 

could expect the sunset to reduce the 

anticipated duration of the Pilot. 

However, the Commission believes that 

broker-dealers that base their order 

routing decisions on transaction-based 

fees and rebates will incur sufficient 

costs from not enacting changes to their 

order routing decisions in response to 

the Pilot with an expected one-year 

sunset such that they are not likely to 

sit out the Pilot Period; therefore, a 

mandatory two-year pilot would not 

likely provide any additional behavioral 

change that would not already be 

obtainable from the Pilot. 

b. Length of Pre- and Post-Pilot Periods 

The Pilot requires a six-month prePilot Period and a six-month post-Pilot 

Period, which would allow the 

Commission and the public to compare 

order routing decisions in the same 

stocks both with and without the Pilot 

restrictions as well as across stocks in 

different test groups. Alternatively, the 

Commission could adopt shorter prePilot and post-Pilot Periods, which a 

few commenters recommended.1044

Shorter pre- and post-Pilot Periods 

would reduce costs to exchanges of 

having to provide the Exchange 

Transaction Fee Summary and order 

routing data. These reduced costs come 

at the trade-off of shorter horizons for 

data collection that could lead to 

reduced statistical power and reduced 

ability of the Pilot to produce 

representative results.1045

In particular, a short pre-Pilot Period 

introduces additional risk that analysis 

of certain Pilot data may be 

uninformative. Even if researchers were 

to wait until the conclusion of the postPilot period to begin analysis, they may 

not be able to identify the effects of the 

Pilot because data obtained from the 

post-Pilot period could be confounded 

by information about the Pilot. For 

example, if exchanges alter their fee 

structures in the post-Pilot period as a 

result of the Pilot (rather than revert 

back to their fee models in effect prior 

to the Pilot), data from the post-Pilot 

period likely would be unable to 

supplement or substitute for data 

obtained from a shorter pre-Pilot Period, 

underscoring the importance of a longer 

pre-Pilot Period. Thus, the value of any 

analyses obtained from the Pilot may be 

limited, thereby reducing the 

information obtained from such 

analyses for any potential regulatory 

recommendations. 

c. Zero Access Fee Test Group 

As discussed above, a few 

commenters recommended that the Pilot 

include a zero access fee test group to 

further test the relationship between 

exchange fee models and order routing, 

which would effectively serve to 

temporarily remove a source of revenue 

for exchanges entirely from a subset of 

securities.1046 This approach could 

produce additional information, such as 

how order routing behavior and 

execution quality change in the absence 

of transaction-based fees (and likely 

rebates), that could be useful to the 

Commission to facilitate future policy 

decisions regarding the transactionbased pricing structures of exchanges. 

The inclusion of a zero access fee test 

group would eliminate the transactionbased fee model for a subset of 

securities, which could force exchanges 

to create entirely new revenue models 

for securities in this test group with 

uncertain outcomes for both exchanges 

and market participants. Doing so 

presents the risk that if coupled to the 

current Pilot, the inclusion of a zero 

access fee test group could contaminate 

the analysis of both the current test 

groups and the zero access fee test 

group. This could occur if exchanges 

determine that it is cheaper to subsidize 

trading in the zero access fee group with 

revenue earned from the control group 

and the other test groups. In this case 

the inclusion of the zero access fee test 

group would alter the behavior of the 

exchanges with regard to all their other 

securities, which would weaken the 

exogeneity of the shock imposed by the 

Pilot for all test groups. 

d. Alternative Test Groups 

As discussed above, the Pilot will 

have two test groups: (1) One that caps 

access fees at $0.0010 and (2) one that 

prohibits rebates or Linked Pricing for 

displayed and non-displayed liquidity 

and along the entire depth of the limit 

order book. Alternatively, the 

Commission could have proposed other 

test groups with different caps on access 

fees. For example, the Commission 

could instead have proposed only caps 

on access fees (i.e., fees for removing 

liquidity), similar to those in the 

EMSAC recommendation,1047 or could 

have increased the number of test 

groups to test more gradations in 

alternative fee caps. As a few 

commenters suggested, and as discussed 

above, the Commission also could have 

included a test group with a higher fee 

cap level than Rule 610(c) or no cap on 

fees at all.1048 Further, as discussed 

above, a few commenters suggested 

other alternatives, like basis point 

pricing or pricing based on the tick size. 

Many alternatives would have 

replaced the no-rebate test group with 

another access fee cap group. These 

options could provide information to 

help refine the analysis of the impact of 

access fees on various market outcomes. 

However, if the Pilot did not include a 

no-rebate test group and only studied 

exogenous shocks to access fees, it 

would produce more limited 

information about the role that rebates 

play in affecting market outcomes. As 

discussed in more detail above, the 

Commission believes that it is important 

to have a test group that specifically 

focuses on the removal of rebates and 

the corresponding impact on conflicts of 

interest, execution quality, and market 

quality. 

An alternative to increase the number 

of test groups to study the impact of the 

various levels of access fee on various 

market outcomes could produce 

additional refinement to the data 

currently in the Pilot. However, to 

produce more gradation in the caps to 

access fees, would increase the 

complexity of the Pilot, and potentially 

increase the implementation costs to 

account for the additional test groups. 

Increasing the number of test groups 

would also increase the number of 

stocks subject to the pilot thereby 

increasing the fraction of the market 

exposed to the uncertain outcomes of 

the Pilot. 

e. Non-Displayed Liquidity and Depth 

of Book 

Only Test Group 2, which eliminates 

rebates or Linked Pricing, would restrict 

5296 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

1049See Clearpool Letter, at 3–4; Healthy Markets 

Letter I, at 16. 1050See RBC Letter I, at 3; MFS Letter, at 2–3. 

fees or rebates or Linked Pricing in nondisplayed liquidity and depth-of-book, 

though a small number of commenters 

suggested expanding those conditions to 

Test Group 1.1049 As discussed in 

Section II.C., under the Pilot, incentives 

to move liquidity away from the 

displayed liquidity or the top-of-book 

could be created if rebates are not 

eliminated along the entire depth of the 

book as well as for displayed and nondisplayed liquidity. If an exchange were 

to offer rebates for those types of orders, 

it would reduce the benefits of the norebate test group as it would inhibit the 

Commission’s ability to collect data on 

a treatment group in which rebates do 

not exist and thus cannot impact or 

potentially distort the markets and 

market participants. 

An alternative could have applied the 

transaction fee restrictions in Test 

Group 1 to both non-displayed liquidity 

and the depth-of-book. However, the 

Commission believes this is 

unnecessary. In particular, the 

Commission does not believe that 

exchanges would have the incentive to 

charge higher fees or pay higher rebates 

for executions against or of nondisplayed and depth of book compared 

to fees and rebates charged against or of 

top-of book depth in Test Group 1 

securities. Unlike the problem 

associated with exchanges offering 

rebates (in the no-rebate test group) for 

these types of orders that could emerge 

if rebates or Linked Pricing were not 

prohibited across the entire depth of the 

limit order book, the Commission does 

not believe that under the Pilot 

incentives would emerge for exchanges 

to charge higher fees to access nondisplayed interest or depth-of-book 

quotes. Charging more for nondisplayed liquidity as well as the depth 

of the limit order book would lead to 

increased uncertainty for market 

participants that take liquidity, as they 

would not be able to control whether 

their executions are with displayed or 

non-displayed liquidity and would be 

uncertain of their fees when they enter 

their orders. If the fees differed between 

displayed and non-displayed liquidity, 

broker-dealers would face cost 

uncertainty when making routing 

decisions over what access fees they 

would incur. From the exchanges’ 

perspective, having differing fees for 

posting or interacting with displayed 

and non-displayed liquidity would be 

burdensome to track and more costly to 

administer and, to the extent the 

uncertainty it creates dissuades market 

participants from routing to their 

market, could ultimately cause them to 

lose order flow. 

f. Linked Pricing 

Test Group 2 will prohibit rebates and 

Linked Pricing. As discussed above, a 

few commenters suggested that the 

Commission also prohibit exchanges 

from offering other inducements, 

including discounts on non-transaction 

fees that are linked to trading volumes 

in the no-rebate Test Group.1050 While 

such an approach would have the added 

benefit of testing a greater absence of 

exchange-offered inducements, it would 

further increase costs and add to the 

complexity and scope of the Pilot. As 

currently designed, the no-rebate Test 

Group is intended to test the extent to 

which exchange rebates introduce 

potential distortions to execution 

quality and market quality and 

introduce conflicts of interest in order 

routing. Adding more variables to the 

Pilot will increase its complexity, size, 

and cost, while potentially reducing 

benefits by inhibiting the Commission’s 

stated focus on gathering data 

specifically on the impact of exchange 

transaction rebates. With more 

variables, it becomes difficult to isolate 

the impact of any particular change 

without dramatically expanding the 

size, scope, and complexity of the Pilot. 

Alternatively, the Commission could 

instead prohibit only rebates, without 

also prohibiting Linked Pricing, in Test 

Group 2. While such an approach would 

reduce costs and simplify the Pilot 

design, it could reduce the benefits of 

Test Group 2. Specifically, one of the 

aims of Test Group 2 is to examine the 

impact between take fees (rebates) and 

make rebates (fees) in current exchange 

fee-and-rebate pricing models. For 

example, as discussed above, fees may 

be set above their equilibrium price 

(within the current regulatory structure) 

in order to subsidize rebates. An 

alternative that prohibits rebates but not 

the ability of an exchange to crosssubsidize make rebates from take fees 

(or vice versa) would provide 

opportunities for exchanges to work 

around the rebate prohibition thus 

perpetuating the potential subsidization 

distortion. Consequently, such an 

alternative would reduce the benefits of 

Test Group 2 by reducing the 

effectiveness of the information received 

about NMS stocks in the no-rebate Test 

Group. 

