76282 Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Parts 232 and 240 

[Release No. 34–98766; File No. S7–18–23] 

RIN 3235–AN29 

Volume-Based Exchange Transaction 

Pricing for NMS Stocks 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Proposed rule. 

SUMMARY: The Securities and Exchange 

Commission (‘‘Commission’’) is 

proposing a new rule under the 

Securities Exchange Act of 1934 

(‘‘Exchange Act’’) to prohibit national 

securities exchanges from offering 

volume-based transaction pricing in 

connection with the execution of 

agency-related orders in certain stocks. 

If exchanges offer such pricing for their 

members’ proprietary orders, the 

proposal would require the exchanges to 

adopt rules and written policies and 

procedures related to compliance with 

the prohibition, as well as disclose, on 

a monthly basis, certain information 

including the total number of members 

that qualified for each volume tier 

during the month. 

DATES: Comments should be received on 

or before January 5, 2024. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s internet 

comment form (https://www.sec.gov/ 

rules/2023/10/feetiers); or 

• Send an email to rule-comments@

sec.gov. Please include file number S7– 

18–23 on the subject line. 

Paper Comments 

• Send paper comments to Secretary, 

Securities and Exchange Commission, 

100 F Street NE, Washington, DC 

20549–1090. 

All submissions should refer to file 

number S7–18–23. This file number 

should be included on the subject line 

if email is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method of submission. The 

Commission will post all comments on 

the Commission’s website (https://

www.sec.gov/rules/proposed.shtml). 

Comments are also available for website 

viewing and printing in the 

Commission’s Public Reference Room, 

100 F Street NE, Washington, DC 20549, 

on official business days between the 

hours of 10 a.m. and 3 p.m. Operating 

conditions may limit access to the 

Commission’s Public Reference Room. 

Do not include personal information in 

submissions; you should submit only 

information that you wish to make 

available publicly. We may redact in 

part or withhold entirely from 

publication submitted material that is 

obscene or subject to copyright. 

Studies, memoranda, or other 

substantive items may be added by the 

Commission or staff to the comment file 

during this rulemaking. A notification of 

the inclusion in the comment file of any 

materials will be made available on the 

Commission’s website. To ensure direct 

electronic receipt of such notifications, 

sign up through the ‘‘Stay Connected’’ 

option at www.sec.gov to receive 

notifications by email. 

A summary of the proposal of not 

more than 100 words is posted on the 

Commission’s website (https://

www.sec.gov/rules/2023/10/feetiers). 

FOR FURTHER INFORMATION CONTACT: 

Richard Holley III, Assistant Director, 

Yvonne Fraticelli, Special Counsel, 

Terri Evans, Special Counsel, or Julia 

Zhang, Special Counsel, at (202) 551– 

5500, Office of Market Supervision, 

Division of Trading and Markets, 

Securities and Exchange Commission, 

100 F Street NE, Washington, DC 20549. 

SUPPLEMENTARY INFORMATION: The 

Commission is proposing to add new 17 

CFR 240.6b–1 (Rule 6b–1 under the 

Exchange Act) and amend 17 CFR 

232.101 (Rule 101 of Regulation S–T) 

and 17 CFR 232.405 (Rule 405 of 

Regulation S–T). 

Table of Contents 

I. Introduction 

A. Background 

B. Volume-Based Exchange Transaction 

Pricing 

C. Commission Concerns 

1. Competition Among Members 

2. Conflicts of Interest 

3. Exchange Competition 

II. Description of Proposed Rule 

A. Overview of Proposed Rule 

B. Prohibition on Volume-Based Exchange 

Transaction Pricing for Agency-Related 

Volume 

C. Anti-Evasion 

D. Transparency for Volume-Based Pricing 

on Member Proprietary Orders 

III. Paperwork Reduction Act 

A. Summary of Collections of Information 

1. Rule 6b–1(a)—Prohibition on VolumeBased Pricing for Agency-Related 

Volume 

2. Rule 6b–1(b)(1)—Rules To Prevent 

Evasion 

3. Rule 6b–1(b)(2)—Policies and 

Procedures To Prevent Evasion 

4. Rule 6b–1(c)—Transparency for VolumeBased Pricing on Member Proprietary 

Orders 

B. Proposed Use of Information 

1. Rule 6b–1(a)—Prohibition on VolumeBased Pricing for Agency-Related 

Volume 

2. Rule 6b–1(b)(1)—Rules To Prevent 

Evasion 

3. Rule 6b–1(b)(2)—Policies and 

Procedures To Prevent Evasion 

4. Rule 6b–1(c)—Transparency for VolumeBased Pricing on Member Proprietary 

Orders 

C. Respondents 

D. Total Initial and Annual Reporting and 

Recordkeeping Burdens 

1. Rule 6b–1(a)—Prohibition on VolumeBased Pricing for Agency-Related 

Volume 

2. Rule 6b–1(b)(1)—Rules To Prevent 

Evasion 

3. Rule 6b–1(b)(2)—Policies and 

Procedures To Prevent Evasion 

4. Rule 6b–1(c)—Transparency for VolumeBased Pricing on Member Proprietary 

Orders 

E. Collection of Information Is Mandatory 

F. Confidentiality of Responses to 

Collection of Information 

G. Retention Period for Recordkeeping 

Requirements 

H. Request for Comments 

IV. Economic Analysis 

A. Introduction 

B. Baseline 

1. Exchange Pricing 

2. Volume-Based Tiers and Order Routing 

Incentives 

3. Routing Incentives and Potential 

Conflicts of Interest 

4. The Market To Provide Exchange Access 

5. Lack of Tier Transparency 

C. Economic Effects 

1. Effect of the Proposed Ban on VolumeBased Tiers for Non-Principal Orders 

2. Effects of Proposed Requirement of 

Rules and Policies and Procedures To 

Prevent Evasion 

3. Effects of the Transparency Provisions 

D. Effect on Efficiency, Competition, and 

Capital Formation 

1. Efficiency 

2. Competition 

3. Capital Formation 

E. Reasonable Alternatives 

1. Ban Volume-Based Pricing for All 

Orders 

2. Ban Volume-Based Pricing for All 

Orders Except Registered Market Makers 

3. Proceed With Transparency Provisions 

for All Orders Without Tiers Prohibition 

4. Banning the Linking of Volume-Based 

Tiers for Closing Auctions To 

Consolidated Volume 

5. Require Disclosures of Volume-Based 

Pricing in Proprietary Volume in NMS 

Stocks To Be Posted on Exchange 

Websites or Submitted Through a 

Different System 

6. Require a Different Structured Data 

Language for the Disclosures of VolumeBased Pricing in Proprietary Volume in 

NMS Stocks 

7. Remove Structured Data Language 

Requirement for Disclosures of VolumeBased Pricing in Proprietary Volume in 

NMS Stocks 

F. Request for Comment 

V. Regulatory Flexibility Act Certification 


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Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 76283 

1See 17 CFR 242.600(b)(55) (defining ‘‘NMS 

stock’’). 

2Exchange rules limit their membership to 

registered brokers or dealers. See, e.g., Cboe BZX 

Exchange, Inc. (‘‘Cboe BZX’’) Rule 2.3. 

3This release uses the term ‘‘price’’ or ‘‘pricing’’ 

to refer to the fees (charges incurred for an 

execution), rebates (refundable credits in 

connection with an execution), and other incentives 

(e.g., discounts or caps that are not refundable 

credits but are credited to the member’s billing 

account) that exchanges assess to their members for 

transactions on the exchange. Rebates are 

refundable because they can exceed the fees 

(transaction fees and other fees) that members 

incur. See, e.g., Remarks of Chris Concannon, Cboe 

Global Markets, before the SEC Roundtable on 

Market Data Products, Market Access Services, and 

Their Associated Fees, Oct. 25, 2018, Transcript at 

74–75, available at https://www.sec.gov/spotlight/ 

equity-market-structure-roundtables/roundtablemarket-data-market-access-102518-transcript.pdf 

(‘‘Five out of the top 10 get a check from us after 

the costs of their connectivity and market data. So 

we are cutting them a check monthly after their 

costs.’’) (‘‘Remarks of Chris Concannon’’). 

4See, e.g., 15 U.S.C. 78f and 78s. 

5See 15 U.S.C. 78c(a)(27) (defining ‘‘rules’’) and 

17 CFR 240.19b–4(c) (providing further information 

on the phrase ‘‘stated policies, practices, and 

interpretations’’). 

6See 15 U.S.C. 78s(b). Exchange pricing 

proposals are effective immediately upon filing 

with the Commission because the Exchange Act 

does not require advance notice or Commission 

approval before an exchange may implement a 

pricing change. 15 U.S.C. 78s(b)(3)(A)(ii). Within 60 

days after the date of filing of an immediately 

effective proposal, the Commission may summarily 

temporarily suspend the proposal if it appears to 

the Commission that a suspension is necessary or 

appropriate in the public interest, for the protection 

of investors, or otherwise in furtherance of the 

purposes of the Exchange Act. See 15 U.S.C. 

78s(b)(3)(C). If the Commission suspends the 

proposal, the Commission will institute 

proceedings under section 19(b)(2)(B) (15 U.S.C. 

78s(b)(2)(B)) of the Exchange Act to determine 

whether the proposal should be approved or 

disapproved. See 15 U.S.C. 78s(b)(3)(C). At the 

conclusion of the proceedings, the Commission 

shall approve a proposal if it finds that it is 

consistent with the requirements of the Exchange 

Act, or it shall disapprove the proposal if it does 

not make such a finding. See 15 U.S.C. 78s(b)(2)(C). 

If the Commission does not suspend an 

immediately effective filing on or before the sixtieth 

day after the filing date, the Exchange Act does not 

deem the proposal to have been approved by the 

Commission. See 15 U.S.C. 78s(b)(2)(D) (providing 

when a proposed rule change shall be deemed to 

have been approved by the Commission). 

7See 17 CFR 240.19b–4(m). 

8 15 U.S.C. 78f(b)(4). 

9 15 U.S.C. 78f(b)(5). 

10 15 U.S.C. 78f(b)(8). 

11Securities Acts Amendments of 1975, Report of 

the Senate Comm. on Banking, Housing and Urban 

Affairs to Accompany S.249, S. Rep. No. 94–75, 

94th Cong., 1st Sess. 11 (1975), at 96 (‘‘Senate 

Report’’). 

12 15 U.S.C. 78k–1. 

13 15 U.S.C. 78k–1(a)(1)(C)(ii) and (iv). 

14See Senate Report, supra note 11, at 8–9. 

15Exchange transaction pricing for NMS stocks is 

characterized by three different pricing models: (1) 

maker-taker (where the liquidity providing ‘‘maker’’ 

receives a rebate from the exchange and the ‘‘taker’’ 

that executes against that resting order pays a fee 

to the exchange); (2) taker-maker or inverted (where 

liquidity takers are offered a rebate and liquidity 

providers are assessed a fee); and (3) flat (where an 

exchange does not offer rebates and instead charges 

a fee to neither side of a trade, one side of a trade, 

or both sides of a trade). In rebate pricing models, 

the exchange’s transaction revenue (‘‘net capture’’) 

is the difference between the fee it collects on one 

side of the trade and the rebate it pays out on the 

other side of the trade. As of Mar. 2023, nine 

exchanges had a maker-taker pricing model. See 

Cboe BZX pricing schedule, available at https://

www.cboe.com/us/equities/membership/fee_

schedule/bzx/; Cboe EDGX Exchange, Inc. (‘‘Cboe 

EDGX’’) pricing schedule, available at https://

www.cboe.com/us/equities/membership/fee_

schedule/edgx/; Nasdaq PHLX, LLC (‘‘Phlx (PSX)’’) 

pricing schedule, available at https://listingcenter.

nasdaq.com/rulebook/phlx/rules/phlx-equity-7; The 

Nasdaq Stock Market LLC (‘‘Nasdaq’’) pricing 

schedule, available at http://nasdaqtrader.com/ 

Trader.aspx?id=PriceListTrading2#rebates; NYSE 

Arca, Inc. (‘‘NYSE Arca’’) pricing schedule, 

available at https://www.nyse.com/publicdocs/nyse/ 

markets/nyse-arca/NYSE_Arca_Marketplace_

Fees.pdf; NYSE American LLC (‘‘NYSE American’’) 

pricing schedule, available at https://

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

New York Stock Exchange, LLC (‘‘NYSE’’) pricing 

schedule, available at https://www.nyse.com/ 

publicdocs/nyse/markets/nyse/NYSE_Price_

List.pdf; MEMX, LLC pricing schedule, available at 

https://info.memxtrading.com/fee-schedule/; and 

MIAX PEARL, LLC (‘‘MIAX Pearl’’) equities pricing 

schedule, available at https://

www.miaxoptions.com/sites/default/files/fee_

schedule-files/MIAX_Pearl_Equities_Fee_Schedule_

01012023_1.pdf. As of Mar. 2023, four exchanges 

had a taker-maker pricing model. See Cboe BYX 

Exchange, Inc. (‘‘Cboe BYX’’) pricing schedule, 

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

membership/fee_schedule/byx/; Cboe EDGA 

Exchange, Inc. (‘‘Cboe EDGA’’) pricing schedule, 

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

membership/fee_schedule/edga/; and NYSE 

National, Inc. (‘‘NYSE National’’) pricing schedule, 

available at https://www.nyse.com/publicdocs/nyse/ 

regulation/nyse/NYSE_National_Schedule_of_

Fees.pdf. Nasdaq BX, Inc. (‘‘BX’’) also uses the 

taker-maker pricing model but charges a $0.0007 fee 

if a member fails to reach any liquidity removing 

rebate tier. See BX pricing schedule, available at 

http://www.nasdaqtrader.com/trader.aspx?id=bx_

pricing. As of Mar. 2023, Investors Exchange LLC 

(‘‘IEX’’) and NYSE Chicago, Inc. (‘‘NYSE Chicago’’) 

offer a flat pricing model. See IEX pricing schedule, 

available at https://www.iexexchange.io/resources/ 

trading/fee-schedule#transaction-fees and NYSE 

Chicago pricing schedule, available at https://

www.nyse.com/publicdocs/nyse/NYSE_Chicago_

Fee_Schedule.pdf. As of Sept. 1, 2023, IEX began 

offering a rebate of $0.0004 per share on displayed 

orders that add liquidity for executions at or above 

$1. Another exchange, Long-Term Stock Exchange, 

Continued 

VI. Consideration of Impact on the Economy 

Statutory Authority 

I. Introduction 

A. Background 

National securities exchanges 

(‘‘exchanges’’) that trade NMS stocks 1

maintain pricing schedules that set forth 

the transaction pricing they apply to 

their broker-dealer members 2 that 

execute orders on their trading 

platforms.3 As self-regulatory 

organizations under the Exchange Act, 

exchanges are subject to unique 

principles and processes that do not 

apply to other businesses.4 For example, 

all proposed rules of an exchange,5

including exchange transaction pricing 

proposals, must be filed with the 

Commission.6 In addition, pricing 

schedules must be publicly posted on 

the exchange’s website.7

The Exchange Act further requires 

that exchange pricing proposals, among 

other things, provide for the ‘‘equitable 

allocation of reasonable dues, fees, and 

other charges among its members and 

issuers and other persons using its 

facilities’’ 8 that ‘‘are not designed to 

permit unfair discrimination between 

customers, issuers, brokers, or dealers’’ 9

and ‘‘do not impose any burden on 

competition not necessary or 

appropriate in furtherance of the 

purposes of’’ the Exchange Act.10 With 

respect to the requirement that the rules 

of an exchange not impose any burden 

on competition not necessary or 

appropriate in furtherance of the 

purposes of the Exchange Act, the 

Senate Banking, Housing and Urban 

Affairs Committee report that 

accompanied the 1975 amendments to 

the Exchange Act stated that ‘‘this 

paragraph is designed to make clear that 

a balance must be struck between 

regulatory objectives and competition, 

and that unless an interference with 

competition is justified in terms of the 

achievement of a statutory objective, it 

cannot stand.’’ 11

Section 11A of the Exchange Act 12

directs the Commission to facilitate the 

establishment of a national market 

system in accordance with specified 

Congressional findings. Among the 

Congressional findings are assuring (i) 

fair competition among brokers and 

dealers and among exchange markets, 

and (ii) the practicability of brokers 

executing investors’ orders in the best 

market.13 Rather than setting forth 

minimum components of the national 

market system, the Exchange Act grants 

the Commission broad authority to 

oversee the implementation, operation, 

and regulation of the national market 

system consistent with Congressionally 

determined goals and objectives.14

B. Volume-Based Exchange Transaction 

Pricing 

As part of its ongoing efforts to assess 

whether aspects of the national market 

system continue to meet the statutory 

goals and objectives as markets and 

market participants evolve, the 

Commission is considering the impact 

of volume-based exchange transaction 

pricing in NMS stocks. Many exchanges 

use increasingly complex transaction 

pricing schedules that feature 

differentiated incentives (e.g., lower fees 

or higher rebates) that depend on 

member volume.15 These exchanges 


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76284 Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 

Inc., (‘‘LTSE’’) does not charge fees to transact. See 

https://ltse.com/trading/market-overview. 

16Tier criteria typically reference a member’s 

average total daily traded share volume on the 

exchange during the month as a percentage of the 

average total daily market volume in stocks 

reported by one or more of the consolidated tapes 

(‘‘Tapes’’) during the month pursuant to effective 

national market system plans that govern the 

collection, consolidation, processing, and 

dissemination of certain national market system 

information. See, e.g., Nasdaq pricing schedule, 

supra note 15. There currently are three such 

effective national market system plans. They are: (1) 

the Consolidated Tape Association Plan (‘‘CTA 

Plan’’); (2) the Consolidated Quotation Plan (‘‘CQ 

Plan’’); and (3) the Joint Self-Regulatory 

Organization Plan Governing the Collection, 

Consolidation, and Dissemination of Quotation and 

Transaction Information for Nasdaq-Listed 

Securities Traded on Exchanges on an Unlisted 

Trading Privileges Basis (‘‘UTP Plan’’) (together, the 

‘‘Equities Data Plans’’). The Equities Data Plans 

disseminate SIP data over three separate networks: 

(1) Tape A for securities listed on NYSE; (2) Tape 

B for securities listed on exchanges other than 

NYSE and Nasdaq; and (3) Tape C for securities 

listed on Nasdaq. The CTA Plan governs the 

collection, consolidation, processing, and 

dissemination of last sale information for Tape A 

and Tape B securities. The CQ Plan governs the 

collection, consolidation, processing, and 

dissemination of quotation information for Tape A 

and Tape B securities. Finally, the UTP Plan 

governs the collection, consolidation, processing, 

and dissemination of last sale and quotation 

information for Tape C securities. See also 

Securities Exchange Act Release No. 98271 (Sept. 

1, 2023), 88 FR 61630 (Sept. 7, 2023) (File No. 4– 

757) (Order directing the exchanges and the 

Financial Industry Regulatory Authority (‘‘FINRA’’) 

to file a national market system plan regarding 

consolidated equity market data). 17Currently, as exchanges assess transaction 

pricing to their members on a monthly basis in 

arrears, exchanges apply the highest tier a member 

achieves during a month to all of the member’s 

executions during that month (e.g., if a member 

qualifies for Tier 2 in June (out of 4 tiers), all of 

its June volume will be assessed at the Tier 2 rate, 

including volume transacted at the lower Tiers 4 

and 3 earlier in the month). Separately, the 

Commission has proposed to require exchanges to 

make the amounts of all fees and rebates 

determinable at the time of execution, which would 

require volume-based exchange transaction pricing 

to be applied prospectively rather than retroactively 

to the start of a month. See Securities Exchange Act 

Release No. 96494 (Dec. 14, 2022), 87 FR 80266, 

80270 (Dec. 29, 2022) (File No. S7–30–22) (‘‘Access 

Fee Proposal’’). The Commission encourages 

commenters to review the Access Fee Proposal to 

determine whether it might affect their comments 

on this release. As exchanges compete to attract 

liquidity, frequent pricing changes (typically 

effective and/or operative on the first business day 

of a month) are common. See, e.g., id. at 87 FR at 

80311 (stating that between Jan. 2018 and June 

2022, market participants interacting with all 

exchanges had to adjust to an average of 155 fee 

changes per year across all exchanges). 

18See infra Table 2 (showing the number of 

available tiers at each exchange in March 2023, 

ranging from 0 to 93). Some exchanges offer 

additive incentives, including ‘‘step-up’’ rebates, 

that can be earned in addition to a standard tiered 

incentive. See, e.g., Cboe BZX Fee Schedule’s StepUp Tiers, available at https://www.cboe.com/us/ 

equities/membership/fee_schedule/bzx/. See also 

infra Tables 1 and 2. 

19See Letter to Brent Fields, Secretary, 

Commission, from Rich Steiner, RBC Capital 

Markets (Oct. 16, 2018) (‘‘RBC Letter’’) at 8 

(comment letter on File No. S7–05–18) (‘‘Our 

analysis identifies at least 1,023 pricing paths 

across the exchanges. Over one-third, or 381, of 

these paths consist of rebates. These 1,023 pricing 

paths are themselves determined by at least 3,762 

pricing variables.’’). 

20A ‘‘customer’’ of a member is anyone using the 

services of the member to access the exchange, 

including another exchange member, a non-member 

broker-dealer, an institution, or any other person. 

21See Letter from Tyler Gellasch, President and 

CEO, Healthy Markets Association, to Gary Gensler, 

Chair, Commission, dated Nov. 16, 2022 at 4 

(‘‘Healthy Markets Letter’’), available at https://

healthymarkets.org/wp-content/uploads/2022/12/ 

HMA-Ltr-re-Volume-Based-Pricing-11-16-22-1.pdf 

(stating that to ‘‘the extent that different competitors 

fall into different pricing tiers, it will directly 

impact the competitive balance between those 

firms’’). The letter also includes suggestions for 

potential reforms to exchange routing incentives 

and transaction pricing fees. See id. at 4. 

22See, e.g., Securities Exchange Act Release No. 

63241 (Nov. 3, 2010), 75 FR 69792 at 69793 (Nov. 

15, 2010) (‘‘Rule 15c3–5 Adopting Release’’) 

(discussing that certain market participants may 

find the wide range of access arrangements, 

including sponsored and/or direct market access, 

beneficial and that such arrangements may ‘‘reduce 

trading costs by lowering operational costs, 

commissions, and exchange fees’’). 

23See infra section IV.B.4 (The Market to Provide 

Exchange Access). 

24See id. 

25See 15 U.S.C. 78f(b)(4) (requiring that the rules 

of an exchange provide for the equitable allocation 

of reasonable dues, fees, and other charges among 

its members); (b)(5) (requiring that the rules of an 

exchange, among other things, not be designed to 

permit unfair discrimination); (b)(8) (requiring that 

the rules of an exchange not impose any burden on 

competition not necessary or appropriate in 

furtherance of the purposes of the Exchange Act); 

and 15 U.S.C. 78k–1(a)(1)(C) (finding it in the 

public interest and appropriate for the protection of 

investors and the maintenance of fair and orderly 

markets to assure fair competition among brokers 

and dealers, and among exchange markets). 

offer members lower fees or higher 

rebates as the number of shares the 

member executes on the exchange 

reaches successively higher predefined 

volume-based levels (‘‘tiers’’). The 

transaction volume that qualifies a 

member for a better fee or rebate tier 

typically is measured as a fraction of 

total consolidated market volume, rather 

than a fixed value. Such tiers are 

commonly based on a member 

achieving a designated average daily 

volume on the exchange that equals or 

exceeds a certain percentage of total 

market volume in a given month (e.g., 

an average daily volume on the 

exchange that equals or exceeds 0.10% 

of the total consolidated market 

volume).16 Each member’s tier is 

calculated by the exchange as of the end 

of a month and reset thereafter on a 

monthly basis.17 The large number of 

available tiers, and possible 

combinations of some tiers,18 greatly 

complicate exchange pricing schedules 

and that complexity can make it more 

difficult for the public to understand 

and meaningfully comment on exchange 

pricing proposals.19

Volume-based exchange transaction 

pricing raises competitive concerns 

among exchange members as well as 

among exchanges. With respect to 

members competing for customers,20

members with lower exchange volume 

do not qualify for the more favorable 

volume-based exchange transaction 

pricing tiers available to high-volume 

members. Accordingly, lower-volume 

members may find it difficult to 

compete for customer order flow 

because they are unable to pass through 

to customers the favorable exchange 

transaction pricing or lower 

commissions that are available to 

higher-volume members.21 Similar 

competitive concerns also may be 

present for members as a result of 

volume-based exchange transaction 

pricing when they trade proprietarily 

using principal orders where no 

customers are involved. 

As a result of volume-based exchange 

transaction pricing, lower-volume 

members may seek to route some or all 

of their orders through high-volume 

members to qualify for better exchange 

pricing.22 As that happens, the lowervolume members that are otherwise 

competing with the high-volume 

members become customers of their 

high-volume competitors. This dynamic 

can lead to order flow becoming 

increasingly concentrated among a 

small number of high-volume members, 

who then qualify for even higher tiers 

(i.e., tiers that feature lower fees or 

higher rebates) as a result of that flow, 

which further impacts the ability of 

lower-volume members to compete with 

them in a self-reinforcing cycle.23 This 

concentration impacts customers by 

reducing the number of exchange 

members capable of offering them 

competitive exchange transaction 

pricing. Further, lower-volume 

exchange members provide a subsidy 

for the high-volume members when 

exchanges use the higher fees and lower 

rebates of the lower-volume members to 

fund the lower fees and higher rebates 

the exchange offers to high-volume 

members.24 Accordingly, the 

Commission is concerned that volumebased exchange transaction pricing may 

have the effect of ensuring that highvolume members retain a persistent 

competitive advantage over lowervolume exchange members.25

In addition, volume-based transaction 

pricing tiers may provide incentives to 

members of more than one exchange to 

route orders to one particular exchange 

in order to qualify for that exchange’s 

tiers and achieve lower fees and higher 


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26Membership can overlap across the exchanges. 

For example, as of Feb. 21, 2023, MIAX Pearl 

Equities Exchange had 49 members and NYSE had 

143 members. See https://www.miaxoptions.com/ 

exchange-members/pearl-equities and https://

www.nyse.com/markets/nyse/membership. Fortytwo of those MIAX Pearl Equities Exchange’s 

members were also members of NYSE. 

27The Commission understands that full passthrough of exchange transaction pricing by 

members to their customers is less common. 

28See, e.g., NYSE pricing schedule, supra note 15 

(offering incremental per share discounts on 

market-at-the-close orders depending on a 

member’s average daily trading volume that added 

liquidity to NYSE during the billing month as a 

percentage of CADV). According to NYSE, the 

proposed discounts were designed ‘‘to align 

incentives among both trading on the close and 

intraday trading on the Exchange.’’ See Securities 

Exchange Act Release No. 94543 (Mar. 19, 2022), 87 

FR 19544 at 19543 (Apr. 4, 2022). The NYSE further 

stated ‘‘that other marketplaces provide discounts 

based on intraday adding volume, and that aligning 

incentives for lower pricing at the close with 

additional intraday volume is thus neither novel 

nor an unreasonable stance in a competitive 

marketplace.’’ Id. at 19546. 

29While the proposed rule addresses only NMS 

stocks, the Commission is requesting comment 

below on whether the proposal should be applied 

to options. 

30See supra notes 8–10 and accompanying text 

(discussing the Exchange Act principles applicable 

to exchange pricing proposals). 

31See supra note 6. See also 15 U.S.C. 

78s(b)(3)(C). 

32See John Ramsay, Chief Market Policy Officer, 

IEX, Why Exchange Rebate Tiers are AntiCompetitive (June 5, 2023), available at https://

www.iex.io/article/why-exchange-rebate-tiers-areanti-competitive (‘‘Ramsay Article’’) (stating that 

some ‘‘exchanges offer specialized ‘bespoke’ 

volume tiers with formulas that are so specific, they 

can appear to be specifically designed to benefit one 

or a few firms, and it is widely assumed that some 

are’’ (citation omitted) and that ‘‘tailored-tier rates 

seems to have the effect, if not the purpose, of 

allowing the highest-volume firms that already have 

a competitive edge to keep it’’). See id. See also 

infra Table 2. 

33See supra note 26 and accompanying text. See 

also infra section IV.B.1.b, Volume-Based Pricing 

Tiers. 

rebates as a result.26 With respect to 

customer orders, an economic incentive 

to route customer orders to a particular 

exchange to achieve volume tiers on 

that specific exchange can present a 

conflict of interest between members 

and customers when members do not 

fully pass-through exchange transaction 

fees and rebates to their customers and 

instead retain for themselves the 

benefits of tiered exchange transaction 

pricing.27

Volume-based exchange transaction 

pricing also can impact competition 

among exchanges. For example, when a 

primary listing exchange bases pricing 

in its closing auction on the volume that 

a member executes on the exchange 

during regular trading hours, members 

that prefer (or whose customers prefer) 

the primary listing exchange’s closing 

auction are incentivized to route orders 

to the exchange during the regular hours 

trading session in order to obtain more 

favorable pricing in the closing auction, 

which could negatively affect the ability 

of other exchanges to compete for that 

volume during regular trading hours.28

As discussed below, the proposed 

rule would prohibit exchanges from 

offering volume-based transaction fees, 

rebates, or other incentives in 

connection with the execution of agency 

or riskless principal orders in NMS 

stocks.29 This prohibition is designed to 

remove a competitive impediment 

between higher-volume and lowervolume members when they compete 

for customer business, and also to 

mitigate the conflict of interest between 

members and customers presented by 

volume-based exchange transaction 

pricing tiers when members are routing 

customer orders to an exchange for 

execution. Because the prohibition in 

proposed Rule 6b–1 would be limited to 

agency and riskless principal orders, 

exchanges would continue to have the 

ability to provide tiered transaction 

pricing for member proprietary volume, 

and therefore this proposed prohibition 

does not seek to address any potential 

concerns associated with the routing of 

proprietary orders. 

With respect to proprietary volume, 

the proposed rule would enhance 

transparency of tiered exchange 

transaction pricing for such volume by 

requiring exchanges to disclose the 

number of members that qualify for each 

of their pricing tiers. This information is 

intended to facilitate the Commission’s 

review of proposed pricing changes and 

provide the public with additional 

relevant information for assessing and 

providing informed comment on 

exchange pricing proposals, including 

assessing exchange statements about the 

number of members that may qualify for 

a proposed tier, assessing the actual 

effect of a pricing change, and assessing 

whether a tier meets the applicable 

statutory standards.30

C. Commission Concerns 

As introduced above and further 

discussed below, the Commission has 

several concerns about volume-based 

exchange transaction pricing. First, the 

Commission is concerned about the 

impact of volume-based exchange 

transaction pricing, as tiered pricing has 

expanded and evolved, on competition 

among exchange members, such as 

when broker-dealers are competing for 

customers. Second, the Commission is 

concerned that the desire to qualify for 

volume-based transaction pricing tiers 

exacerbates a conflict of interest 

between members and their customers 

when members route customers’ orders 

for execution because the member can 

economically benefit from its routing 

decision. Specifically, tiered transaction 

pricing exacerbates that conflict because 

the benefit to the member increases as 

the number of orders it executes on the 

exchange increases, and for the highest 

tier it meets during a month, the 

member receives that higher rebate or 

lower fee on all of its orders that it 

executed on that exchange during the 

month. Finally, the Commission is 

concerned that tiered pricing may 

impose a burden on exchange 

competition, especially when exchanges 

base pricing for an auction, trading 

session, or special program on volume 

submitted during regular trading hours 

outside that auction, trading session, or 

program. 

As discussed above, the Commission 

is able to summarily temporarily 

suspend individual exchange proposed 

rule changes related to transaction 

pricing shortly after they are filed.31

This post hoc filing-by-filing approach, 

however, does not address similar 

pricing across other exchanges. The 

Commission is proposing this rule as a 

cross-exchange approach intended to 

facilitate investor protection and the 

public interest while enhancing 

competition among members and among 

exchanges. 

1. Competition Among Members 

Some exchange pricing schedules 

have evolved to the point of offering 

exceptionally specific pricing tiers, 

where some observers have questioned 

whether certain tiers may be available to 

only a limited number of members.32

The Commission is concerned that 

exchanges’ tiered transaction pricing 

may confer an inappropriate benefit on 

a small group of members to the 

detriment of other members by offering 

the best prices (i.e., the lowest fees and 

highest rebates) only to the exchange’s 

highest volume members.33 In turn, this 

advantage may significantly limit the 

ability of lower-volume members to 

compete with higher-volume members 

for the order flow volume necessary to 

reach higher tiers. 

By design, volume-based exchange 

transaction pricing involves an 

exchange assessing different fees and 

offering different rebates and other 

incentives to different members for 

executions of orders with identical 

terms (symbol, price, size, side, order 

type, etc.). The range in fees and rebates 

can vary considerably, as shown below 

in Table 1. While the transaction price 

for each execution is small in absolute 

dollar terms, the percentage difference 

between what different members are 


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34The fees and rebates shown in Table 1 are 

derived from the exchanges’ Mar. 2023 pricing 

schedules. See supra note 15. Table 1 shows only 

the generally available core pricing tiers, meaning 

it excludes fees and rebates applicable to special 

activities that may not apply to every member: 

orders not executed on the exchange (i.e., routed to 

an away exchange); executions resulting from an 

auction or specific order types (e.g., closing 

auctions or retail liquidity program order types or 

non-displayed order types); incentives for specific 

purposes (e.g., setting the best bid or offer price); 

registered market-maker incentives; non-rebate 

incentives; and cross-asset tiers (options versus 

equities). Table 1 also excludes fees and rebates tied 

to increased volume compared to a specific date 

because those additive rebates are not generally 

available pricing tiers. Moreover, the dollar ranges 

in Table 1 do not net together additive fees or 

rebates and count them as a separate tier (e.g., 

where a base rebate could be combined with a stepup additive rebate) because those are in addition to 

other tiers and the exchanges do not identify them 

as separate named tiers. Further, the number of 

categories is a count of those separately listed fees 

or rebates used in determining the range of an 

exchange’s basic fees or rebates for purposes of 

Table 1. 

35Table 2 counts separately listed fee or rebate 

levels that are based on the achievement of a 

specified volume level and assessed on a per share 

basis. Additive rebates or other incentives were 

only counted once and not added together and 

counted separately with each applicable base price. 

Different Tapes with differing fees or rebates were 

counted separately, but Tapes with the same fee or 

rebate were not counted separately. Different fees 

for separate order types that reference the same 

volume level were counted separately. Base fees 

and rebates that are not based on volume were not 

counted. 

assessed can be large, and the 

cumulative effect may quickly add up 

across the billions of shares executed 

each trading day. To show the range of 

individual tiered transaction fees that 

apply to different members engaged in 

the same activity, Table 1 shows the 

primary pricing model for each equities 

exchange and presents a general 

summary of the number and dollar 

range of each exchange’s basic volumebased transaction tiers applicable during 

regular trading hours.34

TABLE 1—SUMMARY OF TRANSACTION-BASED PRICING SCHEDULES FOR DISPLAYED/REGULAR ORDERS ON EQUITIES

EXCHANGES DURING REGULAR TRADING HOURS AS OF MAR. 2023 

Fees and rebates for transactions at or above $1.00 on Tapes A, B & C * 

Exchange Pricing model Fees (# of categories) Rebates (# of categories) 

Cboe BZX .................... Maker-Taker ............... $0.0030 (Tapes A, B & C—1 each) ............... ($0.0016)–($0.0031) (Tapes A, B & C—7 

each). 

Cboe BYX .................... Taker-Maker ............... $0.0012–$0.0020 (Tapes A, B & C—6 each) ($0.0002)–($0.0015) (Tapes A, B & C—2 

each). 

Cboe EDGA ................. Taker-Maker ............... $0.0015–$0.0030 (Tapes A, B & C—4 each) ($0.0016)–($0.0022) (Tapes A, B & C—3 

each). 

Cboe EDGX ................. Maker-Taker ............... $0.00275–$0.0030 (Tapes A, B & C—2 each) ($0.0016)–($0.0029) (Tapes A, B & C—4 

each). 

BX ................................ Taker-Maker/Flat ........ $0.0012–$0.0030 (Tapes A, B & C—5 each) ($0.0004)–($0.0018) ** (Tapes A, B & C—5 

each). 

Phlx (PSX) ................... Maker-Taker ............... $0.0030 (Tapes A, B & C—1 each) ............... ($0.0020)–($0.0032) (Tapes A, B & C—2 

each). 

Nasdaq ........................ Maker-Taker ............... $0.0030 (Tapes A, B & C—1 each) ............... ($0.0013)–($0.00305) (Tapes A, B & C—11 

each). 

NYSE Arca .................. Maker-Taker ............... $0.0029–$0.0030 (Tape A—1, Tapes B & 

C—2 each).

($0.0016)–($0.0034) (Tape A—7, Tapes B & 

C—10 each). 

NYSE American .......... Maker-Taker ............... $0.0026–$0.0030 (Tapes A, B & C—3 each) ($0.0020)–($0.0026) (Tapes A, B & C—3 

each). 

NYSE ........................... Maker-Taker ............... $0.0026–$0.0030 (Tapes A & B—1 each, 

Tape C—3).

($0.0012)–($0.0031) (Tape A—2, Tape B—4 

& Tape C—5). 

NYSE National ............ Taker-Maker ............... $0.0020–$0.0029 (Tapes A, B & C—5 each) $0.000–($0.0030) (Tapes A, B & C—5 each). 

NYSE Chicago ............ Flat ............................. $0.0010 (Tapes A, B & C—1 each) ............... $0.00 (0). 

IEX ............................... Flat ............................. $0.0009 (Tapes A, B & C—1 each) ............... $0.000 (0). 

MEMX .......................... Maker-Taker ............... $0.0029–$0.0030 (Tapes A, B & C—3 each) ($0.0018)—($0.00335) (Tapes A, B & C—5 

each). 

MIAX Pearl .................. Maker-Taker ............... $0.00275–$0.00295 (Tapes A, B & C—3 

each).

($0.0029)–($0.0036) (Tapes A, B & C—4 

each). 

LTSE ............................ Free ............................ $0.0000 (0) ...................................................... $0.0000 (0). 

* Table 1 reflects that, as of Mar. 2023, some exchanges apply fees and rebates according to the market data Tape on which a security is disseminated, which is based on the security’s primary listing exchange. Tape A is for securities listed on NYSE, Tape B is for securities listed on 

exchanges other than NYSE and Nasdaq, and Tape C is for securities listed on Nasdaq. 

** BX charges a $0.0007 fee for Tapes A, B and C if a member fails to reach any liquidity removing rebate tier. 

Volume-based exchange transaction 

pricing is more complicated and varied 

than what is presented in Table 1. For 

example, many exchanges also offer 

additional step-up tiers that increase the 

amount of rebates offered, as well as 

specific tiering programs for registered 

market-maker activity, selected order 

types that an exchange seeks to 

incentivize, or special programs like 

retail liquidity programs. Fees also may 

vary depending on whether an order is 

displayable or non-displayed or is 

executed in the opening or closing 

auction. To show the complexity of 

volume-based exchange transaction 

pricing, Table 2 identifies the number of 

volume-based pricing levels each 

exchange offers.35

TABLE 2—COUNT OF TRANSACTION

PRICING LEVELS THAT ARE BASED

ON VOLUME FOR EXECUTIONS AT OR

ABOVE $1 AS OF MAR. 2023 

Exchange 

Volume-based 

pricing 

levels 

NYSE .................................... 93 

Nasdaq ................................. 74 

NYSE Arca ........................... 72 

Cboe BZX ............................. 26 


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36See Healthy Markets Letter, supra note 21, at 

5–6 (stating that pricing tiers ‘‘offer cheaper trading 

for larger firms with greater order volumes [which] 

puts smaller firms at a competitive disadvantage on 

order and execution prices’’ and further stating that 

as a consequence, ‘‘several larger trading firms will 

then use their lower rates to attract greater order 

flow—consolidating order flow at the largest trading 

firms’’ and as ‘‘order flow has aggregated to the 

largest firms, this has increased their ability to 

garner for themselves even better rates; further 

expanding the gap between themselves and smaller 

firms’’). 

37Sponsored access generally refers to an 

arrangement whereby a member permits a customer 

to route orders directly to an exchange using 

technology supplied by the customer that bypasses 

the member’s trading system but not its market 

access checks. See Rule 15c3–5 Adopting Release, 

supra note 22, at 69793 (describing sponsored 

access as ‘‘referring to an arrangement whereby a 

broker-dealer permits customers to enter orders into 

a trading center that bypass the broker-dealer’s 

trading system and are routed directly to a trading 

center . . .’’). 

38 Generally, direct market access refers to an 

arrangement whereby a member permits a customer 

to use its trading systems to send orders directly to 

a trading center. See id. at 69793 (describing direct 

market access as an ‘‘arrangement whereby a 

broker-dealer permits customers to enter orders into 

a trading center but such orders flow through the 

broker-dealer’s trading systems prior to reaching the 

trading center’’). 

39See, e.g., id. at 69793 n. 11 (stating that 

‘‘[e]xchange members may use access arrangements 

as a means to aggregate order flow from multiple 

market participants under one MPID to achieve 

higher transaction volume and thereby qualify for 

more favorable pricing tiers’’). 

40See id. at 69793 (discussing, in part, how direct 

market access or sponsored access arrangements 

may help to reduce certain costs such as exchange 

fees). See also infra section IV.B.4. 

41See infra section IV.B.4.b. 

42While some rules may seek to address conflicts 

of interest in the context of agency brokerage 

activity, this proposal seeks to mitigate the conflict 

specific to volume-based exchange transaction 

pricing at its source through the proposed 

prohibition. See, e.g., Securities Exchange Act 

Release No. 96496 (Dec. 14, 2022), 88 FR 5440 (Jan. 

27, 2023) (‘‘Regulation Best Execution Proposing 

Release’’). The Commission encourages commenters 

to review the Regulation Best Execution Proposing 

Release to determine whether it might affect their 

comments on this release. 

43Customers could benefit from exchange tiered 

pricing if members pass some or all of the savings 

through to the customers either directly or in the 

form of lower commissions or other subsidies. See 

also Access Fee Proposal, supra note 17 (proposing, 

among other things, revisions to the access fee cap 

in 17 CFR 242.610 (Rule 610 of Regulation NMS)). 

The Commission encourages commenters to review 

the Access Fee Proposal to determine whether it 

might affect their comments on this release. 

TABLE 2—COUNT OF TRANSACTION

PRICING LEVELS THAT ARE BASED

ON VOLUME FOR EXECUTIONS AT OR

ABOVE $1 AS OF MAR. 2023—Continued 

Exchange 

Volume-based 

pricing 

levels 

BX ......................................... 20 

Cboe EDGX .......................... 19 

MEMX ................................... 13 

Cboe BYX ............................. 11 

NYSE National ...................... 11 

NYSE American .................... 10 

Cboe EDGA .......................... 8 

MIAX Pearl ........................... 8 

Phlx (PSX) ............................ 4 

IEX ........................................ 0 

LTSE ..................................... 0 

NYSE Chicago ...................... 0 

Unless the terms of the pricing tier 

provide otherwise, a member’s customer 

volume and its proprietary orders 

typically are combined for purposes of 

determining whether the member 

qualifies for a volume tier. Once a 

member attains a volume tier, the 

pricing advantage it receives from 

reaching that volume tier may turn into 

a competitive advantage in two ways.36

First, the member can use the 

advantaged pricing it receives to benefit 

its proprietary trading business (i.e., it 

may pay lower fees or receive higher 

rebates on that business compared to 

other members that do not qualify for 

the favorable pricing tier). Second, the 

member may be able to attract 

additional order flow from customers 

because it can offer customers the same 

lower fees and higher rebates either 

directly through pass-through exchange 

transaction pricing or indirectly through 

lower commissions. This would allow 

the member to further increase and 

consolidate customer order flow, which 

in turn would help the member reach 

and maintain higher tiers. The gap in 

transaction pricing between base fees 

and rebates and top-tier fees and rebates 

can make it more difficult for new and 

lower-volume members to compete, 

putting both their proprietary and 

customer business at a competitive 

disadvantage. 

Members at the best exchange pricing 

tiers can further widen the competitive 

gap by using their tiered pricing 

advantage to sell sponsored access 37

and direct market access 38 services to 

customers (including other member and 

non-member broker-dealers with whom 

they compete as well as any other 

customer that wants direct access to an 

exchange), through which the customer 

(including other broker-dealers) uses the 

sponsoring member’s systems and 

connectivity to access an exchange. The 

sponsoring member benefits by being 

able to count the volume from its 

sponsored customers toward its own 

volume tiers, which can benefit the 

sponsored customers if they receive 

better pass-through pricing or lower 

commissions as a result, as well as the 

sponsoring member’s proprietary 

trading business that also receives that 

better transaction pricing.39 In turn, if 

the sponsored customer receives passthrough pricing from the sponsoring 

member, the sponsored customer may 

be able to share in part of the sponsoring 

member’s advantaged pricing (subject to 

the fees or mark-up it pays to the 

sponsoring member for the services), 

which can result in the sponsored 

customer paying lower exchange fees or 

earning higher exchange rebates than if 

it executed transactions on the exchange 

directly.40 These private arrangements 

between a sponsoring member and its 

sponsored customer, however, work to 

further entrench the competitive 

advantage that exchange pricing tiers 

provide to high-volume members 

because, as the Commission 

understands, sponsoring members 

typically do not pass along the entirety 

of their transaction pricing advantage to 

their sponsored broker-dealer customers 

(thereby maintaining the sponsoring 

members’ exchange transaction pricing 

advantage). As a result, the sponsoring 

members’ broker-dealer customers 

depend on using the services of their 

competitors—the sponsoring members— 

to access any advantaged exchange 

transaction pricing their competitors are 

able to obtain through these access 

arrangements, which the sponsored 

broker-dealer customers could not 

obtain on their own. The extent to 

which any such pass-through 

transaction pricing is provided to 

sponsored customers is uncertain 

because these arrangements are not 

disclosed.41

2. Conflicts of Interest 

With respect to agency brokerage 

activity, where the member transacts on 

an exchange for purposes of filling an 

order for another person, the 

Commission is concerned that volumebased exchange transaction pricing 

exacerbates a conflict of interest 

between the member and its customer.42

Specifically, when the member executes 

an agency order, it faces an economic 

incentive to route the order to one 

particular exchange over others to 

achieve volume tier requirements on 

that exchange that could result in 

reduced fees or increased rebates (and, 

in both cases, the member would retain 

some or all of the benefit for itself if it 

does not pass through that better 

exchange transaction pricing to its 

customer).43

While exchange fees and rebates in 

general may contribute to a conflict of 

interest between a member and its 

customer when routing orders, volumebased fees and rebates can exacerbate 

that conflict because they present an 

additional economic incentive to 


ddrumheller on DSK120RN23PROD with PROPOSALS2
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44See Healthy Markets Letter, supra note 21, at 

4 (‘‘The inherent conflict of interest created by 

different pricing tiers may also impact how brokers 

treat their own customers in a way that isn’t quite 

as transparent as simply chasing the higher rebate 

or lower fee venue. For example, a broker with a 

less-sophisticated customer may send orders to a 

venue so that the firm would reach a certain tier 

threshold, despite the broker’s awareness that 

executions on that venue may result in inferior 

execution outcomes to investors. However, the 

same broker, if faced with the same order from a 

more-sophisticated customer, may not.’’). See also 

Recommendation of the SEC Investor Advisory 

Committee Regarding Exchange Rebate Tier 

Disclosure (Jan. 24, 2020), available at https://

www.sec.gov/spotlight/investor-advisorycommittee-2012/exchange-rebate-tierdisclosure.pdf. In the recommendation, the Investor 

Advisory Committee stated that ‘‘[t]he lack of 

public disclosure concerning the structure of 

rebates for executing brokers’’ exacerbates ‘‘a 

principle-agency conflict in the receipt of rebates 

for orders executed on behalf of clients but not 

shared with clients.’’ 

45See infra section IV.B.3. 

46See also infra section IV.B.1.c. 

47The proposed rule would provide a consistent 

approach to these issues, which the Commission 

could not achieve through piecemeal suspensions 

of individual exchange pricing filings. 

48See proposed Rule 6b–1(a). 

49See infra section IV.E.1 and 2 (proposing 

alternatives that would prohibit exchanges from 

offering volume-based exchange transaction pricing 

for member proprietary volume). 

50See proposed Rule 6b–1(b)(1). Exchanges 

would have flexibility under the proposed rule as 

to what rules to adopt. For example, an exchange 

may allow members to designate that certain of 

their ports or sessions handle exclusively agencyrelated orders or exclusively proprietary orders as 

a means to facilitate the exchange’s ability to 

comply with the prohibition. If the member does 

not use separate ports in that manner, the exchange 

could require members to indicate for billing 

purposes which orders are agency-related and 

ineligible for tiered pricing if the exchange does not 

already have a mechanism to distinguish those 

orders. Or, if a member does not conduct an agency 

business and only trades proprietarily or does not 

trade proprietarily and only trades on an agency 

basis, an exchange may not need to require 

anything additional from that member for purposes 

of this proposed rule. 

51See proposed Rule 6b–1(b)(2). For example, if 

an exchange allows members to designate that 

certain of their ports or sessions handle exclusively 

agency-related orders or exclusively proprietary 

orders as a means to facilitate the exchange’s ability 

to comply with the prohibition, an exchange might 

adopt a policy and procedure to review the ports 

and sessions designated by members to make sure 

that members are not, for example, submitting 

agency-related orders though a port or session the 

member has designated as solely for proprietary 

orders. 

members when selecting an exchange 

for routing: the member’s desire to reach 

volume tiers on an exchange to achieve 

preferential pricing. Specifically, 

volume-based pricing may incentivize 

members to route customer order flow 

to certain exchanges for the purpose of 

meeting tier qualification, which has the 

potential to be costly to customers if it 

comes at the expense of execution 

quality. Moreover, this incentive may be 

particularly enticing for members 

because customer volume can accrue 

towards the member’s total volume 

level, giving it the ability to achieve 

more favorable tiered pricing for all of 

its order flow, including proprietary 

orders that the member sends to the 

exchange for its own account. The fact 

that volume-based exchange transaction 

pricing applies to both agency-related 

and proprietary order flow even further 

exacerbates the conflict of interest 

between a member and its customer 

because the routing decisions a member 

makes with respect to its agency-related 

order flow can also benefit its unrelated 

proprietary business. Finally, it may be 

challenging for customers to understand 

and assess the impact that tiered 

exchange pricing may have on brokerdealer routing decisions due to the 

complexity of the exchanges’ tiered 

pricing schedules, which makes it 

difficult for customers to provide a 

check against any conflicts of interest.44

Accordingly, the economic incentive 

presented by tiered exchange 

transaction pricing may affect members’ 

order routing decisions, exacerbating a 

conflict of interest that can potentially 

harm investors with inferior executions 

when members route customer orders to 

exchanges.45

3. Exchange Competition 

An exchange’s volume-based 

transaction pricing schedule is designed 

to entice members to route orders to that 

exchange over other exchanges by 

lowering fees or increasing rebates as 

volume-based transaction tiers are met. 

Pricing tiers that are based on total 

consolidated volume may create 

additional incentives for members to 

route to certain exchanges, particularly 

towards the end of each month as 

members seek to achieve tier targets to 

qualify for a better pricing tier on that 

exchange. This dynamic may harm the 

ability of other exchanges to compete for 

order flow during that time. 

Further, certain forms of exchange 

transaction pricing tiers can raise 

unique issues and concerns. For 

example, if a primary listing exchange 

for a stock were to base its closing 

auction pricing on the volume a member 

executes during regular trading hours 

outside of the auction, members that 

send customer orders in that stock to the 

primary listing exchange’s closing 

auction may be incentivized to also 

route to the exchange during regular 

hours to qualify for tiered pricing in the 

closing auction.46 In this scenario, the 

exchange is leveraging its role as the 

primary listing exchange for a stock, in 

addition to the closing auction it 

provides for that stock, to use members’ 

desire to achieve tiered pricing in the 

closing auction as an incentive for those 

members to also route to the exchange 

during the regular trading session. 

Accordingly, the Commission is 

concerned about the potential for 

exchanges to use some forms of volumebased exchange transaction pricing to 

insulate certain portions of member 

volume from competition while at the 

same time over-emphasizing 

competition based on fee tiering, which 

can constrain innovation among 

exchanges in other areas and impose a 

burden on competition among 

exchanges that may be inconsistent with 

the goals of a national market system. 

II. Description of Proposed Rule 

A. Overview of Proposed Rule 

The Commission is proposing a rule 

designed to address its specific concerns 

with volume-based exchange 

transaction pricing schedules.47

Proposed Rule 6b–1 has three 

components. First, the proposed rule 

would prohibit equities exchanges from 

offering volume-based exchange 

transaction pricing in connection with 

the execution of agency or riskless 

principal orders in NMS stocks 

(‘‘agency-related volume’’).48 The 

proposed rule would not prohibit 

exchanges from offering volume-based 

exchange transaction pricing for 

member proprietary volume where the 

member is trading solely for its own 

account and not in connection with 

filling an order for a customer.49

Second, the proposed rule contains an 

anti-evasion clause that would require 

equities exchanges that have volumebased transaction pricing for member 

proprietary volume to adopt rules to 

require members to engage in practices 

that facilitate the exchange’s ability to 

comply with the prohibition on volumebased exchange transaction pricing in 

connection with the execution of 

agency-related volume.50 The proposed 

rule also would require exchanges to 

establish, maintain, and enforce written 

policies and procedures that are 

reasonably designed to detect and deter 

members from receiving volume-based 

exchange transaction pricing in 

connection with the execution of agency 

or riskless principal orders in NMS 

stocks.51 This requirement would help 

to promote an exchange’s compliance 

with the proposed rule by ensuring that 

an exchange develops mechanisms that 

would prevent its members from 

inappropriately receiving volume-based 


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52See, e.g., section 6(b)(1) of the Exchange Act, 

15 U.S.C. 78f(b)(1) (requiring an exchange to be so 

organized and have the capacity ‘‘to be able to carry 

out the purposes of [the Exchange Act] and to 

comply, and . . . to enforce compliance by its 

members and persons associated with its members 

with the provisions of [the Exchange Act], the rules 

and regulations thereunder, and the rules of the 

exchange’’). 

53See proposed Rule 6b–1(c). Consistent with the 

proposed disclosure requirement, the Commission 

also is proposing to amend 17 CFR 232.101 (Rule 

101 of Regulation S–T) to add the disclosure 

required under proposed Rule 6b–1(c) as a filing 

that must be submitted electronically. 

54See proposed 17 CFR 232.405(b)(6). Rule 405 

of Regulation S–T applies to the submission of 

Interactive Data Files. The Commission is proposing 

conforming changes in Rule 405 of Regulation S– 

T to reflect the inclusion of proposed Rule 6b–1(c). 

Such files must be submitted using Inline XBRL. 

See proposed 17 CFR 232.405(a)(3). The 

Commission also is proposing conforming changes 

to Rule 101 of Regulation S–T to reflect the 

inclusion of proposed Rule 6b–1. See proposed 17 

CFR 232.101. 

55As discussed below in section II.D, Request for 

Comments, the Commission is soliciting comment 

on other potential metrics for the disclosures, 

including the volume of shares at each tier and the 

dollar amount of fees, rebates, or other incentives 

at each tier. 

56See supra sections I.B (Volume-Based 

Exchange Transaction Pricing), and I.C.1 

(Competition Among Members). 

57See supra section I.C.2 (Conflicts of Interest). 

58To comply with the prohibition, an exchange 

that offers volume-based transaction fees, rebates, or 

other incentives in connection with the execution 

of agency or riskless principal orders in NMS stocks 

would need to file a proposed rule change on Form 

19b–4 to remove any such pricing from its pricing 

schedule. 

59See, e.g., 17 CFR 240.3a5–1(b) (exempting 

banks from the definition of ‘‘dealer’’ under the 

Exchange Act when acting in a riskless principal 

capacity when certain conditions are met, which 

states that ‘‘[f]or purposes of this section, the term 

riskless principal transaction means a transaction in 

which, after having received an order to buy from 

a customer, the bank purchased the security from 

another person to offset a contemporaneous sale to 

such customer or, after having received an order to 

sell from a customer, the bank sold the security to 

another person to offset a contemporaneous 

purchase from such customer.’’); 17 CFR 240.3a5– 

2 (exemption from the definition of ‘‘dealer’’ for 

banks effecting transactions in securities issued 

pursuant to Regulation S); 17 CFR 255.6(c)(2) (other 

permitted proprietary trading activities); 17 CFR 

240.31(a)(14) (Section 31 transaction fees); 17 CFR 

230.144A(a)(5) (private resales of securities to 

institutions); and 17 CFR 230.144 (persons deemed 

not to be engaged in a distribution and therefore not 

underwriters) (defining the term ‘‘riskless principal 

transaction’’ generally without reference to price, 

but further providing in 17 CFR 230.144(f)(1)(iii) 

the possible manners of sale, one of which is a 

riskless principal transaction where the offsetting 

trades are executed at the same price). Generally, 

the exchanges use the terms ‘‘agency’’ and ‘‘riskless 

principal’’ in their rules without defining them 

because the terms are widely and commonly 

understood. For example, Cboe BZX refers to the 

terms ‘‘agency’’ and ‘‘riskless principal’’ 12 times 

each in its rulebook (covering equities and options 

rules), but does not separately define either term, 

except with respect to retail orders under its Retail 

Order Attribution Program. See Cboe BZX Rule 

11.25(a)(2) (retail order attribution program, 

referring to a ‘‘riskless principal order that meets 

the criteria of FINRA Rule 5320.03’’). Moreover, 

each of the exchange rules that implement the 

Consolidated Audit Trail, which requires the 

capture of the capacity of the member executing the 

order, whether principal, agency, or riskless 

principal, uses those terms in an identical manner 

Continued 

exchange transaction pricing for agencyrelated orders.52

Third, the proposed rule would 

require equities exchanges that have 

volume-based transaction pricing for 

member proprietary volume to submit 

electronically to the Commission 

disclosures of the number of members 

that qualify for their volume-based 

transaction pricing.53 Specifically, such 

exchanges would be required to submit 

electronic, machine-readable structured 

data tables of their volume-based 

transaction pricing tiers and the number 

of members that qualify for each tier in 

an Interactive Data File in accordance 

with 17 CFR 232.405 (Rule 405 of 

Regulation S–T),54 and the public would 

be able to access those disclosures 

through the Commission’s EDGAR 

system.55 Additional public 

transparency regarding the number of 

members that qualify for each pricing 

tier for their proprietary volume would 

help the Commission, members, and the 

public understand how the benefits of 

volume-based pricing are distributed 

and the potential impact on members, 

which should facilitate and inform 

members’, the public’s, and other 

exchanges’ efforts to submit comment 

letters on volume-based exchange 

transaction pricing proposals to further 

inform the Commission as it considers 

those proposals. For example, 

information on the number of members 

that have qualified for a newly adopted 

pricing tier would allow the 

Commission and interested parties to 

assess exchange statements regarding 

the number of members that the 

exchange estimated should qualify for a 

proposed new tier or amended tier. In 

addition, such information would 

provide a data point for the Commission 

to consider in determining whether a 

proposed tier meets the applicable 

statutory standards and whether the 

Commission should temporarily 

suspend the newly adopted pricing tier. 

B. Prohibition on Volume-Based 

Exchange Transaction Pricing for 

Agency-Related Volume 

The Commission is concerned about 

the impact of exchange tiered 

transaction pricing on competition 

among an exchange’s members. As 

discussed above, volume-based 

exchange transaction pricing can 

frustrate and impede the ability of new 

and lower-volume members to compete 

with high-volume members, including 

for customer order flow, which can 

reduce the number of members that are 

able to offer customers the highest-tiers 

of exchange transaction pricing.56 For 

example, if a member that qualifies for 

the best pricing tier can offer a customer 

pass-through of its $0.0015 take fee for 

executing on Exchange A, but a member 

that does not qualify for a tier can only 

offer a customer pass-through of its 

$0.0030 take fee on that same exchange 

for execution of the same customer 

order, the lower-volume member faces a 

distinct and measurable disadvantage 

even though both are members of 

Exchange A. The Commission also is 

concerned that volume-based exchange 

transaction pricing that applies to 

agency-related volume exacerbates a 

conflict of interest between members 

and their customers when members face 

an economic incentive to earn 

increasingly lower fees or higher rebates 

or other incentives from an exchange in 

connection with the execution of more 

customer orders on that exchange.57

Accordingly, to address the 

Commission’s concerns with member 

competition, as well as the conflict of 

interest between members and their 

customers, the prohibition on volumebased exchange transaction pricing in 

proposed Rule 6b–1(a) would apply to 

agency-related volume. Specifically, the 

proposed rule would prohibit exchanges 

from offering volume-based transaction 

fees, rebates, or other incentives in 

connection with the execution of agency 

or riskless principal orders in NMS 

stocks.58

The proposed prohibition would 

apply broadly to all executions where a 

member is executing an agency or 

riskless principal order in an NMS stock 

for the purpose of filling a customer 

order and is not trading for its own 

account. For purposes of the proposed 

rule, customers could include, for 

example, other members, non-member 

broker-dealers, institutions, an affiliate 

of the member, natural persons, or any 

person that uses the member to access 

an exchange, including through direct 

market access or sponsored access 

services. 

The proposed rule would define 

riskless principal to mean ‘‘a transaction 

in which, after having received an order 

to buy from a customer, the broker or 

dealer purchased the security from 

another person to offset a 

contemporaneous sale to such customer 

or, after having received an order to sell 

from a customer, the broker or dealer 

sold the security to another person to 

offset a contemporaneous purchase from 

such customer.’’ That definition is 

consistent with other Commission 

definitions of the term.59


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without defining them. See, e.g., Nasdaq General 7, 

Section 3(a)(1)(E)(iv); BZX Rule 4.7(a)(1)(E)(iv). See 

also Limited Liability Company Agreement of 

Consolidated Audit Trail, LLC, Article VI, Section 

6.3(d)(v)(D). Those terms also are not defined 

within the CAT NMS Plan. 

60See, e.g., 17 CFR 242.201(a)(8) (concerning 

‘‘short exempt’’ order marking for certain riskless 

principal orders) and 17 CFR 240.10b–18 

(purchases of certain equity securities by the issuer 

and others). 

61See, e.g., FINRA Rule 5320.03 (excluding 

riskless principal transactions from FINRA’s 

Prohibition Against Trading Ahead of Customer 

Orders) and FINRA Rule 6380B(d)(3)(B) (concerning 

reporting to the FINRA/NYSE Trade Reporting 

Facility). The FINRA rule prohibiting trading ahead 

of customer orders generally prohibits members 

from trading for their own account at a price that 

would satisfy the customer order, subject to an 

exception for riskless principal orders. Exchanges 

have incorporated FINRA’s rule by reference or 

have adopted similar rules. See, e.g., FINRA Rule 

5320.03 and BZX Rule 12.6.03. 

Like agency orders, riskless principal 

orders are one way for a member to fill 

a customer’s order. Riskless principal 

orders involve contemporaneous buys 

and sells that are ‘‘riskless’’ to the 

member, in that the member does not 

take on the market risk of price moves 

in the stock because it buys or sells to 

promptly transfer the position to a 

customer rather than retain the position 

for any significant length of time in its 

own account. 

Some rules, in contexts other than 

exchange transaction pricing, include 

definitions of the term ‘‘riskless 

principal’’ that require the price of both 

legs of the riskless principal trade be at 

the same price.60 In addition, FINRA 

has a definition of riskless principal that 

specifies that the member’s principal 

trade and the customer fill occur at the 

‘‘same price.’’ 61

The definition of riskless principal in 

proposed Rule 6b–1 does not require the 

principal leg and customer leg to occur 

at the same price. Proposed Rule 6b–1 

uses a broader definition of riskless 

principal to achieve the purposes of the 

proposed rule and to limit the ability of 

members to easily circumvent the 

proposed rule’s prohibition by an 

economically insignificant amount. For 

example, if the proposed rule contained 

a ‘‘same price’’ requirement in the 

definition of riskless principal, a 

member might attempt to circumvent 

the prohibition by providing an 

economically insignificant different 

price on the customer leg—one that 

varied by the smallest fraction of a 

penny possible—to avoid classifying the 

transaction as ‘‘riskless principal.’’ If 

proposed Rule 6b–1 excluded such a 

transaction from its definition of riskless 

principal, the member would qualify for 

volume-based exchange transaction 

pricing on the principal leg of the 

transaction even though the transaction 

had the defining characteristics of a 

riskless principal trade because the 

member did not take on the market risk 

of price moves in the stock and 

promptly transferred the position to the 

customer. A definition that includes the 

concept of ‘‘same price’’ therefore 

would not achieve the Commission’s 

goals of prohibiting volume-based 

exchange transaction pricing for agencyrelated volume. 

Because orders executed in the 

capacity of agent and riskless principal 

both are done to fill a customer order, 

the conflict of interest exacerbated by 

exchange tiered transaction pricing is 

equally present for both: the member 

faces conflicting economic incentives 

when choosing the exchange execution 

venue, and the customer bears any costs 

associated with an execution that results 

from that decision. The Commission 

therefore proposes to treat riskless 

principal orders the same as agency 

orders for purposes of proposed Rule 

6b–1(a). 

Finally, because proposed Rule 6b– 

1(a) would prohibit exchanges from 

offering volume-based transaction 

pricing in connection with the 

execution of agency or riskless principal 

orders in NMS stocks, which represent 

a member’s agency-related volume, it 

would prohibit exchanges from 

counting that agency-related volume 

towards any volume-based transaction 

tiers applicable to the member’s 

proprietary volume. For example, if a 

member is engaged in proprietary 

trading (e.g., as a registered market 

maker on the exchange) and also has a 

separate division or affiliate that is 

engaged in a customer brokerage 

business (e.g., as an executing broker for 

non-member brokers), an exchange 

could not count the member’s agencyrelated volume towards any volumebased transaction tiers the member 

qualifies for on its proprietary volume. 

Similarly, because the proposal would 

prohibit volume-based exchange 

transaction pricing in connection with 

the execution of agency or riskless 

principal orders in NMS stocks, it 

would prohibit exchanges from basing 

transaction pricing in an auction on 

agency-related volume executed within 

or outside the auction. In either case, an 

exchange could count only the 

member’s proprietary volume to 

determine the pricing tier for the 

member’s proprietary trades. 

Prohibiting volume-based exchange 

transaction pricing for agency-related 

orders is intended to promote 

competition among members for 

customer business. It also is intended to 

mitigate the conflict of interest between 

members and customers that is 

exacerbated by exchange tiered pricing 

where the member economically 

benefits from its choice of exchange 

execution venue for customer orders. 

The proposed rule would eliminate one 

incentive—reaching a volume tier—for a 

member to route a customer order to a 

particular exchange when doing so 

might not be in the customer’s interest. 

Request for Comments 

The Commission generally requests 

comment from the public on all aspects 

of proposed Rule 6b–1(a), including its 

objectives and its terms to achieve those 

objectives. More specific requests for 

comment are set forth below. As much 

as possible, commenters are requested 

to provide empirical data in support of 

any arguments or analyses and to offer 

explanations for their views. 

1. Do commenters believe that 

volume-based exchange transaction 

pricing impacts competition among 

members when competing for customers 

on an agency basis? Do sponsored 

access and direct market access 

arrangements contribute to these 

competitive effects when exchange 

members compete for customers? Why 

or why not? Does volume-based 

exchange transaction pricing impact 

competition among members when 

trading proprietarily? If there is an 

impact, is the impact greater for 

members when they are competing for 

customers or when they are trading 

proprietarily, or is the impact 

equivalent? 

2. Do commenters believe that 

volume-based exchange transaction 

pricing exacerbates the conflict of 

interest between members and 

customers when members are routing 

customer orders, because of the 

member’s desire to qualify for volumebased transaction tiers? Would complete 

pass through of exchange pricing to the 

member’s customer eliminate that 

conflict? Why or why not? To what 

extent do members completely or 

partially pass through all exchange 

pricing to their customer? Do customers 

prefer pass through exchange 

transaction pricing or broker 

commissions, and for what reasons? Is 

the Commission’s understanding correct 

that full and partial pass-through of 

exchange transaction pricing by 

members to their customers is less 

common? For sponsored access and 

direct market access arrangements, how 

common is pass-through of exchange 

transaction fees? What types of passthrough arrangements are most common 

and how much does the sponsoring 

member typically retain as 

compensation? 


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62See infra section IV.E.1. 63See infra section IV.E.2. 

3. To what extent does volume-based 

exchange transaction pricing impact 

competition among exchanges, and/or 

between exchanges and off-exchange 

venues, such as alternative trading 

systems (‘‘ATSs’’) and wholesaler 

broker-dealers? 

4. To what extent is volume-based 

exchange transaction pricing used by 

exchanges to attract specific types of 

members or customers of members, such 

as proprietary traders, registered market 

makers, or agency customers? Among 

agency customers, are any particular 

types of customers particularly attracted 

by volume-based exchange transaction 

pricing, such as long-term investors, 

short-term traders, investment advisers, 

and institutional investors? 

5. To what extent is the ability of an 

exchange to attract order flow from 

specific types of members or customers 

through volume-based exchange 

transaction pricing or other forms of 

targeted pricing necessary to support 

competition between exchanges and offexchange venues? For example, if 

exchanges lack the ability to offer such 

pricing on agency-related order flow, 

could that potentially make offexchange venues relatively more 

attractive as a destination for that flow? 

If so, should the Commission address 

such a competitive disparity? For 

example, should the Commission 

expand the scope of the prohibition on 

volume-based transaction pricing for 

agency-related volume in certain stocks 

to off-exchange venues such as ATSs? 

6. How consistently do individual 

exchange members hit specific tiers over 

time? How do members respond to 

volume-based exchange transaction 

pricing changes and how do those 

member responses differ across different 

exchanges? 

7. How does using volume-based 

exchange transaction pricing as a means 

of compensating liquidity providers 

compare to other fee and non-fee 

methods of attracting those liquidity 

providers? Do exchange-registered 

market makers react differently from 

other members that provide liquidity to 

exchange transaction pricing? Does 

volume-based exchange transaction 

pricing affect liquidity taking orders 

differently from liquidity providing 

orders? 

8. Would the proposed prohibition on 

volume-based exchange transaction 

pricing in connection with the 

execution of agency or riskless principal 

orders in NMS stocks address the 

concerns the Commission identified 

about member competition and conflicts 

of interests between members and 

customers? Why or why not? 

9. Is the proposed definition of 

riskless principal in proposed Rule 6b– 

1(a) appropriate? Why or why not? If the 

definition included a ‘‘same price’’ 

requirement, do commenters agree that 

the Commission would not be able to 

achieve its objectives for the proposed 

rule? Why or why not? 

10. Do exchanges have rules and 

policies and procedures in place that 

require members to mark their orders for 

transaction billing purposes in a manner 

that would readily allow exchanges to 

comply with the proposed prohibition, 

or would those rules and policies and 

procedures need to be revised to 

accommodate the proposed prohibition? 

11. Should the Commission also 

prohibit volume-based exchange 

transaction pricing for member 

proprietary volume (i.e., should the 

Commission prohibit exchanges from 

offering volume-based transaction 

pricing for all volume in NMS 

stocks)? 62 Why or why not? Would 

doing so obviate the need for the antievasion provisions in proposed Rule 

6b–1(b) and the proposed disclosures in 

proposed Rule 6b–1(c) since tiered 

pricing would no longer be permitted? 

Would a broader prohibition that 

includes both agency-related and 

proprietary orders address the 

Commission’s concerns, discussed 

above in section I.C, about competition 

among members and competition among 

exchanges, as well as the conflict of 

interest between members and 

customers with respect to agencyrelated order flow? How would a 

broader prohibition affect exchange fees 

and rebates compared to what they offer 

today? Would exchanges be able to 

extend their best fee and rebate pricing 

to all members? Why or why not? If not, 

and if the purpose of tiered transaction 

pricing is to attract more order flow 

from members, why would exchanges 

not be able to offer the best pricing to 

all members to attract the greatest 

possible volume? 

12. If the Commission extends the 

prohibition on volume-based exchange 

transaction pricing to member 

proprietary volume, should displayed 

liquidity-adding orders from an 

exchange’s registered market makers in 

their registered or appointed symbols 

not be subject to the prohibition in order 

to provide exchanges with a means to 

incentivize displayed quotes from their 

registered market makers? In other 

words, should the Commission prohibit 

exchanges from offering volume-based 

transaction pricing for all volume in 

NMS stocks, but subject to a carve-out 

only for displayed liquidity providing 

orders from exchange registered market 

makers in their registered or appointed 

symbols? 63 Should such an exception 

be limited to registered exchange market 

makers that are subject to minimum 

quantitative and qualitative quotation 

requirements that meet or exceed the 

highest such standards in place among 

national securities exchanges to avoid 

conferring a benefit without meaningful 

corresponding obligations that protect 

investors? Would continuing to allow 

volume-based exchange transaction 

pricing for displayed liquidity-adding 

orders from such exchange registered 

market-makers in their registered or 

appointed symbols be an appropriate 

benefit to encourage members to become 

and remain registered market makers 

and to provide publicly displayed 

quotes, consistent with their quoting 

obligations? Would tiered pricing 

encourage greater quoted depth or 

narrower quoted spreads, or both, for 

displayed quotes? If the Commission 

adopted a broader prohibition on 

volume-based transaction pricing with a 

carve-out for registered market makers, 

would the anti-evasion provisions in 

proposed Rule 6b–1(b) and the 

transparency disclosures in proposed 

Rule 6b–1(c) be less relevant in 

circumstances where the only reportable 

activity would be the activity of 

registered market makers who are 

subject to exchange market making 

rules? 

13. Instead of prohibiting volumebased exchange transaction pricing, 

should the Commission instead allow 

exchanges to offer volume-based pricing 

to attract order flow, but require the 

volume tiers to be based on total 

aggregate volume submitted to the 

exchange, with the associated tiered 

pricing applied to all members 

uniformly? For example, an exchange 

could establish a volume-based pricing 

tier that considers cumulative exchangelevel liquidity-adding activity, where all 

liquidity-adding volume executions 

from all members is combined to count 

towards the tier, and, after a tier 

threshold is reached, the enhanced 

rebate would be available to all 

members equally. Would this alternative 

address the Commission’s concerns 

regarding competition among members? 

Would it impose a burden on 

competition among exchanges and a 

conflict of interest between members 

and customers when routing customer 

orders because of the incentives to reach 

tiers? Would that burden and conflict be 

greater than, or less than, under the 

current tiering structure? Would this 

alternative obviate the need for the antiVerDate Sep<11>2014 18:37 Nov 03, 2023 Jkt 262001 PO 00000 Frm 00011 Fmt 4701 Sfmt 4702 E:\FR\FM\06NOP2.SGM 06NOP2

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76292 Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 

64 If an exchange does not offer volume-based 

transaction pricing, then it would not be required 

to adopt such a rule. 

65Many exchanges already have rules requiring 

members to accurately mark their orders. See, e.g., 

Nasdaq General 3, Rule 1032(a)(6) (requiring 

members to ‘‘input [ ] accurate information into the 

System. . . .’’). 

evasion provisions in proposed Rule 

6b–1(b) and the transparency 

disclosures in proposed Rule 6b–1(c)? 

14. If exchanges continue to offer 

volume-based transaction pricing for 

member proprietary orders, should the 

Commission prohibit an exchange from 

basing tiers on total consolidated 

volume (‘‘TCV’’), or another metric that 

is based on volume transacted on other 

exchanges and off-exchange, and 

instead limit volume-based transaction 

tiers to volume that occurs solely on the 

exchange as a means of promoting 

competition among exchanges? Do tiers 

based on TCV constrain competition 

among exchanges by seeking primarily 

to preserve relative exchange market 

share? Why or why not? Even if tiers 

were not permitted to be based on TCV, 

could exchanges effectively circumvent 

such a prohibition by replicating a 

similar approach using absolute 

numbers and updating them on a 

monthly basis based on future estimates 

of total consolidated market volume? 

Why or why not? 

15. If exchanges continue to offer 

volume-based transaction pricing for 

member proprietary orders, should the 

Commission prohibit exchanges from 

basing tiers in an auction, trading 

session, or special program or order 

types (e.g., retail liquidity program) on 

volume done outside that auction, 

trading session, or program or order 

type? For example, should the 

Commission prohibit exchanges from 

basing tiers in the closing auction on 

volume transacted during regular 

trading hours in order to prevent an 

exchange from leveraging its closing 

auction in a manner that harms the 

ability of other exchanges to compete 

with it in the regular hours trading 

session? Do these types of arrangements 

impact competition among exchanges 

and among members? Why or why not? 

16. Should the Commission prohibit 

volume-based exchange transaction 

pricing for agency-related orders also for 

listed options? Why or why not? Would 

extending the prohibition to listed 

options implicate the same costs and 

benefits that would apply to a 

prohibition on volume-based exchange 

transaction pricing for NMS stocks, or 

are there unique aspects of the listed 

options markets that would apply 

different costs or result in different 

benefits? What would those differences 

be? 

17. If the Commission also prohibits 

volume-based exchange transaction 

pricing for member proprietary volume 

in NMS stocks, should listed options 

also be included within the broader 

prohibition? If the Commission were to 

adopt a broader prohibition on all 

volume-based exchange transaction 

pricing and apply it to all NMS 

securities (including NMS stocks and 

listed options), should it carve-out 

displayed liquidity-adding orders from 

an exchange’s registered market makers 

in their assigned options classes and 

series from such a prohibition? Should 

there be any particular minimum 

quantitative and qualitative quoting 

requirements to qualify for the carveout? Would such a carve-out for listed 

options be an appropriate benefit to 

encourage members to become and 

remain registered market makers and 

undertake registered market making 

obligations in the same way that it 

would for NMS stocks? Does tiered 

pricing encourage greater quoted depth 

or narrower quoted spreads, or both, for 

listed options in a similar manner to 

NMS stocks? If the Commission were to 

allow exchanges to offer volume-based 

transaction pricing but require that tiers 

be aggregated across all members and 

the associated pricing be applicable to 

all members uniformly, should that 

condition apply to listed options as well 

as NMS stocks? 

18. Instead of prohibiting volumebased exchange transaction pricing for 

agency and riskless principal orders, 

should the Commission instead prohibit 

exchanges from offering tiers that are 

reasonably achievable by only one or a 

few members based on those members’ 

order flow? Why or why not? If such a 

prohibition were adopted, would it be 

appropriate, for example, to prohibit 

tiers for which fewer than 50% of an 

exchange’s members could have met the 

tier criteria during the prior month? 

Would assuring that exchanges set tier 

criteria at levels for which at least 50% 

of the exchange’s members are capable 

of meeting based on order flow they 

route help assure that such tiered 

pricing meets the applicable statutory 

standards because at least a majority of 

members would be eligible to receive it? 

Would such a prohibition increase 

competition among members for 

customers while providing exchanges 

with the ability to offer tiered pricing at 

levels that incentivize members to 

contribute additional liquidity to the 

exchange? Alternatively, would it be 

appropriate, for example, to prohibit 

tiers for which only one, two, three, or 

four members are capable of qualifying 

to prevent tiers that are only achievable 

by only a few members and help assure 

that tiers meet the applicable statutory 

standards? Should any of the above 

prohibitions also be applied to 

proprietary orders for the account of a 

member? Why or why not? Should such 

a prohibition also apply to listed 

options? Why or why not? 

C. Anti-Evasion 

The prohibition in proposed Rule 6b– 

1(a) is intended in part to address the 

conflict of interest between members 

and customers that is exacerbated by 

volume-based exchange transaction 

pricing schedules when members route 

customer orders to an exchange, as well 

as address burdens on competition that 

volume-based exchange transaction 

pricing can impose on members 

competing for customer business. In 

light of the combination of these 

conflicts and potential competitive 

advantages, the Commission is 

concerned that members may have a 

financial incentive to mischaracterize 

their agency-related orders to continue 

to qualify for volume-based pricing. 