Finally, the Commission could ban 

Linked Pricing for all market 

participants in Test Group 2, including 

market makers. This alternative would 

allow the Commission to study how 

markets react in the absence of both 

rebates and Linked Pricing incentives, 

whereas the adopted Rule does not 

allow this analysis. The Commission 

recognizes that banning Linked Pricing 

in Test Group 2 may yield different 

results than under the adopted Rule, 

which permits an exchange to adopt 

rules to provide non-rebate Linked 

Pricing to its registered market makers 

in consideration for the market maker 

meeting rules-based market quality 

metrics. However, the Commission is 

interested in specifically exploring the 

effect of eliminating rebates, but 

continuing to allow Linked Pricing for 

a narrow, targeted segment of the 

market, i.e., market makers with specific 

obligations designed to improve an 

exchange’s market quality without the 

various effects previously discussed that 

may be associated with rebates, in order 

to understand any effects of rebates on 

liquidity. In so much as this is an 

alternative that could be considered at 

the completion of the Pilot, the 

Commission seeks to test specifically for 

this scenario. 

g. Execution Quality Data 

The Pilot does not require the 

exchanges to produce publicly available 

information on order execution quality 

statistics. As an alternative, the 

Commission could require that the 

exchanges produce daily order 

execution quality statistics similar to 

that required in Appendix B.1 of the 

Tick Size Pilot Plan. Compared to the 

Pilot, this alternative could provide 

information on order-based measures of 

execution quality such as effective 

spreads, price improvement, and 

realized spreads for liquidity taking 

orders, in addition to the trade-based 

measures available from public data 

sources. As noted in the baseline, orderbased measures of execution quality 

from the incorporation of order size and 

the costs of latency. Exchanges currently 

have systems in place to produce daily 

order-based execution quality data, 

which would limit implementation 

costs. However, the Commission 

recognizes that exchanges incur ongoing 

costs to produce these data. 

Unlike for the Tick Size Pilot, the 

Commission does not believe that daily 

order-based execution quality statistics 

are as important for the Transaction Fee 

Pilot as it was for the Tick Size Pilot and 

that the benefits for the Transaction Fee 

Pilot could be marginal. In particular, 

the Commission believes that tradebased execution quality statistics will be 

sufficient to measure execution quality 

for liquidity taking orders and notes that 

the order routing data to be received by 

the Commission will contain data that 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5297 

1051See supra Section II.B. 

1052See id. 

1053 5 U.S.C. 601 et seq. 

1054 5 U.S.C. 605(b). 

1055The Pilot is discussed in detail in Sections I 

and II, above. We discuss the potential economic 

consequences, including the estimated compliance 

costs and burdens, of the Pilot in Section IV 

(Economic Analysis) and Section III (Paperwork 

Reduction Act) above. 

1056See NYSE Letter I, at 13–14. 

1057 Id. at 14, n.50. 

1058See id. (citing 494 F.3d 161, 177 (D.C. Cir. 

2007)). 

1059See Aeronautical Repair Station Ass’n v. 

FAA, 494 F.3d 161, 177 (D.C. Cir. 2007) (further 

stating that the RFA ‘‘requires that the agency 

conduct the relevant analysis or certify ‘no impact’ 

for those small businesses that are ‘subject to’ the 

regulation, that is, those to which the regulation 

‘will apply.’ ’’). 

1060See supra Sections III (Paperwork Reduction 

Act) and IV (Economic Analysis) (discussing, 

among other things, the current market 

environment and compliance obligations for 

national securities exchanges). 

can facilitate the measurement of 

execution quality for liquidity providing 

orders. 

h. Excluding or Rotating Securities 

As discussed above in Section II.B., 

some commenters were concerned that 

the Pilot could introduce unintended 

adverse competitive effects for ETPs or 

corporate issuers that were placed in 

certain test groups if those test groups 

resulted in negative impacts on the 

trading characteristics of those 

securities. Accordingly, some 

commenters, discussed above, 

recommended either excluding ETPs 

from the Pilot, clustering ETPs 

following similar strategies into a single 

test group, or rotate ETPs through the 

various test groups and the control 

group.1051 Other commenters, discussed 

above, suggested allowing issuers to opt 

out of the Pilot.1052 The benefits of such 

an approach would be the avoidance of 

potential harm or disparate impact on a 

particular ETP or issuer vis-a`-vis its 

peers and primary competitors. As 

discussed more fully above, that 

potential for harm is uncertain at best 

and commenters held deeply conflicting 

views with some asserting that the Pilot 

could cause widespread harm while 

others argued that its impact will be 

mostly positive when considering the 

potential distortions that will be 

mitigated or alleviated in the absence of 

exchange rebates or lower fees. 

Although there is a potential for 

temporary competitive effects as a result 

of the Pilot, outright exclusion of ETPs 

or clustering like ETPs in the same test 

group would harm the 

representativeness of the data produced 

by the Pilot or the ability of the Pilot to 

facilitate causal analyses. Exclusion of 

ETPs, for example, could undermine the 

ability of the Commission to use the 

Pilot results to inform future policy 

making with respect to exchange fees, 

particularly if ETPs have the potential to 

respond differently to changes to fees 

and rebates than do other types of NMS 

stocks. 

Similarly, as discussed above, 

allowing issuers to opt out of the Pilot 

could undermine the representativeness 

of the Pilot’s treatment groups and 

potentially bias the Pilot’s results, 

depending on the number of issuers that 

opt out and whether some unobservable 

characteristic is correlated with both an 

issuer’s decision to opt out and market 

outcomes. In turn, the benefits of the 

Pilot would be reduced if researchers 

are less able to draw specific 

conclusions about the impact of the 

Pilot as a result of issuers opting out of 

the Pilot. 

Another alternative solution would be 

to rotate all stocks and or ETPs through 

each of the test groups for a given 

amount of time such that all stocks and 

ETPs spend the same amount of time in 

each test group. This methodology 

would reduce potential costs by 

mitigating potential competitive effects 

of the Pilot on issuers by ensuring that 

all stocks and ETPs receive similar 

exposure to each test group. Rotation 

would also have the advantage of 

allowing many more changes from one 

test group to another, which would 

create additional independent 

observations about the effect of the Pilot 

on various outcomes, potentially 

increasing statistical power. 

The realization of the benefit of 

additional statistical power would 

depend on how broker-dealers react to 

the changes. If broker-dealers need to 

adjust after every change, the statistical 

power could be lower with rotation than 

without. To the extent that brokerdealers design their order routing 

algorithms to the test group, then the 

time needed for broker-dealers to adapt 

to a set of Pilot securities that changes 

every few months would be minimal. 

The broker-dealer would simply replace 

one list of securities in a given test 

group with another. In this case there 

would likely be a period at the 

beginning of the Pilot where brokerdealers experiment somewhat to 

optimize their algorithms in which the 

data on broker dealer behavior would be 

noisier, but after that initial adjustment, 

broker-dealers would not need to repeat 

their experimentation after every 

rotation. However, to the extent that 

broker-dealers’ order routing algorithms 

are bespoke to a given security, rotation 

could decrease the statistical power of 

the tests because each rotation would 

include a period of time during which 

broker-dealers adjust where the data is 

noisier and harder to extract a signal 

from. 

This alternative, however, is also 

likely to be more complex and have 

higher costs than the Pilot. The 

exchange compliance costs of rotation 

would be marginally greater than the 

compliance costs of the Pilot because it 

would involve additional compliance 

checks and complexity, but would 

likely be largely automated. The added 

complexity for exchanges could be more 

significant because complexity increases 

the risk of errors. To the extent that 

broker-dealers set up their systems to 

automate the rotation, they, too would 

have only marginally higher costs with 

rotation. However, to the extent that 

broker-dealers’ order routing algorithms 

are bespoke to a given security, then 

rotation would be both more costly for 

broker-dealers who would have to reoptimize their algorithms every time a 

stock is included or excluded from a 

given test group. 

V. Regulatory Flexibility Analysis 

The Regulatory Flexibility Act 

(‘‘RFA’’) 1053 requires Federal agencies, 

in promulgating rules, to consider the 

impact of those rules on small entities. 

The Commission certified, pursuant to 

section 605(b) of the RFA,1054 that, if 

adopted, Rule 610T would not have a 

significant impact on a substantial 

number of small entities.1055

The Commission solicited comments 

regarding this certification and received 

1 comment.1056 The commenter stated 

that ‘‘the Commission is obligated under 

the RFA to adequately address the 

Proposal’s costs to small-capitalization 

issuers covered under the statute.’’ 1057

The commenter cited Aeronautical 

Repair Station Ass’n v. FAA as support 

for its assertion that the RFA requires 

the Commission to take into account 

costs to small-capitalization issuers as 

they are ‘‘third-party entities incur[ing] 

downstream costs.’’ 1058 The 

Commission believes the commenter 

misconstrues the legal finding in the 

case to which it cited, as the case 

confirms the general premise that the 

RFA analysis shall focus on the impact 

of a rule on a substantial number of 

small entities that are ‘‘directly affected 

and therefore regulated by,’’ in other 

words subject to, such rule’s 

requirements.1059 For purposes of the 

Commission rulemaking in connection 

with the RFA, Rule 610T, by its terms, 

applies only to national securities 

exchanges registered with the 

Commission under Section 6 of the 

Exchange Act.1060

5298 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

1061See 17 CFR 240.0–10(e). 

With regard to a national securities 

exchange, the Commission’s definition 

of a small entity is an exchange that has 

been exempt from the reporting 

requirements of 17 CFR 242.601 (Rule 

601 of Regulation NMS), and is not 

affiliated with any person (other than a 

natural person) that is not a small 

business or small organization.1061 None 

of the national securities exchanges 

registered under Section 6 of the 

Exchange Act that would be subject to 

the Pilot are ‘‘small entities’’ for 

purposes of the RFA. In particular, none 

of the equities exchanges are exempt 

from Rule 601 of Regulation NMS. 

Accordingly, the proposed rule will not 

apply to any ‘‘small entities.’’ Therefore, 

for the foregoing reasons, the 

Commission again certifies that Rule 

610T will not have a significant 

economic impact on a substantial 

number of small entities for purposes of 

the RFA. 

VI. Statutory Authority and Text of the 

Rule Amendments 

Pursuant to the Exchange Act, and 

particularly Sections 3(b), 5, 6, 11A, 15, 

17, and 23(a) thereof, 15 U.S.C. 78c, 78e, 

78f, 78k–1, 78o, 78q, and 78w(a), the 

Commission amends title 17 of the Code 

of Federal Regulations in the manner set 

forth below. 

List of Subjects 

17 CFR Part 200 

Administrative practice and 

procedure, Authority delegations 

(Government agencies), Organization 

and functions (Government agencies). 

17 CFR Part 242 

Brokers, Reporting and recordkeeping 

requirements, Securities. 

For the reasons set out in the 

preamble, the Commission amends title 

17, chapter II of the Code of Federal 

Regulations as follows: 

PART 200—ORGANIZATION; 

CONDUCT AND ETHICS; AND 

INFORMATION AND REQUESTS 

■ 1. The authority citation for part 200 

continues to read in part as follows: 

Authority: 15 U.S.C. 77c, 77o, 77s, 77z– 

3, 77sss, 78d, 78d–1, 78d–2, 78o–4, 78w, 

78ll(d), 78mm, 80a–37, 80b–11, 7202, and 

7211 et seq., unless otherwise noted. 

* * * * * 

■ 2. Amend § 200.30–3 by adding (a)(84) 

to read as follows: 

§ 200.30–3 Delegation of authority to 

Director of Division of Trading and Markets. 

* * * * * 

(a) * * * 

(84) To issue notices pursuant to 17 

CFR 242.610T(b)(1)(i) and (c) (Rule 

610T(b)(1)(i) and (c)). 

* * * * * 

PART 242—REGULATIONS M, SHO, 

ATS, AC, NMS AND SBSR AND 

CUSTOMER MARGIN REQUIREMENTS 

FOR SECURITY FUTURES 

■ 3. The authority citation for part 242 

continues to read as follows: 

Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 

78b, 78c, 78g(c)(2), 78i(a), 78j, 78k–1(c), 78l, 

78m, 78n, 78o(b), 78o(c), 78o(g), 78q(a), 

78q(b), 78q(h), 78w(a), 78dd–1, 78mm, 80a– 

23, 80a–29, and 80a–37. 

■ 4. Add § 242.610T to read as follows: 

§ 242. 610T Equity transaction fee pilot. 

(a) Pilot pricing restrictions. 

Notwithstanding § 242.610(c), on a pilot 

basis for the period specified in 

paragraph (c) of this section, in 

connection with a transaction in an 

NMS stock, a national securities 

exchange shall not: 

(1) For Test Group 1, impose, or 

permit to be imposed, any fee or fees for 

the display of, or execution against, the 

displayed best bid or best offer of such 

market that exceed or accumulate to 

more than $0.0010 per share; 

(2) For Test Group 2, provide to any 

person, or permit to be provided to any 

person, a rebate or other remuneration 

in connection with an execution, or 

offer, or permit to be offered, any linked 

pricing that provides a discount or 

incentive on transaction fees applicable 

to removing (providing) liquidity that is 

linked to providing (removing) 

liquidity, except to the extent the 

exchange has a rule to provide nonrebate linked pricing to its registered 

market makers in consideration for 

meeting market quality metrics; and 

(3) For the Control Group, impose, or 

permit to be imposed, any fee or fees in 

contravention of the limits specified in 

§ 242.610(c). 

(b) Pilot securities—(1) Initial List of 

Pilot Securities. (i) The Commission 

shall designate by notice the initial List 

of Pilot Securities, and shall assign each 

Pilot Security to one Test Group or the 

Control Group. Further, the Commission 

may designate by notice the assignment 

of NMS stocks that are interlisted on a 

Canadian securities exchange to Test 

Group 2 or the Control Group. 

(ii) For purposes of this section, ‘‘Pilot 

Securities’’ means the NMS stocks 

designated by the Commission on the 

initial List of Pilot Securities pursuant 

to paragraph (b)(1)(i) of this section and 

any successors to such NMS stocks. At 

the time of selection by the 

Commission, an NMS stock must have 

a minimum share price of $2 to be 

included in the Pilot and must have an 

unlimited duration or a duration beyond 

the end of the post-Pilot Period. In 

addition, an NMS stock must have an 

average daily volume of 30,000 shares or 

more to be included in the Pilot. If the 

share price of a Pilot Security in one of 

the Test Groups or the Control Group 

closes below $1 at the end of a trading 

day, it shall be removed from the Pilot. 

(iii) For purposes of this section, 

‘‘primary listing exchange’’ means the 

national securities exchange on which 

the NMS stock is listed. If an NMS stock 

is listed on more than one national 

securities exchange, the national 

securities exchange upon which the 

NMS stock has been listed the longest 

shall be the primary listing exchange. 

(2) Pilot Securities Exchange Lists. (i) 

After the Commission selects the initial 

List of Pilot Securities and prior to the 

beginning of trading on the first day of 

the Pilot Period each primary listing 

exchange shall publicly post on its 

website downloadable files containing a 

list, in pipe-delimited ASCII format, of 

the Pilot Securities for which the 

exchange serves as the primary listing 

exchange. Each primary listing 

exchange shall maintain and update this 

list as necessary prior to the beginning 

of trading on each business day that the 

U.S. equities markets are open for 

trading through the end of the post-Pilot 

Period. 

(ii) The Pilot Securities Exchange 

Lists shall contain the following fields: 

(A) Ticker Symbol; 

(B) Security Name; 

(C) Primary Listing Exchange; 

(D) Security Type: 

(1) Common Stock; 

(2) ETP; 

(3) Preferred Stock; 

(4) Warrant; 

(5) Closed-End Fund; 

(6) Structured Product; 

(7) ADR; and 

(8) Other; 

(E) Pilot Group: 

(1) Control Group; 

(2) Test Group 1; and 

(3) Test Group 2; 

(F) Stratum Code; and 

(G) Date the Entry Was Last Updated. 

(3) Pilot Securities Change Lists. (i) 

Prior to the beginning of trading on each 

trading day the U.S. equities markets are 

open for trading throughout the end of 

the post-Pilot Period, each primary 

listing exchange shall publicly post on 

its website downloadable files 

containing a Pilot Securities Change 

List, in pipe-delimited ASCII format, 

that lists each separate change 

applicable to any Pilot Securities for 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5299 

which it serves or has served as the 

primary listing exchange. The Pilot 

Securities Change List will provide a 

cumulative list of all changes to the 

Pilot Securities that the primary listing 

exchange has made to the Pilot 

Securities Exchange List published 

pursuant to paragraph (b)(2) of this 

section. 

(ii) In addition to the fields required 

for the Pilot Securities Exchange List, 

the Pilot Securities Change Lists shall 

contain the following fields: 

(A) New Ticker Symbol (if 

applicable); 

(B) New Security Name (if 

applicable); 

(C) Deleted Date (if applicable); 

(D) Date Security Closed Below $1 (if 

applicable); 

(E) Effective Date of Change; and 

(F) Reason for the Change. 

(4) Posting requirement. All 

information publicly posted in 

downloadable files pursuant to 

paragraphs (b)(2) and (3) of this section 

shall be and remain freely and 

persistently available and easily 

accessible by the general public on the 

primary listing exchange’s website for a 

period of not less than five years from 

the conclusion of the post-Pilot Period. 

In addition, the information shall be 

presented in a manner that facilitates 

access by machines without 

encumbrance, and shall not be subject 

to any restrictions, including 

restrictions on access, retrieval, 

distribution and reuse. 

(c) Pilot duration. (1) The Pilot shall 

include: 

(i) A six-month ‘‘pre-Pilot Period;’’ 

(ii) A two-year ‘‘Pilot Period’’ with an 

automatic sunset at the end of the first 

year unless, no later than thirty days 

prior to that time, the Commission 

publishes a notice that the Pilot shall 

continue for up to one additional year; 

and 

(iii) A six-month ‘‘post-Pilot Period.’’ 

(2) The Commission shall designate 

by notice the commencement and 

termination dates of the pre-Pilot 

Period, Pilot Period, and post-Pilot 

Period, including any suspension of the 

one-year sunset of the Pilot Period. 

(d) Order routing datasets. 

Throughout the duration of the Pilot, 

including the pre-Pilot Period and postPilot Period, each national securities 

exchange that facilitates trading in NMS 

stocks shall prepare and transmit to the 

Commission a file, in pipe-delimited 

ASCII format, no later than the last day 

of each month, containing sets of order 

routing data, for the prior month, in 

accordance with the specifications in 

paragraphs (d)(1) and (2) of this section. 

For the pre-Pilot Period, order routing 

datasets shall include each NMS stock. 

For the Pilot Period and post-Pilot 

Period, order routing datasets shall 

include each Pilot Security. Each 

national securities exchange shall treat 

the order routing datasets as regulatory 

information and shall not access or use 

that information for any commercial or 

non-regulatory purpose. 

(1) Dataset of daily volume statistics, 

with field names as the first record and 

a consistent naming convention that 

indicates the exchange and date of the 

file, that include the following 

specifications of liquidity-providing 

orders by security and separating orders 

by order designation (exchanges may 

exclude auction orders) and order 

capacity: 

(i) Code identifying the submitting 

exchange. 