To mitigate this incentive to 

mischaracterize order capacities, 

proposed Rule 6b–1(b)(1) would require 

an equities exchange that offers volumebased transaction pricing for member 

proprietary orders to have a rule to 

require its members to engage in 

practices that facilitate the exchange’s 

ability to comply with the prohibition 

on volume-based exchange transaction 

pricing in connection with the 

execution of agency-related volume.64

The proposed rule would provide 

exchanges with flexibility to adopt a 

rule that is tailored to its needs, 

systems, and members. For example, an 

exchange rule could require members to 

identify, for transaction pricing and 

billing purposes, their proprietary 

orders for their own account and submit 

or mark them in a distinct manner from 

all other orders. Similarly, an exchange 

could adopt or enhance any existing 

rule that requires members to properly 

label orders or identify which types of 

orders are submitted through specific 

ports or sessions to ensure the accuracy 

of order marking and ensure that 

members do not mislabel or misdirect 

orders specifically for transaction billing 

purposes.65 Proposed Rule 6b–1(b)(1) 

would support proposed Rule 6b–1(a)’s 

prohibition on volume-based 

transaction fees, rebates, or other 

incentives in connection with the 

execution of agency or riskless principal 

orders in NMS stocks. 

Second, proposed Rule 6b–1(b)(2) 

would require the exchange to establish, 


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66See, e.g., 15 U.S.C. 78s(g)(1). 

67Exchanges that do not offer any volume-based 

transaction pricing would not be required to submit 

the disclosures required under proposed Rule 6b– 

1(c). 

68 15 U.S.C. 78f(b)(4). 

69 15 U.S.C. 78f(b)(5). 

70 15 U.S.C. 78f(b)(8). 

71 15 U.S.C. 78k–1(a)(1)(C)(ii) and (iv). 

72Under the proposed rule, an exchange would 

not have to identify its members by name in the 

proposed transparency disclosures. 

73See supra note 6 and accompanying text 

(discussing suspensions). 

maintain, and enforce written policies 

and procedures reasonably designed to 

detect and deter members from 

receiving volume-based pricing in 

connection with the execution of 

agency-related volume. While 

exchanges generally already establish, 

maintain, and enforce written policies 

to detect and deter non-compliance with 

their rules and the Federal securities 

laws and rules to ensure compliance 

with their obligations under the 

Exchange Act,66 the Commission is 

adding a specific and complementary 

requirement in proposed Rule 6b–1 to 

help ensure exchange compliance with 

the proposed rule. Proposed Rule 6b– 

1(a) would apply specifically to 

exchange pricing schedules and how 

exchanges assess and collect fees and 

offer rebates and other incentives to 

members. For example, exchanges could 

develop written policies and procedures 

to audit member activity to ensure the 

proper marking of orders and review 

trading records to ensure that the 

exchange is not unintentionally offering 

tiered transaction pricing on agencyrelated volume. Proposed Rule 6b– 

1(b)(2) would complement existing 

exchange rules requiring the accurate 

marking of orders and thereby facilitate 

the ability of exchanges to comply with 

proposed Rule 6b–1(a). 

Request for Comments 

The Commission generally requests 

comment from the public on all aspects 

of proposed Rule 6b–1(b), including its 

objectives and its terms to achieve those 

objectives. More specific requests for 

comment are set forth below. As much 

as possible, commenters are requested 

to provide empirical data in support of 

any arguments or analyses and to offer 

explanations for their views. 

19. Is the anti-evasion clause in 

proposed Rule 6b–1(b) appropriately 

designed to ensure exchange 

compliance with the proposed 

prohibition on volume-based exchange 

transaction pricing in connection with 

the execution of agency or riskless 

principal orders? Why or why not? To 

what extent are practices or systems 

already in place that could facilitate 

members accurately marking orders so 

that exchanges can distinguish 

proprietary and agency orders for 

transaction billing purposes? 

D. Transparency for Volume-Based 

Pricing on Member Proprietary Orders 

Proposed Rule 6b–1(c) would add a 

new public disclosure requirement for 

exchanges that offer volume-based 

transaction pricing in connection with 

the execution of proprietary orders in 

NMS stocks for the account of a 

member.67 For purposes of proposed 

Rule 6b–1(c), proprietary orders are 

those where the member is trading 

solely for its own account and not in 

connection with filling an order for a 

customer. Proprietary orders are 

principal capacity orders and are not 

agency or riskless principal capacity 

orders. 

Disclosing information about the 

manner in which an exchange’s tiered 

transaction pricing applies across its 

membership would enhance public 

transparency regarding the application 

of an exchange’s tiered pricing structure 

for member proprietary volume. In turn, 

the increased transparency would 

enhance the ability of members, other 

exchanges, and the public in 

considering and commenting on 

whether proposed volume-based pricing 

changes applicable to member 

proprietary volume provide for the 

‘‘equitable allocation of reasonable dues, 

fees, and other charges’’ 68 that are ‘‘not 

designed to permit unfair 

discrimination’’ between brokerdealers 69 and that do not ‘‘impose any 

burden on competition not necessary or 

appropriate in furtherance of the 

purposes’’ 70 of the Exchange Act. For 

example, monthly disclosures would 

provide timely information during the 

60 day suspension period of an 

exchange’s proposed pricing change that 

would allow the public to see the 

impact of a new or revised pricing tier 

during the first month it was in effect. 

The Commission and the public could 

use that information to assess exchange 

statements about the number of 

members that the exchange expected to 

qualify for a proposed tier, and 

commenters could use that information 

to provide comment as to whether a tier 

change meets the applicable statutory 

standards. 

The Commission also believes that the 

public disclosure of such information 

would be consistent with section 11A of 

the Exchange Act in that it could assist 

in assuring ‘‘fair competition among 

brokers and dealers, [and] among 

exchange markets’’ and ‘‘the 

practicability of brokers executing 

investors’ orders in the best market.’’ 71

For example, the proposed disclosures 

would allow interested parties to see 

how many members have qualified for 

an exchange’s pricing tiers, and how 

members have responded to tiered 

pricing changes (e.g., by looking at 

month-to-month disclosures to see how 

many members moved up to a new or 

revised tier to qualify for a more 

generous pricing incentive). That 

information could be useful in helping 

the Commission and public commenters 

assess whether pricing tier changes are 

reasonable, equitably allocated, not 

unfairly discriminatory, and do not 

impose a burden on competition that is 

not necessary or appropriate in 

furtherance of the purposes of the 

Exchange Act.72

Specifically, proposed Rule 6b–1(c) 

would require equities exchanges to 

submit electronically to the 

Commission, within five calendar days 

after the end of each calendar month, 

the information described below. Given 

that exchanges assess transaction prices 

to their members on a monthly basis 

according to their respective pricing 

tiers, the Commission believes that such 

information should be readily available 

to exchanges, since they are already 

familiar with the pricing tier for which 

each member qualifies. Further, 

submitting the disclosures within five 

calendar days after the end of each 

calendar month would help ensure that 

the information is available in a timely 

manner for the Commission and the 

public’s consideration after an exchange 

implements a new pricing change to 

show the impact of the pricing change 

during the first month that it was billed 

to members. This timing would allow 

time for the Commission and the public 

to review this data before the expiration 

of the period within which the 

Commission is able to summarily 

temporarily suspend a proposed rule 

change.73

The content of the disclosures is 

intended to show a high-level and 

anonymized summary of the volumebased transaction tiers applicable to the 

execution of proprietary orders in NMS 

stocks for the account of a member and 

how many members qualify for each 

tier. Monthly tables would show, for 

example, the potential impact of any 

recent tiered transaction pricing change 

for member proprietary orders during 

the month that it was first in effect 

following the exchange’s proposed rule 

change as well as how members qualify 

over time for pricing tiers that do not 

change. While the Commission reviews 

each proposed rule change, the actual 


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74See supra note 17 and accompanying text. 

Further, as discussed above, monthly disclosure 

would also provide the Commission with timely 

information to consider whether to temporarily 

suspend a proposed rule change within the 

statutory deadline of 60 days beginning on the date 

of filing of such proposed rule change. See 15 

U.S.C. 78s(b)(3)(C). 

75See infra section II.D., Request for Comments 

(requesting comment on other benchmarks). 

76The base fee would be the highest fee that the 

exchange assesses to members by default if no 

incentives apply. Similarly, the base rebate would 

be the lowest rebate that the exchange provides to 

members if no incentives apply. 

77See proposed Rule 6b–1(c)(3). Under proposed 

Rule 6b–1(c)(3), exchanges would be required to 

provide information using Interactive Data File in 

accordance with Rule 405 of Regulation S–T. 

78 17 CFR 240.17a–1. Generally, Rule 17a–1(b) 

requires national securities exchanges to retain 

specified documents for a period of not less than 

five years, the first two years in an easily accessible 

place. 

effect of a pricing change cannot be 

known in advance or guaranteed. The 

information in the proposed disclosures 

is intended to provide the Commission 

and the public with insight into the 

application of an exchange’s volumebased transaction pricing schedule, 

which would allow interested persons 

to better assess an exchange’s volume 

tiers, particularly where the highest 

rebate or lowest tiers on an exchange are 

occupied by only one or a few members. 

Therefore, having more timely and 

readily available information with 

respect to the actual effect of an 

exchange transaction pricing change 

would be useful to the Commission in 

determining whether to summarily 

temporarily suspend a proposed rule 

change before the deadline to 

summarily temporarily suspend expires. 

Further, the Commission also believes 

such information would be useful to the 

public in assessing the impact of the 

proposed rule change and further 

informing their comments on a 

proposed pricing change. 

First, proposed Rule 6b–1(c)(1) would 

require every exchange that offers 

volume-based transaction fees, rebates, 

or other incentives in connection with 

the execution of proprietary orders in 

NMS stocks to submit electronically to 

the Commission each calendar month, 

within five calendar days after the end 

of the month, the number of members 

that executed proprietary orders in NMS 

stocks on the exchange for the member’s 

account. The proposed rule would 

require monthly submissions because 

exchange fees are typically effective at 

the beginning of a calendar month and 

revised as frequently as monthly.74 The 

Commission believes that this 

information could be used to better 

understand the impact of an exchange’s 

volume-based transaction pricing 

structure across its members. 

Specifically, this number would provide 

the baseline denominator against which 

one could calculate percentages of 

members that met a specific tier.75

Seeing the total number of members 

with proprietary orders during a month 

would thus provide the baseline against 

which the number of members 

qualifying for any one tier in that month 

could be understood. 

Second, proposed Rule 6b–1(c)(2) 

would require every exchange that 

offers volume-based transaction fees, 

rebates, or other incentives in 

connection with the execution of 

proprietary orders in NMS stocks to 

disclose a structured data table for each 

volume-based transaction fee, rebate, 

and other incentive that includes 

information to promote transparency 

regarding how that tier applies among 

the exchange’s membership. Exchanges 

would be required to submit 

electronically to the Commission each 

calendar month, within five calendar 

days after the end of the month, the 

following information for each month: 

1. A label to identify the ‘‘base’’ fee 

and rebate. Showing the base fee or 

rebate allows the reader of the table to 

compare and evaluate each tiered 

pricing level against what the exchange 

otherwise would assess to its members 

in the absence of volume-based 

pricing.76 The inclusion of the base fee 

and rebate information in structured 

data format also would allow data 

analysis and computations to be 

performed, which would facilitate 

comparisons over time and across 

exchanges. 

2. A label to identify each pricing tier. 

For example, ‘‘Liquidity Providing 

Rebate Tier 1,’’ ‘‘Step-up Rebate Tier 1,’’ 

or ‘‘Removing Tier 2.’’ The label used in 

the disclosure would be required to 

correspond to the label the exchange 

uses in its pricing schedule so that the 

public can easily locate the tier on the 

exchange’s pricing schedule. Providing 

a label in structured data format also 

would allow for data analysis using 

those labels to identify each pricing tier. 

Results from such analysis would then 

be easily referenced against the 

exchange’s pricing schedule. 

3. The amount of the fee, rebate, or 

other incentive. This information would 

allow the reader of the table to 

understand what pricing applies to each 

pricing tier without having to consult 

the exchange’s pricing schedule. In 

addition, the inclusion of the pricing 

amount in a structured data format 

would allow data analysis and 

computations to be performed, which 

would facilitate comparisons over time 

and across exchanges. 

4. An explanation of the tier 

requirements. Including this 

explanation would allow the reader of 

the table to understand the requirements 

for achieving each tier without having to 

consult the exchange’s pricing schedule. 

In addition, having this information in 

structured data format would allow data 

analysis and computations to be 

performed, which would facilitate 

comparisons over time and across 

exchanges. 

5. The total number of members that 

qualified for the base fee, base rebate, or 

each tier during the month. This 

disclosure would provide important 

transparency into the application of 

volume-based exchange transaction 

pricing and how the prices apply among 

an exchange’s membership. Among 

other things, it could provide members 

with insight as to the tiers that other 

members with whom they compete 

qualify, which could be useful in 

considering whether an exchange’s 

pricing is imposing a burden on the 

member’s ability to compete with those 

other members. It also may provide 

insight into how an exchange’s fees and 

rebates are distributed among members 

and whether those fees that fund the 

rebates the exchange offers, as well as 

fund part of the exchange’s operations, 

constitute an equitable allocation among 

members. It also would provide data 

against which exchange representations 

made as part of or in connection with 

proposed pricing changes could be 

verified. 

Proposed Rule 6b–1(c) would require 

that the information be provided in an 

easily understandable table format, 

using structured data specified by the 

Commission.77 Exchanges would be 

required to retain those records and 

information pursuant to 17 CFR 

240.17a–1 (Rule 17a–1).78

Request for Comments 

The Commission generally requests 

comment from the public on all aspects 

of proposed Rule 6b–(c), including its 

objectives and its terms to achieve those 

objectives. More specific requests for 

comment are set forth below. As much 

as possible, commenters are requested 

to provide empirical data in support of 

any arguments or analyses and to offer 

explanations for their views. 

20. Is the definition of proprietary 

order described in section II.D. 

appropriate? If the definition described 

in section II.D. is not appropriate, what 

definition should the Commission use 

for purposes of Rule 6b–1? Should the 

Commission include the definition 


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Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 76295 

described in section II.D (or another 

definition) in Rule 6b–1, or is the term 

commonly understood without needing 

to be defined in the rule? 

21. Does the proposed 5 calendar day 

deadline for exchanges to submit the 

transparency disclosures after the end of 

each calendar month under proposed 

Rule 6b–1(c) provide exchanges with 

sufficient time to prepare and submit 

the disclosures? If an exchange files a 

proposed rule change related to 

transaction pricing that becomes 

effective on the first day of a month, 

does the proposed 5 calendar day 

deadline after the end of that month 

provide sufficient time for the 

Commission and commenters to 

consider the disclosures before the 

expiration of the 60-day statutory 

deadline to summarily temporarily 

suspend the proposed rule change at 

issue? If 5 calendar days is not sufficient 

for exchanges to submit the 

transparency disclosures, would a 7 or 

10 calendar day deadline provide 

sufficient time? If an exchange files a 

proposed rule change related to 

transaction pricing that becomes 

effective on the first day of a month, 

would a 7 or 10 calendar day deadline 

after the end of that month provide 

sufficient time for the Commission and 

commenters to consider the disclosures 

before the expiration of the 60-day 

statutory deadline to summarily 

temporarily suspend the proposed rule 

change at issue? 

22. Should the transparency 

disclosures under proposed Rule 6b– 

1(c) also require exchanges to report the 

number of their registered market 

makers on the exchange during a month 

if an exchange offers volume-based 

transaction pricing tiers solely 

applicable to its market makers, in order 

to allow the public to see how many 

registered market makers qualify for 

exchange tiered pricing that is 

applicable only to such members? 

Would that information be useful to 

calculate percentages for the volumebased transaction tiers that apply 

specifically to market makers (e.g., to be 

able to calculate that 10% of registered 

market makers qualified for the marketmaker liquidity providing rebate Tier 

2)? Would that information be helpful to 

better understand the impact of 

exchange tiered transaction pricing on 

competition between registered market 

maker members and members that trade 

proprietarily but not as registered 

market makers? 

23. Should the transparency 

disclosure under proposed Rule 6b–1(c) 

also require exchanges to separately 

report the number of members that 

participated during the month in any 

program that has its own volume-based 

transaction pricing in order to be able to 

compute percentages specific to the 

program? For example, tiers specific to 

Tape A, B, and C, to stocks under $1, 

to a retail liquidity program, or to the 

closing auction. Would that more 

granular level of information be useful 

to commenters in commenting on 

specific individual pricing proposals 

that affect such programs? For example, 

if an exchange has tiers for Tape B and 

reports only ten members that qualified 

for them in a month, would it be useful 

to know that only 12 out of forty 

members transacted in Tape B stocks on 

the exchange that month so that 

percentages can be calculated out of 

eligible entities rather than all 

members? Why or why not? 

24. Should the transparency 

disclosure under proposed Rule 6b–1(c) 

also require exchanges to report the 

following: 

a. the applicable trading session (e.g., 

pre-market, opening auction, regular 

hours, closing auction, post-market) to 

allow readers of the tables to more 

quickly identify with certainty which 

tiers apply to which trading session and 

allow researchers to be able to use 

electronic means to parse that data; 

b. the applicable securities (e.g., Tape 

A, B, or C; sub-$1, exchange traded 

funds, etc.) to allow readers of the tables 

to more quickly identify with certainty 

which tiers apply to which securities 

and allow researchers to be able to use 

electronic means to parse that data; 

c. whether the fee, rebate, or other 

incentive is applicable to adding or 

removing liquidity to allow readers of 

the tables to more quickly identify with 

certainty which tiers apply to which 

types of activity and allow researchers 

to be able to use electronic means to 

parse that data; 

d. the number of MPIDs qualifying for 

the price level during the month to 

provide a different metric to assess how 

many members qualify for each pricing 

tier; 

e. the cumulative volume of shares 

qualifying for the tier during the month 

to provide more context to understand 

the amount of volume that qualifies at 

each pricing tier, which the number of 

members alone would not capture, and 

to allow comparison with the 

exchange’s overall volume; 

f. the cumulative dollar amount of 

fees, rebates, or other incentives (as 

applicable) at the tier during the month 

to better understand the financial 

impact of each pricing tier, both on 

members and on the exchange, and 

allow comparison of that impact 

between tiers; and 

g. the average transaction fee paid and 

rebate received by members during the 

month. 

25. Would additional columns allow 

easier sorting and analysis of the tables 

by machine or otherwise? If so, please 

explain. 

26. Should the transparency 

disclosures under proposed Rule 6b– 

1(c) require exchanges to report every 

net price combination for any volumebased fee, rebate, or other incentive, 

including all additive or creditable 

pricing (e.g., a liquidity providing rebate 

of $0.0028 plus a step-up tier of $0.0003 

would be reported as its own pricing 

tier of $0.0031)? Would doing so be 

helpful to show whether volume-based 

transaction tiers are customized to a 

specific member? 

27. Should the transparency 

disclosures under proposed Rule 6b– 

1(c) be posted on an exchange’s website 

in addition to, or instead of, being 

submitted electronically to the 

Commission? Why or why not? 

28. Are there uses beyond those 

identified in this release for the 

transparency disclosures? For example, 

would having volume-based exchange 

transaction fees in a structured data 

format help members as well as other 

market participants and academics 

parse the pricing schedules across 

exchanges and track changes over time? 

Would the transparency disclosures 

affect routing preferences among 

members trading proprietarily? Would 

members use the disclosures to 

comment on exchange proposed rule 

change filings or advocate for exchanges 

to change their transaction pricing if 

they have more transparency of the tiers 

for which their competitors qualify? 

Would that transparency provide a 

useful datapoint to assess whether 

volume-based exchange transaction 

pricing proposals meet the applicable 

statutory standards? Why or why not? 

29. Would the proposed disclosure 

provision raise any issues related to 

disclosures of proprietary trading 

information or other confidentiality 

concerns, especially if the disclosures 

were read in conjunction with brokerdealer Rule 605/606 reports? 

30. Do exchanges enter into 

arrangements with members about 

transaction pricing for proprietary and/ 

or agency-related orders that result in or 

are connected to an exchange proposal 

to adopt or amend a specific volumebased transaction pricing tier? If so, 

what types of terms and conditions 

might such an arrangement include? To 

what extent are these arrangements 

memorialized in writing? How many 

such arrangements, if any, do exchanges 

enter into each year? If such 


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76296 Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 

79 44 U.S.C. 3501 et seq. 

80 44 U.S.C. 3507; 5 CFR 1320.11. 

81 5 CFR 1320.11(l). 

82See SEC File No. 270–38, OMB Control No. 

3235–0045 (June 21, 2023), available at https://

www.reginfo.gov/public/do/PRAViewICR?ref_

nbr=202304-3235-017. 

arrangements exist but are not 

commonly memorialized in writing, 

should the Commission add a provision 

to proposed Rule 6b–1 to require 

exchanges to ‘‘document any 

arrangement, whether written or oral, 

concerning volume-based transaction 

pricing, including the parties to the 

arrangement, all qualitative and 

quantitative terms concerning the 

arrangement, and the date and terms of 

any changes to the arrangement’’? 

III. Paperwork Reduction Act 

Certain provisions of proposed Rule 

6b–1 contain ‘‘collection of information 

requirements’’ within the meaning of 

the Paperwork Reduction Act of 1995 

(‘‘PRA’’).79 The Commission is 

submitting these collections of 

information to the Office of 

Management and Budget (‘‘OMB’’) for 

review in accordance with 44 U.S.C. 

3507(d) and 5 CFR 1320.11.80 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.81 The title of the new 

collection of information is ‘‘VolumeBased Exchange Transaction Pricing for 

NMS Stocks.’’ 

A. Summary of Collections of 

Information 

The proposed rule includes collection 

of information requirements within the 

meaning of the PRA. 

1. Rule 6b–1(a)—Prohibition on 

Volume-Based Pricing for AgencyRelated Volume 

As discussed above, proposed Rule 

6b–1(a) provides that equities exchanges 

shall not offer volume-based transaction 

fees, rebates, or other incentives in 

connection with the execution of agency 

or riskless principal orders in NMS 

stocks. This prohibition would require 

equities exchanges that currently offer 

volume-based transaction pricing for 

agency-related orders to file a proposed 

rule change with the Commission to 

update their price lists. 

2. Rule 6b–1(b)(1)—Rules To Prevent 

Evasion 

Proposed Rule 6b–1(b)(1) would 

require an equities exchange that offers 

volume-based transaction pricing in 

connection with the execution of 

proprietary orders in NMS stocks for the 

account of a member to adopt a rule to 

require its members to engage in 

practices that facilitate the exchange’s 

ability to comply with the prohibition in 

proposed Rule 6b–1(a). 

3. Rule 6b–1(b)(2)—Policies and 

Procedures To Prevent Evasion 

Proposed Rule 6b–1(b)(2) would 

require an equities exchange that offers 

volume-based transaction pricing in 

connection with the execution of 

proprietary orders in NMS stocks for the 

account of a member to establish, 

maintain, and enforce written policies 

and procedures reasonably designed to 

detect and deter members from 

receiving volume-based pricing in 

connection with the execution of agency 

or riskless principal orders in NMS 

stocks. 

4. Rule 6b–1(c)—Transparency for 

Volume-Based Pricing on Member 

Proprietary Orders 

Proposed Rule 6b–1(c) would require 

an equities exchange that offers volumebased transaction fees, rebates, or other 

incentives in connection with the 

execution of proprietary orders in NMS 

stocks for the account of a member to 

submit electronically to the Commission 

information regarding those fees, 

rebates, or other incentives, including 

how many members qualify for such 

fees, rebates, or other incentives on a 

monthly basis. 

B. Proposed Use of Information 

1. Rule 6b–1(a)—Prohibition on 

Volume-Based Pricing for AgencyRelated Volume 

The collection of information 

associated with Rule 6b–1(a) would be 

exchange rule filings with the 

Commission to eliminate volume-based 

pricing for agency-related orders from 

their pricing schedules. The collection 

of information would bring the 

exchanges into compliance with Rule 

6b–1(a), which would foster 

competition among broker-dealers and 

mitigate conflicts of interest for agencyrelated volume. 

2. Rule 6b–1(b)(1)—Rules To Prevent 

Evasion 

Proposed Rule 6b–1(b)(1) would assist 

exchanges in complying with proposed 

Rule 6b–1(a) by requiring exchanges to 

impose rules that require members to 

engage in practices, such as accurate 

order marking, to better enable the 

exchange to assess its pricing in 

compliance with the proposed rule. 

3. Rule 6b–1(b)(2)—Policies and 

Procedures To Prevent Evasion 

Proposed Rule 6b–1(b)(2) would assist 

national securities exchanges in 

complying with proposed Rule 6b–1(a) 

by requiring them to adopt policies and 

procedures reasonably designed to 

detect and deter members from 

receiving volume-based exchange 

transaction pricing in connection with 

the execution of agency or riskless 

principal orders in NMS stocks. 

4. Rule 6b–1(c)—Transparency for 

Volume-Based Pricing on Member 

Proprietary Orders 

The disclosure of information about 

how an exchange’s volume-based 

transaction pricing for member 

proprietary orders applies across its 

membership would enhance the 

transparency of an exchange’s tiered 

pricing structure. In turn, the increased 

transparency would enhance the ability 

of members, other exchanges, and the 

public in considering and commenting 

on proposed volume-based pricing 

changes applicable to member 

proprietary volume. 

C. Respondents 

The respondents to these collections 

of information would be national 

securities exchanges that offer volumebased transaction fees, rebates, or other 

incentives in connection with the 

execution of orders in NMS stocks. 

Currently, while there are 16 national 

securities exchanges that trade NMS 

stocks, only 13 offer volume-based 

transaction pricing. Therefore, there are 

13 estimated respondents. 

D. Total Initial and Annual Reporting 

and Recordkeeping Burdens 

1. Rule 6b–1(a)—Prohibition on 

Volume-Based Pricing for AgencyRelated Volume 

As discussed above, proposed Rule 

6b–1(a) would require equities 

exchanges that currently offer volumebased transaction pricing to file a rule 

change with the Commission to update 

their price list, if necessary, to eliminate 

any existing volume-based pricing that 

would not comply with the proposed 

rule. This would be a one-time initial 

burden, and exchanges should not incur 

an ongoing burden once they have 

updated their rules. However, the PRA 

burden associated with the collection of 

information resulting from exchange 

rule filings that would be required 

pursuant to proposed Rule 6b–1(a) 

would be covered by the existing PRA 

burden estimates for Rule 19b–4 

because those changes would be filed on 

Form 19b–4.82


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83See id. 

84The Commission derived the total estimated 

burdens from the following estimates: (Attorney at 

30 hours) + (Compliance Counsel at 10 hours) + 

(Chief Compliance Officer at 5 hours) + (General 

Counsel at 5 hours) = 50 burden hours. 50 burden 

hours per exchange × 13 respondents = 650 total 

burden hours. The Commission’s estimate is 

informed by the estimated filing burden for Form 

19b–4 (34 hours). See Supporting Statement for the 

Paperwork Reduction Act Information Collection 

Submission for Form 19b–4 (Apr. 18, 2023), 

available at https://www.reginfo.gov/public/do/ 

PRAViewDocument?ref_nbr=202304-3235-017. The 

Commission believes that the policies and 

procedures required under proposed Rule 6b– 

1(b)(2) may require more effort to prepare than the 

proposed rule change required under proposed Rule 

6b–1(b)(1). 

85The Commission derived the total estimated 

burdens from the following estimates: (Compliance 

Attorney at 12 hours) + (Compliance Manager at 8 

hours) + (Business analyst at 5 hours) = 25 burden 

hours. 25 burden hours per exchange × 13 

respondents = 325 total burden hours. The ongoing 

burden hours associated with proposed Rule 6b– 

1(b)(2) is estimated to be lower than the initial 

burdens because the Commission expects it to be 

less burdensome to maintain and review existing 

policies and procedures than to establish new ones. 

2. Rule 6b–1(b)(1)—Rules To Prevent 

Evasion 

Proposed Rule 6b–1(b)(1) would 

require an equities exchange that offers 

volume-based transaction pricing to 

have rules to require its members to 

engage in practices that facilitate the 

exchange’s ability to comply with the 

prohibition in proposed Rule 6b–1(a). 

Similar to the burden for Rule 6b–1(a), 

this would be a one-time initial burden, 

although an exchange may decide to 

amend the rule it adopts pursuant to 

proposed Rule 6b–1(b)(1) from time to 

time. However, the PRA burden 

associated with the collection of 

information resulting from exchange 

rule filings that would be required 

pursuant to proposed Rule 6b–1(b)(1) 

would also be covered by the existing 

PRA burden estimates for Rule 19b–4 

because those changes would be filed on 

Form 19b–4.83 The Commission 

encourages comments on this point. 

3. Rule 6b–1(b)(2)—Policies and 

Procedures To Prevent Evasion 

Proposed Rule 6b–1(b)(2) would 

require exchanges to establish, 

maintain, and enforce written policies 

and procedures to detect and deter 

members from receiving volume-based 

exchange transaction pricing in 

connection with the execution of agency 

or riskless principal orders in NMS 

stocks. Exchanges would incur an initial 

burden and an annual ongoing burden 

associated with proposed Rule 6b– 

1(b)(2). The Commission believes that 

many exchanges generally already have 

rules and policies and procedures in 

place to ensure that members are 

correctly marking their orders, though 

those policies and procedures may need 

to be updated to ensure compliance 

with the proposed rule in the context of 

exchange transaction pricing. 

Exchanges, at a minimum, would be 

required to review their existing policies 

and procedures. Certain exchanges may 

need to supplement or revise their 

policies and procedures to ensure that 

they are reasonably designed to deter 

and detect members from receiving 

tiered pricing on orders for which tiered 

pricing is prohibited. Although the 

exact nature and extent of compliance 

with proposed Rule 6b–1(b)(2) would 

likely differ based on the existing 

policies and procedures of each 

respondent, the Commission estimates 

that the one-time, initial burden to 

update or adopt any additional written 

policies and procedures required under 

proposed Rule 6b–1(b)(2) would be 

approximately 50 hours per exchange or 

650 burden hours across 13 exchanges 

that have volume-based transaction 

pricing.84

The 13 equities exchanges that have 

volume-based transaction pricing would 

incur annual ongoing burden hours to 

maintain and review their policies and 

procedures adopted under proposed 

Rule 6b–1(b)(2) to ensure their 

effectiveness. Those exchanges also 

would need to review for compliance 

pursuant to their policies and 

procedures. The Commission estimates 

that each exchange would likely spend 

an average of 25 hours per year on an 

ongoing basis, for a total of 325 hours 

across all 13 exchanges.85

4. Rule 6b–1(c)—Transparency for 

Volume-Based Pricing on Member 

Proprietary Orders 

Proposed Rule 6b–1(c) would require 

exchanges that offer volume-based 

transaction pricing for the execution of 

proprietary orders in NMS stocks for the 

account of a member to submit 

electronically to the Commission 

aggregated information regarding how 

many members qualify for those pricing 

tiers. These submissions would be 

accessible to the public via the EDGAR 

system and would reflect each 

exchange’s particular pricing structure. 

The exchanges would likely incur an 

initial burden and an annual ongoing 

burden associated with Rule 6b–1(c). 

Exchanges have ready access to all of 

the underlying information and data 

necessary to comply with proposed Rule 

6b–1(c) because the disclosures are 

summaries of the pricing schedules that 

exchanges maintain and the exchanges 

know the number of members that 

qualify for a particular pricing tier 

because they calculate the fees, rebates, 

and other incentives applicable to their 

members on a monthly basis. 

Consequently, the proposed rule would 

not require exchanges to acquire or 

record an entirely new and unfamiliar 

set of information. The exchanges, 

however, would be required to present 

the required information and data in a 

new structured data format and submit 

such information electronically to the 

Commission on a monthly basis. 

Exchange pricing schedules are 

publicly available and identify all of the 

exchange’s volume-based transaction 

fees, rebates, and other incentives. To 

comply with proposed Rule 6b–1(c)(2), 

the exchange would have to identify 

each volume-based transaction fee, 

rebate, and other incentive, and: (i) use 

a label to identify the base fee or rebate, 

(ii) use a label to identify each pricing 

tier that corresponds to the label used in 

the exchange’s pricing schedule, (iii) 

identify the amount of the fee, rebate, or 

other incentive, (iv) provide an 

explanation of the tier requirement, and 

(v) provide the total number of members 

that qualified for the base fee, base 

rebate, or each tier during the month. 

Parts (i) through (iv) would require the 

exchange to take information from its 

publicly accessible pricing schedule and 

put it into the required structured data 

format. The information required for 

part (v) would be readily available to the 

exchange since it assesses transaction 

prices to its members on a monthly 

basis in accordance with its pricing 

schedule and thus knows which 

members qualify for which tiers though 

exchanges currently are not required to 

publicly disclose a tally of that 

information by tier. 

Furthermore, proposed Rule 6b– 

1(c)(1) requires the exchange to identify 

the number of members that executed 

proprietary orders in NMS stocks for the 

member’s account on the exchange 

during the month. Exchanges do not 

currently publicly disclose a tally of this 

information. However, exchanges 

generally have ready access to trading 

information of their members that 

would reveal this information and 

exchanges generally know which of 

their members are engaged in an agency 

business, which are engaged in 

proprietary trading, and which are 

engaged in both because exchanges 

broadly know about what lines of 

business their members are engaged in 

as part of their membership registration. 

Accordingly, the burden on exchanges 

to calculate the number of members 

engaged in proprietary trading would be 

low. 

The Commission estimates that each 

exchange would incur 58 initial burden 


ddrumheller on DSK120RN23PROD with PROPOSALS2
76298 Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 

86The Commission derived the total estimated 

burdens from the following estimates: (Sr. 

Programmer at 25 hours) + (Sr. Systems Analyst at 

10 hours) + (Compliance Manager at 10 hours) + 

(Compliance Attorney at 8 hours) + (Director of 

Compliance at 5 hour) = 58 burden hours. 58 

burden hours per exchange × 13 respondents = 754 

total burden hours. 

87Form ID (OMB control number 3235–0328) 

must be completed and filed with the Commission 

by all individuals, companies, and other 

organizations who seek access to file electronically 

on EDGAR. Accordingly, a filer that does not 

already have access to EDGAR must submit a Form 

ID, along with the notarized signature of an 

authorized individual, to obtain an EDGAR 

identification number and access codes to file on 

EDGAR. See Supporting Statement for the 

Paperwork Reduction Act Information Collection 

Submission for Form ID (Dec. 20, 2021), available 

at https://www.reginfo.gov/public/do/ 

PRAViewDocument?ref_nbr=202112-3235-003 

(stating that it takes 0.3 hours to prepare Form ID). 

88See id. 

89The Commission derived the total estimated 

burdens from the following estimates: (Compliance 

Attorney at 6 hours) + (Compliance Manager at 2 

hours) = 8 burden hours per monthly filing. 8 

burden hours × 12 months = 96 annual burden 

hours per respondent. 

90 96 annual burden hours per exchange × 13 

respondents = 1,248 total burden hours per year. 

hours for the creation of new tables to 

ensure that data responsive to the 

proposed disclosure requirements is 

correctly collected and formatted, and to 

set up automated programs where 

appropriate, or 754 total initial burden 

hours across 13 exchanges.86 The 

Commission does not believe the 

information required to be aggregated 

and included in disclosures made 

pursuant to proposed Rule 6b–1(c) 

would require respondents to acquire 

new hardware or systems to process the 

information required in the reports. 

Rather, the exchanges’ initial burden 

would consist of creating and formatting 

a table that would be responsive to the 

requirements of proposed Rule 6b–1(c). 

As described above, this would require 

the exchanges to convert a portion of the 

information available on their publicly 

accessible pricing schedules into a 

structured data format. Once created, 

these tables should not change unless 

the exchanges create new pricing tiers 

or change the requirements or dollar 

amounts of existing tiers. The 

Commission solicits comment on the 

accuracy of these estimates. 

Furthermore, because exchanges are 

not currently subject to EDGAR filing 

requirements, equities exchanges would 

incur a one-time compliance burden of 

submitting Form ID in order to be able 

to submit the disclosures electronically 

to the Commission through EDGAR. 

Respondents would apply for access to 

EDGAR using Form ID and receive 

access codes to submit documents 

through the EDGAR system. The 

Commission estimates that each filer 

that currently does not have access to 

EDGAR would incur an initial, one-time 

burden of 0.30 hours to complete and 

submit a Form ID.87 However, the PRA 

burden associated with completing and 

submitting a Form ID would be covered 

by the existing PRA burden estimates 

for Form ID.88

The 13 equities exchanges that have 

volume-based transaction pricing also 

would incur annual ongoing burden 

hours to aggregate and disseminate the 

information required under proposed 

Rule 6b–1(c). Proposed Rule 6b–1(c) 

would require exchanges to submit 

electronically updated information each 

month. An exchange generally would 

not need to update the disclosure 

information required under proposed 

Rule 6b–1(c)(2)(i)–(iv) unless the 

exchange amends its pricing schedule, 

in which case the exchange would need 

to make targeted changes to these 

disclosures in accordance with the 

changes it makes to its pricing schedule. 

The Commission expects that the 

disclosures required by proposed Rule 

6b–1(c)(1) and Rule 6b–1(c)(2)(v) would 

possibly change and could need to be 

updated as frequently as each month. 

The Commission believes the exchanges 

would use automated programs to meet 

the ongoing monthly reporting 

obligation under proposed Rule 6b–1(c) 

but each report may require staff to 

verify the accuracy of the information. 

The Commission estimates that each 

exchange would incur 8 burden hours 

per monthly report for a total of 96 

ongoing burden hours on an annual 

basis.89 Therefore, the Commission 

estimates 1,248 total ongoing annual 

burden hours across 13 exchanges.90

TABLE 3—PRA SUMMARY TABLE

Rule Number of 

respondents 

Initial burden 

hours per 

respondent 

Total initial 

burden hours 

Ongoing 

burden hours 

per 

respondent on 

annual 

basis 

Total ongoing 

burden hours 

on annual 

basis 

Rule 6b–1(b)(2) .................................................................... 13 50 650 25 325 

Rule 6b–1(c) ........................................................................ 13 58 754 96 1,248 

Total .............................................................................. 108 1,404 121 1,573 

E. Collection of Information Is 

Mandatory 

The collection of information 

discussed above would be a mandatory 

collection of information. 

F. Confidentiality of Responses to 

Collection of Information 

The collection of information under 

proposed Rule 6b–1(a) and 6b–1(b)(1) 

would not be confidential because 

exchange proposed rule changes filed 

with the Commission are public 

information. Similarly, the collection of 

information under proposed Rule 6b– 

1(c) also would not be confidential. 

Rather, each exchange would be 

required to submit electronically to the 

Commission the information required 

under proposed Rule 6b–1(c) and this 

information would be made publicly 

available. The collection of information 

under proposed Rule 6b–1(b)(2) 

concerning the written policies and 

procedures would contain information 

about an exchange’s regulatory program 

because those materials would provide 

details on how the exchange enforces 

compliance with its rules, specifically 

how the exchange detects and deters 

members from receiving volume-based 

transaction pricing in connection with 

the execution of agency and riskless 

principal orders in NMS stocks. 

Accordingly, where the Commission 

requests that an exchange produce those 

documents, an exchange can request 

confidential treatment of the 

information. If such confidential 

treatment request is made, the 

Commission anticipates that it will keep 

the information confidential subject to 

applicable law. 


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Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 76299 

91 17 CFR 240.17a–1. 

92See 15 U.S.C. 78c(f). 

93See 15 U.S.C. 78w(a)(2). 

94The Commission has previously described a 

non-exhaustive list of factors that may be relevant 

to a broker-dealers’ best execution analysis. See 

Securities Exchange Act Release No. 51808 (June 9, 

2005), 70 FR 37496 at 37538 (June 29, 2005). 

G. Retention Period for Recordkeeping 

Requirements 

National securities exchanges would 

be required to retain records and 

information pursuant to Rule 17a–1 

under the Exchange Act 91 for a period 

of five years. 