(ii) Eight-digit code identifying the 

date of the calendar day of trading in the 

format ‘‘yyyymmdd.’’ 

(iii) Symbol assigned to an NMS stock 

(including ETPs) under the national 

market system plan to which the 

consolidated best bid and offer for such 

a security are disseminated. 

(iv) The broker-dealer’s CRD number 

and MPID. 

(v) Order type code: 

(A) Inside-the-quote orders; 

(B) At-the-quote limit orders; and 

(C) Near-the-quote limit orders. 

(vi) Order size codes: 

(A) <100 share bucket; 

(B) 100–499 share bucket; 

(C) 500–1,999 share bucket; 

(D) 2,000–4,999 share bucket; 

(E) 5,000–9,999 share bucket; and 

(F) ≥10,000 share bucket. 

(vii) Number of orders received. 

(viii) Cumulative number of shares of 

orders received. 

(ix) Cumulative number of shares of 

orders cancelled prior to execution. 

(x) Cumulative number of shares of 

orders executed at receiving market 

center. 

(xi) Cumulative number of shares of 

orders routed to another execution 

venue. 

(xii) Cumulative number of shares of 

orders executed within: 

(A) 0 to < 100 microseconds of order 

receipt; 

(B) 100 microseconds to < 100 

milliseconds of order receipt; 

(C) 100 milliseconds to < 1 second of 

order receipt; 

(D) 1 second to < 30 seconds of order 

receipt; 

(E) 30 seconds to < 60 seconds of 

order receipt; 

(F) 60 seconds to < 5 minutes of order 

receipt; 

(G) 5 minutes to < 30 minutes of order 

receipt; and 

(H) ≥ 30 minutes of order receipt. 

(2) Dataset of daily volume statistics, 

with field names as the first record and 

a consistent naming convention that 

indicates the exchange and date of the 

file, that include the following 

specifications of liquidity-taking orders 

by security and separating orders by 

order designation (exchanges may 

exclude auction orders) and order 

capacity: 

(i) Code identifying the submitting 

exchange. 

(ii) Eight-digit code identifying the 

date of the calendar day of trading in the 

format ‘‘yyyymmdd.’’ 

(iii) Symbol assigned to an NMS stock 

(including ETPs) under the national 

market system plan to which the 

consolidated best bid and offer for such 

a security are disseminated. 

(iv) The broker-dealer’s CRD number 

and MPID. 

(v) Order type code: 

(A) Market orders; and 

(B) Marketable limit orders. 

(vi) Order size codes: 

(A) <100 share bucket; 

(B) 100–499 share bucket; 

(C) 500–1,999 share bucket; 

(D) 2,000–4,999 share bucket; 

(E) 5,000–9,999 share bucket; and 

(F) ≥10,000 share bucket. 

(vii) Number of orders received. 

(viii) Cumulative number of shares of 

orders received. 

(ix) Cumulative number of shares of 

orders cancelled prior to execution. 

(x) Cumulative number of shares of 

orders executed at receiving market 

center. 

(xi) Cumulative number of shares of 

orders routed to another execution 

venue. 

(e) Exchange Transaction Fee 

Summary. Throughout the duration of 

the Pilot, including the pre-Pilot Period 

and post-Pilot Period, each national 

securities exchange that facilitates 

trading in NMS stocks shall publicly 

post on its website downloadable files 

containing information relating to 

transaction fees and rebates and changes 

thereto (applicable to securities having 

a price equal to or greater than $1). Each 

national securities exchange shall post 

its initial Exchange Transaction Fee 

Summary prior to the start of trading on 

the first day of the pre-Pilot Period and 

update its Exchange Transaction Fee 

Summary on a monthly basis within 10 

business days of the first day of each 

calendar month, to reflect data collected 

for the prior month. The information 

prescribed by this section shall be made 

available using the most recent version 

of the XML schema published on the 

Commission’s website. All information 

publicly posted pursuant to this 

5300 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

paragraph (e) shall be and remain freely 

and persistently available and easily 

accessible on the national securities 

exchange’s website for a period of not 

less than five years from the conclusion 

of the post-Pilot Period. In addition, the 

information shall be presented in a 

manner that facilitates access by 

machines without encumbrance, and 

shall not be subject to any restrictions, 

including restrictions on access, 

retrieval, distribution, and reuse. The 

Exchange Transaction Fee Summary 

shall contain the following fields: 

(1) Exchange Name; 

(2) Record Type Indicator: 

(i) Reported Fee is the Monthly 

Average; 

(ii) Reported Fee is the Median; and 

(iii) Reported Fee is the Spot Monthly; 

(3) Participant Type: 

(i) Registered Market Maker; and 

(ii) All Others; 

(4) Pilot Group: 

(i) Control Group; 

(ii) Test Group 1; and 

(iii) Test Group 2; 

(5) Applicability to Displayed and 

Non-Displayed Interest: 

(i) Displayed only; 

(ii) Non-displayed only; and 

(iii) Both displayed and nondisplayed; 

(6) Applicability to Top and Depth of 

Book Interest: 

(i) Top of book only; 

(ii) Depth of book only; and 

(iii) Both top and depth of book; 

(7) Effective Date of Fee or Rebate; 

(8) End Date of Currently Reported 

Fee or Rebate (if applicable); 

(9) Month and Year of the monthly 

realized reported average and median 

per share fees and rebates; 

(10) Pre/Post Fee Changes Indicator (if 

applicable) denoting implementation of 

a new fee or rebate on a day other than 

the first day of the month; 

(11) Base and Top Tier Fee or Rebate: 

(i) Take (to remove): 

(A) Base Fee/Rebate reflecting the 

standard amount assessed or rebated 

before any applicable discounts, tiers, 

caps, or other incentives are applied; 

and 

(B) Top Tier Fee/Rebate reflecting the 

amount assessed or rebated after any 

applicable discounts, tiers, caps, or 

other incentives are applied; and 

(ii) Make (to provide): 

(A) Base Fee/Rebate reflecting the 

standard amount assessed or rebated 

before any applicable discounts, tiers, 

caps, or other incentives are applied; 

and 

(B) Top Tier Fee/Rebate reflecting the 

amount assessed or rebated after any 

applicable discounts, tiers, caps, or 

other incentives are applied; 

(12) Average Take Fee (Rebate)/ 

Average Make Rebate (Fee), by 

Participant Type, Test Group, 

Displayed/Non-Displayed, and Top/ 

Depth of Book; and 

(13) Median Take Fee (Rebate)/ 

Median Make Fee (Rebate), by 

Participant Type, Test Group, 

Displayed/Non-Displayed, and Top/ 

Depth of Book. 

By the Commission. 

Dated: December 19, 2018. 

Brent J. Fields, 

Secretary. 

Note: The following Appendix will not 

appear in the Code of Federal Regulations. 

Appendix A 

Key to Comment Letters Cited in 

Proposed Transaction Fee Pilot for NMS 

Stocks (File No. S7–05–18): 

1. E-mail from David Adorney, C & C 

Trading LLC, to Commission, dated 

March 15, 2018 (‘‘Adorney Email’’). 

2. Letter from Peter L. Swan, Professor 

of Finance, School of Banking and 

Finance, UNSW Sydney Business 

School, to Brent J. Fields, Secretary, 

Commission, dated March 26, 2018 

(‘‘Swan Letter’’). 

3. Letter from O. Mason Hawkins, CFA, 

Chairman & CEO, et al., 

Southeastern Asset Management, 

Inc., et al., to Brent J. Fields, 

Secretary, Commission, dated April 

6, 2018 (‘‘Joint Asset Managers 

Letter’’). 

4. Letter from Adam D. Clark-Joseph, 

University of Illinois at UrbanaChampaign, to Brent J. Fields, 

Secretary, Commission, dated April 

9, 2018 (‘‘Clark-Joseph Letter’’). 

5. Letter from Brent Woods, Chief 

Executive Officer, and Joseph 

Scafidi, Director of Trading, 

Brandes Investment Partners, to 

Brent J. Fields, Secretary, 

Commission, dated April 10, 2018 

(‘‘Brandes Letter’’). 

6. Letter from Sal Arnuk and Joe 

Saluzzi, Partners, Co-Founders and 

Co-Heads of Equity Trading, 

Themis Trading LLC, to Brent J. 

Fields, Secretary, Commission, 

dated April 27, 2018 (‘‘Themis 

Trading Letter I’’). 

7. Presentation from the Institutional 

Equity Division, Morgan Stanley, to 

the Division of Trading and 

Markets, Commission, dated May 1, 

2018 (‘‘Morgan Stanley 

Presentation’’). 

8. E-mail from Tim Quast, President, 

Modern Networks IR LLC, to Brett 

Redfearn, Director, Division of 

Trading and Markets, Commission, 

dated May 2, 2018 (‘‘ModernIR Email’’). 

9. Letter from Sean D. Paylor, Trader, 

AJO, L.P., to Brent J. Fields, 

Secretary, Commission, dated May 

7, 2018 (‘‘AJO Letter’’). 

10. Letter from Tim Quast, President & 

Founder, Modern Networks IR LLC, 

to Brent J. Fields, Secretary, 

Commission, dated May 9, 2018 

(‘‘ModernIR Letter’’). 

11. Letter from Jeffrey P. Mahoney, 

General Counsel, Council of 

Institutional Investors, to Brent J. 

Fields, Secretary, Commission, 

dated May 10, 2018 (‘‘CII Letter’’). 

12. Letter from Kelvin To, Founder& 

President, Data Boiler Technologies, 

LLC, to Brent J. Fields, Secretary, 

Commission, dated May 14, 2018 

(‘‘Data Boiler Letter’’). 

13. Letter from Chris Barnard to 

Commission, dated May 14, 2018 

(‘‘Barnard Letter’’). 

14. Letter from David Mechner, Chief 

Executive Officer, Pragma 

Securities, to Brent J. Fields, 

Secretary, Commission, dated May 

14, 2018 (‘‘Pragma Letter’’). 

15. Letter from Stuart J. Kaswell, 

Executive Vice President & 

Managing Director, General 

Counsel, Managed Funds 

Association, to Brent J. Fields, 

Secretary, Commission, dated May 

15, 2018 (‘‘MFA Letter’’). 

16. Letter from Timothy J. Mahoney, 

Chief Executive Officer, BIDS 

Trading L.P., to Brent J. Fields, 

Secretary, Commission, dated May 

15, 2018 (‘‘BIDS Letter’’). 

17. Letter from Brent Robertson, 

Managing Director, Trading, and 

Rob Gouley, Principal, Trading, 

Ontario Municipal Employees 

Retirement System Administration 

Corporation, to Brent J. Fields, 

Secretary, Commission, dated May 

15, 2018 (‘‘OMERS Letter’’). 

18. Letter from Marc Lipson, Robert F. 

Vandell Research Professor, 

Professor of Business 

Administration, University of 

Virginia School, Darden School of 

Business, to Commission, dated 

May 15, 2018 (‘‘Lipson Letter’’). 

19. Letter from Anthony W. Godonis, 

Principal, Director of Trading, 

Copeland Capital Management, 

LLC, to Brent J. Fields, Secretary, 

Commission, dated May 18, 2018 

(‘‘Copeland Letter’’). 

20. Letter from George Hessler, CEO, 

Magma Trading, to Brent J. Fields, 

Secretary, Commission, dated May 

18, 2018 (‘‘Magma Letter’’). 

21. Letter from Eric Swanson, CEO, XTX 

Markets LLC, to Brent J. Fields, 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5301 

1062The Commission notes that it separately 

received a copy of a signatory page already attached 

to this letter from Karl Polen, Chief Investment 

Officer, Arizona State Retirement System, dated 

May 21, 2018. For purposes of this summary, the 

copy has not been counted as a separate letter or 

comment. 

Secretary, Commission, dated May 

22, 2018 (‘‘XTX Letter’’). 

22. Letter from Douglas A. Cifu, Chief 

Executive Officer, Virtu Financial 

Inc., to Brent J. Fields, Secretary, 

Commission, dated May 23, 2018 

(‘‘Virtu Letter’’). 

23. Letter from Susan M. Olson, General 

Counsel, Investment Company 

Institute, to Brent J. Fields, 

Secretary, Commission, dated May 

23, 2018 (‘‘ICI Letter I’’). 

24. Letter from Mary E. Keefe, Managing 

Director, Regulatory Affairs, 

Nuveen, LLC, to Brent J. Fields, 

Secretary, Commission, dated May 

23, 2018 (‘‘Nuveen Letter’’). 

25. Letter from Thomas K. Lee, 

Executive Director & CIO, et al., 

New York State Teachers’ 

Retirement System, to Brent J. 

Fields, Secretary, Commission, 

dated May 23, 2018 (‘‘NYSTRS 

Letter’’). 

26. Letter from Hubert De Jesus, Global 

Head of Market Structure and 

Electronic Trading, and Joanne 

Medero, U.S. Head of Global Public 

Policy, BlackRock, Inc., to Brent J. 

Fields, Secretary, Commission, 

dated May 23, 2018 (‘‘BlackRock 

Letter’’). 

27. Letter from Frank L. Jobert, Jr., 

Executive Director, Louisiana 

Trustee Education Council, to Brent 

J. Fields, Secretary, Commission, 

dated May 23, 2018 (‘‘LATEC 

Letter’’). 

28. Letter from Joanna Mallers, 

Secretary, FIA Principal Traders 

Group, to Brent J. Fields, Secretary, 

Commission, dated May 24, 2018 

(‘‘FIA Letter’’). 

29. Letter from Theodore R. Lazo, 

Managing Director & Associate 

General Counsel, Securities 

Industry and Financial Markets 

Association, to Brent J. Fields, 

Secretary, Commission, dated May 

24, 2018 (‘‘SIFMA Letter’’). 

30. Letter from Patrick J. Healy, Founder 

& CEO, Issuer Network, to Brent J. 

Fields, Secretary, Commission, 

dated May 24, 2018 (‘‘Issuer 

Network Letter I’’). 

31. Letter from Linda M. Giordano, CoFounder & CEO, and Jeffrey M. 

Alexander, Co-Founder & President, 

Babelfish Analytics, Inc., to Brent J. 

Fields, Secretary, Commission, 

dated May 24, 2018 (‘‘Babelfish 

Letter’’). 

32. Letter from Dennis M. Kelleher, 

President & CEO, et al., Better 

Markets, Inc., to Brent J. Fields, 

Secretary, Commission, dated May 

24, 2018 (‘‘Better Markets Letter’’). 

33. Letter from Rich Steiner, Electronic 

Trading Strategist, RBC Capital 

Markets, to Brent Fields, Secretary, 

Commission, dated May 24, 2018 

(‘‘RBC Letter I’’). 

34. Letter from William H. Hebert, 

Managing Director, Financial 

Information Forum, to Brent J. 

Fields, Secretary, Commission, 

dated May 24, 2018 (‘‘FIF Letter’’). 

35. Letter from Paul M. Russo, Managing 

Director, Goldman Sachs & Co. LLC, 

to Brent J. Fields, Secretary, 

Commission, dated May 24, 2018 

(‘‘Goldman Sachs Letter’’). 

36. Letter from Tyler Gellasch, 

Executive Director, Healthy Markets 

Association, to Brent J. Fields, 

Secretary, Commission, dated May 

24, 2018 (‘‘Healthy Markets Letter 

I’’). 

37. Letter from Jason Clague, Executive 

Vice President, Operational 

Services, Charles Schwab & Co., 

Inc., to Brent J. Fields, Secretary, 

Commission, dated May 25, 2018 

(‘‘Schwab Letter’’). 

38. Letter from Joseph Brennan, 

Principal & Global Head of Equity 

Investment Group, Vanguard, to 

Brent J. Fields, Secretary, 

Commission, dated May 25, 2018 

(‘‘Vanguard Letter’’). 

39. Letter from Marc R. Bryant, Deputy 

General Counsel, Fidelity 

Investments, to Brent J. Fields, 

Secretary, Commission, dated May 

25, 2018 (‘‘Fidelity Letter’’). 

40. Letter from Stephen John Berger, 

Managing Director, Government & 

Regulatory Policy, Citadel 

Securities, to Brent J. Fields, 

Secretary, Commission, dated May 

25, 2018 (‘‘Citadel Letter’’). 

41. Letter from Kevin Cronin, Global 

Head of Trading, Invesco Ltd., to 

Brent J. Fields, Secretary, 

Commission, dated May 25, 2018 

(‘‘Invesco Letter’’). 

42. Letter from Micah Hauptman, 

Financial Services Counsel, 

Consumer Federation of America, to 

Brent J. Fields, Secretary, 

Commission, dated May 25, 2018 

(‘‘CFA Letter’’). 

43. Letter from Heidi W. Hardin, 

General Counsel, MFS Investment 

Management, to Brent J. Fields, 

Secretary, Commission, dated May 

25, 2018 (‘‘MFS Letter’’). 

44. Letter from Timothy J. Coyne, Global 

Head of ETF Capital Markets, and 

Nathaniel N. Evarts, Head of 

Trading, Americas, State Street 

Global Advisors, to Brent J. Fields, 

Secretary, Commission, dated May 

25, 2018 (‘‘State Street Letter’’). 

45. Letter from Dennis Simmons, 

Executive Director, Committee on 

Investment of Employee Benefit 

Access, to Brent J. Fields, Secretary, 

Commission, dated May 25, 2018 

(‘‘CIEBA Letter’’). 

46. Letter from Lisa Mahon Lynch, 

Director, Trading & Counterparty 

Services, Wellington Management 

Company LLP, to Brent J. Fields, 

Secretary, Commission, dated May 

25, 2018 (‘‘Wellington Letter’’). 

47. Letter from Kevin Duggan, Managing 

Director, Execution & Treasury, 

Capital Markets, Ontario Teachers’ 

Pension Plan, et al., to Brent J. 

Fields, Secretary, Commission, 

dated May 25, 2018 (‘‘Joint Pension 

Plan Letter’’).1062

48. Letter from Tim Gately, Managing 

Director, Head of Americas 

Equities, Citigroup Global Markets 

Inc., to Brent J. Fields, Secretary, 

Commission, dated May 25, 2018 

(‘‘Citi Letter’’). 

49. Letter from Michael Jacejko, Birch 

Bay Capital, LLC, to Brent J. Fields, 

Secretary, Commission, dated May 

25, 2018 (‘‘Birch Bay Letter’’). 

50. Letter from Cynthia Lo Bessette, 

General Counsel & Executive Vice 

President, OFI Global Asset 

Management, Inc., et al., 

OppenheimerFunds, Inc., to Brent J. 

Fields, Secretary, Commission, 

dated May 25, 2018 (‘‘Oppenheimer 

Letter’’). 

51. Letter from Ray Ross, Chief 

Technology Officer, Clearpool 

Group, to Brent J. Fields, Secretary, 

Commission, dated May 25, 2018 

(‘‘Clearpool Letter’’). 

52. Letter from James J. Angel, Associate 

Professor of Finance, Georgetown 

University, McDonough School of 

Business, to Commission, dated 

May 25, 2018 (‘‘Angel Letter I’’). 