H. Request for Comments 

The Commission requests comment 

on whether the estimates for burden 

hours and costs are reasonable. Pursuant 

to 44 U.S.C. 3506(c)(2)(B), the 

Commission solicits comments to: (1) 

evaluate whether the proposed 

collections of information are necessary 

for the proper performance of the 

functions of the Commission, including 

whether the information would have 

practical utility; (2) evaluate the 

accuracy of the Commission’s estimate 

of the burden of the proposed 

collections of information; (3) determine 

whether there are ways to enhance the 

quality, utility, and clarity of the 

information to be collected; and (4) 

determine whether there are ways to 

minimize the burden of the collections 

of information on those who are to 

respond, including through the use of 

automated collection techniques or 

other forms of information technology. 

Persons submitting comments on the 

collection of information requirements 

should direct them to the Office of 

Management and Budget, Attention: 

Desk Officer for the Securities and 

Exchange Commission, Office of 

Information and Regulatory Affairs, 

Washington, DC 20503, and should also 

send a copy of their comments to 

Secretary, Securities and Exchange 

Commission, 100 F Street NE, 

Washington, DC 20549–1090, with 

reference to File Number S7–18–23. 

Requests for materials submitted to 

OMB by the Commission with regard to 

this collection of information should be 

in writing, with reference to File 

Number S7–18–23 and be submitted to 

the Securities and Exchange 

Commission, Office of FOIA/PA 

Services, 100 F Street NE, Washington, 

DC 20549–2736. As OMB is required to 

make a decision concerning the 

collection of information between 30 

and 60 days after publication, a 

comment to OMB is best assured of 

having its full effect if OMB receives it 

within 30 days of publication. 

IV. Economic Analysis 

A. Introduction 

The Commission is mindful of the 

economic effects, including the benefits 

and costs, of the proposed rule. Section 

3(f) of the Exchange Act provides that 

when engaging in rulemaking that 

requires the Commission to consider or 

determine whether an action is 

necessary or appropriate in the public 

interest, to also consider, in addition to 

the protection of investors, whether the 

action will promote efficiency, 

competition, and capital formation.92

Section 23(a)(2) of the Exchange Act 

also requires the Commission to 

consider the effect that the proposed 

rule would have on competition, and it 

prohibits the Commission from adopting 

any rule that would impose a burden on 

competition not necessary or 

appropriate in furtherance of the 

Exchange Act.93 The analysis below 

addresses the likely economic effects of 

the proposed rule, including the 

anticipated benefits and costs of the 

amendments and their likely effects on 

efficiency, competition, and capital 

formation. The Commission also 

discusses the potential economic effects 

of certain alternatives to the approaches 

taken in this proposal. 

The Commission is proposing to 

prohibit volume-based transaction fees, 

rebates, or other incentives in 

connection with the execution of agency 

or riskless principal orders in NMS 

stocks, as well as the disclosure of, 

among other things, the number of 

exchange members that qualify for 

different transaction pricing tiers. 

The proliferation of tiered transaction 

pricing schedules across many 

exchanges has resulted in a complex 

system of transaction-based fees, which, 

along with a lack of transparency 

regarding how many members qualify 

for the various pricing tiers, makes it 

difficult for market participants to 

assess the tiered transaction pricing 

schedules’ impact on the fees and 

rebates ultimately realized across 

exchange members. Further, it may be 

the case that some tiers only have a 

single market participant that ultimately 

qualifies for that tier in a given month. 

This lack of transparency presents a 

challenge to other exchange members, 

exchanges, and interested parties to 

assess for themselves whether an 

exchange’s proposed transaction price 

schedule meets the applicable statutory 

standards, so that they can comment on 

such a proposed fee rule. It is also 

possible that the general complexity of 

the tiers inhibits the ability of all market 

participants to understand the price of 

exchange services and understand the 

impact of the particular price schedules 

implemented. By prohibiting the 

application of volume-based pricing for 

agency-related orders the proposed rule 

would help simplify pricing for agencyrelated order flow whilst the proposed 

disclosure provisions will help promote 

transparency for principal order flow, 

for which volume-based transaction 

pricing will continue to be permitted. 

While exchanges compete, in part, on 

the basis of their price schedules, 

volume-based transaction pricing may 

reduce competition among executing 

brokers, which could increase costs for 

investors. With volume-based 

transaction pricing, rebates go up and 

fees go down as a broker-dealer’s 

volume increases, meaning that such 

pricing gives higher-volume brokerdealers lower trading costs. As a result, 

smaller firms, such as new entrants, face 

higher trading costs relative to highvolume incumbent broker-dealers, 

potentially reducing competition and 

raising costs for investors. 

The implementation of volume-based 

transaction fee and rebate pricing 

introduce additional incentives to 

concentrate order flow on a given 

exchange. Volume-based tiers may 

encourage the concentration of a 

member’s order flow on the exchange by 

offering more favorable pricing to a 

member who executes greater trading 

volume on their platform. Not only does 

volume-based transaction price tiering 

incentivize the concentration of order 

flow, it also indirectly increases the 

opportunity cost of routing orders to a 

competing venue, because by doing so 

the exchange member lowers the 

likelihood that it will qualify for a better 

pricing tier. This concentration also 

directly reduces the ability of an 

exchange not offering rebates to 

compete with those that do. Rebates 

themselves are a less transparent means 

of incentivizing liquidity as compared 

with bid-ask spreads. Thus, the 

proliferation of volume-based tiers may 

reduce efficiency by making a nonrebate-focused model difficult to 

sustain. 

The application of volume-based 

pricing to non-principal order flow adds 

to the conflict of interest between a 

broker and its customer as brokerdealers may be incentivized to execute 

customer orders in a manner that would 

not be consistent with the brokerdealer’s duty of best execution (to 

execute customer trades at the most 

favorable terms reasonably available 

under the circumstances).94 Tier 

qualification is based on the exchange 

member’s total monthly trading volume 


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95Agency-related order flow represents a 

substantial share of trading volume, comprising 

56% of trading volume across the equities 

exchanges in Jan. 2023. See infra Table 4. 

96See section IV.C.3.b.ii for a discussion of the 

potential reputational costs that the disclosure of 

tier qualification numbers may have. 

97Exchanges also generate significant revenue 

from selling access to the data generated by the 

exchange as well by charging fees for connectivity. 

98See 17 CFR 242.610 (Rule 610(c)), which 

prohibits trading centers from imposing a fee 

exceeding $0.0030 to access a quote in stock priced 

at or greater than $1.00. This level is commonly 

referred to as 30 mils with 1 mil defined as $0.0001. 

For quotes priced less than $1.00 the fee cap is at 

0.3% of the quotation price. 

99For instance, an exchange stated in a proposed 

rule change that ‘‘[t]he Exchange first notes that it 

operates in a highly competitive market in which 

market participants can readily direct order flow to 

competing venues if they deem fee levels at a 

particular venue to be excessive or incentives to be 

insufficient.’’ See Securities Exchange Act Release 

No. 94252 (Feb. 15, 2022) 87 FR 9780 at 9781 (Feb. 

22, 2022) (SR–CboeBZX–2022–008). 

100Exchanges also compete with off-exchange 

trading venues such as ATSs and wholesaler 

broker-dealers to attract transactions. 

101Exchanges can try to attract such quotes by 

paying rebates on limit orders. By offering to pay 

the market participant who sends a limit order to 

an exchange a rebate should the limit be hit, the 

exchange may be able to increase to total number 

limit orders sent to it. This may increase likelihood 

and upon qualification the pricing of 

that tier applies to the entirety of the 

member’s trading volume on the 

exchange. Diverting order flow to other 

trading venues may risk the member 

losing out on higher rebates or lower 

fees for a whole swath of their order 

flow. Volume-based pricing tiers 

thereby generate the potential for 

exchange members to concentrate 

customer order flow onto particular 

exchanges in order to increase the 

likelihood of tier qualification possibly 

contrary to the interests of individual 

customers. 

Exchanges, particularly those with the 

largest market share, are unlikely to 

unilaterally reduce the use of 

transaction pricing tiers or address the 

advantages that the application of these 

pricing tiers to agency-related volume 

creates for high-volume brokerdealers.95 An exchange may perceive 

that unilaterally excluding agency 

trading volume from volume-based 

transaction pricing tiers would reduce 

one incentive for members to 

concentrate agency orders on their 

exchange, risking that their members 

instead direct that order flow to 

competing exchanges with volumebased pricing tiers. Because of this 

incentive to concentrate order flow, an 

exchange that unilaterally eliminated 

volume-based transaction pricing tiers 

for agency-related order flow could 

experience a loss of trading volume, 

especially if competing venues continue 

to reward agency-related order flow 

concentration. If all existing exchanges 

moved to exclude agency-related 

volume from volume-based transaction 

pricing tiers, the potential gains from a 

single exchange (or new entrant) 

deviating and charging volume-based 

prices could be very high, reducing the 

likelihood that such an effort would be 

successful without the aid of a 

regulatory prohibition. In this case the 

exchanges, particularly those with 

members with high-volume agency 

order flow, may also lose activity as the 

reduced incentive to concentrate order 

flow may result in broker-dealers 

routing order-flow to other venues. 

Exchanges are required to file changes 

to their price schedules with the 

Commission and publish their pricing 

schedules online. However, when filing 

such proposed rule changes and 

publishing such pricing schedules, they 

typically refrain from disclosing the 

number of members that qualify for 

their different tiers, information which 

would be useful to market participants. 

Knowledge of this would aid exchange 

members, other exchanges, and the 

public in considering and commenting 

on whether proposed volume-based 

pricing changes are equitable and not 

unfairly discriminatory. The 

Commission does not believe that the 

exchanges themselves can be expected 

to rectify the lack of tier transparency 

because doing so may reveal valuable 

information to their competitors as well 

as risk potential reputational costs.96

Along with the proposed prohibition of 

volume-based pricing for agency-related 

order flow the Commission is proposing 

to require exchanges to disclose the 

number of members which qualify for 

each pricing tier. Given the proposed 

prohibition of volume-based tiers for 

agency order flow the proposed 

disclosures would relate to tiers that 

would only apply to principal order 

flow. The Commission expects that the 

proposed disclosures would provide 

important information to interested 

parties to provide comment on future 

proposed changes to an exchange’s 

pricing schedule. Observing the 

distribution of principal volume tier 

qualification and its variation over time 

would allow interested parties to better 

assess if pricing tiers had been narrowly 

tailored for the benefit of some members 

and could be judged to be unfair. The 

disclosure of more information on how 

many members qualify for each 

principal pricing tier would add costs 

and could lead to reputational damage 

to an exchange if the exchange’s pricing 

structure is publicly perceived to be 

unfair. 

B. Baseline 

1. Exchange Pricing 

As discussed above in section I.B, 

many stock exchanges utilize a 

transaction pricing model that involves 

charging one party to a trade a per-share 

fee while offering the other party a pershare rebate. While exchange 

transaction pricing structures vary, with 

some exchanges charging both sides a 

fee or no fee at all, most of the onexchange volume goes to exchanges 

which provide a rebate to the resting 

limit order and charge the fee to the 

marketable order. This type of fee 

structure is referred to as ‘‘maker-taker’’ 

pricing. Exchanges may employ makertaker fees as a means of attracting 

competitively priced liquidity to post on 

an exchange, which, in turn, helps 

attract trading to the exchange. 

Many exchanges incorporate volumebased transaction tiers into their pricing 

schedules, meaning that they offer 

improved pricing terms to members that 

execute more trading volume on the 

exchange, typically as a percent of total 

consolidated volume. These pricing 

tiers provide an incentive for exchange 

members to concentrate their order flow 

on a subset of exchanges, rather than 

route their orders more broadly across 

all competing exchanges, so as to 

increase their chances of qualifying for 

a higher tier on a specific exchange. In 

turn, this also helps to secure an 

exchange’s share of the market, and in 

some cases may affect competition 

among exchanges. 

a. Transaction Fees and Rebates 

Exchanges generally seek to increase 

the amount of trading that occurs on 

their respective venue. Exchanges 

generate revenue, in part, from trade 

executions 97 by charging transaction 

fees net of any rebate they pay out, 

subject to a fee cap.98 Because some 

market participants are sensitive to the 

level of fees and rebates, exchange fee 

schedules would affect an exchange’s 

market share. Given that most 

exchanges set their access fees at or near 

the access fee cap it is particularly the 

variation in the rebates they offer which 

is more likely to influence an 

exchange’s market share.99

A major component of the market to 

provide trade executions is the 

competition among exchanges in 

attracting competitively priced liquidity 

as a means of capturing more order 

flow.100 Competitive quotes increase the 

likelihood that marketable orders will 

flow to an exchange which result in 

trades.101 Exchanges aim to attract 


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that the exchange ends up with the best-priced limit 

order in a given symbol. 

102See 17 CFR 242.611 (Rule 611). The rule 

requires trading centers to ‘‘establish, maintain, and 

enforce written policies and procedures that are 

reasonably designed to prevent trade-throughs on 

that trading center of protected quotations in NMS 

stocks’’ (a trade-through occurs when one trading 

center executes an order at a price that is inferior 

to the price of a protected quotation). The 

prevention of trade-throughs means that marketable 

orders are more likely to be executed on trading 

venues with competitively priced quotations at the 

NBBO. 

103See supra note 15. 

104See Table 4. 

105See supra section I.B (describing the different 

exchange pricing models). 

106For a discussion of how long different 

exchanges spend quoting at the NBBO, see Phil 

Mackintosh, Three Charts That Show the 

Importance of a Competitive Bid/Offer NBBO (Dec. 

4, 2018), available at https://www.nasdaq.com/ 

articles/three-charts-that-show-the-importance-of-acompetitive-bid-offer-nbbo-2018-12-04. 

competitively priced quotes because, 

holding other considerations constant, it 

is generally in market participants’ 

interest to route their order to the venue 

with the best prices insofar as doing so 

would be consistent with the duty of 

best execution that broker-dealers have 

with regard to customer orders. In 

addition to these incentives, the Order 

Protection Rule also contributes to the 

competition for order flow by requiring 

that, with specified exceptions,102

orders must execute at prices that are 

equal to or superior to the prevailing 

national best bid and offer (NBBO). 

The competitive environment that has 

emerged from the desire to attract 

competitively priced liquidity 

contributes to the predominance of 

maker-taker pricing across exchanges.103

In January 2023, 9 of the 16 exchanges 

employed maker-taker pricing and the 

trading volume on those 9 exchanges 

make up 89% of trading volume which 

occurred on the exchanges.104 As 

discussed above in section I.B., 

exchanges typically adopt one of three 

different forms of transaction pricing 

models, including maker-taker, 

inverted, or flat.105 The ‘‘maker-taker’’ 

pricing model encourages liquidity 

provision by paying rebates to limit 

orders (i.e., the ‘‘makers’’) that the 

exchange funds by charging fees on 

marketable orders. 

Outside of the maker-taker pricing 

model, other exchanges have adopted 

inverted or flat pricing models. These 

exchanges collectively represent a 

smaller portion of the overall market 

share. As reported in Table 4, inverted 

pricing venues, which charge a fee to 

passive limit orders and pay a rebate to 

marketable orders, accounted for only 

6% of traded share volume in January 

2023. Flat venues accounted for roughly 

5% of traded share volume in January 

2023. 

It is likely that the lack of an incentive 

to post limit orders in the form of a 

transaction rebate contributes to the 

limited share of these non-maker-taker 

venues. Conditional on the quoted price 

on different exchanges being the same, 

a trader would be expected to prefer 

routing its marketable order to either an 

inverted or free venue over a makertaker venue to avoid the access fee and 

potentially earn a rebate instead. 

However, a market observer has stated 

that the occurrence of equivalently 

priced quotes at the NBBO between 

maker-taker exchanges and non-makertaker exchanges is an infrequent 

occurrence.106 The infrequency of this 

occurrence may be due, in part, to the 

lack of rebates for limit orders on these 

non-maker-taker exchanges. 

Three exchange groups together make 

up a large majority of the market share 

in the exchange landscape with the 

Nasdaq group (Nasdaq, BX, Phlx (PSX)) 

making up 30% of the market by trading 

volume, the Intercontinental Exchange 

group (NYSE, NYSE American, NYSE 

Arca, NYSE Chicago, NYSE National) 

making up 34% and Cboe Global 

Markets (Cboe BZX, Cboe BYX, Cboe 

EDGA, Cboe EDGX) making up 24%. 

TABLE 4—EXCHANGE TRADING VOLUME AND SHARE BY LIQUIDITY TYPE, JAN. 2023 

[The following table breaks apart the total buy and sell executed order flow from all exchange members using a sample of CAT data for the 

month of Jan 2023. Exchange members are identified as the set of unique CRD IDs in CAT which have directly routed orders to any of the 

national equities exchanges in the month. Exchange member CRDs are also verified in the CAT Industry Member Identifier List daily reference data. For each exchange the number of shares executed under the CAT allowable trade capacities of Agency, Principal, and Riskless Principal are reported. Trade capacity in CAT is defined by the exchange member for its side of a trade and represents the capacity in 

which the exchange member acted at trade time. Trades with the sale condition codes–M—Market Center Official Close, –Q—Market Center 

Official Open, –V—Contingent Trade, –7—Qualified Contingent Trade (QCT), –8—Placeholder for 611 Exempt, and –9—Corrected Consolidated Close (per listing market) were excluded. The share of total trading volume across all exchanges for orders of a specific capacity are 

reported under the trading volume. The fourth column, ‘‘Total’’ reports the total trading volume for each exchange with the exchange’s volume-based exchange market share reported below.] 

Exchange Agency Principal Riskless 

principal Total 

Nasdaq b (Maker-Taker) ................................................................... 42,381,231,425 

32.04% 

26,084,186,949 

24.37% 

256,443,292 

13.90% 

68,721,861,666 

28.50% 

NYSEa (Maker-Taker) ..................................................................... 23,578,087,344 

17.82% 

15,663,850,087 

14.64% 

145,114,774 

7.86% 

39,387,052,205 

16.33% 

NYSE Arca a (Maker-Taker) ............................................................. 19,581,312,954 

14.80% 

19,600,669,528 

18.31% 

129,269,046 

7.00% 

39,311,251,528 

16.30% 

Cboe EDGXc (Maker-Taker) ........................................................... 13,478,973,097 

10.19% 

12,512,933,159 

11.69% 

677,345,568 

36.70% 

26,669,251,824 

11.06% 

Cboe BZXc (Maker-Taker) .............................................................. 9,612,667,056 

7.27% 

10,242,339,878 

9.57% 

367,462 

0.02% 

19,855,374,396 

8.23% 

MEMX (Maker-Taker) ...................................................................... 6,308,673,864 

4.77% 

6,746,470,107 

6.30% 

186,541,931 

10.11% 

13,241,685,902 

5.49% 

IEX ...................................................................................................

(Flat) ................................................................................................. 6,860,652,435 

5.19% 

3,905,276,620 

3.65% 

7,011,129 

0.38% 

10,772,940,184 

4.47% 

Cboe EDGAc ...................................................................................

(Inverted) .......................................................................................... 3,401,951,122 

2.57% 

2,289,187,280 

2.14% 

109,407,328 

5.93% 

5,800,545,730 

2.41% 

Cboe BYXc ......................................................................................

(Inverted) .......................................................................................... 1,950,854,778 

1.47% 

2,582,413,642 

2.41% 

131,506,520 

7.13% 

4,664,774,940 

1.93% 


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76302 Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 

107The Commission is making the assumption 

that the reported average net capture rates collected 

from public disclosure hold for the trading volume 

reported in Table 4. The publicly sourced data 

regarding average net capture rates for the 

exchanges which are publicly-traded issuers 

include the period of analysis, January 2023, as the 

disclosures pertain to Q1 2023. See infra notes 126, 

127, 128. 

108The revenue numbers are calculated as the 

sum of the total trading volume for the venues in 

an exchange group reported in Table 4 by their 

average net capture rate. Intercontinental Exchange, 

the parent firm of NYSE, reports on page 38 of its 

Form 10–Q filing for the three months ending Mar. 

31, 2023 that its net capture for U.S. equities 

transactions was approximately 4.5 mils in Q1 

2023. 109Nasdaq did not report its net capture in its 

Form 10–K filing, however, Nasdaq provides 

information on its investor relations web page 

which indicates that the average net capture across 

all Nasdaq platforms for U.S. equities transactions 

in Q1 2023 was 6.4 mils. See Nasdaq 2023/2022 

Monthly Volumes, NASDAQ, available at https://

ir.nasdaq.com/static-files/465d2157-c476-4546- 

a9f7-8d7ad0c9be77. 

110Cboe reports in its Form 10–Q filing for the 

three months ending Mar 31, 2023, that its net 

capture for U.S. equities transactions was 

approximately 1.9 mils for Q1 2023. 

111The exchange, LTSE does not charge fees to 

transact. See supra note 15. 

112See IEX pricing schedule, supra note 15. 

113The assumption that the remaining two 

exchanges (MEMX & MIAX Pearl) earn an estimated 

2 mils net capture per transaction is in line with 

prior Commission discussions and would put them 

in line with the net capture rate reported by the 

Cboe group. See supra note 110. 

114See supra note 98 defining the term ‘‘mil’’. 

TABLE 4—EXCHANGE TRADING VOLUME AND SHARE BY LIQUIDITY TYPE, JAN. 2023—Continued 

[The following table breaks apart the total buy and sell executed order flow from all exchange members using a sample of CAT data for the 

month of Jan 2023. Exchange members are identified as the set of unique CRD IDs in CAT which have directly routed orders to any of the 

national equities exchanges in the month. Exchange member CRDs are also verified in the CAT Industry Member Identifier List daily reference data. For each exchange the number of shares executed under the CAT allowable trade capacities of Agency, Principal, and Riskless Principal are reported. Trade capacity in CAT is defined by the exchange member for its side of a trade and represents the capacity in 

which the exchange member acted at trade time. Trades with the sale condition codes–M—Market Center Official Close, –Q—Market Center 

Official Open, –V—Contingent Trade, –7—Qualified Contingent Trade (QCT), –8—Placeholder for 611 Exempt, and –9—Corrected Consolidated Close (per listing market) were excluded. The share of total trading volume across all exchanges for orders of a specific capacity are 

reported under the trading volume. The fourth column, ‘‘Total’’ reports the total trading volume for each exchange with the exchange’s volume-based exchange market share reported below.] 

Exchange Agency Principal Riskless 

principal Total 

MIAX Pearl (Maker-Taker) ............................................................... 1,803,716,409 

1.36% 

2,527,733,474 

2.36% 

153,910,919 

8.34% 

4,485,360,802 

1.86% 

NYSE National a ...............................................................................

(Inverted) .......................................................................................... 827,209,968 

0.63% 

1,489,403,927 

1.39% 

1,340,645 

0.07% 

2,317,954,540 

0.96% 

Phlx (PSX) b (Maker-Taker) ............................................................. 877,534,988 

0.66% 

1,342,954,596 

1.25% 

53,580 

0.00% 

2,220,543,164 

0.92% 

BXb ..................................................................................................

(Inverted) .......................................................................................... 713,708,890 

0.54% 

965,538,116 

0.90% 

32,818,578 

1.78% 

1,712,065,584 

0.71% 

NYSE American a (Maker-Taker) ..................................................... 712,130,625 

0.54% 

818,767,495 

0.77% 

14,185,250 

0.77% 

1,545,083,370 

0.64% 

NYSE Chicago a ...............................................................................

(Flat) ................................................................................................. 177,946,002 

0.13% 

254,499,006 

0.24% 

120,789 

0.01% 

432,565,797 

0.18% 

LTSE ................................................................................................

(Free) ............................................................................................... 10,749,491 

0.01% 

1,411,063 

0.00% 

0 

0.00% 

12,160,554 

0.01% 

Total .......................................................................................... 132,277,400,448 

100.00% 

107,027,634,927 

100.00% 

1,845,436,811 

100.00% 

241,150,472,186 

............................

54.85% 44.38% 0.77% 

aPart of NYSE/ICE Exchange group of exchanges. 

bPart of the Nasdaq group of exchanges. 

cPart of the Cboe group of exchanges. 

The Commission estimates revenues 

generated from net transaction fees for 

the different exchange groups using 

volume-weighted average net capture 

rates which were made publicly 

available either through 10–Q filings or 

published online; the reported net 

capture rates are averages for all the 

different transactions occurring across 

the various equities exchanges in each 

exchange group.107 The Commission 

estimates that one exchange group had 

revenue generated from net transaction 

fees in its US equities exchanges of 

approximately $37,347,258 in January 

2023,108 another exchange group had 

revenue of $46,498,861,109 and a third 

exchange group had revenue of 

$10,828,089.110

The four exchanges outside of those 

three exchange groups made up the 

remaining 11.81% of the market in 

January 2023. One exchange is a free 

exchange, meaning that it does not 

charge access fees (nor does it pay out 

transaction rebates) and hence does not 

generate revenue from transaction net 

capture fees.111 Another exchange 

charges a flat fee of $0.0009 per share 

to both liquidity providers and liquidity 

takers leading to net capture of $0.0018 

and an estimated transactions revenue 

of $19,391,292 for January 2023.112 The 

remaining two exchanges are not 

publicly-traded issuers and do not 

publicly disclose their net capture rates. 

The Commission understands based on 

Staff conversations with industry 

members that the net capture for nonauction trading in stocks is likely close 

to $0.0002 per share and uses this 

assumed net capture rate when 

estimating the transaction revenues for 

these exchanges.113 Using the assumed 

net capture of $0.0002, or 2 mils, the 

Commission estimates the January 2023 

transaction revenues for these two 

exchanges to be $2,648,337 and 

$897,072 respectively.114

The maker-taker transaction pricing 

model and higher rebates play an 

important role in attracting 

competitively priced quotes and 

capturing market share, as suggested by 

the market share statistics of Table 4. 


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115Nasdaq produced two reports concerning their 

access fee experiment. See Frank Hatheway, Nasdaq 

Access Fee Experiment (Mar. 2015), available at 

https://pages.stern.nyu.edu/∼jhasbrou/ 

SternMicroMtg/Old/SternMicroMtg2015/ 

Supplemental/Access%20Fee%20Experiment%20- 

%20Month%20One%20Report%20Final.pdf. See 

also Frank Hatheway, Nasdaq Access Fee 

Experiment Report II (Mar. 2015), available at 

https://pages.stern.nyu.edu/∼jhasbrou/ 

SternMicroMtg/Old/SternMicroMtg2015/ 

Supplemental/Access%20Fee%20Experiment%20- 

%20Second%20Report%20Final.pdf (‘‘Nasdaq 

Access Fee Experiment Report II’’). 

116 ‘‘Liquidity Share’’ is a measure of an 

exchange’s displayed liquidity, factoring in both the 

frequency it is at the NBBO and the size of its quote. 

The calculation involves weighing the average size 

quoted by an exchange that is concurrently quoting 

at the NBBO by the duration of time spent quoting 

at the NBBO to yield a quantity which is referred 

to as ‘‘Average Liquidity.’’ This value is then 

divided by the total average liquidity of all 

exchanges quoting the stock to compute the 

liquidity share. See Nasdaq Access Fee Experiment 

Report II, supra note 115. 

117See Yiping Lin, Peter Lawrence Swan, and 

Frederick H. deB. Harris, ‘‘Why Maker-Taker Fees 

Improve Exchange Quality: Theory and Natural 

Experimental Evidence’’ (Mar. 14, 2019), available 

at https://ssrn.com/abstract=3034901 (retrieved 

from SSRN Elsevier database). 

118Conditional on compliance with Rule 611 and 

keeping all else equal, including other 

considerations of execution quality, traders 

typically would prefer to route their marketable 

order to a trading venue with a lower access fee. 

Thus, a reduction in access fees would help attract 

marketable orders and increase trading volume. 

119See supra note 17 (discussing the 

Commission’s Access Fee Proposal that would 

require exchanges to make the amounts of all fees 

and rebates determinable at the time of execution, 

which would require volume-based transaction 

pricing tiers to be applied prospectively rather than 

retroactively to the start of a month). 

120 Volume-based tiers in trading often have 

different qualifications. For instance, some tiers 

require adding Average Daily Volume (‘‘ADV’’), 

while others consider total ADV (both add and 

remove volume), and some tiers are tape dependent. 

There are also specific tiers for mid-point liquidity 

(‘‘MPL’’) orders, non-displayed limit orders, and 

opening/closing auction trading, to name a few. 

121For example, an exchange may require a 

member to accumulate, on a specific tape, an 

amount of adding trading volume (trade volume 

from trades which executed against a member’s 

liquidity providing order) greater than X% of the 

total consolidated trading volume for that specific 

tape. 

122See infra section IV.B.2 for a discussion of the 

incentives introduced by volume-based pricing 

tiers. 

123A flat pricing schedule does not allow an 

exchange to offer some traders a higher rebate 

(lower fee) by offering others a lower rebate (higher 

fee). In principle the cross-subsidization of rebates 

from other business lines could occur in the 

absence of pricing tiers though this is likely to be 

more costly since the flat nature of the pricing 

schedule would mean that the trading of all 

members would have to subsidized rather than, 

potentially, just the trades of the members which 

qualify for the preferential pricing tiers. 

124See Remarks of Chris Concannon, supra note 

3, Transcript at 74–75. 

There are important factors which serve 

to limit the liquidity of lower volume 

exchanges; these exchanges are not the 

primary listing market for any securities 

as they are newer, and they also tend to 

be more specialized or structured to 

facilitate specific trading strategies. 

The idea that the maker-taker 

transaction pricing model and rebates 

offered play an important role in 

exchange market share is also supported 

by the results of an experiment run by 

one maker-taker exchange, Nasdaq, in 

which it reduced both its fees and 

rebates. The experiment resulted in less 

competitive liquidity being supplied to 

the exchange along with a decrease in 

the exchange’s market share in the 

treated stocks. That market share fell 

despite the reduction in transaction fees 

being greater than the reduction in 

rebates suggests that changes in the 

transaction pricing applicable to 

liquidity-providing order flow may have 

a greater effect on exchange market 

share than similar changes in the 

transaction pricing applicable to 

liquidity-demanding order flow. In this 

experiment, the exchange unilaterally 

reduced both access fees and rebates for 

a set of 14 stocks. Over the course of the 

experiment Nasdaq reported a 

significant drop in a number of liquidity 

provision measures.115 Per the Nasdaq 

reports, the average number of shares 

displayed by Nasdaq at the NBBO in the 

experiment declined by 45%, average 

time at the NBBO declined by 4.7 

percentage points from 92.7% to 88.0%, 

liquidity share 116 fell from 29% to 19%, 

and the share of liquidity provided by 

the exchange’s top five liquidity 

providers prior to the experiment 

decreased from 44.5% to 28.7%. These 

changes align with the findings of one 

academic study (the ‘‘Swan Study’’) 

which also analyzed the Nasdaq 

experiment.117

Both the Nasdaq reports and the Swan 

Study found that Nasdaq’s market share 

fell in traded stocks, with Nasdaq 

reporting an average decline of 1.8 

percentage points. The Swan Study 

found that the Nasdaq share loss was 

captured by the two highest rebatepaying stock exchanges. As the 

experiment also reduced fees in 

addition to rebates, the reported 

reduction in market share was a net 

effect of both reductions, it is likely that 

the reduction in market share would be 

greater had access fees not also been 

reduced.118 Other factors which may 

have contributed to the decrease in 

market share include the improved fill 

rates and fill times, as well as narrower 

effective and realized spreads net of 

transaction rebates and fees on 

competing exchanges which were 

reported in the Swan Study. 

b. Volume-Based Pricing Tiers 

Stock exchange transaction pricing 

schedules often operate with a tiered 

system that relies on the volume an 

exchange member brings to the 

exchange to determine its transaction 

pricing tier for a given month. 

Qualification to different rebate and fee 

tiers is determined at the end of each 

month and typically is based on a 

member’s average daily share volume 

for the month as a percentage of the 

total consolidated volume that 

month.119 This kind of pricing method 

where exchanges offer different fee and 

rebate levels to members based on the 

amount of trading volume each member 

executes on the exchange is referred to 

as volume-based exchange transaction 

pricing.120 The tier threshold is often 

expressed as a percentage of the total 

consolidated volume reported by one or 

all consolidated tapes for the month.121

It is common that tier thresholds are 

defined relative to the trading volume of 

the market as a whole; it is seldom the 

case that tier thresholds are set as an 

absolute number of shares. 

The Commission understands that 

exchanges make use of volume-based 

tiers as a means of encouraging their 

members to execute orders on their 

venue. Volume-based tiers encourage 

exchange members to concentrate, or 

execute a larger share of their order 

flow, on the exchange in order to qualify 

for the higher rebates or lower fees 

offered by higher volume pricing 

tiers.122

The pricing terms of the tiers reserved 

for high volume exchange members may 

be subsidized through higher net 

capture rates of lower-volume members 

or via other lines of business such as 

those earned from providing 

connectivity and market data.123 The 

fact that many exchanges offer high-tier 

rebates that exceed the Rule 610 access 

fee cap in magnitude implies a need for 

cross-subsidization to support these 

rebate tiers. In a 2018 roundtable on 

market data and market access, one 

exchange that participated in the 

roundtable stated that five out of their 

ten largest members by trading volume 

receive payment from the exchange 

even after factoring in the costs of 

connectivity and market data.124 This 

suggests that the rebates an exchange 

pays to those members may be 

subsidized by the net transaction fees 

paid by other exchange members or the 

fees paid for other services such as data 

and connectivity. 

Newer or smaller exchanges may find 

it difficult to attract order-flow away 

from the larger legacy exchanges given 

that a sizable portion of order flow is 

provided by the high-volume exchange 


ddrumheller on DSK120RN23PROD with PROPOSALS2
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125For example, a new exchange in 2020 

implemented a pricing schedule with high rebate 

tiers which would generate losses while the venue 

tried to establish market share. See Shanny Basar, 

New Exchange MEMX Details ‘Smart’ Pricing 

Structure (Sept. 15, 2020) available at https://

www.tradersmagazine.com/am/memx-unveilssmart-pricing-structure/. 

126Most of the public exchanges are organized 

based on families of affiliated exchanges, where the 

exchanges within a family are owned by the same 

holding company but may employ distinct business 

models (e.g., charging a ‘‘make’’ fee on taker-maker 

exchanges or a ‘‘take’’ fee on maker-taker 

exchanges). 

127See Jean Tirole, The Theory of Industrial 

Organization, 346–52 (1988) for a discussion of 

leading firms’ incentive to pack the product space 

so as constrain the market niche for new or minor 

firms. A motivating example is ‘‘the Swedish 

Tobacco Company, upon losing its legal monopoly 

position in 1961, reacted by offering twice as many 

brands.’’ Id. at 346. Dominant firm’s preemptive 

decision to introduce a menu of latent choices is 

also analyzed in Yong Chao, Guofu Tan, and Adam 

Chi Leung Wong, ‘‘Optimal Nonlinear Pricing by a 

Dominant Firm under Competition’’, 14 Am. Econ. 

J.: Microeconomics 240 (May 2022). 

128For S&P 500 stocks, the daily average fraction 

of a stock’s closing auction trades over total shares 

traded increased from 3.5% in 2010 to 10% in 2018. 

See Yanbin Wu, ‘‘Closing Auction, Passive 

Investing, and Stock Prices,’’ 9 (Aug. 2019), 

available at https://papers.ssrn.com/sol3/ 

papers.cfm?abstract_id=3440239. Another source 

reports that the shares that the NYSE closing 

auctions commanded doubled over a five-year 

period to nearly 7% of NYSE-listed volume in 

recent years. See ‘‘Behind the Scenes—An Insider’s 

Guide to the NYSE Closing Auction,’’ available at 

https://www.nyse.com/article/nyse-closing-auctioninsiders-guide. 

129 Yanbin Wu, ‘‘Closing Auction, Passive 

Investing, and Stock Prices,’’ supra note 128. 

130The exchanges that currently have listings are 

Nasdaq, NYSE, NYSE Arca, and Cboe’s BZX. See 

Cboe’s ‘‘The Impact Closing Auctions Have on 

Volumes’’ (Nov. 18, 2020), available at https://

www.cboe.com/insights/posts/the-impact-closingauctions-have-on-volumes/. 

131Staff experience suggests that some brokerdealers aim to enhance their volumes and attract 

flow by guaranteeing the listing market’s official 

closing price at no additional cost. 

132See https://www.cboe.com/us/equities/ 

trading/offerings/cboe_market_close/. 

133See Nasdaq Rule 118(d)(2): Section 118. 

Nasdaq Market Center Order Execution and Routing 

for a description of Nasdaq closing auction tiers that 

include volume criteria based on continuous 

volume: https://listingcenter.nasdaq.com/rulebook/ 

nasdaq/rules/Nasdaq%20Equity%207#section_

118_nasdaq_market_center_order_execution_and_

routing. 

134MEMX comment letter to Regulation NMS: 

Minimum Pricing Increments, Access Fees, and 

Transparency of Better Priced Orders, https://

www.sec.gov/comments/s7-30-22/s73022-20163328- 

333796.pdf. 

members which qualify for the top tiers 

and similar terms would have to be 

offered to those members to pull them 

away. As previously discussed, 

exchanges are able to use volume-based 

pricing as a means of increasing the 

rebates earned by a few high-volume 

exchange members often at the expense 

of members with less trading volume; 

the lack of a large trading base could 

make it difficult to profitably subsidize 

the top tiers from the trades of other 

exchange members. Smaller or newer 

exchanges looking to compete with 

larger exchanges would find it difficult 

to compete with larger exchanges by 

cutting transaction fees. In the case of a 

maker-taker exchange, cutting take fees 

may require lower rebates for liquidity 

provision by lowering the degree to 

which those rebates can be funded via 

take fees. Cutting make rebates relative 

to those offered on other exchanges 

would likely hamper an exchange’s 

tendency to attract competitively priced 

limit orders putting the exchange in a 

competitively disadvantageous position. 

In the case of an inverted or flat venue, 

cutting make fees could help an 

exchange attract more liquidity however 

because these exchanges by their very 

nature, charge fees rather than pay 

rebates to liquidity providers, makes 

them less attractive as a venue to post 

a competitive quote, all else being equal. 

Alternatively, smaller or newer 

exchanges could try to compete with the 

larger maker-taker exchanges on the 

basis of offering larger make rebates, 

lacking substantial trading volume 

could make cross-subsidization of 

rebates difficult possibly meaning that 

the exchange may need to operate their 

trading business at a loss in order to 

match or beat the top rebates of other 

exchanges.125 The lack of a similar 

membership base, trading volume, and 

data and connectivity subscribers make 

it difficult for smaller exchanges to 

sustainably provide volume-based tiers 

competitive with the top tiers offered by 

the largest exchanges. 

An alternative view on the complexity 

of pricing schemes offered by the 

dominant exchange families 126 is to 

regard the range of volume-based 

discounts as a form of product 

proliferation, a preemptive strategy for 

limiting the range of profitable choices 

available for newer and smaller 

exchanges. Reminiscent of behavior by 

established firms when attempting to 

corner the market across other industry 

settings,127 the range of pricing bundles 

offered by the dominant exchanges may 

likewise have partial exclusionary 

effects. 

c. Tying Closing Auction Fees to 

Consolidated Volume 

The daily closing price of NMS 

equities is typically established by 

means of the closing auction, which is 

run at the end of each trading day by the 

primary listing exchange for the 

respective equity. Because of the 

significance of the closing price to a 

variety of financial market functions, 

including the measuring of tracking 

error in index funds, many market 

participants are highly desirous of 

executing trades at precisely the daily 

closing price, an outcome that can be 

facilitated by participating in the closing 

auction on the listing exchange. Listing 

exchanges may be able to exploit this 

demand for participation in the closing 

auction by offering discounts on auction 

orders to members who send volume 

into the intraday trading sessions. This 

practice may help listing exchanges 

preserve or extend their market power, 

potentially at the expense of reducing 

the welfare of the exchange members. 

A number of factors contribute to high 

and growing 128 demand for 

participation in closing auctions. One 

significant reason for this is that an 

important performance metric for 

passive funds, the tracking error, is tied 

to the daily closing price set by these 

closing auctions. For this reason, index 

funds and exchange-traded funds are 

motivated to concentrate flow in the 

closing auctions so as to minimize 

tracking errors.129

Listing exchanges operate closing 

auctions that set an official closing price 

for their listed securities.130 This makes 

them an obvious means by which a 

market participant can get its trades 

executed at the official closing price. 