53. Letter from Chester Spatt, Former 

Chief Economist, Commission, to 

Brent J. Fields, Secretary, 

Commission, dated May 25, 2018 

(‘‘Spatt Letter’’). 

54. Letter from Joseph Kinahan, 

Managing Director, Client Advocacy 

& Market Structure, TD Ameritrade, 

Inc., to Brent J. Fields, Secretary, 

Commission, dated May 25, 2018 

(‘‘TD Ameritrade Letter’’). 

55. Letter from Edward S. Knight, 

Executive Vice President & Global 

Chief Legal & Policy Officer, 

Nasdaq, Inc., to Brent J. Fields, 

Secretary, Commission, dated May 

25, 2018 (‘‘Nasdaq Letter I’’). 

56. Letter from Edward T. Tilly, 

Chairman & Chief Executive Officer, 

5302 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

Cboe Global Markets, Inc., to Brent 

J. Fields, Secretary, Commission, 

dated May 25, 2018 (‘‘Cboe Letter 

I’’). 

57. Letter from Matt D. Lyons, Global 

Equity Trading Manager, and Peter 

D. Stutsman, U.S. Regional Equity 

Trading Manager, The Capital 

Group Companies, to Brent J. 

Fields, Secretary, Commission, 

dated May 30, 2018 (‘‘Capital 

Group Letter’’). 

58. Letter from Mike Rask, Chairman of 

the Board, and James Toes, 

President & CEO, Security Traders 

Association, to Brent J. Fields, 

Secretary, Commission, dated May 

31, 2018 (‘‘STA Letter’’). 

59. Letter from Alan Harris, to 

Commission, dated May 31, 2018 

(‘‘Harris Letter’’). 

60. Letter from Elizabeth K. King, 

General Counsel & Corporate 

Secretary, NYSE Group, Inc., to 

Brent J. Fields, Secretary, 

Commission, dated May 31, 2018 

(‘‘NYSE Letter I’’). 

61. Letter from Kimberly Unger, CEO & 

Executive Director, The Security 

Traders Association of New York, 

Inc., to Brent J. Fields, Secretary, 

Commission, dated June 1, 2018 

(‘‘STANY Letter’’). 

62. Letter from John Ramsay, Chief 

Market Policy Officer, Investors 

Exchange LLC, to Brent J. Fields, 

Secretary, Commission, dated May 

30, 2018 (‘‘IEX Letter I’’). 

63. Market Commentary by Victor Lin, 

Credit Suisse, dated June 4, 2018 

(‘‘Credit Suisse Commentary’’). 

64. Letter from Rajesh Sharma, 

Corporate Secretary, Apache 

Corporation, to Brent J. Fields, 

Secretary, Commission, dated June 

7, 2018 (‘‘Apache Letter’’). 

65. Letter from ‘‘Danny Mulson’’ to 

Commission, dated June 7, 2018 

(‘‘Mulson Letter I’’). 

66. Letter from J.W. Verret, Associate 

Professor of Law, George Mason 

University, Antonin Scalia Law 

School, to Brent J. Fields, Secretary, 

Commission, dated June 11, 2018 

(‘‘Verret Letter I’’). 

67. Letter from James D. Rollins III, 

Chairman & Chief Executive Officer, 

BancorpSouth Bank, to Brent J. 

Fields, Secretary, Commission, 

dated June 11, 2018 

(‘‘BancorpSouth Letter’’). 

68. Letter from Jonathan A. Clark, Chief 

Executive Officer, and James C. 

Dolan, Chief Compliance Officer, 

Luminex Trading & Analytics LLC, 

to Brent J. Fields, Secretary, 

Commission, dated June 12, 2018 

(‘‘Luminex Letter’’). 

69. Letter from Mehmet Kinak, Vice 

President—Global Head of 

Systematic Trading & Market 

Structure, and Jonathan Siegel, Vice 

President—Senior Legal Counsel 

(Legislative & Regulatory Affairs), T. 

Rowe Price, to Brent J. Fields, 

Secretary, Commission, dated June 

12, 2018 (‘‘T. Rowe Price Letter’’). 

70. Letter from Jon R. Moeller, Vice 

Chairman & Chief Financial Officer, 

The Procter & Gamble Company, to 

Brent J. Fields, Secretary, 

Commission, dated June 13, 2018 

(‘‘P&G Letter’’). 

71. Letter from William P. Neuberger, 

Managing Director, Global Co-Head 

of Morgan Stanley Electronic 

Trading, and Andrew F. Silverman, 

Managing Director, Global Co-Head 

of Morgan Stanley Electronic 

Trading, Morgan Stanley & Co. LLC, 

to Brent J. Fields, Secretary, 

Commission, dated June 14, 2018 

(‘‘Morgan Stanley Letter’’). 

72. Letter from Larry Harris, Fred V. 

Keenan Chair in Finance, USC 

Marshall School of Business, to 

Brent J. Fields, Secretary, 

Commission, dated June 15, 2018 

(‘‘Larry Harris Letter’’). 

73. Letter from Keith Neumeyer, 

President & CEO, First Majestic 

Silver Corp., to Brent J. Fields, 

Secretary, Commission, dated June 

19, 2018 (‘‘First Majestic Letter’’). 

74. Letter from ‘‘Avarice Pleonexia’’ to 

Commission, dated June 20, 2018 

(‘‘Pleonexia Letter’’). 

75. Letter from John M. Freeman, 

Executive Vice President, Chief 

Legal Officer & Corporate Secretary, 

McDermott, to Brent J. Fields, 

Secretary, Commission, dated June 

21, 2018 (‘‘McDermott Letter’’). 

76. Letter from Janet McGinness, 

Corporate Secretary, Mastercard, 

Inc., to Brent J. Fields, Secretary, 

Commission, dated June 21, 2018 

(‘‘Mastercard Letter’’). 

77. Letter from Mark Elliott, Chief 

Financial Officer, Level Brands, 

Inc., to Brent J. Fields, Secretary, 

Commission, dated June 21, 2018 

(‘‘Level Brands Letter’’). 

78. Letter from Geir ;ivind Nyga ̊rd, 

Chief Investment Officer Asset 

Strategies, and Simon Emrich, Head 

of Market Structure Strategies, 

Norges Bank Investment 

Management, to Brent J. Fields, 

Secretary, Commission, dated June 

21, 2018 (‘‘Norges Letter’’). 

79. Letter from Neal V. Fenwick, 

Executive Vice President & Chief 

Financial Officer, ACCO Brands, 

Inc., to Brent J. Fields, Secretary, 

Commission, dated June 21, 2018 

(‘‘ACCO Letter’’). 

80. Letter from Thomas R. Kubera, Chief 

Accounting Officer & Interim Chief 

Financial Officer, SIFCO Industries, 

Inc., to Brent J. Fields, Secretary, 

Commission, dated June 21, 2018 

(‘‘SIFCO Letter’’). 

81. Letter from J.A. to Brent J. Fields, 

Secretary, Commission, dated June 

22, 2018 (‘‘JA Letter I’’). 

82. Letter from Timothy P. Olson, 

Senior Corporate Counsel & 

Corporate Secretary, NorthWestern 

Corporation, to Brent J. Fields, 

Secretary, Commission, dated June 

22, 2018 (‘‘NorthWestern Letter’’). 

83. Letter from Eric D. Koster, General 

Counsel & Secretary, Ethan Allen 

Interiors, Inc., to Brent J. Fields, 

Secretary, Commission, dated June 

22, 2018 (‘‘Ethan Allen Letter’’). 

84. Letter from Mark H. Collin, Senior 

Vice President, Chief Financial 

Officer & Treasurer, Unitil 

Corporation, to Brent J. Fields, 

Secretary, Commission, dated June 

22, 2018 (‘‘Unitil Corporation’’). 

85. Letter from Michael R. Peterson, 

Vice President, Corporate Secretary, 

& Associate General Counsel, to 

Brent J. Fields, Secretary, 

Commission, dated June 22, 2018 

(‘‘Johnson Letter’’). 

86. Letter from ‘‘Anonymous 

Anonymous’’ to Commission, dated 

June 22, 2018 (‘‘Anonymous Letter 

I’’). 

87. Letter from Stephen C. Richter, 

Executive Vice President & CFO, 

Weingarten Realty, to Brent J. 

Fields, Secretary, Commission, 

dated June 22, 2018 (‘‘Weingarten 

Letter’’). 

88. Letter from Richard L. Travis, Jr., 

Chief Financial Officer, Ennis, Inc., 

to Brent J. Fields, Secretary, 

Commission, dated June 22, 2018 

(‘‘Ennis Letter’’). 

89. Letter from Bryan H. Fairbanks, 

Chief Financial Officer, Trex 

Company, to Brent J. Fields, 

Secretary, Commission, dated June 

22, 2018 (‘‘Trex Letter’’). 

90. Letter from John J. Manning, Vice 

President, General Counsel & 

Secretary, Sensient Technologies 

Corporation, to Brent J. Fields, 

Secretary, Commission, dated June 

25, 2018 (‘‘Sensient Letter’’). 

91. Letter from John Christofilos, Senior 

Vice-President & Chief Trading 

Officer, AGF Investments Inc., to 

Brent J. Fields, Secretary, 

Commission, dated June 25, 2018 

(‘‘AGF Letter’’). 

92. Letter from Dean Shigemura, Vice 

Chairman & Chief Financial Officer, 

Bank of Hawaii Corporation, to 

Brent J. Fields, Secretary, 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5303 

Commission, dated June 25, 2018 

(‘‘Hawaii Letter’’). 

93. Letter from Jerry Fowden, Chief 

Executive Officer, Cott Corporation, 

to Brent J. Fields, Secretary, 

Commission, dated June 26, 2018 

(‘‘Cott Letter’’). 