Some alternatives do exist, for example, 

some broker-dealers may offer to 

internalize customer orders at the 

closing auction price,131 once it is 

determined on the listing exchange. 

Another example of an alternative is the 

pre-match close offered by one exchange 

for market-on-close orders.132 However, 

if a market participant wishes to execute 

an on-exchange trade at the official 

closing price determined by the primary 

listing exchange, and use a limit-onclose order for that trade, the only 

option is to send that order to the listing 

exchange’s closing auction. 

Some primary listing exchanges 

implement closing auction pricing tiers 

that involve discounts which are based 

on the member’s overall trading volume 

on the same exchange.133 Specifically, 

the exchange pricing schedule is such 

that higher consolidated volume (overall 

volume from both auctions and regular 

trading hours) helps broker-dealers 

qualify for more favorable fees and 

rebates on auction orders. Industry 

practitioners refer to ‘‘auction linked 

pricing’’ as a discount on auction orders 

based on the continuous trading 

volume.134 This practice is a form of 

tying or conditional pricing. The related 

literature, referenced in the following 

paragraph, has shown that tying can 

reduce competition and has potential 


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135 Dennis W. Carlton and Michael Waldman, 

‘‘The Strategic Use of Tying to Preserve and Create 

Market Power in Evolving Industries,’’ 33 Rand J. 

Econ. 194 (Summer 2002). Michael D. Whinston, 

‘‘Tying, Foreclosure, and Exclusion’’, 80 Am. Econ. 

Rev. 837 (Sept. 1990). See also a discussion of tying 

from W. Kip Viscusi, Joseph E. Harrington, and 

David E. M. Sappington, Economics of Regulation 

and Antitrust, Chapter 7 Vertical Mergers and 

Vertical Restraints, 296–312 (5th ed. 2018). Yong 

Chao, Guofu Tan, and Adam Chi Leung Wong, ‘‘AllUnits Discounts as a Partial Foreclosure Device’’, 49 

Rand J. Econ. 155 (2018). 

136For example, in the context of firms competing 

to attract demand from customers who differ in 

their preferences over different goods, some firms 

may use bundling as a way differentiate their 

products, and thereby soften price competition. For 

a numerical example of bundling as a way for firms 

to differentiate their products in a price 

discrimination context see Paul Belleflamme and 

Martin Peitz, Industrial Organization: Markets and 

Strategies, Chapter 11.3.1 Bundling as a Way to 

Soften Price Competition, 274 (2010). 

137By tying part of the competitive portion to its 

captive portion, the dominant firm draws sales 

away from its capacity-constrained rival in Yong 

Chao, Guofu Tan, and Adam Chi Leung Wong, ‘‘AllUnits Discounts as a Partial Foreclosure Device’’, 49 

Rand J. Econ. 155 (2018). 

138 Katherine Ho, Justin Ho, & Julie Holland 

Mortimer, ‘‘The Use of Full-Line Forcing Contracts 

in the Video Rental Industry’’, 102 Am. Econ. Rev. 

686 (2012). 

139 Yong Chao, Guofu Tan, and Adam Chi Leung 

Wong, ‘‘All-Units Discounts as a Partial Foreclosure 

Device’’, 49 Rand J. Econ. 155 (2018). Gregory S. 

Crawford, ‘‘The Discriminatory Incentives to 

Bundle in the Cable Television Industry’’, 6 

Quantitative Mktg. & Econ. 41 (2008). 

140The introduction of Reg NMS, in particular the 

Order Protection Rule, requires investors to interact 

with the exchange(s) offering the most favorable 

execution prices throughout the regular trading 

session. 

141Specifically, tying closing auction fees to 

intraday trading encourages broker-dealers who 

value participation in the closing auction to direct 

more order flow to the primary exchanges, in order 

to benefit from volume-based discounts during the 

closing auctions. 

142Chenghuan S. Chu, Phillip Leslie, and Alan 

Sorensen, ‘‘Bundle-Size Pricing as an 

Approximation to Mixed Bundling’’, American 

Economic Review 101, 263–303 (2011). Gregory S. 

Crawford, ‘‘The Discriminatory Incentives to 

Bundle in the Cable Television Industry’’, 6 

Quantitative Mktg. & Econ. 41 (2008). Katherine Ho, 

Justin Ho, & Julie Holland Mortimer, ‘‘The Use of 

Full-Line Forcing Contracts in the Video Rental 

Industry’’, 102 Am. Econ. Rev. 686 (2012). 

143For a numerical example of bundling as a way 

for firms to differentiate their products in a price 

discrimination context see Paul Belleflamme and 

Martin Peitz, Industrial Organization: Markets and 

Strategies, Chapter 11.3.1 Bundling as a Way to 

Soften Price Competition, 274 (2010). 

144Consumer surplus is the analog of investor 

surplus from the exchange setting. 

145Throughout this section the analysis relies on 

a population of only 16, a small sample reduces the 

statistical confidence (the probability that an 

estimated quantity is not the result of random 

chance) in the estimation of any relationships 

between variables. Despite this limitation, the 

evidence presented in this section is consistent 

with volume-based price tiering promoting the 

concentration of order flow rather than resulting 

from random chance. 

exclusionary effects. There is a lack of 

consensus within the economic 

literature on the anti-competitive 

potential of offering price discounts for 

allocating a target purchasing level in a 

bundled goods context. However, the 

theoretical literature has provided 

examples arguing that tying the sales of 

a monopolized or dominant product to 

other product(s) can be a profitable way 

for a firm to protect its market power, 

oftentimes through partially foreclosing 

the more competitive portion of the 

market to competitors.135 In other 

imperfectly competitive market settings, 

offering more generous terms for 

purchasing a bundle of different goods 

can also result in greater producer 

surplus.136 Bundling arrangements may 

have partial exclusionary effects when a 

dominant firm takes advantage of its 

captive (non-contestable) portion of 

demand and ties its captive demand 

with part of its contestable demand.137

More generally, both the theoretical and 

empirical literatures have offered 

evidence that bundling, or offering 

discounts for purchasing a portfolio of 

different goods, can result in greater 

producer surplus,138 but sometimes at 

the expense of consumer surplus.139

The same forces analyzed in the 

literature on bundling and tying may be 

present in the case of listing exchanges 

and their closing auction discounts. 

Because of the high value placed on 

executing in the closing auction 

described above, listing exchanges are 

able to offer a relatively unique trading 

mechanism. This is in contrast to 

intraday trading, where the orders may 

potentially interact with multiple 

trading platforms.140 The use of volume 

discounts that apply across both 

mechanisms may enable the listing 

exchanges to leverage their position as 

the sole primary listing exchange and 

provider of a closing auction to increase 

order flow to their intraday trading.141

As described above, the economic 

literature shows that this may reduce 

the welfare of the exchange members. 

In addition to leveraging market 

power, the economic literature suggests 

that bundling can increase exchange 

profit by averaging (through aggregating) 

consumer preferences.142 To the extent 

that broker-dealers differ in their 

willingness to participate in the closing 

auction and intraday trading, tying 

execution fees for the closing auctions 

to total volume may help the listing 

exchanges capture greater demand from 

a segment of the participants. By 

drawing in broker-dealers who might 

otherwise have little interest in 

participating on one of the venues (e.g., 

closing auction or intraday trading), the 

listing exchanges may earn greater 

revenue than what would be possible 

with component (unbundled) pricing for 

closing auction and intraday trading. 

To the extent exchanges are engaged 

in imperfect competition for order flow 

across heterogeneous broker-dealers, 

bundling as a product differentiation 

strategy could also help a listing 

exchange extract more order flow.143

Auction linked pricing may be 

particularly effective in attracting order 

flow from broker-dealers who value 

gains from executing trades during the 

closing auction but who might 

otherwise have lower valuation for 

intraday trading on that exchange. 

While the exchanges may benefit from 

auction-linked pricing, the impact on 

broker-dealers and their customers is 

ambiguous. In general, depending on 

the particular situation price 

discrimination can either increase 

consumer welfare or decrease it. 

Nevertheless, a significant number of 

academic studies have found that 

bundling decreases consumer 

surplus.144 Consumer surplus (i.e., 

consumer welfare), is typically defined 

as the net benefit the buyer derives from 

his optimal consumption bundle, after 

adjusting for the price he incurs from 

his preferred purchase. 

2. Volume-Based Tiers and Order 

Routing Incentives 

Volume-based tiering serves 

exchanges by incentivizing their 

members to concentrate their order-flow 

onto their platform. The following 

analysis presents evidence consistent 

with this notion.145 Maker-taker 

exchanges with a higher number of 

pricing tiers are not only larger but have 

a higher proportion of their members 

execute a plurality of their order flow on 

their platform; plurality members are 

also responsible for a greater proportion 

of the trading volume executed on these 

exchanges. The analysis also finds that 

individual member order flows are on 

average more concentrated than they 

would be had their executed order flow 

been split in line with the relative 

market shares of the exchanges. Order 

flow deviations from the relative market 

weights which contribute to higher 

concentration measures tend to be those 

which place more weight on makertaker exchanges with the most pricing 

tiers. 

The use of volume-based pricing tiers 

by exchanges can affect the routing 

decisions of their members through the 

incentives it introduces. Volume-based 

pricing encourages members to 

concentrate their order flow on 

exchanges where members hope to 

increase their chances of qualifying for 

a preferential pricing tier. Qualifying for 

a better pricing tier can result in both 


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76306 Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 

146See infra section IV.B.4 (discussing the market 

to provide exchange access to non-members). 

saving on transaction costs (or even 

profiting from net rebates), and 

potentially obtaining a competitive 

advantage in the market to provide nonmember customers access to the 

exchanges.146

The following table examines the 

relationship between market share, the 

average share of member order flow, and 

the number of tiers on an exchange. 

Panel A of Table 5 shows that the 

average share of member order flow 

which is directed to the exchange tends 

to be greater for exchanges with more 

tiers, in particular the maker-taker 

exchanges. 

BILLING CODE 8011–01–P 


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Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 76307 


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Table 5 - Exchange Tiers, Pricing, Market Share, and Plurality Members 

This table lists out market share,# of tiers, base rebates and fees, and order flow concentration statistics 

for the 16 national equities exchanges using the total executed buy and sell order flow from all 

exchange members using a sample of CAT data for the month of Jan. 2023. Exchange members are 

identified as the set of unique CRD IDs in CAT which have directly routed orders to any of the national 

equities exchanges in the month. Exchange member CRDs are also verified in the CAT Industry 

Member Identifier List daily reference data. For each exchange the number of shares executed under 

the CAT allowable trade capacities of Agency, Principal, and Riskless Principal are reported. Trade 

capacity in CAT is defined by the exchange member for its side of a trade and represents the capacity 

in which the exchange member acted at trade time. Trades with the sale condition codes-M - Market 

Center Official Close, -Q - Market Center Official Open, -V- Contingent Trade, - 7 - Qualified 

Contingent Trade (QCT), -8 - Placeholder for 611 Exempt, and-9 - Corrected Consolidated Close (per 

listing market) were excluded. Market share measures are pulled from Table 4 and the number of tiers 

correspond to the count of the number of tiers reported are collected from the exchange price schedules 

which were effective for the month of Jan. 2023 in the same method as for Table 1. 

Panel A: Base Rebates and Average Member Order flow shares. Base Rebate and Fees correspond 

to the default pricing for orders which do not qualify for any tiers listed on an exchange' s pricing 

schedule. Average member order flow share is a simple average of the proportion of trading volume 

that an exchange member executed on the exchange relative to the total trading volume across all the 

other exchanges they are a member of. Member order flow share is calculated as the number of shares 

executed by an exchange member during regular trading hours over the month of Jan. 2023 divided by 

the total number of shares the exchange member executed across all national stock exchanges during 

regular trading hours over the month of Jan. 2023. 

Avg 

Exchange Market # of Base Fee Base Member 

Share Tiers Rebate Orderflow 

Share 

Nasdaq 28.46% 74 -30 13 51.52% 

NYSE 16.45% 93 -30 12 35.43% 

NYSE Arca 16.28% 72 -30 20 31.59% 

Cboe EDGX 11.04% 19 -30 16 15.28% 

Cboe BZX 8.22% 26 -30 16 14.17% 

MEMX 5.48% 13 -30 20 8.59% 

MIAX Pearl 1.86% 8 -29 29 3.41% 

Phlx (PSX) 0.92% 4 -30 20 5.89% 

NYSE American 0.64% 10 -30 20 4.82% 

IEX 4.46% 0 -9 0 22.58% 

Cboe EDGA 2.40% 8 -30 16 7.59% 

Cboe BYX 1.93% 11 -20 2 3.88% 

NYSE National 0.96% 11 -29 0 1.30% 

BX 0.71% 20 -30 -7 0.94% 

NYSE Chicago 0.18% 0 -10 0 10.28% 

LTSE 0.01% 0 0 0 0.01% 
76308 Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 

BILLING CODE 8011–01–C 

Panel A of Table 5 shows that an 

exchange’s market share is more 

associated with the number of pricing 

tiers than they are with either the base 

fee or rebate. The coefficient of 

correlation between the number of tiers 

and market share is 0.87 whereas the 

coefficients of correlation of market 

share with the base fee and rebate are 

¥0.34 and 0.20 respectively. Focusing 

on the maker-taker exchanges, the base 

take fees are all set at 30 mils with a 

single exception at 29 mils. Among the 

maker-taker exchanges there does not 

appear to exist a clear relationship 

between the base rebate paid out and an 

exchange’s observed market share. The 

smallest three maker-taker exchanges, 

with a combined market share of 3.42%, 

have a volume-weighted average base 

rebate of 23.7 mils which is 

substantially larger than the 13.5 mil 

average base rebate for the three largest 

maker-taker exchanges which make up 

over 60% of the market. On the other 

hand, Table 5 shows a clearer 

correspondence between the count of 

tiers on a maker-taker exchange’s price 

schedule and its market share with the 

three largest exchanges having a 

volume-weighted average of 61 tiers and 

the three smallest maker-taker 

exchanges having 3.4 tiers on average. 

To the extent that rebates may play a 

role in order-routing considerations, as 

discussed in section IV.B.1, the 

evidence presented here is consistent 

with the notion that tiered rebate rates 

are more important than the base 

rebates. This is not to suggest that 

merely having a greater number of 

pricing tiers would result in greater 

market share but rather that if the 

number of tiers serves as a viable proxy 

for how important tiering is for an 

exchange’s pricing then the apparent 

association between the market share 

and number of tiers is consistent with 

the hypothesis that tiers incentivize the 


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Panel B: Plurality Members and Plurality Order flow. A plurality member for an exchange is any 

exchange member who executes the largest share of their order flow on that exchange. For each 

exchange member the member order flow share (described above in panel A) is computed for every 

exchange for which they are a member of, the member is considered to be a plurality member for the 

exchange for which their member order flow share is highest. Exchange members are identified as the 

set of unique CRD IDs in CAT which have directly routed orders to any of the national equities 

exchanges in the month. Exchange member CRDs are also verified in the CAT Industry Member 

Identifier List daily reference data. The "percent of plurality members" is computed as the proportion 

of exchange members who are plurality members. "Average plurality order flow share" is a simple 

average of the proportion of order flow executed on the exchange across plurality members only. 

"Volume Due to Plurality members" is the proportion of exchange total volume which is attributable to 

plurality members. The last column, average number of exchanges of plurality members ("Avg # of 

Exgs of Plurality Members"), is a simple average of the number of exchanges for which a plurality 

member is a member of. 

Exchange 

Nasdaq 

NYSE 

NYSE Arca 

Cboe EDGX 

Cboe BZX 

MEMX 

MIAX Pearl 

Phx (PSX) 

NYSE American 

IEX 

Cboe EDGA 

Cboe BYX 

NYSE National 

BX 

NYSE Chicago 

LTSE 

Market 

Share 

28.46% 

16.45% 

16.28% 

11.04% 

8.22% 

5.48% 

1.86% 

0.92% 

0.64% 

4.46% 

2.40% 

1.93% 

0.96% 

0.71% 

0.18% 

0.01% 

# of 

Tiers 

74 

93 

72 

19 

26 

13 

8 

4 

10 

0 

8 

11 

11 

20 

0 

0 

Percent of 

Plurality 

Members 

64.71% 

29.21% 

31.48% 

11.76% 

7.69% 

3.85% 

2.78% 

4.44% 

3.70% 

22.99% 

5.56% 

1.41% 

0.00% 

0.00% 

10.00% 

0.00% 

Average 

Plurality 

Orderflow 

Share 

70.35% 

91.47% 

64.75% 

64.48% 

89.79% 

52.53% 

30.48% 

100.00% 

100.00% 

79.08% 

98.46% 

100.00% 

100.00% 

Volume 

Due to 

Plurality 

Members 

89.93% 

17.97% 

15.98% 

11.83% 

0.16% 

1.02% 

1.77% 

0.06% 

0.49% 

10.17% 

0.01% 

0.01% 

0.00% 

0.00% 

0.62% 

0.00% 

Avg# of 

Exgs of 

Plurality 

Members 

5.9 

2.7 

5.4 

4.9 

2.3 

9.5 

10 

1 

1 

4.5 

1.3 

1 

1.0 
Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 76309 

147Aside from order flow concentration, higher 

rebate/lower fee pricing tiers could increase trading 

volume and therefore market share by incentivizing 

the submission of limit orders which would have 

otherwise not been submitted absent the tiers. 

148A plurality member is defined for a particular 

exchange as a member who executes the largest 

share (a plurality) of their order flow on that 

exchange. If a broker-dealer is a member of only one 

exchange they are necessarily a plurality member of 

that exchange since 100% of the order flow they 

execute across all the exchanges (for which they are 

a member) occur on that exchange. 

149See Maureen O’Hara, and Mao Ye ‘‘Is Market 

Fragmentation Harming Market Quality?’’, 100 J. 

Fin. Econ. 459 (2011). 

150The HHI is generally calculated as the sum of 

squared weights which normally add up to one. The 

HHI ranges from (0,1) with lower values indicating 

a more even split between the constituent weights 

and higher values indicative of a more uneven 

distribution with a max value of one indicative of 

a single entity with a 100% weight. Conditional on 

the number of entities N, the lowest possible HHI 

value is 1/N which corresponds to the case when 

all weights are equal to one-another (equal to 1/N). 

151To illustrate the computation of member and 

pro-rata HHIs consider the case of a broker-dealer 

that directs principal orders to three different 

exchanges they are a member of. If the broker-dealer 

sends 60% of their principal order flow to one 

exchange and 20% to each of the other two, then 

the broker-dealer’s member HHI for their principal 

orders be 0.44 (0.602 + 0.202 + 0.202). If the relative 

market share for the exchanges, using the 

executions of principal orders, are 30%, 30%, and 

40% then the pro-rata HHI would be 0.34. In this 

case because the member HHI of 0.44 is greater than 

the pro-rata HHI of 0.34, then the member 

concentrates their order flow to a greater degree 

than would be expected had they routed their order 

flow in accordance to exchange size. 

152Overall, the executed member order flow was 

more concentrated relative to the pro-rata HHI. For 

the month of Jan. 2023, the volume-weighted 

average pro-rata HHI was 0.18 whereas the volumeweighted average member HHI was 0.20. 

concentration of order flow and increase 

market share.147

Consistent with the idea that price 

tiering incentivizes the concentration of 

order flow, there appears to be a 

positive association between the 

number of tiers on an exchange’s pricing 

schedule and that exchange’s share of 

members which execute at least a 

plurality of their trading volume on the 

exchange; the correlation coefficient 

between the two variables is 0.76. Panel 

B of Table 5 reports statistics regarding 

those exchange members which execute 

a plurality of their trading volume on 

each exchange. The three exchanges 

with the largest number of tiers on their 

pricing schedules have an average of 

41.8% of their members executing at 

least a plurality of their trading volume 

on the exchanges. This is in contrast 

with the 3 exchanges with no tiering for 

which 11% of members, on average, 

execute a plurality of their orders on 

their exchanges. Restricting to those 

exchanges with price tiering, the three 

exchanges with the lowest number of 

tiers have an average of 4.26% of their 

members sending them a plurality of 

order flow. Three exchanges (NYSE 

National, BX, LTSE) did not have any 

members with a plurality of their 

trading volume on the exchanges and 

for three other exchanges (Phlx (PSX), 

NYSE American, and NYSE Chicago) 

the only members which execute a 

plurality of their orders on those 

exchanges do so only because they did 

not execute any order flow on any other 

exchange.148 Moreover ‘‘plurality 

members’’ constitute a greater share of 

the total exchange trading volume for 

exchanges with more tiers relative to 

those with fewer tiers. The measure of 

correlation between the number of 

pricing tiers and the share of exchange 

volume from plurality members is 0.64. 

For exchanges with above median 

number of tiers (≤11) an average of 

19.56% of their total trading volume 

originate from plurality members 

whereas for exchanges with less than/ 

equal to the median number of tiers 

(<=11) is 1.46%. The average proportion 

of plurality member trading volume for 

the three largest exchanges by number 

of tiers, 41.8%, is roughly 20 times the 

average for every other exchange, 

2.01%. 

It is important to note that these 

observations do not prove a causal 

relationship between tiering and market 

share and the Commission 

acknowledges that there may exist other 

factors that could drive the patterns 

observed. For instance, it may be the 

case that maintaining a complex pricing 

schedule may be costly and, as a result, 

exchanges with larger market shares 

may find it more feasible to employ a 

pricing schedule with more tiers than an 

exchange with a smaller market share. 

Another reason for differences in market 

share across exchanges could be the 

widely documented fact that stocks 

trade more heavily on their primary 

listing venue particularly with respect 

to trading at the close.149

The following analysis directly 

measures the degree of concentration for 

the order flow of individual members 

and examines how they deviate from a 

market benchmark on average. The 

Herfindahl-Hirschman Index (HHI) is 

employed to gauge the degree to which 

each individual exchange member 

diversifies or concentrates its order flow 

across the exchanges of which it is a 

member. The HHI is widely used for 

measuring market concentration or 

dispersion.150 Member HHIs are 

computed based on the relative order 

flow dispatched to the exchanges by the 

individual exchange member. This 

calculation is performed for each 

exchange member’s principal orders, the 

combination of agency and riskless 

principal orders, as well as their overall 

order flow. 

The concept of a ‘‘pro-rata HHI’’ is 

introduced to serve as a benchmark 

which encapsulates the inherent 

disparities in market shares among 

exchange. As with the member HHI, a 

pro-rata HHI is computed for each 

individual exchange member and 

category of order flow using the relative 

market shares of exchanges, this 

contrasts with the member HHI 

computation which is calculated with 

the relative share of the member’s order 

flow. The pro-rata HHI has a 

straightforward interpretation; it reflects 

what an individual member’s HHI 

would have been had it distributed its 

order flow across its member exchanges 

in proportion to their relative market 

shares.151

Deviations in the share of order flow 

routed to an exchange from the relative 

market weight can either contribute to 

increasing or decreasing member HHI 

relative to the pro-rata HHI.152 Most 

order flow deviations which contribute 

to higher order flow concentration are 

associated with maker-taker exchanges 

with more pricing tiers and these 

deviations are positive and of larger 

magnitude relative to those of other 

exchanges. In contrast, deviations in 

order flow which contribute to lower 

HHI measures tend to be negative for the 

maker-taker exchanges with the highest 

number of pricing tiers and are positive 

for the other exchanges. This is to say 

that when broker-dealers concentrate 

their order flow, they tend to increase 

the share of order flow sent to those 

exchanges with more pricing tiers, 

consistent with the notion that tiering 

promotes the concentration of order 

flow. Table 6 reports each exchange’s 

share of the total order flow deviations 

which either increase or decrease 

concentration and the volume-weighted 

average size of the deviation for each 

exchange. 

BILLING CODE 8011–01–P 


ddrumheller on DSK120RN23PROD with PROPOSALS2
76310 Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 

BILLING CODE 8011–01–C 3. Routing Incentives and Potential 

Conflicts of Interest 

In the case of agency-related volume 

the use of volume-based pricing tiers by 

exchanges introduces a potential 

conflict of interest between exchange 

members and their non-member 

customers without exchange access. 


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Table 6 - Order flow deviation from relative market weights and shares of deviating order flow 

The following table splits deviations in exchange member order flow from their relative market 

benchmark into those which increase or decrease member order flow concentration using the 

sample of CAT data for the month of Jan. 2023 described in Table 4." Member order flow share is 

calculated as the number of shares executed by an exchange member in any capacity (e.g. 

principal, agency, riskless principal) during regular trading hours over the month of Jan. 2023 

divided by the total number of shares the exchange member executed across all national stock 

exchanges during regular trading hours over the month ofJan. 2023. The share volume-weighted 

average deviation (in percentage points) for deviations which increase concentration and decrease 

concentration are reported under columns "Avg Deviation From Market", this is the difference 

between the percentage of order flow sent to the exchange by members and the relative market 

share of that exchange for that member. Columns titled "Share of Deviating Flow" denotes the 

share of total deviating order flow which either increases or decreases member concentration. 

Increase Concentration Decrease Concentration 

Avg Deviation Share of Avg Deviation Share of 

Exchange # of Tiers Deviating Deviating From Market Flow From Market Flow 

NYSE 93 13.2% 20.7% -3.7% 15.3% 

NSDQ 74 19.2% 39.8% -4.8% 50.6% 

ARCA 72 7.4% 13.4% -3.3% 14.2% 

BZX 26 2.3% 3.9% -1.6% 0.9% 

EDGX 19 9.3% 11.9% -2.8% 6.8% 

MEMX 13 3.2% 3.7% 1.2% 0.6% 

AMER 10 -0.2% 0.0% 1.7% 0.4% 

PEARLEQ 8 2.3% 0.3% 2.9% 2.8% 

PSX 4 3.4% 0.3% 6.0% 1.9% 

BX 20 -0.3% 0.0% 1.7% 0.5% 

NSX 11 -0.5% 0.0% 2.7% 1.2% 

BYX 11 -0.6% 0.1% 2.2% 1.8% 

EDGA 8 3.6% 1.2% 1.9% 1.2% 

IEX 0 7.4% 4.8% 1.9% 1.7% 

CHX 0 -0.1% 0.0% 1.0% 0.1% 

LTSE 0 0.0% 0.0% 0.0% 0.0% 

• For each exchange member (index i) a deviation from the relative market weight for an exchange (index}) 

is defined by the difference dy=Sy-My where Sy denotes the share of member order flow and My denotes the 

relative market weight. Share of member order flow Sy is calculated as the order flow executed by the 

member i on exchange j divided by the total order flow executed by member i across all the exchanges they 

are a member of. The relative market weight My is calculated as the total order flow executed on exchange 

j divided by the sum of total order flow executed across all the exchanges for which i is a member. N; 

denotes the number of exchanges that the exchange member i is a member of. Conditional on My> JIN;, a 

deviation dy contributes to a decreased member HHI if 2(My-JINJ<dy<O and increases it otherwise. 

Conditional on My< JIN;, a deviation dy contributes to a decreased member HHI if O<dy<2 (My-JIN J and 

increases it otherwise. In the case My= JIN; then any deviation dy>O would contribute to a greater member 

HHI. The size of a deviation is calculated as the product between the deviation dy and total share volume 

member i executed on the exchange. 
Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 76311 

153The overall member HHIs for principal order 

flow is 0.21 whereas it is 0.24 for agency+riskless 

principal order flow; relative to their benchmark 

pro-rata HHI the principal member HHI is 31% 

greater whereas agency member HHI is 11% greater 

than its benchmark. See infra Table 7. The 

benchmark pro-rata HHIs differ between the two 

since the principal pro-rata HHI is computed using 

relative market weights taking only into account 

principal orders whereas the relative market 

weights used for the agency pro-rata HHI are 

computed using only agency or riskless principal 

order flow. For a more detailed discussion of the 

calculations of member and pro-rata HHIs see supra 

section IV.B.2. 

154The Commission finds that the member HHI 

for principal order flow computed using only 

liquidity taking orders was 0.19 whereas it was 0.24 

for agency order flow. When member HHI is 

calculated using only liquidity making orders it was 

0.24 for principal order flow and 0.26 for agency 

order flow. 

155Contracting solutions/payment arrangements 

between a broker and its customer may mitigate but 

not fully eliminate the incentive conflict. Investors 

may have difficulty in fully assessing execution 

quality, and broker-dealers may sacrifice execution 

quality on agency order flow, especially in 

situations where firms have concentrated sufficient 

principal order flow on an exchange to be near toptier thresholds. If additional agency flow helps the 

broker-dealer cross the threshold for achieving a 

desirable tier, the broker-dealer has an incentive to 

direct agency orders to the exchange. In doing do, 

the broker-dealer could be trading off limit order 

execution quality for agency orders and potential 

rebate revenue for both agency and principal orders. 

Meanwhile, investors typically only partially accrue 

the rebates/transaction fees on agency orders under 

negotiated arrangements with their brokers. 

156The member would still be subject to certain 

restrictions such as the Order Protection Rule. 

157See Costis Maglaras, Ciamac Moallemi, and 

Hua Zheng, ‘‘Optimal Execution in a Limit Order 

Book and an Associated Microstructure Market 

Impact Model,’’ (working paper May 13, 2015), 

available at https://papers.ssrn.com/sol3/ 

papers.cfm?abstract_id=2610808 (retrieved from 

SSRN Elsevier database). 

158Execution quality of non-marketable orders 

decreasing on exchanges with high take-fees is 

expected as liquidity takers tend to route their 

marketable orders to venues with the lowest take 

fees, all else equal. 

159See James J. Angel, Lawrence E. Harris, and 

Chester S. Spatt, ‘‘Equity Trading in the 21st 

Century’’, 1 Q. J. Fin. 1 (2011). 

160See Robert Battalio, Shane Corwin, and Robert 

Jennings, ‘‘Can Brokers Have It All? On the Relation 

between Make-Take Fees and Limit Order 

Execution Quality’’, 71 J. Fin. 2193 (Oct. 2016). 

161See supra note 155. 

Volume-based pricing for agency order 

flow may give exchange members an 

incentive to route customer order flow 

to certain exchanges for the purposes of 

tier qualification rather than 

maximizing other aspects of execution 

quality. The Commission finds evidence 

that agency and riskless principal order 

flow is overall more concentrated than 

principal order flow; however, relative 

to the relevant benchmark HHI, 

principal order flow is more 

concentrated.153 However, Commission 

analysis suggests that the lower 

principal concentration is due in part to 

less concentration in marketable orders 

compared to similar agency-related 

order flow.154 Additionally 

concentration of order flow may not 

always be contrary to customer 

interests. It is therefore unclear if 

differences in order flow concentration 

between principal and agency order 

flow are attributable to broker-dealers 

acting on the conflict of interest. 

The potential for a conflict of interest 

emerges since broker-dealers can 

typically enjoy the benefits of the 

qualifying for a better pricing tier as a 

result of concentrating customer order 

flow without having to internalize the 

costs of that concentration.155 Exchange 

members directly benefit from 

qualifying for a better tier since the 

preferential pricing would not only 

extend to their own principal orders but 

would also improve their ability to 

attract more customer flow by allowing 

them to pass through more savings. The 

concentration of agency order flow has 

the potential to be costly to the 

customers of exchange members if it 

comes at the cost of other factors of 

execution quality such as fill rates, time 

to execution, the availability of betterpriced liquidity, and the likelihood of 

being adversely selected, each of which 

may vary across exchanges. However, it 

may not always be the case that 

concentration for the purpose of tier 

qualification comes at the expense of 

the customer, particularly if the member 

passes through large proportions of the 

cost savings from the tier qualification, 

then the reduction in costs for 

customers may on-balance leave the 

customer better off. 

In contrast, when exchange members 

trade for their own account using 

principal orders, the incentives of the 

members are more straightforward. A 

member can choose to route an order to 

a particular exchange primarily out of a 

desire to make a profitable trade or to 

concentrate order flow and obtain a 

volume discount at its own 

discretion.156

Results from relevant academic 

research suggest that routing customer 

order flow in a rebate maximizing 

manner comes at the cost of execution 

quality. Brokers routing limit orders 

may also be motivated by liquidity 

rebates. Different sources document that 

limit order execution quality tends to be 

lower on exchanges with high take fees 

and low make rebates.157 Execution 

quality can be measured along the 

different dimensions of fill rates, 

execution speeds, realized spreads, and 

adverse selection costs. Higher access 

fees tend to be associated with lower fill 

rates and execution speeds for nonmarketable orders, and standing limit 

orders directed to high take-fee 

exchanges tend to face greater adverse 

selection costs.158 One academic paper 

makes the claim that brokers typically 

route customer limit orders to 

exchanges where the broker will receive 

a rebate and that the rebate is typically 

not passed on to the customer.159

Another study examining four high 

volume retail brokers which appear to 

route all nonmarketable limit orders in 

a manner consistent with maximizing 

rebates find that the expected rebate 

revenue offered by high take-fee venues 

may be insufficient to justify the 

opportunity cost, or potential loss in 

execution quality concurrently available 

on low take-fee venues.160

Member broker-dealers may have an 

incentive to profit to the detriment of 

the customer by choosing to concentrate 

agency orders onto a limited number of 

specific exchanges not because routing 

to those specific exchanges is 

necessarily in the interests of the 

customer but rather to increase the 

member’s chances of qualifying for a 

particular volume-based pricing tier 

without necessarily passing some or all 

of the benefits of doing so back to the 

customer.161

There are forces in the market for 

equity brokerage services that serve to 

limit the extent to which this conflict of 

interest can alter behavior. For example, 

because of the Order Protection Rule, a 

broker-dealer looking to concentrate 

order flow on a particular exchange 

could not do so if doing so resulted in 

trading through the NBBO. In addition, 

the Commission understands that it is 

common for some institutional 

customers to monitor their brokerdealers on a trade-by-trade basis which 

would be expected to influence order 

routing decisions. 


ddrumheller on DSK120RN23PROD with PROPOSALS2
76312 Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 

162A possible explanation of this could be that 

there may be a greater degree of correlation between 

agency trading decisions than between trading 

principal trades. 

163 It is worth noting that a broker-dealer can still 

route orders through to an exchange of which it is 

not a member but would have to do so through an 

intermediary which is a member of the target 

exchange, and that order flow would count towards 

the trading volume of the intermediary member 

rather than the original broker-dealer. 

164 If broker-dealers all choose to concentrate 

order flow in the exact same proportions on the 

same choice of exchanges, then the market and 

member HHI would be equal. If instead brokerdealers chose to concentrate their order flow on 

different exchanges then the difference between 

market and member HHI would be large. 

165Letter from Tyler Gellasch, President and CEO, 

Healthy Markets Association to Mr. Brent J. Fields, 

TABLE 7—EXCHANGE MEMBER AND PRO-RATA HHI FOR OVERALL, AGENCY OR RISKLESS PRINCIPAL, AND PRINCIPAL

ORDER FLOW

[This table uses a sample of CAT data of NMS stocks traded on the national equities exchanges for Jan. 2023 and reports share volume-weighted measures of market and member HHI values using all, agency-related, and principal order executions.a See Table 4 for a description of 

how exchange members are identified as well as how agency, riskless principal, and principal transactions are identified. The table also reports the percentage difference between member and pro-rata HHIs; this is calculated as the difference between the member HHI and prorata HHI divided by the pro-rata HHI. Also reported are the share volume-weighted average HHI measures for different order capacities 

using only liquidity taking orders (Remove) and liquidity making orders (Add). The CAT liquidity categories specify if the side of the trade 

was adding or removing liquidity. As the HHI measurement is influenced by the number of entities involved in its calculation, market and 

member HHIs are also separately calculated among broker-dealers who are members of many (>10) and few (<=10) exchanges.] 

Order capacity Pro-rata HHI Member HHI % Difference HHI 

(remove) 

HHI 

(add) 

Overall (100%) ............................ All ................................................................ 0.18 0.20 16 0.18 0.23 

Agency Or Riskless Principal ...................... 0.22 0.24 11 0.24 0.26 

Principal ....................................................... 0.16 0.21 31 0.19 0.24 

>10 Exchanges (95%) ................. All ................................................................ 0.16 0.18 14 0.16 0.20 

Agency Or Riskless Principal ...................... 0.18 0.20 11 0.19 0.22 

Principal ....................................................... 0.15 0.19 32 0.18 0.22 

<=10 Exchanges (5%) ................ All ................................................................ 0.48 0.61 27 0.57 0.61 

Agency Or Riskless Principal ...................... 0.69 0.78 12 0.76 0.79 

Principal ....................................................... 0.38 0.48 29 0.45 0.49 

aFor a more detailed discussion of the calculations of member and pro-rata HHIs see section IV.B.2. 

Table 7 reports the volume-weighted 

average market and member HHIs 

derived from the individual exchange 

members. Consistent with section 

IV.B.2, individual members appear to be 

more concentrated (0.20) than would be 

expected by the relative market shares 

of the exchanges (0.18). Both market and 

member HHIs computed using agency or 

riskless principal trades are greater than 

they are when using only principal 

order flow in absolute terms. However, 

when measured relative to their 

benchmarks, agency related member 

HHI is only 11% greater than the prorata HHI whereas principal member HHI 

is 31% greater.162 Broker-dealers 

typically have more discretion when 

routing non-marketable orders since the 

routing of non-marketable orders is not 

directly constrained by the Order 

Protection Rule. Therefore, the fact that 

the difference between agency-related 

and principal HHIs appears to be 

smaller when only considering the 

execution of non-marketable limit 

orders suggests that the observed 

differences in concentration between 

agency-related and principal order flow 

may not be driven by routing decisions 

taken where broker-dealers have the 

most discretion. 

As the HHI measurement is 

influenced by the number of entities 

involved in its calculation, market and 

member HHIs are separately calculated 

among broker-dealers who are members 

of many (>10) and few (<=10) 

exchanges. This approach ensures a 

more accurate representation of market 

concentration since the average HHI 

could be skewed by instances where the 

member HHI is calculated over a low 

number of exchanges. For instance, the 

HHI will, by definition, be equal to one 

when the broker-dealer is a member of 

a single exchange meaning that 100% of 

its order flow is executed on that single 

exchange.163 Consistent with this, Table 

7 shows that the various HHI measures 

are generally greater when calculated for 

broker-dealers with 10 or fewer 

exchanges of which they are a member. 

For the subset of broker-dealers with 10 

or fewer exchanges the differences 

between principal and agency 

concentration measures are greater. 

While agency-related order flow 

appears to be more concentrated than 

principal order flow it deviates less 

from its respective benchmark pro-rata 

HHI measure than principal order flow. 

This result suggests that the brokerdealers who concentrate their principal 

order flow do so on a greater variety of 

venues whereas agency order flow 

across broker-dealers should 

concentrate more on the same 

exchanges across broker-dealers.164 As 

the pro-rata HHI encapsulates 

commonalities in the distribution of 

order flow, larger deviations from the 

pro-rata HHI suggest that distribution of 

order flow is less dependent on those 

commonalities. For this reason, the 

Commission believes principal order 

flows are likely to be more responsive 

to any changes in the market. 

4. The Market To Provide Exchange 

Access 

Broker-dealer exchange members 

compete to provide access to the 

exchanges for investors, as well as for 

proprietary traders and other brokerdealers who give up orders to an 

exchange member. There is significant 

variation in the size of the exchange 

members, as measured by total order 

flow. In each of these markets, volumebased transaction pricing for agencyrelated volume may provide a 

competitive advantage to the larger 

exchange members. 

a. The Current Effect of Volume-Based 

Tiers on the Market for Broker-Dealer 

Services 

The tiered transaction pricing 

schedules create competitive advantages 

for high-volume broker-dealers in the 

market to provider brokerage services to 

investors. These tiered schedules may 

also be contributing to a trend of 

increased concentration in the executing 

broker industry. 

The current equities exchange tiered 

transaction pricing schedules create 

differences in the fees and rebates 

applied across members. Tiered 

transaction pricing currently affords 

high-volume broker-dealers 

substantially cheaper trading, placing 

them at a competitive advantage over 

the smaller firms. One commenter 

suggested that ‘‘[a] smaller firm’s trading 

costs for any given trade on an exchange 

may be 30% or more of the costs of a 

larger competitor—for the exact same 

trade.’’ 165 Lower-volume exchange 


ddrumheller on DSK120RN23PROD with PROPOSALS2
Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 76313 

Secretary, Commission, dated Nov. 13, 2018, at 5 

(‘‘Healthy Markets 2018 Letter’’), available at 

https://www.sec.gov/comments/s7-03-20/s70320- 

7235195-217095.pdf. 

166See, e.g., Chester Spatt, ‘‘Is Equity Market 

Exchange Structure Anti-Competitive?’’ at 7 (Dec. 

28, 2020) available at https://www.cmu.edu/tepper/ 

faculty-and-research/assets/docs/anti-competitiverebates.pdf and at 5 (describing rebate pricing tiers 

based upon relative volume as ‘‘advantaging large 

vs. small brokers’’ and citing a letter from the 

Honorable Ted Budd, the Honorable Alex Mooney, 

and the Honorable Ann Wagner, Congress, to 

Chairman Jay Clayton, Commission, dated Jan. 31, 

2020 for its criticism of the role of pricing tiers in 

disadvantaging small brokers), and Healthy Markets 

2018 Letter, supra note 165, at 5, observing that as 

lower-volume and medium-sized exchange 

members pay relatively higher transaction fees (and 

receive relatively lower rebates), they may be crosssubsidizing the exchange transaction pricing 

benefits enjoyed by high-volume broker-dealers. 

The sentiment that the only high-volume exchange 

member’s transaction prices are heavily subsidized 

is also expressed by IEX in ‘‘Why Exchange Rebate 

Tiers are Anti-Competitive’’, available at https://

www.iex.io/article/why-exchange-rebate-tiers-areanti-competitive. 

167Chester Spatt, ‘‘Is Equity Market Exchange 

Structure Anti-Competitive?’’, supra note 166, at 7. 

168Remarks of Chris Concannon, supra note 3, 

Transcript at 74–75. 

169Healthy Markets 2018 Letter, supra note 165, 

at 5. 

170Norges Bank comment letter ‘‘Re: Notice of 

Proposed Rule on Market Data Infrastructure, 

Securities Exchange Act Release No. 88216 (Feb. 14, 

2020) (File No. S7–03–20)’’, dated July 15, 2020, at 

3, available at https://www.sec.gov/comments/s7- 

03-20/s70320-7422691-219826.pdf. 

171See Securities Industry & Financial Markets 

Association, An Analysis of Market Data Fees, 

available at https://www.sifma.org/resources/ 

general/an-analysis-of-market-data-fees/. 

172See U.S. Institutional Equity Trading Study 

(Feb. 2021), available at https://assets.bbhub.io/ 

professional/sites/10/2021_02-Market-StructureBuyside-Survey-US.pdf. 

173See id. 

174Norges Bank comment letter ‘‘Re: Notice of 

Proposed Rule on Market Data Infrastructure, 

Securities Exchange Act Release No. 88216 (Feb. 14, 

2020) (File No. S7–03–20)’’, dated July 15, 2020, at 

3, available at https://www.sec.gov/comments/s7- 

03-20/s70320-7422691-219826.pdf. 

175See U.S. Securities and Exchange Commission 

Fiscal Year 2024 Congressional Budget Justification, 

available at https://www.sec.gov/files/fy-2024- 

congressional-budget-justification_final-3-10.pdf, 

which reports there being 3,538 registered brokerdealers in 2022 which is down from the 4,450 

registered broker-dealers in 2015. See U.S. 

Securities and Exchange Commission Fiscal Year 

2015 Congressional Budget Justification, available 

at https://www.sec.gov/about/reports/ 

secfy15congbudgjust.pdf. 

176The use of relative volume thresholds based 

on total consolidated volume reinforces the 

transaction pricing advantages of high-volume 

broker-dealers. If exchange transaction pricing 

qualifications were based on absolute volume 

thresholds, it could increase the number of lowervolume members that benefit from rebates. In 

contrast, relative volume qualifications effectively 

put broker-dealers in a race against each other. 

177For example, hedge funds that trade large 

volumes would be directly impacted by the size of 

exchange transaction rebates if they have negotiated 

pass-through arrangements with the sell-side 

broker-dealers they use to access exchanges, 

through which they pay on a ‘‘cost plus’’ basis. 

Since the exchange transaction rebates would flow 

back to these investors, higher exchange rebates 

incentivize hedge funds to direct order flow to the 

top-tiered broker-dealers. 

178One lower-volume broker-dealer’s expressed 

concerns to the Commission that the decrease in the 

number of brokers is reflective of the lower-volume 

broker-dealers’ inability to qualify for better volume 

discounts. Healthy Markets 2018 Letter, supra note 

165, at 5. 

members may be providing a subsidy for 

a handful of the high-volume 

members.166 One exchange group 

suggested that its highest volume 

members receive rebates exceeding the 

trading fees, data, and connectivity fees 

combined.167 A representative of one 

exchange group has stated that ‘‘[there 

are just the] top 10 firms across our four 

exchanges by market share. [. . .] Five 

of the top 10 get a check from us after 

the costs of their connectivity and 

market data. So we are cutting them a 

check monthly after their costs. [. . . At 

the same time, the] top 10 firms on our 

exchange eat up 50 percent of the 

capacity on our exchanges.’’ 168 While 

the highest volume traders are either 

trading at heavily discounted rates or 

making a profit from exchange 

transaction rebates, the revenue to 

supply such discounts may come, in 

part, from lower-volume broker-dealers 

who do not qualify for volume 

discounts.169

There has been increased 

concentration in the executing broker 

industry in recent years.170 A number of 

factors may be contributing to this 

trend. According to an industry source, 

data and connectivity costs have been 

trending upwards,171 which increases 

the fixed costs of being an executing 

broker. In contrast, broker commission 

pools and rates that have long been in 

decline because, as some broker-dealers 

have become more efficient through 

automating most trades, competition for 

customers forced other broker-dealers to 

streamline or offer price cuts.172 In 

addition, high-volume broker-dealers 

may be better positioned to attract 

customers through performance along 

dimensions other than commission. For 

example, high-volume broker-dealers 

may be better equipped with 

algorithmic tools and other technologies 

that facilitate execution quality, or they 

may be better positioned to bundle 

execution services with other offerings, 

such as research. According to one 

survey from 2021, because of the large 

brokers’ various perceived strengths, 

28% of buy-side asset managers 

anticipate doing more business with 

high-volume brokers versus only 10% 

who expected less.173 In sum, increasing 

concentration in the broker/dealer space 

hints at competitive pressure to 

constrain fees and ‘‘barriers to entry 

based on necessary scale to be able to 

absorb the fixed costs of infrastructure, 

market data and connectivity.’’ 174 The 

number of registered broker-dealers 

declined by over 20% between 2015 and 

2022, or by close to 1,000 from an initial 

value of 4,450 in 2022.175 The decline 

in the number of broker-dealers is 

consistent with the Commission’s 

understanding that the broker-dealer 

community has seen no salient growth 

of nascent firms in recent years. 

Volume-based transaction pricing may 

further contribute to this trend of 

increased concentration. Under volumebased exchange transaction pricing, the 

top volume broker-dealers’ lower 

trading costs give them an advantage 

when competing for customers against 

smaller members.176 Specifically, 

investments in infrastructure (e.g., 

trading algorithms), connectivity (low 

versus high latency), and market data 

tend to be fixed costs that do not scale 

in proportion of trading volume. Highvolume broker-dealers tend to have 

lower trading costs, in part due to 

volume-based pricing, which better 

position them to offer lower 

commissions or fees.177 If these lower 

fees allow them to attract greater order 

flow from customers and non-member 

broker-dealers, they will be able to 

attain more favorable pricing tiers. 

Thus, volume-based transaction 

discounts create a self-reinforcing cycle 

that amplifies the competitive advantage 

of the members with the highest existing 

volumes. This self-reinforcing cycle may 

be further exacerbated to the extent to 

which lower-volume exchange 

members, or their customers, find it 

more economically viable to route 

orders through a higher volume 

exchange member which can qualify for 

more preferential pricing tiers. Some 

observer(s) express concern that 

volume-based exchange transaction 

pricing that favors the high-volume 

broker-dealers helps to erect significant 

barriers to entry for lower-volume 

broker-dealers.178

Broker-dealers may be motivated to 

offer lower commission fees or partially 

pass through their transaction price 

advantages, in part because certain 

classes of investors are sensitive to 

changes in their trading costs or cumrebate commission rates. Lower broker 

commission rates may provide 

incentives for sell-side institutional 

customers to place more orders through 

the broker-dealer providing liquidity, as 

opposed to pursuing other strategies 

such as taking liquidity, posting the 

same order on dark pools, or using 

special order types. Likewise, 

proprietary trading firms are known to 

change their trading patterns with 


ddrumheller on DSK120RN23PROD with PROPOSALS2
76314 Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 

179See U.S. Institutional Equity Trading Study 

(Feb. 2021), available at https://assets.bbhub.io/ 

professional/sites/10/2021_02-Market-StructureBuyside-Survey-US.pdf. 

180See Daniel Aisen, ‘‘Connecting to the Stock 

Market (Choosing a DMA Partner)’’ (Mar. 2021), 

available at https://medium.com/prooftrading/ 

connecting-to-the-stock-market-choosing-a-dmapartner-9176ccd3ce84 (‘‘[i]t’s gotten to the point 

where if you trade a fair amount of volume, you can 

probably find a good DMA provider who will offer 

you the service for free [. . .]’’). 

181See supra section IV.B.4.b for a discussion of 

the benefits for small broker-dealers to send orders 

via high-volume exchange members. 

182Norges Bank comment letter ‘‘Re: Notice of 

Proposed Rule on Market Data Infrastructure, 

Securities Exchange Act Release No. 88216 (Feb. 14, 

2020) (File No. S7–03–20)’’, dated July 15, 2020, at 

3, available at https://www.sec.gov/comments/s7- 

03-20/s70320-7422691-219826.pdf. 

183Exchanges can extract more profits from data 

sales by offering ‘‘low-latency’’ access to data feeds, 

such as additional monthly fees for the opportunity 

to co-locate their computers in physical proximity 

to the exchange’s own computer. This practice is 

known as ‘‘co-location’’, and co-location fees alone 

can cost traders tens of thousands per month. See 

New York Stock Exchange’s Connectivity Fee 

Schedule, available at https://www.nyse.com/ 

publicdocs/Wireless_Connectivity_Fees_and_

Charges.pdf. Co-location fees are separate from fees 

for accessing individual exchange’s proprietary 

data, which can amount to thousands per month. 

See An Analysis of Market Data Fees (Aug. 2018), 

available at https://www.sifma.org/wp-content/ 

uploads/2019/01/Expand-and-SIFMA-An-Analysisof-Market-Data-Fees-08-2018.pdf. According to 

IEX’s description of its market data fees, the 

maximum monthly cost for ‘‘low-latency’’ (superfast) data subscription is around $3,500. IEX’s 

report on its market data fees is available at https:// 

www.sec.gov/rules/sro/iex/2022/34-96331.pdf. 

184See An Analysis of Market Data Fees (Aug. 

2018), available at https://www.sifma.org/wpcontent/uploads/2019/01/Expand-and-SIFMA-AnAnalysis-of-Market-Data-Fees-08-2018.pdf. 

changes in broker commission rates. 

One reason for their commission price 

responsiveness, the Commission 

understands, is that some active 

proprietary trading firms may profit 

from exchange transaction rebates on 

some exchanges. Comparing the relative 

sizes of exchange transaction rebates 

and broker commissions, average broker 

commissions tended to range from 0.65 

to 2.67 cents per share in 2020.179 Since 

the base tiers for exchange rebates tend 

to be capped at roughly 0.3 cents per 

share, exchange transaction rebates for 

high-volume broker-dealers could be 

more than 10 percent of average 

commissions. Considering that 

exchange transaction rebates from highvolume members can be non-trivial 

compared to the average broker 

commissions, high-volume brokerdealers may effectively attract order 

flow by sharing portion of the rebates or 

offering lower commissions. While the 

current trend of consolidation may be 

concurrent with lower prices for 

investors and better service, increased 

market power among the high-volume 

broker-dealers could eventually lead to 

increased costs for investors. When the 

dominance of high-volume brokerdealers becomes sufficiently heightened, 

it is conceivable that dominant brokerdealers may eventually choose to 

exercise market power more 

aggressively. As a manifestation of the 

more general principle that a monopoly 

(or players with market power) tends to 

charge prices higher than what is 

socially optimal, large broker-dealers 

may raise commission fees. Doing so 

may result in a decline of trading 

volume facilitated by broker-dealers and 

a shrinkage of total surplus across 

investors. 

b. The Market To Provide Exchange 

Access to Non-Member Broker-Dealers 

Substantial differences in the 

exchange transaction pricing applicable 

across members with different volume 

echoes in the dramatic difference in size 

across those members. One measure of 

the dispersion of trading activities 

across members on an exchange is the 

coefficient of variation, applied to 

shares executed or total dollar volume. 

The coefficient of variation for memberlevel shares summarizes the standard 

deviation of firm’s total monthly shares 

relative to the average across members 

on an exchange. The coefficient of 

variation, or ratio of standard deviation 

to mean, ranges from 1.6 to 2.45 across 

the 16 exchanges for the month of 

January 2023. The coefficient of 

variation, applied to total dollar volume 

defined as shares times trade price, 

ranges from 1.48 to 3.11 across 

exchanges for the same month. For both 

measures of dispersion, the ratios 

suggest that the standard deviation of 

dollar volume is as large as the mean 

across all firms. Moreover, the standard 

deviation of dollar volume across 

members can be 3 times as large as 

within-exchange average. 

Higher rebate earned enables the 

largest exchange members to attract a 

disproportionate share of order flow 

from non-members, further exacerbating 

their competitive advantage over 

smaller exchange members. Pricing 

arrangements for non-member’s 

exchange access services can be ‘‘cost 

plus’’, meaning that all or a portion of 

the access fee and rebates get passed on 

to non-members, with an additional fee 

for connecting to an exchange. 

Competition among direct market access 

(‘‘DMA’’) providers constrains the fee 

for non-members’ exchange access to a 

narrow band of 0.5 to 2 mils per share, 

and one source suggests that DMA 

providers may offer the service free.180

Considering that top tiers across 

exchanges lead to rebates exceeding 3 

mils, the cost for direct market access 

may be modest compared to the highest 

rebates and justifies non-members’ 

decisions to route through the largest 

exchange members. Large exchange 

members’ market power in DMA 

provision amplifies their competitive 

advantage over smaller exchange 

members, as the added liquidity accrued 

from non-members helps the exchange 

members achieve even more favorable 

tiers. 

In addition to competing for order 

flow from investors, broker-dealers also 

compete to provide sponsored access to 

exchanges for other entities, such as 

broker-dealers or proprietary traders. 

Executing broker-dealers also compete 

to receive order flow from other brokers 

who do not interact with the exchanges 

themselves. Through direct market and 

sponsored access services, investors and 

other lower-volume broker-dealers 

choose to route orders through highvolume broker-dealers. Among the 

benefits from doing so,181 the current 

exchange transaction price tiers allow 

the lower-volume broker-dealers to 

share in some or all of the volume-based 

tiers of high-volume broker-dealers if 

they receive pass-through exchange 

transaction pricing, subject to the costs 

they pay to the sponsor for those 

services. Thus, within these markets, 

high-volume broker-dealers have certain 

competitive advantages over lowervolume broker-dealers that helps to 

account for their size. While a number 

of factors are involved, volume-based 

transaction pricing for agency-related 

volume contributes to the competitive 

advantages of high-volume brokerdealers. 

One reason that lower-volume brokerdealers and proprietary traders that are 

not broker-dealers may rely on the 

broker-dealers that are exchange 

members to provide access and 

connectivity to exchanges is the 

substantial fixed costs associated with 

exchange connectivity and data. Market 

data and connectivity fees, together with 

exchange membership, have increased 

substantially in recent years and can be 

significant enough to raise entry cost 

concerns.182 While the cost to maintain 

exchange membership tends to fall 

between $5,000 and $10,000 on the 

exchanges with the largest market share, 

proprietary exchange market data fees 

and fees for the most closely-connected 

connectivity to the exchange’s matching 

engine can range from thousands to tens 

of thousands or more per month.183 One 

study reports that the fees for depth of 

book data on some exchanges have 

increased more than tenfold from 2010 

to 2018,184 while a commenter on a 


ddrumheller on DSK120RN23PROD with PROPOSALS2
Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 76315 

185See Letter from David L. Cavicke, Chief Legal 

Officer, Wolverine Trading LLC, Wolverine 

Execution Services LLC, and Wolverine Trading 

Technologies LLC to Mr. Brent J. Fields, Secretary, 

Commission, dated Dec. 23, 2016. 

186For example, pricing arrangements between 

members and non-members for sponsored and 

direct market access services can be ‘‘cost plus,’’ 

meaning that the sponsoring broker-dealer passes 

through to the non-member customer all or a 

portion of the exchange transaction fees and rebates 

for which it qualifies, with an additional fee 

charged for connecting to an exchange. A 

sponsoring member whose total volume qualifies 

for a high tier would have more to offer through 

such arrangements than a lower-volume member. 

See Daniel Aisen, ‘‘Connecting to the Stock Market 

(Choosing a DMA Partner)’’ (Mar. 2021), available 

at https://medium.com/prooftrading/connecting-tothe-stock-market-choosing-a-dma-partner9176ccd3ce84. 187See id. 

188See supra section IV.B.4.a. 

189See supra note 7 and accompanying text. 

proposed exchange fee stated in 2016 

that fees for connectivity and colocation have also escalated during an 

overlapping time period.185

Moreover, high-volume exchange 

members’ size and scale affords them 

the resources that permit them to hire 

the expertise required to develop and 

use the smart order routing technologies 

necessary to trade competitively in the 

NMS stock market. Lower-volume 

market participants may lack the 

economies of scale to operate their own 

smart order routers, and may need to 

purchase those services from the highvolume broker-dealers that are exchange 

members. Some proprietary traders and 

lower-volume broker-dealers, who may 

otherwise be deterred from becoming 

members of and trading directly on the 

exchanges, can benefit from the highvolume exchange members’ access and 

sophisticated systems, and may 

otherwise find it difficult to grow their 

business or to compete on equal terms 

with those members. 

Another reason behind lower-volume 

broker-dealers’ and proprietary traders’ 

reliance on exchange members may be 

that the smaller firms cannot 

individually qualify for the fee and 

rebate levels that exchanges offer to 

their high-volume exchange members. 

Rather than becoming members of and 

trading directly on exchanges, the 

smaller firms can benefit from sending 

orders to exchanges via high-volume 

exchange members to share in a portion 

of the larger members’ volume-based 

pricing advantage, subject to any costs 

or commissions.186 It is likely that 

volume-based transaction pricing 

creates an advantage for the highvolume broker-dealers in attracting such 

order flow. Because high-volume 

broker-dealers tend to qualify for the 

highest tiers, they effectively have lower 

costs when offering sponsored access or 

execution services to other brokers. 

Competition among these sponsored 

access and direct market access 

providers constrains the fee for nonmember’s exchange access to a narrow 

band of 0.5 to 2 mils per share, and 

some providers may offer the service for 

less.187 Considering that top tiers across 

exchanges lead to rebates exceeding 30 

mils, nonmembers’ cost for direct 

market access may be modest compared 

to the highest rebates and potential cost 

savings achieved. As with the market to 

provide broker-dealer services to 

investors, these lower costs lead to more 

volume from non-members. The brokerdealer is more able to qualify for the 

best tiers, further lowering costs and 

exacerbating its competitive advantage 

over lower-volume exchange members. 

c. The Dispersion of Member BrokerDealer Size 

The fact that there are a range of 

different sizes by order volume for 

exchange members is an assumption 

that enters into the analysis that the 

Commission is presenting on the 

economic effects of the proposed rule. 

In this section, the Commission presents 

analysis showing the existence of such 

a dispersion in broker-dealer size. 

One measure of the dispersion of 

trading activities across members on an 

exchange is the coefficient of variation, 

applied to shares executed or total 

dollar volume. The coefficient of 

variation for member-level shares 

summarizes the standard deviation of 

firm’s total monthly shares relative to 

the average across members on an 

exchange. The coefficient of variation, 

or ratio of standard deviation to mean, 

ranges from 1.6 to 2.45 across the 16 

exchanges for the month of January 

2023. The coefficient of variation, 

applied to total dollar volume defined 

as shares times trade price, ranges from 

1.48 to 3.11 across exchanges for the 

same month. Both measures of 

dispersion suggest that the distribution 

of member’s trading level has 

considerable variability about its 

exchange’s mean, with the standard 

deviation of dollar volume being as 

large as the mean across all exchanges. 

Moreover, the standard deviation of 

dollar volume across members can be 3 

times as large as within-exchange 

average. 

For further evidence of the large 

disparities in trading activities across 

broker-dealers, one can compare order 

volume of exchange members at the 

25th percentile and at the 75th 

percentile on each exchange. For trading 

activities measured by shares executed 

in the month of January 2023, shares 

from exchange members at the 25th 

percentile can be as little as less than 

1% of the shares from members at the 

75th percentile on a single exchange. 

The proportion of exchange order flow 

attributable to members between the 

25th percentile and 75th percentile is no 

more than 12 percent on each exchange. 

Comparable ranges apply to trading 

activities measured by a member’s total 

dollar volume defined as shares times 

trade price. Comparing the ratios of the 

25th percentile to 75th percentile across 

exchanges, dollar volume from the 

exchange member at the 25th percentile 

is as small as less than 1% and no 

greater than 12% of dollar volume at the 

75th percentile. When one restricts the 

analysis of order flow to liquidityadding activities on maker-taker 

exchanges, order flow is similarly 

concentrated. On several exchanges, the 

member from the 25th percentile of the 

dollar volume (or shares) distribution 

executed trades that are less than 1% of 

the dollar volume (or shares) of the 75th 

percentile member on the same 

exchange. Across exchanges, the ratio of 

the 25th to 75th percentile trading 

activities is no more than 10%. The 

substantial differences in trading 

activities between high-volume and the 

tail of lower-volume exchange members 

are consistent with an earlier 

observation that the broker-dealer space 

is highly concentrated.188

5. Lack of Tier Transparency 

There is no public transparency about 

the number of firms that qualify for the 

different tiers across exchange 

transaction pricing schedules. This lack 

of transparency may limit the ability of 

members, other exchanges, and the 

public to submit informed comment on 

exchange pricing proposals and draw 

conclusions about the effects of all 

exchange transaction pricing including 

volume-based transaction pricing tiers. 

Knowing how many exchange members 

qualify for different pricing tiers would 

provide interested parties with insight 

into how the costs and benefits afforded 

by volume-based tiers are distributed 

across exchange members. This 

knowledge would allow market 

participants to submit more informed 

comments to the Commission by 

allowing them to better compare the 

pricing they receive to their competitors 

and better ascertain if a pricing schedule 

disproportionately favors certain 

participants. 

Exchanges are required to provide 

information on their websites that detail 

the pricing schedules for trading on the 

exchange.189 These documents include 


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190See RBC Letter, supra note 19, at 8 (‘‘Our 

analysis identifies at least 1,023 pricing paths 

across the exchanges.’’). 

191See supra sections I.B and IV.B.1 (discussing 

volume-based pricing tiers). 

192See supra section I.B (discussing changes to, 

and general complexity of, pricing schedules). 

193See Healthy Markets Letter, supra note 165, at 

5. 

194 ‘‘Price discrimination’’ is a term of art in 

economics, meaning charging different prices to 

different segments of consumers, sometimes for 

identical goods or services. Under price 

discrimination, consumers could be segmented 

based on their choices of different goods or services. 

The practice of price discrimination is not 

equivalent to unfair discrimination in the legal 

sense. The welfare consequence of price 

discrimination is ambiguous and can vary across 

industry settings. However, a number of empirical 

papers have found that when restricting to a 

constant price, customers previously enjoying the 

lower prices are worse off and those enjoying higher 

prices are better off, relative to a world where firms 

can vary prices with the customers’ pricesensitivity. See, e.g., Igal Hendel, and Aviv Nevo, 

‘‘Intertemporal Price Discrimination in Storable 

Goods Markets’’, 103 Am. Econ. Rev. 2722 (2013); 

Guillermo Marshall, ‘‘Hassel Costs and Price 

Discrimination: An Empirical Welfare Analysis’’, 7 

Am. Econ. J.: Applied Econ. 123 (2015). 

195 It is worth acknowledging that while charging 

an ‘‘intermediate’’ price is a plausible outcome, it 

is by no means the only outcome. The Commission 

believes an ‘‘intermediate’’ price to be a likely 

outcome given the wide range of order volume 

across broker-dealers, described in supra section 

IV.B.4.c. See W. Kip Viscusi, Joseph E. Harrington, 

and David M. Sappington, Economics of Regulation 

and Antitrust 365–70 (5th ed. 2018), for a simple 

setting with a numerical example. Alternatively, 

when trading venues are optimally setting prices in 

standard screening settings with private ‘‘types’’ 

across customers, optimal contracts for trading 

venues implies price discrimination. See Patrick 

Bolton and Mathias Dewatripont, Contract Theory 

47–52 (2005), for a general reference. 

196This benefit may be, in part, a transfer from 

the large-volume broker-dealers, who would end up 

paying more under this pricing arrangement. See 

infra section IV.C.1.b.i (discussing costs to highvolume broker-dealers from this effect). 

197See Daniel Aisen, Connecting to the Stock 

Market (Choosing a DMA Partner), supra note 180. 

the various tiers that market participants 

might qualify for, along with the 

associated fee or rebate. 

The current transaction pricing 

practices of the exchanges in the market 

for NMS stocks is characterized by a 

large number of different pricing 

possibilities. These possibilities arise, in 

part, because fees and rebates for trades 

are often contingent on multiple factors 

including, the order types used in the 

trade, and whether the trade takes place 

in opening or closing auctions with 

additional discounts for volume-based 

tiers. The combination of the large 

number of pricing contingencies on 

many of the exchanges and the number 

of different exchanges in the market 

creates a large number of different 

pricing possibilities for market 

participants to consider when choosing 

where to route orders.190

The volume-based tiers 191 used in 

many exchange pricing schedules are 

generally based on a member’s trading 

volume relative to the market’s total 

trading volume in the month in which 

the market participant’s trades take 

place. This means that the member faces 

a degree of uncertainty during the 

month about the precise tier it will be 

able to achieve on the exchange during 

the month. 

The complexity and number of the 

various tiers, along with the frequency 

with which they change,192 creates the 

possibility that for some tiers, only a 

few market participants qualify in a 

given month. It may even be the case 

that some tiers only have a single 

market participant that ultimately 

qualifies for them in a given month on 

a specific exchange.193 If only one or a 

small number of members regularly 

qualify for a particular pricing tier it 

may suggest that an exchange’s pricing 

schedule is structured to reserve the tier 

for the benefit of particular members. 

Pricing tiers of this manner could serve 

to entrench the dominant position of 

some members and contribute to the 

competitive imbalances between 

exchange members. Because of the lack 

of transparency with regards to ex-post 

tier qualification, the public is unable to 

assess whether there are tiers for which 

only one or a few market participants 

qualify. The Commission believes that 

many market participants are not aware 

of whether such limited qualification for 

tiers occurs. 

C. Economic Effects 

1. Effect of the Proposed Ban on 

Volume-Based Tiers for Non-Principal 

Orders 

a. Benefits 

i. Benefits To Lower Volume Exchange 

Members 

We expect the proposal to yield some 

benefits to lower-volume exchange 

members, some of which would be 

passed on to investors who are their 

customers. In particular, to the extent 

that the differences in transaction fees 

would be less extreme under the 

proposed prohibition on volume-based 

pricing for agency-related volume in 

proposed Rule 6b–1(a), the proposed 

volume-based ban would result in 

benefits to lower-volume exchange 

members in the form of lower 

transaction fees and higher rebates. In 

response to the proposed prohibition of 

volume-based pricing for agency-related 

order flow, exchanges could set fees on 

agency-related orders that are between 

the current highest fees charged in the 

lowest volume tiers and the lowest fees 

charged in the highest volume tiers paid 

by the high-volume broker-dealers. Such 

an outcome is supported by results from 

the price discrimination and mechanism 

design literatures,194 applied to settings 

where trading platforms (i.e., firms 

making pricing decisions) face 

heterogeneous customers and may offer 

different prices depending on 

observable choices or observable 

customer characteristics. For models 

where firms may potentially sort 

customers based on volume, when 

comparing firm’s optimal choices under 

price discrimination and restricting to a 

uniform price, prohibiting price 

discrimination oftentimes results in the 

new, flat per unit fee falling within the 

current range of the lowest per unit fee 

and highest per unit fee.195 The context 

of non-volume based pricing among 

exchanges is more complex, as 

exchanges can condition prices on other 

broker-dealer characteristics. However, 

similar findings from the price 

discrimination literature may prevail, 

and price differentials across brokerdealers may be diminished under a 

volume-based ban. The smallest and 

medium-sized members, who currently 

pay higher transaction fees, would 

likely benefit from these ‘‘intermediate’’ 

prices, or prices that are less extreme 

relative to a setting where exchanges 

target low net transaction fees to highvolume broker-dealers and high fees to 

lower-volume broker-dealers.196

The proposed prohibition on volumebased pricing may result in an increase 

in agency order flow to medium-sized 

exchange members, due to their ability 

to divert business from direct market 

access customers. Under the current 

tiered pricing schemes, lower-volume 

broker-dealers with limited or no ability 

to route directly to exchanges are most 

likely to take advantage of the highvolume members’ connectivity and 

tiers. In particular, because direct 

market access (DMA) pricing tends to be 

‘‘cost plus,’’ 197 lower transaction fees/ 

higher rebates for the high-volume 

exchange members may translate into 

lower fees for sponsored broker-dealers. 

The proposed ban on volume-based 

tiers, which would limit transaction fee 

differentials between the high-volume 

broker-dealers and the remaining 

players, would also lessen the pricing 

advantage of high-volume members 

when competing for DMA customers. 

Hence one consequence of removing the 

high-volume exchange members’ tiered 

pricing advantage is that agency flow 

from direct market access customers 

may shift from the high-volume 


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Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 76317 

198See supra note 194 and associated text. 

199This calculation was performed by first 

tabulating the number of members contributing up 

to 99% of dollar volume for each exchange, and 

then takes the mean across exchanges. The counts 

are based on data from the Consolidated Audit 

Trail, for the month of Jan. 2023. 

200See supra section IV.B.3 (discussing this 

conflict of interest in greater detail). 

201See supra section IV.C.1.a.i discussing how 

the proposed ban on volume-based tiers for agency 

orders may reduce transaction fees paid by smaller 

executing brokers. 

202See infra section IV.D.2.b and Table 9 (for 

detailed discussion of the different scenarios 

discussed here and the underlying assumptions 

made). 

exchange members to the medium-sized 

exchange members. 

ii. Benefits to Investors 

Proposed Rule 6b–1(a) may benefit 

investors by increasing competition 

among exchange members. The 

advantages afforded to high-volume 

broker-dealers through volume-based 

exchange transaction pricing may favor 

a more concentrated market structure in 

the market for brokerage services in 

NMS stocks. The removal of volumebased pricing tiers for agency-related 

order flow would reduce the pricing 

advantage afforded to higher volume 

exchange members for having more 

customer order flow. Having the same 

pricing for agency-related order flow 

across differently sized members would 

allow lower-volume members to more 

effectively compete against highervolume members on the basis of passing 

on a higher proportion of collected 

rebates. In contrast, the likely changes 

in transaction fees and rebates, 

previously discussed in section 

IV.C.1.a.i, suggest lower cum-rebate 

transaction fees for small and medium 

sized broker-dealers under the proposed 

ban on volume-based tiers for agency 

flow, which lead to higher profit 

margins for such firms.198 Competition 

leading to a high proportion of rebates 

being passed through may benefit 

investors even in the scenario in which 

the proposed rule reduces the total 

amount of price-savings (higher rebates/ 

lower fees) available to be passed 

through to investors. 

The lower transaction fees for small 

and medium sized broker-dealers 

described in section IV.C.1.a.i might 

lead to higher profit margins for such 

firms. This in turn would lead to a 

lower propensity to exit the market for 

such firms, and a greater likelihood of 

new entrants. With more firms in the 

market for brokerage services in NMS 

stocks, competition to provide those 

services could increase, benefiting 

investors. 

Following the proposed ban on 

volume-based tiers, medium-sized 

exchange members may be better 

positioned to gain DMA customers, 

compared to lower-volume exchange 

members who are not well-equipped 

with fast connectivity and trading 

infrastructure. Based on staff 

experience, the Commission 

understands that roughly 30 brokerdealers across exchanges, including the 

dozen or so largest exchange members, 

have functional smart order routers 

(‘‘SORs’’), dedicated cabinets at data 

centers, and enough technical staff to 

support their functionalities. Consistent 

with that understanding, the average 

exchange has 34 members who 

contribute up to 99% of its dollar 

volume, where the average is taken over 

the 16 exchanges for the month of 

January 2023.199 This observation aligns 

with the fact that substantial economies 

of scale are required to build expensive 

SORs with significant operational and 

regulatory risks. Consequently, while 

there is gradation in execution quality 

among exchange members, the 

difference in capability is more 

pronounced between the 30 or so large 

or medium-sized exchange members 

with both functional SORs and fast 

connectivity and the remaining small 

players. Banning volume-based tiers for 

agency-related order flow, which is 

expected to level competition for direct 

market access would benefit investors. 

The extent to which lower net 

transaction fees facilitate the survival of 

lower-volume broker-dealers a wider 

variety of broker-dealers may be 

available to investors. Some lowervolume broker-dealers may specialize in 

niche areas or be better positioned to 

provide personal attention to investors 

and the proposed rule could help 

prevent the loss of such firms, 

benefitting investor welfare. 

The proposed prohibition on volumebased transaction pricing for agencyrelated trades may also result in the 

benefit of improved execution quality 

for some customers of broker-dealers by 

removing an incentive to concentrate 

agency order flow. Reducing the 

incentive to concentrate agency order 

flow may result in improved execution 

quality for the direct market access 

customers of broker-dealers particularly 

if the broker-dealer had previously 

routed customer orders in accordance 

with that incentive. How much the 

customers of exchange members would 

tend to benefit from reducing the 

conflict of interest is uncertain as it is 

dependent on the preferences and 

practices of each routing broker. 

Additionally, the proposed prohibition 

of volume-based pricing for agencyrelated order flow will not resolve all 

potential conflicts of interest between 

exchange members and their customers. 

Currently, when exchanges offer 

volume-based transaction pricing to 

members in return for those members 

executing more orders on the exchange, 

this creates a financial interest that 

could incentivize a member to route 

orders, including customer orders, to 

certain exchanges to qualify for better 

tiered pricing on those exchanges.200 A 

prohibition on volume-based 

transaction pricing would remove this 

incentive. As a consequence of the 

proposed rule, broker-dealers may focus 

on execution quality for their customers 

in making routing decisions without the 

influence of volume-based exchange 

transaction pricing, which may result in 

improved execution quality. 

Lower exchange transaction fees 201

that could result from the proposed rule 

and that better facilitate the survival of 

smaller brokers may result in benefits to 

investors through increasing the variety 

of broker-dealers available. Although 

smaller broker-dealers may not have the 

scale economies of larger broker-dealers, 

they may have firm-specific expertise 

valued by particular investors. A 

brokerage’s strength may lie in good 

research in a niche area or personal 

attention which contributes to a firm’s 

perceived service quality. By preventing 

the loss of firm-specific advantages and 

increasing the overall variety of brokerdealers, lower exchange transaction fees 

and higher rebates for small brokerdealers may enhance investors’ overall 

welfare under the proposed ban on 

volume-based exchange rebates for 

agency-related volume. 

iii. Benefits to Lower Volume Exchanges 

Based on analysis described in section 

IV.D.2 below, the Commission expects 

that the proposed rule may decrease the 

level of order flow concentration for 

agency and riskless-principal orders and 

increase the concentration of principal 

order flow, which would be likely to 

benefit some exchanges. In the analysis 

of the changes to competition among 

exchanges, the Commission considered 

four separate scenarios: (1) agency order 

flow concentration decreases by 100%, 

(2) agency order flow concentration 

decreases by 20%, (3) principal order 

flow concentration increases by 20%, 

and (4) agency order flow concentration 

decreases by 20% and principal order 

flow concentration increases by 20%.202

Lower volume exchanges would be 

most likely to benefit from a decrease in 

the concentration of agency order flow. 

In the upper bound case where agency 

order flow was maximally dispersed 


ddrumheller on DSK120RN23PROD with PROPOSALS2
76318 Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 

203See supra note 123 and the accompanying text 

(for a description of how net transaction fee revenue 

is estimated and the assumed average net capture 

rates). 

204See infra section IV.D.2.b. 

205See infra section IV.D.2.b. 

206See Healthy Markets 2018 Letter, supra note 

165, at 5; Chester Spatt, ‘‘Is Equity Market Exchange 

Structure Anti-Competitive?’’, supra note 166, at 7. 

(agency order flow concentration 

decreases by 100%), 11 of the 16 

exchanges that currently make up a 

combined 19.58% of the on-exchange 

market would experience a 2.38 

percentage point increase in market 

share on average. Assuming that both 

volume and average net captures remain 

the same as those of January 2023, this 

would translate to a combined overall 

increase of $26,382,403 in net 

transaction fee revenue across the 11 

venues.203 In the less extreme scenario 

in which concentration of agency order 

flow decreases by 20%, the same 

smaller exchanges would still benefit, 

but with an average increase in market 

share of 0.47 percentage points and a 

combined overall increase of 

$5,276,481. 

The Commission’s competition 

analysis 204 also considers the 

possibility of an increase in the 

concentration of principal order flow. 

That analysis concludes that the highest 

volume exchanges would be more likely 

to benefit from an increase in the 

concentration of principal order flow. 

Using January 2023 market shares, the 5 

largest exchanges would experience an 

average 0.50% percentage point increase 

in market share given a 20% increase in 

principal order flow concentration. 

Assuming that both volume and average 

net capture rates remain the same as 

those of January 2023, the increase in 

market share would translate to a 

combined overall increase of $2,900,853 

in net transaction fee revenue across the 

5 venues. 

The Commission also considered a 

case in its competition analysis 205

where a 20% increase in principal order 

flow concentration is coupled with a 

20% decrease in the concentration of 

agency order flow would result in 

increased market shares for the 12 

smallest exchanges by trading volume, 

with the exception of a single exchange, 

which would lose market share. In this 

case, the eleven positively affected 

exchanges would experience an average 

percentage point increase in market 

share of 0.26% and a combined increase 

in net transaction fee revenues of 

$2,574,733. That exchanges could be 

negatively or positively affected when 

only one kind of order flow 

concentration changes, indicates that 

exchanges have different sensitivities to 

changes in order-flow concentration. 

b. Costs 

i. Cost to High-Volume Exchange 

Members 

To the extent that average exchange 

per unit trading fees become more 

expensive than the lowest per unit (i.e., 

top tier) fees currently offered, the 

proposed banning of volume-based 

exchange transaction pricing for agencyrelated volume would result in costs for 

the high-volume exchange members and 

possibly the smaller non-members 

routing through them if they receive 

pass-through exchange transaction 

pricing. This increase in costs may in 

turn cause the commissions charged by 

such broker-dealers to increase, 

resulting in costs for their customers as 

well. 