94. Letter from Adam F. Wergeles, EVP 

& General Counsel, Leaf Group Ltd., 

to Brent J. Fields, Secretary, 

Commission, dated June 26, 2018 

(‘‘Leaf Letter’’). 

95. Letter from Haim Bodek, Managing 

Principal, and Stanislav 

Dolgopolov, Chief Regulatory 

Officer, Decimus Capital Markets, 

LLC, to Brent J. Fields, Secretary, 

Commission, dated June 26, 2018 

(‘‘Decimus Letter’’). 

96. Letter from Michael Sherman, 

Senior Vice President & General 

Counsel, Genesis Healthcare, Inc., 

to Brent J. Fields, Secretary, 

Commission, dated June 26, 2018 

(‘‘Genesis Letter’’). 

97. Letter from ‘‘Anonymous 

Anonymous’’ to Commission, dated 

June 27, 2018 (‘‘Anonymous Letter 

II’’). 

98. Letter from Michael J. Schewel, 

Vice-President, General Counsel & 

Secretary, Tredegar Corporation, to 

Brent J. Fields, Secretary, 

Commission, dated June 27, 2018 

(‘‘Tredegar Letter’’). 

99. Letter from Nicholas C. Taylor, 

Chairman & CEO, Mexco Energy 

Corporation, to Brent J. Fields, 

Secretary, Commission, dated June 

27, 2018 (‘‘Mexco Letter’’). 

100. Letter from John Ramsay, Chief 

Market Policy Officer, Investors 

Exchange LLC, to Brent J. Fields, 

Secretary, Commission, dated June 

27, 2018 (‘‘IEX Letter II’’). 

101. Presentation from Security Traders 

Association to Commission, dated 

June 28, 2018 (‘‘STA 

Presentation’’). 

102. Letter from Timothy W. Gorman, 

Executive Vice President & Chief 

Financial Officer, Energizer 

Holdings, Inc., to Brent J. Fields, 

Secretary, Commission, dated June 

28, 2018 (‘‘Energizer Letter’’). 

103. Letter from Christopher A. 

Iacovella, Chief Executive Officer, 

American Securities Association, to 

Brent J. Fields, Secretary, 

Commission, dated June 28, 2018 

(‘‘ASA Letter’’). 

104. Letter from W. Stancil Starnes, 

Chairman, President & Chief 

Executive Officer, ProAssurance 

Corporation, to Brent J. Fields, 

Secretary, Commission, dated June 

29, 2018 (‘‘ProAssurance Letter’’). 

105. Letter from Isabel Janci, Vice 

President, Investor Relations, The 

Home Depot, to Brent J. Field[s], 

Secretary, Commission, dated June 

29, 2018 (‘‘Home Depot Letter’’). 

106. Letter from Eric P. Sills, CEO & 

President, Standard Motor 

Products, Inc., to Brent J. Fields, 

Secretary, Commission, dated July 

2, 2018 (‘‘SMP Letter’’). 

107. Letter from Christopher T. Weber, 

Executive Vice President & Chief 

Financial Officer, Halliburton, to 

Brent J. Fields, Secretary, 

Commission, dated July 2, 2018 

(‘‘Halliburton Letter’’). 

108. Letter from Jennifer D. Whalen, 

Senior Vice President & Chief 

Financial Officer, Era Group Inc., to 

Brent J. Fields, Secretary, 

Commission, dated July 2, 2018 

(‘‘Era Letter’’). 

109. Letter from David M. Weisberger, 

Head of Equities, ViableMkts, to 

Brent J. Fields, Secretary, 

Commission, dated July 2, 2018 

(‘‘ViableMkts Letter’’). 

110. Letter from John S. Fischer, General 

Counsel, Natural Grocers by 

Vitamin Cottage, Inc., to Brent J. 

Fields, Secretary, Commission, 

dated July 3, 2018 (‘‘Natural 

Grocers Letter’’). 

111. Letter from Mark J. Airola, Senior 

Vice President, General Counsel, 

Chief Administrative Officer & 

Corporate Secretary, Newpark 

Resources, Inc., to Brent J. Fields, 

Secretary, Commission, dated July 

3, 2018 (‘‘Newpark Letter’’). 

112. Letter from Jenny H. Parker, Senior 

Vice President—Finance, Secretary 

& Treasurer, Haverty Furniture 

Companies, Inc., to Brent J. Fields, 

Secretary, Commission, dated July 

3, 2018 (‘‘Haverty Letter’’). 

113. Letter from Adam W. Miller, Chief 

Financial Officer & Treasurer, 

Knight-Swift Transportation 

Holdings Inc., to Brent J. Fields, 

Secretary, Commission, dated July 

5, 2018 (‘‘Knight-Swift Letter’’). 

114. Letter from Tyler Gellasch, 

Executive Director, Healthy Markets 

Association, to Brent J. Fields, 

Secretary, Commission, dated July 

6, 2018 (‘‘Healthy Markets Letter 

II’’). 

115. Letter from R. Dale Lynch, 

Executive Vice President—Chief 

Financial Officer, Federal 

Agricultural Mortgage Corporation, 

to Brent J. Fields, Secretary, 

Commission, dated July 9, 2018 

(‘‘Farmer Mac Letter’’). 

116. Letter from Elizabeth K. King, 

General Counsel & Corporate 

Secretary, New York Stock 

Exchange, to Brent J. Fields, 

Secretary, Commission, dated July 

10, 2018 (‘‘NYSE Letter II’’). 

117. Letter from ‘‘Danny Mulson’’ to 

Commission, dated July 10, 2018 

(‘‘Mulson Letter II’’). 

118. Letter from Maria Trainor, Vice 

President, General Counsel & 

Secretary, Ampco-Pittsburgh 

Corporation, to Brent J. Fields, 

Secretary, Commission, dated July 

11, 2018 (‘‘Ampco-Pittsburgh 

Letter’’). 

119. Letter from Ted A. Dosch, 

Executive Vice President—Finance 

& Chief Financial Officer, Anixter 

International Inc., to Brent J. Fields, 

Secretary, Commission, dated July 

13, 2018 (‘‘Anixter Letter’’). 

120. Letter from John K. Lines, SVP/ 

Secretary & General Counsel, 

National HealthCare Corporation, to 

Brent J. Fields, Secretary, 

Commission, dated July 16, 2018 

(‘‘NHC Letter’’). 

121. E-mail from Patrick Healy, Founder 

& CEO, Issuer Network, to David 

Shillman, Commission, dated July 

17, 2018 (‘‘Issuer Network Email’’). 

122. Letter from R. Scott Mahoney, 

Senior Vice President—General 

Counsel & Secretary, AVANGRID, 

Inc., to Brent J. Fields, Secretary, 

Commission, dated July 18, 2018 

(‘‘Avangrid Letter’’). 

123. Letter from J.A. to Brent J. Fields, 

Secretary, Commission, dated July 

19, 2018 (‘‘JA Letter II’’). 

124. Letter from Ruairidh Ross, Deputy 

General Counsel & Assistant 

Secretary, HP Inc., to Brent J. 

Fields, Secretary, Commission, 

dated July 31, 2018 (‘‘HP Letter’’). 

125. Letter from Glenn E. Tynan, Vice 

President & Chief Financial Officer, 

Curtiss-Wright Corporation, to 

Brent J. Fields, Secretary, 

Commission, dated August 3, 2018 

(‘‘Curtiss-Wright Letter’’). 

126. Letter from James J. Angel, 

Associate Professor of Finance, 

Georgetown University, 

McDonough School of Business, to 

Commission, dated August 3, 2018 

(‘‘Angel Letter II.’’) 

127. Letter from John Ramsay, Chief 

Market Policy Officer, Investors 

Exchange LLC, to Brent J. Fields, 

Secretary, Commission, dated 

August 8, 2018 (‘‘IEX Letter III’’). 

128. Letter from Fiona Reynolds, Chief 

Executive Officer, Principles for 

Responsible Investment, to Brent J. 

Fields, Secretary, Commission, 

dated August 15, 2018 (‘‘PRI 

Letter’’). 

129. Letter from Walter K. Compton, 

Executive Vice President & General 

Counsel, Murphy Oil Corporation, 

to Brent J. Fields, Secretary, 

5304 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

Commission, dated August 15, 2018 

(‘‘Murphy Letter’’). 

130. Letter from Sal Arnuk & Joe 

Saluzzi, Partners, Co-Founders & 

Co-Heads of Equity Trading, 

Themis Trading LLC, to Brent J. 

Fields, Secretary, Commission, 

dated August 16, 2018 (‘‘Themis 

Trading Letter II’’). 

131. Letter from Jeffrey S. Davis, 

Nasdaq, Inc., to Brent J. Fields, 

Secretary, Commission, dated 

August 31, 2018 (‘‘Nasdaq Letter 

II’’). 

132. Recommendation of the Investor 

Advisory Committee, dated 

September 13, 2018 (‘‘IAC 

Recommendation’’). 

133. Letter from Sanda E. O’Connor, 

Chief Regulatory Affairs Officer, 

JPMorgan Chase & Co., to Brent J. 

Fields, Secretary, Commission, 

dated September 14, 2018 

(‘‘JPMorgan Letter’’). 

134. Letter from Anonymous 

Anonymous to Commission, dated 

September 21, 2018 (‘‘Anonymous 

Letter III’’). 

135. Letter from John Ramsay, Chief 

Market Policy Officer, Investors 

Exchange LLC, to Brent J. Fields, 

Secretary, Commission, dated 

September 24, 2018 (‘‘IEX Letter 

IV’’). 