The proposed ban on volume-based 

exchange transaction tiers might impose 

costs on a handful of the high-volume 

members in the form of lower rebates/ 

higher transaction fees for agency order 

flow, along with loss of customer flow 

due to the large members’ reduced price 

advantage when competing for 

customers. Various sources suggest that 

lower-volume exchange members may 

be effectively subsidizing a handful of 

the high-volume members receiving net 

payments.206 A ban on volume-based 

exchange transaction tiers that dampens 

the extent of cross-subsidization across 

broker-dealers may cost the large 

members their forgone net payments. A 

second source of cost is the loss of 

potential customer flow, order flow that 

may have otherwise streamed to the top 

broker-dealers. Under volume-based 

pricing, the top broker-dealers’ lower 

trading costs may give them a price 

advantage when competing for 

customers against smaller members. As 

the high-volume broker-dealers can 

better afford lower commission fees, 

they attract greater order flow from 

investing customers and non-members, 

which enhances their ability to attain 

more favorable pricing tiers. The 

proposed ban on volume-based 

discounts removes the competitive 

advantage that the high-volume brokerdealers otherwise gain through this selfreinforcing cycle. 

Tiered rebates that aid in the 

concentration of order flow among highvolume exchange members may be 

desirable from an allocative efficiency 

perspective. Due to their scale 

economies, the high-volume exchange 

members may be most efficient at 

executing. Alternatively, the highvolume exchange members may have 

technology, capital or service strengths 

arising from their scale economies. 

Directing order flow to the high-volume 

exchange members may better ensure 

that resources are utilized in a costeffective manner. Conversely, under the 

proposed ban on volume-based pricing, 

dispersing order flow across brokerdealers may reduce allocative efficiency. 

An indirect, negative effect on the 

high-volume broker-dealers would arise 

from removing direct market access 

services and sponsored access from the 

tier qualifications for the high-volume 

members. If exchanges did not adjust 

their pricing levels in response to the 

proposed ban on volume-based 

exchange transaction pricing for agencyrelated volume, then removing the 

sponsored customers’ order flow from 

the tiers calculation would weaken their 

ability to obtain more favorable pricing 

on principal orders compared to lowervolume members, thus eroding this 

competitive advantage. 

Exchange members with large 

principal order flow also tend to have 

large agency order flow which is 

consistent with greater liquidity 

provision of either kind encouraging 

liquidity provision from the other order 

type. The majority of exchange members 

with principal order flow also route 

agency orders to the same exchange. 

There are over a thousand exchangemember firm pairs from January 2023 

across 16 exchanges, with a majority of 

exchange members engaged in principal 

trading. Among exchange members that 

handle both principal and agency 

trades, 79% of members with principal 

trading also routed agency orders. One 

can compare a firm’s position within the 

distribution of principal volume against 

its rank among agency trading firms on 

the same exchange. Conditional on 

executing both agency and principal 

orders on the same exchange, 83% of 

members whose principal trading was 

above an exchange’s median dollar 

volume also ranked in the top half of 

agency trading dollar volume. Again, 

among members routing both types of 

orders, approximately 61% of members 

that ranked in the top quarter in terms 

of principal dollar volume also qualified 

for the top quarter of agency dollar 

volume on the same exchange. Thus, 

high relative principal flow is 

imperfectly associated with high 

relative agency flow. One plausible 

underlying force is that top-tier 

exchange transaction pricing (notably, 

rebates) earned from large principal 

flow provide incentives for nonmembers to direct their agency-related 

order flow through high-volume 

members to take advantage of a portion 

of that better exchange transaction 


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Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 76319 

207Here ‘‘total welfare’’ is defined as profitability 

summed across exchanges and broker-dealers with 

trading activities facilitated by exchange members. 208Meghan Busse and Marc Rysman, 

‘‘Competition and Price Discrimination in Yellow 

Pages Advertising’’, 36 RAND J. Econs. 378 (2005). 

209See supra section IV.C.1.a.i for discussion of 

this point. 

210See supra section IV.C.1 for additional 

discussion on effect of the tiering ban on 

transaction pricing. 

211See section IV.C.1.b.iii for a discussion of the 

costs to high-volume exchange members. 

pricing that may not otherwise be 

available to them. For these sponsoring 

members that already are rewarded 

preferred pricing for their principal 

flow, orders routed through them from 

non-members further contributes to the 

firm’s larger agency and overall 

presence. 

While the direct effect of the proposed 

banning of volume-based exchange 

transaction fee tiers could raise 

transaction costs on the high-volume 

broker-dealers’ agency orders, the 

overall effect on the high-volume 

broker-dealers’ trading activities and 

total welfare 207 depends on how 

exchanges respond to the proposed ban, 

especially through adjusting volumebased tiers for principal order flow. 

Offering a steeper volume-based pricing 

discount, or lower per-unit prices for 

greater utilization, has been 

documented as a means to attract 

demand to platforms in other market 

settings.208 Likewise it is conceivable 

that while a ban on agency-related 

volume discounts could weaken the 

incentive to extract increasing levels of 

agency order flows if exchanges chose 

not to offer their best transaction pricing 

to all members equally, exchanges might 

respond with an increased rate of 

discounting for principal order flows. 

More generally, with the proposed ban 

on agency-related price tiers, the 

exchanges might re-adjust pricing 

schedules within each family of 

affiliated exchanges. Enhancing 

principal order flow enhances the 

liquidity externality across exchanges 

within a family, thereby increasing the 

value of keeping agency order flow on 

exchanges. 

For high-volume broker-dealers 

trading in a principal capacity, the 

exchanges might re-adjust price 

schedules in a way that leaves the 

current high-volume firms with no 

substantial drop in profitability. While 

the proposed ban on agency-related 

volume transaction pricing tiers would 

weaken the competitive advantage of 

high-volume broker-dealers over smaller 

ones, the exchanges may attempt to 

offset the potential loss of agency order 

flow by either lowering the agency base 

fee or offering even steeper volumebased discounts for principal order 

flow. Deeper discounts for high 

principal volume may even enhance the 

profitability of these high-volume 

members with high amounts of 

principal trading. In addition, many 

high-volume broker-dealers engage in 

both proprietary trading and in a 

customer brokerage business. As 

discussed earlier in this section many 

firms with high levels of principal order 

flows also tend to achieve high levels of 

agency order flow on the same 

exchange. In the scenario with a ban on 

volume-based exchange transaction 

pricing for agency-related flow, better 

pricing for principal order flow may 

favor many of the same high-volume 

members as are favored under current 

volume-based pricing schedules. If 

deeper discounts on principal order 

flow for high-volume players helped to 

retain substantial principal order flow, 

then agency order flow may also tend to 

coalesce on the same exchange due to 

the order flow externality. Changes in 

volume discount transaction rates for 

principal order flow, combined with 

possible fee cuts on agency order flow, 

may counter the profit losses from 

forgoing previous subsidies on agencyrelated order flow for the high-volume 

broker-dealers. 

ii. Cost to Investors With Trades 

Intermediated by High-Volume 

Exchange Members 

Investors and other market 

participants that send exchange orders 

through large exchange members, which 

currently likely benefit from the 

volume-based transaction tiers of their 

sponsors, may experience costs in the 

form of higher fees from their executing 

broker-dealers under the proposed rule. 

In the absence of the ability of 

exchanges to use volume-based 

transaction pricing for agency-related 

flow, investors which rely on highvolume exchange members for market 

access may be left with relatively more 

expensive exchange transaction fee 

options. The transition from volumebased tiers to a flat fee that could result 

from the proposed rule is expected to 

lead to fees and rebates that are between 

the current values for the highest and 

lowest tiers.209 This would lead to largevolume broker-dealers who qualify for 

the best tiers to be worse off, and lowvolume broker-dealers to be better off. 

Because the changes for these brokerdealers would be to the marginal costs 

of their trading, the Commission expects 

this to impact the prices charged to their 

investor customers in the same 

direction. That is, when considered in 

isolation, this effect would tend to make 

customers of large broker-dealers worse 

off and customers of small brokerdealers better off. One potential 

response to limiting volume-based 

pricing for agency-related order flow 

would be for the exchanges to set 

intermediate transaction pricing for 

agency-related orders that are between 

the current highest fees charged in the 

lowest volume tiers and the lowest fees 

charged in the top-tiers.210 To the extent 

that average exchange pricing on 

agency-related orders become more 

expensive than the previous top-tier 

pricing, investors and any 

intermediating broker-dealers who 

previously benefitted from the highvolume broker-dealers’ passing through 

the volume-based exchange transaction 

pricing may be worse off. 

Another category of trading activity 

that would no longer benefit from the 

tiered pricing advantages of highvolume broker-dealers would be 

sponsored and direct market access. 

Because proprietary traders using such 

access trade through the exchange 

member’s connectivity to the exchange, 

orders directly routed to a trading center 

through sponsored access are marked as 

agency orders. These orders would no 

longer count towards volume-based tiers 

of the sponsoring member. 

Consequently, some sponsored traders 

may face higher net fees, compared to a 

setting where (1) the sponsored traders 

benefit from being the customers of toptiered broker-dealers and (2) 

incorporating orders from sponsored 

traders reinforces the broker-dealers’ 

ability to achieve higher rebates. The 

proposed ban on volume-based tiers 

may have a particularly adverse effect 

on the smaller traders that use these 

arrangements. Without the ability to 

tailor agency-related transaction fees to 

trading volume, some exchanges may 

not find it worthwhile to lower average 

fees in order to retain the order flows of 

the smallest traders. 

The Commission also believes that the 

proposed banning of volume discounts, 

when considered in isolation, may have 

the effect of reducing efficiency if highvolume exchange members reduce the 

amount of order flow which they 

execute on the exchanges, something 

which could harm investor welfare.211

As high-volume exchange members 

likely contribute substantially more to 

the depth of book on an exchange, a 

withdrawal of agency order flow on 

exchanges by these members may lower 

the overall displayed liquidity provision 


ddrumheller on DSK120RN23PROD with PROPOSALS2
76320 Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 

212See section IV.D.1 for additional discussion of 

the effects of lower agency order flow on investor 

welfare and of the effects on efficiency that the 

costs to high-volume broker-dealers could have. 

213See section IV.D.2.b and Table 9 (for detailed 

discussion of the different scenarios discussed here 

and the underlying assumptions made). 

214See section IV.D.2.a. 

215See Malceniece, Laura, Ka ̄rlis Malcenieks, and 

Ta ̄lis J. Putnin ̧sˇ. ‘‘High frequency trading and 

comovement in financial markets.’’ Journal of 

Financial Economics 134.2 (2019): 381–399. 216See 17 CFR 240.15c3–1. 

imposing a negative externality on other 

exchange members.212

iii. Costs to Higher-Volume Exchanges 

Based on the analysis described in 

section IV.D.2 below, the Commission 

expects that the proposed rule may 

decrease the level of order flow 

concentration for agency and risklessprincipal orders and increase the 

concentration of principal order flow, 

which would result in costs for some 

exchanges. The Commission considers 

four separate scenarios: (1) agency order 

flow concentration decreases by 100%, 

(2) agency order flow concentration 

decreases by 20%, (3) principal order 

flow concentration increases by 20%, 

and (4) agency order flow concentration 

decreases by 20% and principal order 

flow concentration increases by 20%.213

Larger exchanges would be most 

likely to bear a cost in the form of lost 

market share and net transaction cost 

revenue from an expected increase in 

the dispersion of agency order flow 

across more competing exchanges. Per 

Table 9, in the extreme case where 

broker-dealers decrease their agency 

order flow concentration by 100%, 5 of 

the 16 exchanges that currently make up 

a combined 80.42% of the on-exchange 

market would experience a 5.24 

percentage point decrease in market 

share on average. Assuming that both 

volume and average net captures remain 

the same as those of January 2023, this 

would translate to a combined overall 

decrease of $32,720,244 in net 

transaction fee revenue across the 5 

venues. In the scenario under which 

agency order flow concentration 

decreases by 20%, these 5 exchanges 

would also be adversely affected, 

though not as much as in the case of 

even re-distribution of agency flow 

across exchanges, with an average 

decrease in market share of 1.05 

percentage points and a combined 

overall decrease in trading revenues of 

$6,544,049. 

Smaller exchanges may lose market 

share from a given increase in the 

concentration of principal order flow. 

Using January 2023 market shares, the 

11 smallest exchanges by trading 

volume would experience an average 

0.23% percentage point decrease in 

market share given a 20% increase in 

principal order flow concentration. 

Assuming that both volume and average 

net capture rates remain the same as 

those of January 2023, the decrease in 

market share would translate to a 

combined overall decrease of $3,356,751 

in net transaction fee revenue across the 

11 venues. 

In the case where a 20% increase in 

principal order flow concentration is 

coupled with a 20% decrease in the 

concentration of agency order flow, it 

could result in decreased market shares 

for the four largest exchanges. In 

addition, one smaller exchange could 

also lose market share in this case. In 

this case the five negatively affected 

exchanges would experience an average 

percentage point drop in market share of 

0.58% and a combined decrease in net 

transaction fee revenues of $4,298,199. 

iv. Increase in Principal Trades 

The Commission recognizes that the 

proposed prohibition of volume-based 

pricing for only agency and risklessprincipal orders would likely increase 

the benefits of principal trading which 

may increase systemic risk across 

broker-dealers. Without being able to 

count on agency order flow to help 

qualify for a volume-based tier exchange 

members may have to increase the 

concentration of their principal order 

flow in order to qualify for a preferred 

pricing tier. This effect likely would be 

exacerbated should exchanges adopt 

pricing schedules with more attractive 

volume-based pricing tiers for principal 

orders.214

One way market participants could 

increase their principal order flow 

would be to increase proprietary trading 

operations. Proprietary trading can 

increase market instability if the 

positions of different traders are 

correlated as correlated trading can 

amplify price movements and quickly 

deplete available liquidity.215

Some exchange members might adopt 

an inventory-based model to manage to 

effectively substitute what would have 

been agency or riskless principal orders 

with principal orders. Under an 

inventory model the broker dealer 

would aim to uphold a target inventory 

level in its traded securities which they 

could thereby use to internalize their 

customer trades. After internalizing the 

customer trade the broker-dealer could 

offset any changes in their inventory by 

executing an identical order on an 

exchange. The offsetting order, since it 

would be to manage the broker-dealer’s 

inventory, would be a principal order. If 

the off-setting principal order is 

executed on exchange at the same price 

at which the customer order was 

previously internalized at, then the 

internalize-then-offset process would 

effectively transform what would have 

otherwise been an agency or risklessprincipal order into principal order. The 

member broker-dealer would however 

risk that the offsetting principal trade 

would be executed at a worse price than 

what it had internalized the customer 

order at. 

Maintaining an inventory position is 

both costly and risky. Holding inventory 

involves the investment of capital, 

broker-dealers have to purchase the 

shares needed to have a sufficient 

supply of stock in order to fill 

marketable buy orders as well as 

sufficient cash to handle marketable sell 

orders. Exchange members looking to 

transition to an inventory model may 

also have to maintain specific net 

capital levels as required by regulations 

to maintain solvency.216 It is risky 

because holding non-zero inventory 

exposes the member broker-dealer to 

losses due to price fluctuation. This risk 

could lead to correlated trading among 

inventory-holding broker-dealers if 

price changes cause some to liquidate 

their inventory positions. This kind of 

correlated trading can exacerbate 

systemic risk among broker-dealers, as 

the liquidation of inventory by some can 

trigger further liquidations by others 

forming a self-reinforcing cycle. In the 

case that following this proposed rule 

exchanges would adopt pricing 

schedules that would make the 

transition to an inventory model 

worthwhile, larger broker-dealers would 

likely have a competitive advantage in 

absorbing the costs and managing risk 

given their greater resources. The 

Commission expects the costs 

associated with a shift in business 

model to limit the increase in principal 

trading due to broker-dealers taking on 

inventory for internalization. 

v. Migration to Off-Exchange Venues 

The proposed prohibition of volumebased pricing for agency-related order 

flow by exchanges would risk exchanges 

losing market share to off-exchange 

venues. In addition to competing with 

other exchanges, exchanges also use 

volume-based pricing tiers as a means of 

competition for order flow with offexchange market centers such as 

wholesalers and ATSs. Lacking the 

ability to offer volume discounts on 

agency-related order flow may make 

exchanges less competitive. Not being 

able to realize preferential pricing 

offered by the highest volume-based 

tiers for the agency portion of their 


ddrumheller on DSK120RN23PROD with PROPOSALS2
Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 76321 

217See Hall R. Varian, ‘‘Price Discrimination and 

Social Welfare,’’ 75 Am. Econ. Rev. 870–75 (1985). 

See W. Kip Viscusi, Joseph E. Harrington, and 

David M. Sappington, Economics of Regulation and 

Antitrust 365–70 (5th ed. 2018), Chapter 8 

‘‘Monopolization and Price Discrimination’’, pp 

365–370 for a simple setting with a numerical 

example. See also Hall R. Varian, ‘‘Price 

Discrimination and Social Welfare,’’ 75 Am. Econ. 

Rev. 870–75 (1985). 

218This is assuming that volume-based rebates to 

liquidity providers contribute to narrowing the 

NBBO, this particular increase in transaction costs 

may be limited to the extent to which such rebates 

do not influence the NBBO. 

219See RBC Letter, supra note 19, at 1 (‘‘In total, 

we found at least 3,762 separate pricing variables 

across the exchanges—that is, 3,762 factors that 

ultimately determine the fees charged and rebates 

offered by exchanges’’). 

order flow higher volume exchange 

members may instead face less attractive 

pricing thereby making off-exchange 

venues relatively more attractive. 

Freeing up agency flow from the 

effects of volume-based tiers could 

result in fewer agency orders routed to 

exchanges. This view is manifested by 

both standard screening games from the 

mechanism design literature and price 

discrimination models, which suggest 

that volume-based price discrimination, 

particularly those based on absolute 

pricing tiers, can increase total demand 

for the platforms.217 On the other hand, 

shutting down quantity discount 

schemes would remove a way for 

individual exchanges to better retain 

order flow from migrating to competing 

venues. This may lead to both greater 

dispersion of order flow across 

exchanges and a decline in trade 

volume among exchanges. Either (1) 

total order flow across exchanges may 

decrease or (2) a portion of that flow 

moves off-exchange, which in turn 

would harm on-exchange liquidity and 

increase trading costs. 

Applying the insights from the price 

discrimination literature to the 

exchange setting suggests that the 

proposed ban on volume-based pricing 

may decrease both overall order flow 

across exchanges and overall efficiency, 

defined in terms of profit summed 

across broker-dealers and the exchanges. 

Standard theoretic models suggest that 

price discrimination can be a natural 

consequence of the trading venues’ 

profit-maximizing incentive schemes 

(i.e., contracts with customers), in 

setting with incomplete information 

present. Incomplete information could 

denote a setting with variation in 

valuation for execution/gains to trade 

across broker-dealers. Because the 

exchanges cannot perfectly ascertain 

each broker-dealer’s intrinsic preference 

for trades, exchanges cannot condition 

transaction fees on broker-dealers’ 

(private) valuations for order execution. 

Offering volume-based price discounts, 

compared to a regime prohibiting 

pricing tiers, can encourage brokerdealers with the most to gain from trade 

to better express their higher 

willingness to participating on an 

exchange. Tiered pricing can heighten 

the incentive to add liquidity to 

exchanges, enhancing not only total 

order flow and profit summed across the 

exchanges but also total broker-dealers’ 

welfare. Prohibiting tiered pricing may 

shrink exchanges’ overall profitability, 

to the detriment of broker-dealers as 

well. 

Effectiveness of using price 

discrimination to increase total surplus, 

relative to a world absent of volumebased discounts, depends on sufficient 

heterogeneity across exchange members. 

Higher valuation, or greater gains from 

execution, could originate from the 

lower cost of operating broker-dealer 

businesses for high-volume exchange 

members. While the range of data 

products and co-location services 

offered by exchanges present substantial 

fixed costs for exchange participants, 

fees for proprietary data and 

connectivity do not increase 

proportionally with trading activity. As 

the per-share cost falls with increases in 

the exchange’s trading volume, highvolume broker-dealers may find the 

value of trading greater than lowervolume exchange members. Another 

feature of standard screening models is 

that the participant’s intrinsic value is 

revealed by the exchange member’s selfselected quantity. The broad range of 

trading quantities across agency brokerdealers suggests a large degree of 

heterogeneity across agency brokerdealers. Across the 16 exchanges in 

January 2023, the coefficient of variation 

for dollar volume among exchange 

members’ agency order flow ranges from 

1.3 to over 3.3. Fixing an exchange, the 

exchange member at the 25th percentile 

has agency dollar volume that is as little 

as less than 0.1% and no more than 

12.5% of the dollar volume coming from 

the 75th percentile exchange member. 

One difference between the 

conventional nonlinear pricing/ 

screening framework and the exchanges’ 

price tiering setting is the use of relative 

volumes in the rebate formulae. Brokerdealers have an incentive to commit 

volume to an exchange so that their 

accumulated liquidity outcompetes 

rivals’ liquidity and satisfies the 

threshold for higher rebates. The use of 

relative volumes in the rebate formulae 

may further reinforce the exchanges’ 

ability to concentrate volume on their 

venue. 

Market shrinkage and fragmentation 

of agency orders may have negative 

effects on transaction costs and 

undercut the internalization of the 

liquidity externality, potentially 

resulting in further loss of both 

principal and agency order flow. 

Coalescence on the larger exchanges is 

not only desirable for the exchanges but 

also increases the value of participating 

on each exchange, as trades are easiest 

to arrange on good terms in liquid 

markets. Having more consolidated 

markets under volume-based price tiers 

makes it easier for liquidity demand to 

meet liquidity supply on the same 

platform, lowering transaction costs. 

Conversely, loss of agency order flow 

from shutting down volume-based 

pricing could make the search for best 

price more costly for the remaining 

participants (both agency and principal) 

on an exchange, who might in turn 

decide to redirect orders away from 

dominant exchanges. Order flow 

externality reinforces the initial loss of 

surplus from shutting down volumebased price discrimination, resulting in 

further loss in efficiency, for dominant 

exchanges and their participants alike. 

Finally, as off-exchange market centers 

such as wholesalers often benchmark 

trades (and price improvement) to the 

NBBO, the withdrawal of a portion of 

on-exchange order flow may potentially 

result in wider (NBBO) spreads thereby 

harming execution quality in the market 

as a whole.218

Following the proposed ban, 

exchanges might adjust so as to 

ameliorate the loss of order flow and 

efficiency from reduced participation 

across exchange venues. In particular, 

one predicted response of the proposed 

ban is that some exchanges might try to 

retain agency order flows by offering 

steeper volume-based tiers for principal 

order flows. Deeper discounts that 

attract the largest proprietary traders 

and increase principal order flow on 

exchanges also benefit agency traders 

due to liquidity externality. More 

generally, exchanges might attempt to 

price discriminate along other 

dimensions not directly related to 

agency trading volume. As one source 

reports at least 3,762 separate pricing 

variables across exchanges, fees charged 

and rebates offered are based on an 

intricate array of other quality metrics, 

some of which are likely correlated with 

trading volume.219 It is conceivable that 

exchanges might continue to ‘‘lock in’’ 

order flow by offering discounts for 

broker-dealers’ percentage of time spent 

at the NBBO, among other measures of 

trading activities. 


ddrumheller on DSK120RN23PROD with PROPOSALS2
76322 Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 

220See supra section IV.C.1.a (discussing the 

benefits associated with the prohibition on volumebased transaction pricing in agency-related volume 

for NMS stocks). 

221This estimate is based on the assumption that 

the 13 national securities exchanges for NMS stocks 

currently offering volume-based tiers would 

continue to offer such tiers for principal related 

order flow after the implementation of proposed 

Rule 6b–1(a). See supra section III.D. 

222The Commission derived the total estimated 

burdens from the following estimates: (Attorney at 

30 hours * $462 per hour) + (Compliance Counsel 

at 10 hours * $406 per hour) + (Chief Compliance 

Officer at 5 hours * $542 per hour) + (General 

Counsel at 5 hours * $663 per hour) = $23,945 per 

exchange in initial costs. $23,945 per exchange × 13 

respondents = $311,285 total initial costs. See supra 

note 84. The Commission derived the hourly rate 

figures from SIFMA’s Management & Professional 

Earnings in the Securities Industry 2013, modified 

to account for an 1,800-hour work-year and 

inflation, and multiplied by 5.35 to account for 

bonuses, firm size, employee benefits, and 

overhead. 

223The Commission derived the total estimated 

burdens from the following estimates: (Compliance 

Attorney at 12 hours * $406 per hour) + 

(Compliance Manager at 8 hours * $344 per hour) 

+ (Business analyst at 5 hours * $265 per hour) = 

$8,949 per exchange in ongoing annual costs. 

$8,949 per exchange × 13 respondents = $116,337. 

See supra note 85. 

224The Commission derived the total estimated 

burdens from the following estimates: (Sr. 

Programmer at 25 hours * $368 per hour) + (Sr. 

Systems Analyst at 10 hours * $316 per hour) + 

(Compliance Manager at 10 hours * $344 per hour) 

+ (Director of Compliance at 5 hour * $542 per 

hour) + (Compliance Attorney at 8 hours * $406) 

= $21,758 per exchange in initial costs. $21,758 per 

exchange × 13 respondents = $282,854. See supra 

notes 85, 106, and accompanying text. 

225The Commission derived the total estimated 

burdens from the following estimates: (Compliance 

Attorney at 6 hours * $406 per hour) + (Compliance 

Manager at 2 hours * $344 per hour) = $3,124 per 

monthly filing. $3,124 × 12 months = $37,488 per 

respondent. $37,488 per exchange × 13 respondents 

= $487,344. See supra note 89. 

226See supra section IV.C.2.b (discussing costs 

associated with proposed Rule 6b–1(a)). 

227See supra section II.D, discussing the full 

requirements of proposed Rule 6b–1(c). 

2. Effects of Proposed Requirement of 

Rules and Policies and Procedures To 

Prevent Evasion 

a. Benefits 

Proposed Rule 6b–1(b)(1) would 

require national securities exchanges 

offering volume-based transaction 

pricing in connection with the 

execution of proprietary orders in NMS 

stocks for the account of a member to 

impose rules to require members to 

engage in practices that facilitate the 

ability of the exchange to comply with 

the prohibition in proposed Rule 6b– 

1(a). Proposed Rule 6b–1(b)(2) would 

require national securities exchanges 

offering such volume-based pricing for 

NMS stocks to establish, maintain, and 

enforce written policies and procedures 

reasonably designed to detect and deter 

members from receiving volume-based 

transaction pricing in connection with 

the execution of agency or riskless 

principal orders in NMS stocks. These 

requirements would increase the 

likelihood that the benefits of Rule 6b– 

1(a) would materialize. It is possible 

that exchange members would attempt 

to recover volume discounts for their 

agency-based order flow by trying to 

obtain volume discounts offered for 

principal-based order flow for their 

agency-based order flow. To the extent 

this happens, the benefits associated 

with prohibiting volume discounts for 

agency-based flow 220 would be less 

likely to materialize. Exchange rules 

requiring members to engage in 

practices that facilitate the exchange’s 

ability to comply with proposed Rule 

6b–1(a) and exchange policies and 

procedures reasonably designed to 

detect and deter members from 

receiving volume-based transaction 

pricing in connection with the 

execution of agency-related orders 

would reduce the likelihood that such 

attempts would happen, or would be 

successful if they did happen. The 

Commission is unable to quantify the 

size of this benefit because it is not 

feasible to determine the propensity of 

exchange members to attempt evasion 

without such measures in place. 

b. Costs 

The requirements of proposed Rules 

6b–1(b)(1) and 6b–1(b)(2) would result 

in costs for those national securities 

exchanges for NMS stocks that choose to 

offer volume-based transaction pricing 

for a member’s proprietary order flow 

after the implementation of the 

prohibition in proposed Rule 6b–1(a). 

Specifically, any national securities 

exchanges for NMS stocks that offers 

such volume-based transaction pricing 

would incur the legal and 

administrative costs to revise its rules to 

include the rules required by proposed 

Rule 6b–1(b)(1), and to develop and 

implement the policies and procedures 

required by proposed Rule 6b–1(b)(2), as 

well as the costs to maintain and 

enforce these rules and policies. 

Table 8 provides the Commission’s 

estimates of the PRA costs associated 

with developing the required written 

policies and procedures. The 

Commission estimates that there would 

be 13 221 exchanges that would incur 

these costs. 

TABLE 8—COMPLIANCE COSTS ESTIMATES

Description Initial 

(one-time) 

Ongoing 

(annual) 

Review & revise price schedule + supplement anti-evasion rules .............................................................. 222 $23,945.00 223 $8,949.00 

Collect, compile, and submit required disclosures to the Commission ...................................................... 224 21,758.00 225 37,488.00 

Total (per exchange) ............................................................................................................................ 45,703.00 46,437.00 

× 13 Exchanges with volume-based pricing ................................................................................................ 594,139.00 603,681.00 

The requirements of proposed Rules 

6b–1(b)(1) and 6b–1(b)(2) to revise 

exchange rules and implement antievasion policies and procedures would 

also impose costs by increasing the 

likelihood that the effects of Rule 6b– 

1(a), the prohibition of volume-based 

pricing to agency-related order flow, are 

realized. The Commission believes the 

proposed prohibition on volume-based 

transaction pricing for agency-based 

order flow would result in costs.226

3. Effects of the Transparency 

Provisions 

a. Benefits 

i. Increased Transparency 

Proposed Rule 6b–1(c) would require 

equities exchanges to make monthly 

submissions to the Commission 

concerning how many members qualify 

for their volume-based pricing in 

connection with the execution of 

proprietary volume in NMS stocks, 

among other things.227

Knowing the number of exchange 

members that qualify for the different 

tiers will provide additional information 

to exchange members who would be 

concerned with which tiers they qualify 

for per their principal trading. While 

exchange members already know the 

tier qualification criteria or many 

volume-based tiers knowing the tier 

qualification criteria does not mean that 


ddrumheller on DSK120RN23PROD with PROPOSALS2
Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 76323 

228For example, one exchange defines total 

consolidated volume as ‘‘the total consolidated 

volume reported to all consolidated transaction 

reporting plans by all exchanges and trade reporting 

facilities during a month in equity securities, 

excluding executed orders with a size of less than 

one round lot.’’ See https://listingcenter.

nasdaq.com/rulebook/nasdaq/rules/nasdaq-equity7. 

229See supra section II.D. 

230See About, XBRL.org, available at https://

www.xbrl.org/the-consortium/about; Tools and 

Services, available at https://www.xbrl.org/thestandard/how/tools-and-services/. 

231See supra section II.D (establishing the more 

effective assessment of whether pricing tier changes 

are reasonable, equitably allocated, not unfairly 

discriminatory, and do not impose a burden on 

competition as an objective of proposed Rule 6b– 

1(c)). 

an exchange member can with certainty 

know which tier it would qualify for a 

given absolute amount of trading 

volume. For example, many volumebased pricing tiers set the volume 

threshold needed for tier qualification 

as a percentage of aggregate measures 

such as the total consolidated trading 

volume 228 which is dependent on the 

trading of other market participants and 

not just that of the member itself. The 

disclosures of how many members 

qualify for their volume-based pricing in 

connection with the execution of 

principal flow would help resolve 

uncertainty regarding the distribution of 

tier qualification. 

The Commission expects that the 

main benefit from the disclosure 

provisions of the proposed rule would 

be to improve the comments provided 

by members and other interested parties 

by providing information on the 

distribution of member tier 

qualification. As previously 

mentioned,229 the monthly disclosures 

would identify the different transaction 

pricing tiers at each exchange and 

provide a breakdown of how many 

members qualified for the various tiers 

each month. The enhanced transparency 

would increase the ability of the 

exchange members, other exchanges, 

and other interested parties to assess 

how many members qualify for specific 

transaction pricing on an exchange and 

better understand the effect of exchange 

fee tiers which may enable more 

detailed comment. The Commission 

expects that by helping interested 

parties in providing more detailed 

comment on future fee filings the 

required disclosures would enhance the 

information available to the 

Commission and improve regulatory 

efficiency. 

Disclosure of the number brokerdealers qualifying for each tier across all 

NMS stock exchanges would enable 

investors to learn the distribution of 

transaction fee-related costs across 

broker-dealers. 

The proposed rule would also require 

the exchanges to disclose the number of 

members that executed principal orders 

in NMS stocks for each month as well 

as provide a table enumerating each 

volume-based tier along with basic 

information regarding the tier and its 

qualification criteria. While the 

Commission does not expect these other 

items to provide new benefits, since 

total membership numbers and detailed 

pricing schedules are already publicly 

accessible, the proposed rule would also 

require that these data be submitted to 

EDGAR in Inline XBRL, which would be 

a benefit as we discuss below. 

ii. Benefits of EDGAR and Inline XBRL 

Requirements 

Under proposed Rule 6b–1(c)(3), 

exchanges would provide the monthly 

disclosures in EDGAR in Inline XBRL. 

Requiring equities exchanges to present 

this information in a machine-readable, 

structured data language—namely, 

Inline XBRL—rather than an 

unstructured format (e.g., HTML, ASCII, 

PDF) would further heighten 

transparency around exchange fee tier 

structures by facilitating more efficient 

retrieval, comparison, aggregation, and 

other analysis of fee tiers data on 

specific exchanges as well as across 

different exchanges and time periods. 

The use of Inline XBRL tags for 

proprietary volume-based pricing 

disclosures would thus make the 

disclosures more easily accessible to, 

and usable by, the Commission, 

exchange members, and the public, 

which in turn should allow for more 

efficient review of the impact of 

volume-based exchange transaction 

pricing. 

Inline XBRL is an open, 

nonproprietary standard overseen by a 

not for profit consortium that includes 

a community of service providers and 

software tools.230 Exchange members 

and market participants could leverage 

this existing infrastructure to readily 

compile, compare, and analyze the 

number of tiers at different exchanges, 

the number of members in various tiers 

at different exchanges, and the financial 

benefits attributable to different tiers 

within and across exchanges. Thus, the 

Inline XBRL standard could help the 

public more efficiently assess the effects 

and application of exchanges’ volumebased pricing for NMS stocks for 

proprietary volume. 

In addition, requiring exchanges to 

file the disclosures with the 

Commission would allow the 

Commission, the public, or exchange 

members to access the disclosures 

directly from a central, publicly 

accessible location, thus enabling 

efficient access and retention of the 

number of exchange members that 

qualify for each volume-based pricing 

tier on their proprietary volume. 

Centralized filing of the proposed 

disclosures would assist members, other 

exchanges, and the public in analyzing 

and commenting on volume-based 

exchange transaction pricing schedules 

that apply to proprietary volume. 

Additionally, centralized filing of the 

tiers disclosures with the Commission 

could, by making it easier for the 

Commission and the public to retrieve 

the exchange fee tiers disclosures over 

time from a single source, facilitate 

assessment of the level of competition 

and the impact of pricing tiers on 

intermarket competition.231 The EDGAR 

system also would enable technical 

validations (i.e., programmatic data 

error checks) on the disclosures, thus 

potentially improving data quality by 

reducing the incidence of nondiscretionary errors (e.g., including text 

for a disclosure that should contain only 

numbers). 

iii. Impact on Exchange Price Schedules 

The proposed transparency provisions 

would publicly reveal the number of 

exchange members which qualify for 

different pricing tiers on each exchange. 

If publicized, this information could 

prompt exchanges to reconsider their 

pricing structures, especially if they 

could give the appearance of 

disproportionately favoring a small 

number of exchange members. A 

possible effect of this kind of disclosure 

could be for exchanges to voluntarily 

adopt price schedules with fewer 

pricing tiers that end up applying to a 

few select exchange members in order to 

not give the appearance of 

disproportionately favoring a small 

number of exchange members. If 

exchanges adopt pricing schedules 

which result in a more even distribution 

of tier qualification as opposed to 

pricing schedules where more members 

qualify for lower volume tiers and few 

qualify the top tiers it could result in a 

benefit to the small to medium-sized 

exchange members who, under the 

current price schedules, may struggle to 

qualify for the best pricing tiers. 

Such a shift in pricing structure 

would enable a broader range of 

members to qualify for improved pricing 

terms which in turn could help level the 

competitive field in the market between 

exchange members to provide direct 

market access to non-member customers 

insofar as members subsidize the terms 


ddrumheller on DSK120RN23PROD with PROPOSALS2
76324 Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 

232See, e.g., Cboe Global Holdings, Inc. 2022 

Form 10–K, available at https://www.sec.gov/ 

ix?doc=/Archives/edgar/data/0001374310/ 

000155837023008202/cboe-20230331x10q.htm; 

Intercontinental Exchange, Inc. 2022 Form 10–K, 

available at https://www.sec.gov/ix?doc=/Archives/ 

edgar/data/1571949/000157194923000006/ice20221231.htm; NASDAQ, Inc. 2022 Form 10–K; 

available at https://www.sec.gov/ix?doc=/Archives/ 

edgar/data/0001120193/000112019323000014/ 

ndaq-20221231.htm. 

233The Commission recently proposed that 

national securities exchanges and exempt 

exchanges, including the equities exchanges that 

would be covered by proposed Rule 6b–1(c), file 

certain forms in EDGAR in structured data 

languages. See Electronic Submission of Certain 

Materials Under the Securities Exchange Act of 

1934; Amendments Regarding the FOCUS Report, 

Securities Act Release No. 11176; Exchange Act 

Release No. 97182; Investment Company Release 

No. 34864 (Mar. 22, 2023) 88 FR 23920 (Apr. 18, 

2023). 

234Form ID must be completed and filed with the 

Commission by all individuals, companies, and 

other organizations who seek access to file 

electronically in EDGAR. See 17 CFR 232.10(b); 17 

CFR 249.446. Accordingly, a filer that does not 

already have access to EDGAR must submit a Form 

ID along with the notarized signature of an 

authorized individual to obtain an EDGAR central 

index key and access codes to file on EDGAR. 

235See supra note 7 and accompanying text. 

236See supra section IV.B.5 (discussing the 

current state of price tier transparency). 

offered to their agency customers with 

the savings realized from hitting higher 

pricing tiers with their principal order 

flow. 

b. Costs 

i. Implementation Costs 

With respect to the Inline XBRL 

requirement for the proposed fee tiers 

disclosures, equities exchanges would 

incur both initial Inline XBRL 

compliance costs, such as the cost of 

training in-house staff to prepare filings 

in Inline XBRL, and the cost to license 

Inline XBRL preparation software from 

vendors, and ongoing Inline XBRL 

compliance burdens that would result 

from the proposed tagging requirements. 

The proposed Inline XBRL requirements 

for the proposed fee tiers disclosures 

would result in compliance costs for 

equities exchanges relative to the 

current baseline, because equities 

exchanges would be newly required to 

apply Inline XBRL tags to the proposed 

disclosures before filing the fee tiers 

disclosures with the Commission (or 

pay a third-party tagging service 

provider to do so). 

Because Inline XBRL tagging 

compliance software has already been 

developed and is already in use by 

public reporting companies to fulfill 

Inline XBRL requirements, the 

Commission expects that vendors would 

update their tagging software to 

accommodate the proposed Inline XBRL 

requirement for the proposed fee tiers 

disclosures if such a requirement is 

adopted. Equities exchanges currently 

are not subject to Inline XBRL 

requirements to comply with their legal 

requirements as exchanges. That said, 

most equities exchanges are affiliated 

with public reporting companies that 

are subject to existing Inline XBRL 

requirements. For example, 12 of the 16 

equities exchanges are affiliated with 

public companies that are required to 

file financial statements and other 

disclosures in EDGAR in Inline 

XBRL.232 To the extent that an equities 

exchange shares compliance systems 

with an affiliated entity that is required 

to submit Inline XBRL structured filings 

in EDGAR, or could otherwise leverage 

the affiliated entity’s processes, licenses, 

service agreements, and expertise in 

complying with Inline XBRL 

requirements, the exchange’s 

compliance costs could be partially 

mitigated. 

The Commission believes the 

compliance costs associated with the 

proposed requirement to structure the 

proposed fee tiers disclosures in Inline 

XBRL likely would decrease over time 

because equities exchanges likely would 

comply with structuring requirements 

more efficiently after gaining experience 

over repeated filings, although such an 

effect could be diminished for equities 

exchanges affiliated with public 

reporting companies that already have 

experience structuring filings in Inline 

XBRL. 