136. Letter from Chris Concannon, 

President & Chief Operating Officer, 

Cboe Global Markets, Inc., to Brent 

J. Fields, Secretary, Commission, 

dated September 28, 2018 (‘‘Cboe 

Letter II’’). 

137. Letter from Susan M. Olson, 

General Counsel, Investment 

Company Institute, to Brent J. 

Fields, Secretary, Commission, 

dated October 1, 2018 (‘‘ICI Letter 

II’’). 

138. Letter from Katya Malinova, 

Mackenzie Investments Chair in 

Evidence-Based Investment 

Management, DeGroote School of 

Business, McMaster University, et 

al., to Brent J. Fields, Secretary, 

Commission, dated October 1, 2018 

(‘‘CSA Letter’’). 

139. Letter from ‘‘Richard P. Grasso,’’ 

‘‘Grasso Plumbing LLC,’’ to Brent J. 

Fields, Secretary, Commission, 

dated October 1, 2018 (‘‘Grasso 

Letter’’). 

140. Letter from Ira S. Lederman, W.R. 

Berkley Corporation, to Brent J. 

Fields, Secretary, Commission, 

dated October 2, 2018 (‘‘Berkley 

Letter’’). 

141. Letter from Stacey Cunningham, 

President, New York Stock 

Exchange, to Brent J. Fields, 

Secretary, Commission, dated 

October 2, 2018 (‘‘NYSE Letter 

III’’). 

142. Letter from Rich Steiner, Electronic 

Trading Strategist, RBC Capital 

Markets, to Brent Fields, Secretary, 

Commission, dated October 16, 

2018 (‘‘RBC Letter II’’). 

143. Letter from Elizabeth K. King, 

General Counsel & Corporate 

Secretary, NYSE Group, to Brent J. 

Fields, Secretary, Commission, 

dated November 9, 2018 (‘‘NYSE 

Letter IV’’). 

144. Letter from Elizabeth K. King, 

General Counsel & Corporate 

Secretary, NYSE Group, Inc., to 

Brent J. Fields, Secretary, 

Commission, dated November 20, 

2018 (‘‘NYSE Letter V’’). 

145. Letter from J.A. to Brent J. Fields, 

Secretary, Commission, dated 

December 3, 2018 (‘‘JA Letter III’’). 

146. Letter from J.W. Verret to Brent J. 

Fields, Secretary, Commission, 

dated December 4, 2018 (‘‘Verret 

Letter II’’). 

147. Letter from Patrick J. Healy, 

Founder & CEO, Issuer Network, to 

Brent J. Fields, Secretary, 

Commission, dated December 14, 

2018 (‘‘Issuer Network Letter II’’). 

148. Letter from Jeffrey S. Davis, Vice 

President & Deputy General 

Counsel, Nasdaq, Inc., to Brent J. 

Fields, Secretary, Commission, 

dated December 17, 2018 (‘‘Nasdaq 

Letter III’’). 

Note: The following Exhibit will not 

appear in the Code of Federal Regulations. 

Exhibit 1: Data definitions for the 

Exchange Transaction Fee Summary 

The table below represents the data 

model for the reporting requirements of 

an Exchange Transaction Fee Summary. 

This data model reflects the disclosures 

required by 17 CFR 242.610T(e) and the 

logical representation of those 

disclosures to a corresponding XML 

element. The Commission’s XML 

schema is the formal electronic 

representation of this data model. 

• Concept—the information content as 

described in 17 CFR 242.610T(e) 

items 1 through 13. 

• Element—a name for the XML 

element. 

• Type—the XML data type, either a list 

of possible values or a general type 

such as ‘‘number’’. 

• Spot, Monthly—How the element 

appears in a record of that type. 

Æ R—Required. The XML file is not 

valid unless this element is present. 

Æ NA—Not applicable. The element 

may appear in the record but its 

value is not to be used. 

Æ O—Optional. The XML file is valid 

without that element; whether it 

appears for a particular SRO, record 

type, test group, etc., depends on 

the actual fee being described. XML 

validation by itself cannot 

determine this. 

• When Absent—If the element is 

absent, its value is interpreted as if 

it had been present with the value 

shown. 

• Definition—Text to be included in the 

XML definition file (‘‘schema’’). 

Concept Element Type Spot Monthly When 

absent Definition 

Exchange exch Non-empty 

Text 

R R A required unique code to identify each exchange in the Transaction Fee Pilot. 

Record 

Type.

rt S or M R R A required record type indicator. M, if the fee type reported is the 

monthly realized fee (average or median fee); S, if the fee type 

reported is a spot fee schedule (base or top tier fee). 

Participant 

Type.

ptcpt MM, Other or 

Blank 

O O Blank MM, if the fees are for market makers, or else Other. Required for 

spot records if the exchange charged market makers and others different base and top tier fees. Required for monthly fee 

records if the exchange charged different average or median 

fees or pays different average or median fees. Otherwise blank 

or absent. 

Pilot 

Group.

grp 1, 2, or C R R A required indicator that identifies the test or control group during 

the Pilot and post-Pilot Period. 1, 2—Test Groups 1, 2; C— 

Control group. 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5305 

Concept Element Type Spot Monthly When 

absent Definition 

Displayed disp D, N, or B R R D—Displayed, N—Not displayed, B—Both. For spot fee type 

records, if the fees are the same between displayed and nondisplayed liquidity, then the exchange may report both in a single ‘‘B‘‘ record. For monthly records, this should be segmented 

into the average and median fee per share for displayed liquidity, and the average and median fee for non-displayed liquidity 

unless there are no differences between the average and median fees for displayed and non-displayed liquidity, in which 

case the exchange can report the average and median fee in a 

single ‘‘B’’ record. 

Top/Depth topOrDepth T, D, or B R R T—Fees for top-of-book liquidity; D—Fees for depth-of-book liquidity; B—Both. For spot records, if the fees are the same between top-of-book and depth-of-book liquidity, then the exchange may report both fees in a single ‘‘B‘‘ record. For monthly records, if there are no differences between the fees for topof-book and depth-of-book liquidity, then the exchange may include only the average and median fees in a single ‘‘B‘‘ record. 

Start Date start YYYY-MMDD R O The start date element must be present for a spot fee record, and 

the end element cannot appear alone. The effective date for 

any fee changes. This should correspond to the effective date 

referenced in the Form 19b–4 fee filings submitted to the Commission. This is needed in a monthly record only if fees 

changed on a day other than the first of the month; otherwise 

blank or absent. 

End Date end YYYY-MMDD or 

Blank 

O O Blank The last date that a given fee is viable prior to any fee changes. 

This column will be blank unless a mid-month change to fees is 

made. This should correspond to the last date that a given fee 

is applicable prior to the effective date of the new fee reflected 

in Form 19b–4 fee filings submitted to the Commission to capture any revisions to transaction-based fees and rebates. This 

is needed in a monthly record only if fees changed on a day 

other than the first of the month. 

Month 

and 

Year.

YearMonth YYYY-MM NA R The year and month of the monthly realized reported average and 

median per share fees. 

Pre/Post .. preOrPost 1, 2, or Blank O O Blank An indicator variable needed only if the exchange changed fees 

on a day other than the first day of the month. Blank-there were 

no fee changes other than on the first day of the month. 1— 

The average and median are the pre-change average and median for the part of the month prior to the change. 2—The average and median are the post-change average and median for 

the part of the month after the change. 

Base 

Taker 

Fee.

baseTakeFee Number R NA The Base Taker Fee is the standard per share fee assessed or 

rebate offered before any applicable discounts, tiers, caps, or 

other incentives are applied. Fees have a positive sign; rebates 

have a negative sign. 

Top Tier 

Taker 

Fee.

topTierTakeFee Number R NA The Top Tier Taker Fee is the per share fee assessed or rebate 

offered after all applicable discounts, tiers, caps, or other incentives are applied. Fees have a positive sign; rebates have a 

negative sign. 

Average 

Taker 

Fee.

avgTakeFee Number NA R The monthly average realized Taker fee assessed or rebate offered per share by category (i.e., test group, participant type, 

displayed vs. non-displayed, and top-of-book vs. depth-ofbook). Fees have a positive sign; rebates have a negative sign. 

Median 

Taker 

Fee.

medianTakeFee Number NA R The monthly median realized Taker fee assessed or rebate offered per share by category (i.e., test group, participant type, 

displayed vs. non-displayed, and top-of-book vs. depth-ofbook), across broker-dealers. Fees have a positive sign; rebates have a negative sign. 

Base 

Maker 

Fee.

baseMakeFee Number R NA The Base Maker Fee is the standard per share fee assessed or 

rebate offered before any applicable discounts, tiers, caps, or 

other incentives are applied. Fees have a positive sign; rebates 

have a negative sign. 

Top Tier 

Maker 

Fee.

topTierFee Number R NA The Top Tier Maker Fee is the per share fee assessed or rebate 

offered all applicable discounts, tiers, caps, or other incentives 

are applied per share. Fees have a positive sign; rebates have 

a negative sign. 

Average 

Maker 

Fee.

avgMakeFee Number NA R The monthly average realized Maker fee assessed or rebate offered per share by category (i.e., test group, participant type, 

displayed vs. non-displayed, and top-of-book vs. depth-ofbook). Fees have a positive sign; rebates have a negative sign. 

5306 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

Concept Element Type Spot Monthly When 

absent Definition 

Median 

Maker 

Fee.

medianMakeFee Number NA R The monthly median realized Maker fee assessed or rebate offered per share by category (i.e., test group, participant type, 

displayed vs. non-displayed, or top-of-book vs. depth-of-book), 

across broker-dealers. Fees have a positive sign; rebates have 

a negative sign. 

[FR Doc. 2018–27982 Filed 2–19–19; 8:45 am] 

BILLING CODE 8011–01–P