Because national securities exchanges 

are not currently subject to EDGAR 

filing requirements,233 equities 

exchanges would incur a one-time 

compliance burden of submitting Form 

ID to access EDGAR as a result of the 

proposed requirement to submit the fee 

tiers disclosure via EDGAR.234 While 

there are no fees associated with 

registering as an EDGAR filer, the 

Commission recognizes that the 

proposed requirement to submit the 

proposed fee tiers disclosures in EDGAR 

would impose compliance costs on 

equities exchanges in order to make 

limited changes to their systems, 

policies, and procedures to comply with 

the EDGAR filing requirement. These 

costs could be mitigated by the fact that 

many equities exchanges have affiliated 

entities that provide disclosures in 

EDGAR in Inline XBRL, and therefore 

employees of the equities exchanges 

could leverage the knowledge and 

experience about EDGAR and Inline 

XBRL possessed by staff within those 

affiliates. 

ii. Reputation Costs & Changes in 

Exchange Price Schedules 

The proposed transparency provisions 

which require the monthly public 

disclosure of the number of exchange 

members which qualify for different 

pricing tiers with their principal order 

flow has the potential to impose 

reputational costs on the exchanges. As 

the proposed rule would prohibit the 

application of volume-based tiers to 

agency-related order flow any 

qualification to a volume-based tier 

would have to be a function of nonagency related volume and the pricing 

of those tiers would only apply to nonagency related orders. The fact that the 

disclosure would only apply to 

principal trades limits the extent to 

which the information would be useful 

for market participants other than 

proprietary traders. 

While exchanges currently are 

required to disclose their pricing 

schedules by publishing them online,235

the number of members which qualify 

for each tier is not known to the 

public.236 Some exchanges could suffer 

reputational costs if the distribution of 

members over the tiers for which they 

qualified for is perceived to be unfair. 

For instance, if only a few exchange 

members qualify for the most 

advantageous pricing tiers, the potential 

perception that these select few 

members receive advantages not 

available to a wider group could harm 

the reputation of the relevant exchange, 

especially if it appears as if the 

exchange is subsidizing the top pricing 

tiers at the expense of lower tiers. 

The Commission believes that the risk 

of such reputational costs may induce 

exchanges to change their price 

schedules. Such changes would result 

in costs for those exchanges who 

undertake them, in the form of costs to 

alter existing price schedules, and 

through the possibility that such 

changes in price may reduce the 

incentive for their members to 

concentrate their principal order flow. 

Having to adopt a pricing schedule with 

a more even distribution of tier 

qualification, one where more members 

qualify for the different tiers, may only 

be possible by offering less attractive 

pricing across the top tiers. Trading off 

the pricing terms of high volume tiers in 

order to adopt a pricing schedule which 

may be perceived as more equitable 

could cause the exchange to lose trading 

volume or liquidity provided as high 

volume members may find other venues 

as more attractive following the change. 

As discussed in sections IV.D.2 and 

IV.D.1 the Commission cannot establish 

a reliable estimated range for the extent 

of these costs and which exchanges 

would be affected given that exchanges 


ddrumheller on DSK120RN23PROD with PROPOSALS2
Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 76325 

237A broker-dealer solely looking to minimize 

transaction fees and maximize transaction rebates 

would concentrate their principal order flow on the 

exchange(s) with the most attractive principal 

volume tiers and concentrate their agency flow on 

the exchange(s) with the best agency order pricing. 

Markets are more likely to fragment if the set of 

exchanges with the best agency order pricing differ 

from the set with the best principal order pricing. 

238With the exception of sponsored access trades 

under which the exchange member’s sponsored 

customer can directly access the exchanges using 

the member’s infrastructure, although sponsored 

access trades comprise a small portion of total 

agency flow. 

239 Igal Hendel and Aviv Nevo, ‘‘Intertemporal 

Price Discrimination in Storable Goods Markets,’’ 

103 Am. Econ. Rev. 2722 (2013); Guillermo 

Marshall, ‘‘Hassel Costs and Price Discrimination: 

An Empirical Welfare Analysis,’’ 7 Am. Econ. J.: 

Applied Econ. 123 (2015); Sofia Berto Villas-Boas, 

‘‘An empirical investigation of the welfare effects of 

banning wholesale price discrimination.’’ 40 RAND 

J. Econ. 20 (2009). 

240See Hall R. Varian, ‘‘Price Discrimination and 

Social Welfare,’’ 75 Am. Econ. Rev. 870–75 (1985). 

may modify their pricing schedules in 

response to many factors, including the 

proposed rule. 

D. Effect on Efficiency, Competition, 

and Capital Formation 

1. Efficiency 

The Commission anticipates that the 

proposed rule would result in most 

exchanges that trade NMS stocks 

significantly adjusting their transaction 

pricing schedules. By prohibiting one 

form of transaction pricing (volumebased) for trades of agency and riskless 

principal, the proposed rule would 

allow exchanges to apply different fees 

or rebates to principal trades. An 

example of one such case could entail 

offering fixed transaction fees and 

rebates to agency and riskless-principal 

trades but offering volume-based tiered 

prices to principal trades. While current 

pricing tiers may effectively 

differentiate between agency-related and 

principal trades it is often as a byproduct of the tier categorization rather 

than an explicit condition of the 

application of the tier. An example of 

such an instance would be pricing tiers 

reserved for exchange members that are 

registered with the exchange as a 

market-maker and whose marketmaking orders would all be principal 

trades. However, this pricing would not 

apply to other exchange members that 

exclusively trade in a principal capacity 

if they are not registered market makers; 

so while all orders in such a tier may 

be of the same capacity categorization, 

qualification to such a market-maker tier 

does not universally apply to all 

principal capacity trades. The proposed 

rule would not prohibit exchanges from 

proposing transaction pricing where 

qualification is predicated on the 

capacity of the order as long as they are 

not based on volume to any extent. 

The potential for exchanges to offer 

distinct pricing to principal and agencyrelated order flow introduces the 

possibility for greater market 

segmentation. This could arise if 

exchanges chose to tailor their 

transaction pricing schedule to favor 

one type of order flow over another.237

Such segmentation could negatively 

impact overall transaction costs by 

resulting in wider spreads being quoted 

on the exchanges. By their very nature 

agency orders have to be handled by an 

intermediary before being able to reach 

one of the exchanges, which leaves 

agency traders with a latency 

disadvantage relative to principal 

traders that can access the exchanges 

directly.238 If such a concentration of 

agency orders on certain exchanges 

occurs it would result in traders having 

a higher degree of certainty as to 

whether they are trading against an 

agency order or not based on which 

exchange the transaction is occurring. 

Understanding that their orders are 

more likely to be routed to some 

exchanges over others and hence more 

readily identified as an agency order, 

agency traders could elect to provide 

liquidity at a wider spread as a means 

of compensation for the increased risk 

of being adversely selected by a 

principal trader. While the latency 

disadvantage exists in current markets, 

exchanges that have a mix of agency and 

principal orders may see less likely 

adverse selection for agency orders 

because principal orders face more 

uncertainty about the capacity of their 

counterparty. The relative scarcity of 

agency order flow on exchanges that 

become dominated by principal trading 

following the implementation of the 

proposed rules could also result in 

wider spreads on those exchanges. 

These dynamics could be even more 

pronounced in the presence of 

additional discrepancies between the 

informativeness or adverse selection 

risk of agency and principal orders. This 

phenomenon further underscores the 

potential implications of distinct pricing 

mechanisms for different types of order 

flow on market efficiency and 

transaction costs. 

The effects of the proposed 

elimination of volume-based transaction 

pricing tiers for agency-related trades 

could improve transaction quality and 

market efficiency by alleviating an 

impediment to switching the routing of 

orders from one exchange to another. As 

previously discussed, volume-based 

transaction price tiering effectively 

makes it more difficult for market 

participants to justify partially 

switching trading venues by increasing 

the opportunity costs of doing so, 

because switching the venue to which 

agency orders are routed to makes it less 

likely that the market participant will 

end up qualifying for a preferential 

pricing tier. The elimination of volumebased transaction price tiering for 

agency-related trades would alleviate 

this worry of missing out on preferential 

pricing and allow broker-dealers to 

route orders more readily to a variety of 

exchanges on the basis of execution 

quality. While variation in rebates and 

fees across exchanges would likely 

continue to exist and be one factor that 

influenced the routing decisions of 

brokers, the lack of volume-based 

transaction tiering would mean that 

brokers could route agency orders to a 

different exchange without jeopardizing 

the average net per-share costs of their 

overall trading. 

While welfare for different customer 

segments may increase or decrease 

under the proposed ban, the overall 

welfare effects of banning price 

discrimination are ambiguous and can 

vary across market settings.239

Nevertheless, standard intuition derived 

from economic theory suggests that 

when heterogeneity across customers 

exists, price discrimination may 

increase total welfare (i.e., welfare 

summed across firm(s) and their 

customers who derive utility from the 

purchased goods) if the quantity sold 

increases under discrimination.240 The 

analog of ‘‘customers’’ in the exchange 

setting is a combination of brokerdealers and their customers. Brokerdealers and the end investors share in 

gains from executing trades. As the 

intermediaries, to the extent the brokerdealers share the rebates with their 

investors, the end investors benefit from 

both the fulfilled trades and rebate passthrough. To the extent that brokerdealers’ responsiveness to volume-based 

discounts is driven by the end investors’ 

responsiveness to cost savings, volumebased discounts may expand overall 

liquidity across exchanges. Not only 

might volume-based discounts help the 

dominant exchange extract more order 

flow and revenue, but the pricing 

schemes could also increase brokerdealers’ and their customers’ total 

surplus. 

Evaluation of price discrimination 

from other market settings provides the 

insight that volume-based pricing that 

attracts more agency business from 

high-volume exchange members may 

benefit both the high-volume exchange 

members and the exchanges, possibly at 

the cost of lower-volume exchange 

members. However, in the context of 


ddrumheller on DSK120RN23PROD with PROPOSALS2
76326 Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 

241See supra section IV.C.2.b.iii (discussing how 

the proposed rule is expected to increase the 

incentive to increase the concentration of principal 

order flow). 

242See supra section IV.C.1.b.v (discussing how 

the proposed rule may increase the amount of 

trading which may migrate to off-exchange market 

centers). 

trading platforms with liquidity 

externality, additional order flow from 

high-volume exchange members may 

ultimately be beneficial to lower-volume 

broker-dealers. High-volume exchange 

members likely contribute substantially 

more to the depth of book on an 

exchange. When volume-based 

discounts induce additional order flow 

from high-volume broker-dealers to 

convene on a dominant exchange, more 

liquidity reduces the cost of searching 

for the best execution and benefits the 

lower-volume broker-dealers. This order 

flow externality, which is absent in 

many traditional price discrimination 

settings, provides a benefit that partially 

countervails the potential negative 

impact of volume-based tiers on the 

lower-volume broker-dealers. 

2. Competition 

a. Broker-Dealer Competition 

To the extent that such increased 

costs for investors caused them to send 

order flow to other, lower-volume 

exchange members, allocative efficiency 

in the market for NMS stock brokerage 

services might be reduced. The highvolume exchange members might be 

most efficient at executing trades due 

technology, capital or service strength 

arising from their scale economies. 

Directing more order flow to the lowervolume exchange members might result 

in resources being inefficiently utilized. 

The effects of the proposed rule on the 

competition among broker-dealers are 

discussed in sections IV.C.1.a.i and 

IV.C.2.b.i. 

b. Changes in Order Flow Concentration 

The Commission expects that the 

proposed prohibition for volume-based 

exchange transaction pricing on agencyrelated order flow would be likely to 

increase the dispersion of agency flow 

and increase the concentration of 

principal order flow across exchanges. 

The reason that agency-related 

volume might be impacted in this way 

is that volume-based transaction pricing 

incentivizes the concentration of order 

flow and, all else being equal, the 

removal of this incentive should result 

in less concentration of that flow. Under 

the assumption that some variant of 

volume-based transaction pricing 

remains in place for principal orders, 

the concentration of principal order 

flow on exchanges that previously used 

tiered transaction pricing would be 

expected to increase since the absence 

of agency volume counting towards tier 

qualification could lead to a higher 

degree of concentration of principal 

flow that would be needed to qualify for 

pricing similar to what they realized 

prior to the proposed rule. As reported 

in Table 5 the members of exchanges 

with more price tiering are more likely 

to concentrate their order flow onto 

those exchanges as illustrated by higher 

average share of member trading volume 

and a greater proportion of members 

executing a plurality of their order flow 

on the exchange. This suggests that 

exchanges might adjust their pricing 

schedules to confer greater rewards to 

the execution of principal trading 

volume as a means of competing for 

principal trading flows. This effect 

would not be present if exchanges 

instead offered their best transaction 

pricing to all members equally. 

The extent to which the different 

order flows become more or less 

dispersed under the proposed 

prohibition is uncertain as it depends 

on the changes of a multitude of other 

factors and their interactions which are 

infeasible for the Commission to reliably 

forecast. For instance, many exchange 

transaction pricing schedules would be 

likely to significantly change as a result 

of the proposed rule, which would 

likely affect broker-dealer routing 

decisions and could possibly increase 

principal trading.241 In light of these 

difficulties, rather than providing a 

single point estimate, the following 

analysis will present expected effects on 

the exchanges that a variety of 

hypothetical changes in order flow 

concentration are likely to have. 

Table 9 reports the expected trading 

volumes and market shares for the 16 

exchanges under different changes in 

order flow concentration. The analysis 

uses the January 2023 on-exchange 

trading volume as a baseline. Implicit in 

the analysis is the assumption that the 

various exchange members execute the 

same trading volume on-exchange as 

they did in January 2023 baseline.242

TABLE 9—EXCHANGE POSITIONS GIVEN CHANGES IN ORDER-FLOW CONCENTRATION

The following table reports the total amount of executed orders (panel A) and the changes in executed orders (panel B), measured in number of 

shares, that were executed during regular trading hours across the 16 national stock exchanges under different scenarios using the total buy 

and sell executed order flow from all exchange members using a sample of CAT data for the month of Jan. 2023 from Table 4 as a baseline. 

Exchange members are identified as the set of unique CRD IDs in CAT which have directly routed orders to any of the national equities exchanges in the month. Exchange member CRDs are also verified in the CAT Industry Member Identifier List daily reference data. For each 

exchange the number of shares executed under the CAT allowable trade capacities of Agency, Principal, and Riskless Principal are reported. 

Trade capacity in CAT is defined by the exchange member for its side of a trade and represents the capacity in which the exchange member 

acted at trade time. Trades with the sale-condition codes–M—Market Center Official Close, –Q—Market Center Official Open, –V—Contingent 

Trade,–7—Qualified Contingent Trade (QCT), –8—Placeholder for 611 Exempt, and –9—Corrected Consolidated Close (per listing market) 

were excluded. ‘‘Agency ¥100% Concentration’’ corresponds to the scenario under which every exchange member sends an equal proportion of its agency-related order flow (orders of capacity code of agency or riskless principal) across all the exchanges they are a member of. 

‘‘Agency ¥20% Concentration’’ corresponds to the case where the proportion of agency-related order flow executed by each exchange member is adjusted to be 20% closer to the equal proportion levels. ‘‘Principal +20% Concentration’’ corresponds to the case where the proportion 

principal order flow executed by each exchange member is adjusted to be 20% further from the equal proportion levels. ‘‘Agency ¥20% Concentration & Principal +20% Concentration’’ corresponds to the case where the proportion of principal order flow executed by each exchange 

member is adjusted to be 20% further from the equal proportion levels and the proportion of agency-related order flow executed by each exchange member is adjusted to be 20% closer to the equal proportion levels. See note 243 and the associated text for a detailed description 

of the calculations. 

Panel A: Trading Volume and Market Share Levels. Below the total order flow, measured in number of shares, for each of the four scenarios 

and the baseline for each exchange is reported. The percentage share of total trading volume between each of the four scenarios and the 

baseline for each exchange are reported under the trading volume. 


ddrumheller on DSK120RN23PROD with PROPOSALS2
Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 76327 

Exchange Baseline Agency ¥100% 

concentration 

Agency ¥20% 

concentration 

Principal +20% 

concentration 

Agency ¥20% & 

principal +20% 

NYSE American ..................................... 1,545,083,370 

0.64% 

9,014,311,364 

3.74% 

3,038,928,968 

1.26% 

925,779,162 

0.38% 

2,419,624,761 

1.00% 

NYSE Arca ............................................. 39,311,251,528 

16.30% 

28,194,801,883 

11.69% 

37,087,961,599 

15.38% 

40,979,313,252 

16.99% 

38,756,023,323 

16.07% 

BX .......................................................... 1,712,065,584 

0.71% 

10,202,384,309 

4.23% 

3,410,129,329 

1.41% 

954,950,476 

0.40% 

2,653,014,221 

1.10% 

Cboe BYX .............................................. 4,664,774,940 

1.93% 

10,767,820,881 

4.47% 

5,885,384,128 

2.44% 

3,996,852,852 

1.66% 

5,217,462,040 

2.16% 

Cboe BZX .............................................. 19,855,374,396 

8.23% 

18,464,904,008 

7.66% 

19,577,280,318 

8.12% 

20,177,425,112 

8.37% 

19,899,331,035 

8.25% 

NYSE Chicago ....................................... 432,565,797 

0.18% 

6,732,028,311 

2.79% 

1,692,458,299 

0.70% 

271,874,586 

0.11% 

1,531,767,089 

0.64% 

Cboe EDGA ........................................... 5,800,545,730 

2.41% 

10,492,471,510 

4.35% 

6,738,930,886 

2.79% 

5,050,458,361 

2.09% 

5,988,843,517 

2.48% 

Cboe EDGX ........................................... 26,669,251,824 

11.06% 

21,126,143,742 

8.76% 

25,560,630,207 

10.60% 

27,337,564,263 

11.34% 

26,228,942,646 

10.88% 

IEX ......................................................... 10,772,940,184 

4.47% 

12,475,034,616 

5.17% 

11,113,359,070 

4.61% 

10,073,270,498 

4.18% 

10,413,689,385 

4.32% 

LTSE ...................................................... 12,160,554 

0.01% 

6,380,358,525 

2.65% 

1,285,800,148 

0.53% 

10,749,491 

0.00% 

1,284,389,085 

0.53% 

MEMX .................................................... 13,241,685,902 

5.49% 

14,925,744,644 

6.19% 

13,578,497,650 

5.63% 

12,975,451,264 

5.38% 

13,312,263,013 

5.52% 

Nasdaq ................................................... 68,721,861,666 

28.50% 

36,597,959,759 

15.18% 

62,297,081,284 

25.83% 

71,138,284,292 

29.50% 

64,713,503,911 

26.84% 

NYSE National ....................................... 2,317,954,540 

0.96% 

9,158,405,160 

3.80% 

3,686,044,664 

1.53% 

1,708,621,212 

0.71% 

3,076,711,336 

1.28% 

NYSE ..................................................... 39,387,052,205 

16.33% 

26,406,685,490 

10.95% 

36,790,978,862 

15.26% 

40,310,486,972 

16.72% 

37,714,413,629 

15.64% 

MAX Pearl .............................................. 4,485,360,802 

1.86% 

9,986,884,064 

4.14% 

5,585,665,454 

2.32% 

3,863,443,029 

1.60% 

4,963,747,682 

2.06% 

Phlx (PSX) ............................................. 2,220,543,164 

0.92% 

10,224,533,912 

4.24% 

3,821,341,313 

1.58% 

1,375,947,356 

0.57% 

2,976,745,506 

1.23% 

Panel B: Changes in Trading Volume and Market Share. Below the difference in total order flow, measured in number of shares, across 

each of the four scenarios and the baseline for each exchange is reported. Differences in the percentage share of total trading volume across 

each of the four scenarios and the baseline for each exchange are reported under the trading volume. The number of tiers for each exchange 

from Table 5 are also reported for each exchange. 

NYSE American ..................................... 10 7,469,227,994 

3.10% 

1,493,845,598 

0.62% 

¥619,304,208 

¥0.26% 

874,541,391 

0.36% 

NYSE Arca ............................................. 72 ¥11,116,449,645 

¥4.61% 

¥2,223,289,929 

¥0.92% 

1,668,061,724 

0.69% 

¥555,228,205 

¥0.23% 

BX .......................................................... 20 8,490,318,725 

3.52% 

1,698,063,745 

0.70% 

¥757,115,108 

¥0.31% 

940,948,637 

0.39% 

Cboe BYX .............................................. 11 6,103,045,941 

2.54% 

1,220,609,188 

0.51% 

¥667,922,088 

¥0.27% 

552,687,100 

0.23% 

Cboe BZX .............................................. 26 ¥1,390,470,388 

¥0.57% 

¥278,094,078 

¥0.11% 

322,050,716 

0.14% 

43,956,639 

0.02% 

NYSE Chicago ....................................... 0 6,299,462,514 

2.61% 

1,259,892,502 

0.52% 

¥160,691,211 

¥0.07% 

1,099,201,292 

0.46% 

Cboe EDGA ........................................... 8 4,691,925,780 

1.94% 

938,385,156 

0.38% 

¥750,087,369 

¥0.32% 

188,297,787 

0.07% 

Cboe EDGX ........................................... 19 ¥5,543,108,082 

¥2.30% 

¥1,108,621,617 

¥0.46% 

668,312,439 

0.28% 

¥440,309,178 

¥0.18% 

IEX ......................................................... 0 1,702,094,432 

0.70% 

340,418,886 

0.14% 

¥699,669,686 

¥0.29% 

¥359,250,799 

¥0.15% 

LTSE ...................................................... 0 6,368,197,971 

2.64% 

1,273,639,594 

0.52% 

¥1,411,063 

¥0.01% 

1,272,228,531 

0.52% 

MEMX .................................................... 13 1,684,058,742 

0.70% 

336,811,748 

0.14% 

¥266,234,638 

¥0.11% 

70,577,111 

0.03% 

Nasdaq ................................................... 74 ¥32,123,901,907 

¥13.32% 

¥6,424,780,382 

¥2.67% 

2,416,422,626 

1.00% 

¥4,008,357,755 

¥1.66% 

NYSE National ....................................... 11 6,840,450,620 

2.84% 

1,368,090,124 

0.57% 

¥609,333,328 

¥0.25% 

758,756,796 

0.32% 

NYSE ..................................................... 93 ¥12,980,366,715 

¥5.38% 

¥2,596,073,343 

¥1.07% 

923,434,767 

0.39% 

¥1,672,638,576 

¥0.69% 

MIAX Pearl ............................................. 8 5,501,523,262 

2.28% 

1,100,304,652 

0.46% 

¥621,917,773 

¥0.26% 

478,386,880 

0.20% 

Phlx (PSX) ............................................. 4 8,003,990,748 

3.32% 

1,600,798,149 

0.66% 

¥844,595,808 

¥0.35% 

756,202,342 

0.31% 


ddrumheller on DSK120RN23PROD with PROPOSALS2
76328 Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 

243Suppose that a broker-dealer allocates, for 

each exchange i, a share si such that the sum of si’s 

across exchanges indexed by i (‘‘sum of shares’’) 

equals one. Given a percentage change p in 

concentration, the broker-dealer shares are 

transformed to an updated si*=max[si+p(si-1/N),0], 

where N denotes the count of exchanges over which 

the broker-dealer allocates order flow. When p>0, 

member HHI increases, since the sum of the 

updated (si*)2’s is greater than the sum of the (si)2’s. 

In cases where si+p(si-1/N) < 0, the updated sum of 

shares would be greater than 1. In these cases the 

new shares are recalculated as the ratio of si* to the 

updated sum of shares, in order to ensure that the 

shares sum to one; whenever this occurs the 

number of exchanges receiving non-zero order flow 

decreases. 

244To illustrate, if a broker-dealer distributed 

their order flow 70%/30% across two exchanges a 

50% increase in concentration would result in a 

80%/20% split (0.8 = 0.7 + p(0.7–0.5), and 0.2 = 

0.3+p(0.3–0.5) for p = 50%). A 50% decrease in 

concentration would result in a 60%/40% split (0.6 

= 0.7—p(0.7–0.5), and 0.4 = 0.3¥p(0.3–0.5) fir p = 

50%). 

245This is the case when p=¥1, and si=(1/N) for 

each exchange i. 

246See section IV.B.2 (discussing non-tier factors 

that may influence order routing decisions). 

247Overall pro-rata HHI is calculated as the sum 

of squared market shares reported in Table 6. 

248 It is important to note that the basis for the 

statement relies on the assumption that agencyrelated order flow concentration would decrease at 

least as much as principal order flow concentration 

increases. More importantly the analysis assumes 

that exchange membership and exchange pricing 

schedules do not change (outside of the prohibition 

of applying volume-based pricing on agency or 

riskless principal order flow). 

249See supra section IV.C.1.a.ii. 

250See supra section IV.C.2.a.i. 

251See supra section IV.C.2.a.iii. 

252See supra section IV.C.2.b.ii. 

Changes in concentration are 

calculated by either increasing or 

decreasing the distance between the 

proportions of order flow individual 

broker-dealers allocate to the different 

exchanges and an even split. For a given 

percentage increase in concentration, 

the distance between the relative share 

of a broker-dealer’s order flow sent to an 

exchange and 1/N, where N denotes the 

number of exchanges it is a member of, 

is increased by that percentage 

amount.243 The effect of this is to 

increase a member’s HHI measure by 

reducing the share of order flow sent to 

exchanges for which the exchange 

member allocated a smaller proportion 

of its original order flow and increase 

the share sent to those exchanges for 

which it was already allocating larger 

shares of its order flow. Similarly, a 

percentage decrease in concentration 

would manifest in a lower HHI value.244

A 100% decrease in concentration 

corresponding to the case when an 

exchange member evenly splits its order 

flow and the member HHI is equal to the 

minimum achievable value.245

The first non-baseline column of 

Table 9 shows what the on-exchange 

market would look like if all exchange 

members evenly split their agency flow 

across the exchanges they are member of 

while not changing the distribution of 

principal order flow. This case serves as 

an upper limit of the potential effect of 

the proposed rule’s effect on agencyrelated order flow concentration. The 

reason why this case reflects an upper 

bound is because while the Commission 

expects agency order flow concentration 

to decrease as a result of the proposed 

rule, it believes that it is highly unlikely 

that the resulting market landscape 

would result in individual brokerdealers evenly distributing their agencyrelated order flow.246 The case of an 

even distribution of agency-related 

order flow across exchanges would 

result in a more fragmented market with 

the overall pro-rata HHI falling from 

0.16 to 0.08.247

Aside from the upper bound case of 

an even distribution of agency flow, a 

case where there would be a 20% 

reduction in agency flow concentration, 

a case where there would be a 20% 

increase in principal flow 

concentration, and a case with the 

combination of the two are also reported 

Table 9. While the case of a 100% 

reduction in agency-related flow 

concentration serves as an upper bound 

of the potential effects on order flow, 

other scenarios serve as an exercise in 

comparative statistics to illustrate the 

effects of more modest changes in 

concentration. For the cases of a 20% 

decrease in concentration of agencyrelated order flow and a 20% increase 

in principal order flow concentration, 

the overall pro-rata HHI would be 0.14 

and 0.17, respectively. For the 

combined case of both a 20% decrease 

in agency-related flow concentration 

and 20% increase in principal flow 

concentration the resulting pro-rata HHI 

would be 0.15. Compared to the January 

2023 HHI of 0.16, these changes suggest 

that the distribution of trading volume 

across the market is slightly more 

sensitive to decreases in agency-related 

order flow concentration than to similar 

increases in principal order flow 

concentration. As a result, a reasonable 

expectation for the likely effect of the 

proposed rule would be to result in a 

marginally more even distribution of 

market share across stock exchanges, 

which may be representative of a more 

competitive market.248

c. Tying Closing Auction Fees to 

Consolidated Volume 

As discussed in section IV.B.1.c, tying 

closing auction fees to broker-dealers’ 

overall volume helps the primary listing 

exchanges extend their market power 

and softens inter-exchange competition. 

For listing companies and index funds 

with strong interests in closing auctions, 

the current pricing structure heightens 

their incentive to divert order flow to 

the primary exchanges in order to 

qualify for lower fees during the closing 

auctions. The proposal would prohibit 

exchanges from offering volume-based 

pricing in connection with the 

execution of agency-related order flow 

in NMS stocks. The proposal would 

thus prohibit exchanges from offering 

transaction pricing on any orders if that 

pricing is determined, in part, by the 

execution of agency-related trading 

volume. Accordingly, the proposal 

would prohibit exchanges from tying 

transaction pricing on orders executed 

during closing or opening auctions to a 

member’s agency-related trading volume 

in NMS stocks during regular trading 

hours. Limiting the listing exchanges’ 

ability to tie prices for the closing 

auctions to intraday agency-related 

trading volume may benefit smaller 

exchanges without listing capabilities. 

A more level playing field for intraday 

trading across exchanges will likely 

benefit broker-dealers for two reasons. 

First, the absence of tying that protects 

the primary listing exchanges may result 

in more intense competition for order 

flow across exchanges during the 

regular hours. This may in turn result in 

lower transaction fees/more generous 

terms for broker-dealers for order 

executed. Second, the primary 

exchanges’ closing auction pricing 

structure tends to partially foreclose 

broker-dealers’ order flow that may have 

otherwise gone to whichever exchange 

offering the best execution quality or 

more generous rebates. Broker-dealers’ 

welfare may be higher under 

‘‘unbundling’’, if changes in choice sets 

result in broker-dealers choosing 

superior products. 

3. Capital Formation 

The Commission believes the 

proposed rules would have a modest 

impact on capital formation. The 

proposed rules may lower transaction 

costs for investors through their effect 

on exchange transaction pricing 

schedules,249 broker-dealer 

competition,250 and the broker-dealer 

conflict of interest.251 However, the net 

effect is difficult to determine. For 

example, some broker-dealers’ 

transaction costs may increase,252 which 

could then increase the transaction costs 

of investors to the extent these increases 

are passed through to them. 

To the extent the proposed rules 

reduce transaction costs, they would 

increase the efficiency of trading, which 

may lead to better capital allocation. 


ddrumheller on DSK120RN23PROD with PROPOSALS2
Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 76329 

253See section IV.B.3 for a discussion of the 

additional incentives introduced by volume-based 

pricing tiers to order routing decisions. 

254Exchange members compete for the agencyrelated order flow of non-exchange member 

customers. Volume-based pricing tiers present a 

network effect, or positive feed-back loop, in that 

exchange members with large amount of trading 

volume find it easier to qualify for higher volume 

tiers which in turn allows them to attract more 

customer volume by offering more attractive terms 

than lower volume competitors. 255For example, a broker, instead of working a 

sell order as an agent for the customer, might just 

offer the customer a price to buy the shares outright 

from the customer. 256See section IV.C.1.b.i for a discussion of how 

the proposed rule could adversely affect exchange 

members with a high volume of agency-related 

order flow. 

257See Letter from John Ramsay, Chief Market 

Policy Officer, Investors Exchange LLC to Vanessa 

Countryman, Secretary, Commission (Sept. 20, 

2023) (‘‘IEX Letter’’) (comment letter on File No. 

S7–30–22), available at https://www.sec.gov/ 

comments/s7-30-22/s73022-262059-619382.pdf. 

E. Reasonable Alternatives 

1. Ban Volume-Based Pricing for All 

Orders 

As an alternative to the proposed 

prohibition of volume-based transaction 

pricing for agency-related orders in 

NMS stocks, the Commission might 

instead prohibit exchanges from offering 

volume-based transaction pricing for all 

volume in NMS stocks. 

The Commission believes that much 

of the baseline regarding the effects of 

volume-based transaction pricing on 

agency-related volume is relevant to 

principal-based volume. One difference 

in the baseline for principal order flow 

from proprietary trading is that such 

order flow does not have the potential 

for a conflict of interest between 

members and customers with respect to 

routing. Because the member trades for 

its own account when routing in a 

principal capacity, only its own 

interests are at stake in the routing 

decisions. Currently, the transaction 

fees that a member pays and the rebates 

that it receives apply to both the 

member’s agency-related volume and its 

proprietary volume, as exchanges 

generally do not distinguish their 

pricing tiers for orders solely on the 

basis of whether the order was filled in 

a principal or agency capacity. 

However, some tiers, such as those 

reserved for registered market makers, 

effectively only apply to principal 

orders. In addition, the incentives, in 

the form of lower transaction pricing, 

that volume-based exchange transaction 

pricing create to attract members to 

route their orders to particular 

exchanges also apply to principal orders 

in the same way that they do for agencyrelated orders.253 Further, the potential 

for burdens on competition between 

members associated with volume-based 

exchange transaction pricing exist for 

proprietary volume in a similar manner 

as for agency-related volume. Even 

though unlike for agency-related volume 

there are no third-party customers 

involved in or directly impacted by 

exchange transaction pricing for 

principal orders, volume-based pricing 

tiers still present issues related to 

competition by granting those exchange 

members with a high degree of principal 

trading a competitive advantage in 

attracting customer order flow.254

High-volume exchange members’ 

current tiered pricing advantage also 

helps them attract customer order flow 

from non-members and other members. 

The same pricing advantage applies to 

members engaged in both agency and 

principal trading because a member’s 

combined agency-related and principal 

activity is counted towards its total 

volume to qualify it for higher tiers, 

which benefits the member when 

competing for customers in the market 

to provide exchange access to others. To 

the extent that broker-dealers engage in 

principal bidding to fill customer 

orders,255 principal trading may still be 

related to the market to provide 

exchange access to investors, albeit in 

an indirect manner. In this case, the 

barriers to entry in the brokerage 

business, including the contribution of 

volume-based transaction pricing, 

would continue to apply to principalbased trading. 

Whether or not exchange members 

compete for customer orders or 

primarily trade in a principal capacity, 

they face the same fixed costs described 

in section IV.B.4 for data, hardware, 

connectivity including co-location 

services, and other inputs. While these 

fixed costs may create a substantial 

barrier-to-entry, volume-based discounts 

that lower variable costs for trades may 

increase trading activities and variable 

profits for the high-volume members. 

Higher variable profits for high-volume 

members help to offset the fixed costs of 

trading. Hence volume-based 

transaction pricing that lowers trading 

costs for higher volume exchange 

members may amplify the market shares 

of those higher volume exchange 

members. Unlike the proposal which is 

more likely to adversely affect exchange 

members with a high volume of agencyrelated order flow, a ban on volumebased pricing for all orders may also 

affect exchange members with a high 

volume of principal order flow.256

Prohibiting volume-based pricing for 

principal order flow could lead to a 

more level competitive environment 

between exchange members which 

primarily trade in a principal capacity, 

including amongst market makers, as 

differences in fees paid and rebates 

collected may meaningfully affect the 

competitive position of the higher 

volume firms which qualify for more 

preferential pricing tiers.257 Moreover, 

conditional on the extent to which 

volume-based pricing increases trading 

volumes, the prohibition of volumebased pricing under this alternative may 

decrease the investment in faster 

connectivity and technological prowess 

(e.g., trading algorithms) that contribute 

to the competitive edge of principal 

traders by lowering the value of such 

investments. 

A full ban on volume-based 

transaction pricing would result in a 

number of differences in benefits and 

costs. 

Under a full ban on volume-based 

transaction pricing, there would be no 

need, and therefore no requirement, for 

disclosures regarding the number of 

exchange members qualifying for 

volume-based tiers, as there would be 

no volume-based tiers left. Therefore, 

under this alternative there would be no 

need for the disclosures required under 

proposed Rule 6b–1(c) nor would the 

anti-evasion provision in proposed Rule 

6b–1(b) be needed because members 

would not be able to evade a broad 

prohibition through activity such as 

mismarking orders to qualify for tiered 

pricing because volume-based tiered 

transaction pricing would no longer be 

permitted. As described in sections 

IV.B.1 and IV.B.5 volume-based pricing 

tiers contribute to a highly complex 

trading environment and by banning 

volume-based pricing for all orders, this 

alternative may result in simpler 

markets. Volume-based pricing tiers 

allow for significant variation across 

exchanges in the volume-based tiers 

offered to principal orders, and a 

prohibition of volume-based price 

tiering would greatly limit the degree of 

variation in pricing schedules across 

exchanges. This lack of variation would 

make the various trading venues look 

more similar in terms of the fees 

charged facilitating the comparison of 

transaction pricing across exchanges 

and could lead trading to increasingly 

congregate on a smaller number of 

exchanges, those with the highest 

rebates and lowest fees. Relative to this 

alternative, the proposal would still 

allow for a greater variation between 

exchange pricing schedules since it 

would continue to allow the application 

of volume-based pricing tiers to 

principal order flow. On the other hand, 

contrary to the proposal, this alternative 

would be simpler for exchanges to 


ddrumheller on DSK120RN23PROD with PROPOSALS2
76330 Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 

258Exchange members which currently qualify for 

the best volume-based pricing tiers may be worse 

off whilst those which fail to do so may be better 

off. 

259Excessive intermediation here refers to 

excessive quoting in sufficiently liquid securities in 

order to earn rebates, which crowds out investors 

from being able to supply liquidity. Large rebates 

can increase quoting activity from high-frequency 

traders looking to earn rebates. Because rebates are 

paid when a quote is hit by a marketable order, 

obtaining high priority in the queue at each tick is 

essential to such strategies. High-frequency, 

proprietary traders are generally better able to 

obtain such priority, and consequently investors 

may have less opportunity to profitably fill their 

trades using limit orders. 

260Broker-dealers seeking to execute a proprietary 

order may choose to route it to an exchange for the 

purpose of increasing the likelihood of qualifying 

for a volume tier even if, absent tier considerations, 

they would choose to route to another exchange. 

Extending the prohibition of volume-based pricing 

to principal orders would remove this effect and 

could result in a greater dispersion in order flow 

over exchanges, which might increase the 

competitiveness of less dominant exchanges. See 

section IV.C.1.a.iii for a discussion of how 

increased order flow dispersion might benefit 

lower-volume exchanges. 

261See section IV.D.2.b. 

262See section IV.D.2.c. 

263See section IV.D.1 for discussion of how 

exchanges may adjust their price schedules. 

implement than a ban on only tiered 

transaction pricing for agency-related 

volume in at least one sense: exchanges 

would not have to ascertain order 

capacity codes to separate agencyrelated orders from proprietary orders 

when computing member transaction 

invoices. 

The Commission believes that the 

benefits to lower-volume exchange 

members described in section IV.C.1.a.i 

could be increased and extended. In that 

section, the Commission describes how, 

consistent with the relevant economic 

literature, exchanges could set new 

prices that are between the current 

lowest and highest prices offered for 

transactions, benefiting those brokerdealers that currently pay the highest 

prices. To the extent that these brokerdealers have principal order flow, the 

change in transaction pricing would 

apply to that order flow as well, further 

reducing these broker-dealers’ 

transaction costs. 

Similarly, the costs to broker-dealers 

that currently qualify for the highest 

tiers, described in section IV.C.1.b.ii 

would be increased and extended. 

Banning volume-based exchange 

transaction tiers would likely impose 

costs on high-volume exchange 

members in the form of lower rebates/ 

higher transaction fees. The expanded 

ban may also contribute to a loss in the 

competitive advantage of the highvolume members in competing for 

customers, particularly if the member 

would have otherwise leveraged 

discounts on principal volume to attract 

customers and qualify for higher volume 

tiers. The number of broker-dealers 

affected would be greater under this 

alternative relative to the proposal.258 If 

exchanges set transaction fees and 

rebates for all orders that are between 

those offered at the highest and lowest 

volume tiers then exchange members, 

including those which primarily trade 

with principal orders would be affected. 

If exchanges respond to the full ban by 

offering a new price schedule in which 

rebates of the lowest tier are increased 

or transaction fees are decreased, those 

broker-dealers whose principal-related 

volume would have continued to 

qualify for discounts would be subject 

to higher trading costs for this principal 

volume. 

A broad ban on the application of 

volume-based transaction pricing might 

also reduce excessive intermediation, 

i.e., excessive quoting from highfrequency traders looking to earn 

rebates, which may be exacerbated 

through the offer of large rebates, 

particularly amongst higher volume 

exchange members.259

A broad ban would fully prohibit 

volume-based discounts in the closing 

auctions, where the tiers are based on a 

member’s overall trading volume, which 

may benefit both high- and low-volume 

exchange members if this unbundling 

results in a more level playing field for 

intraday trading. As a consequence of 

unbundling, broker-dealers may be less 

constrained by the incentive to direct 

intraday order flow to a primary listing 

exchange so as to qualify for higher 

discounts for their principal order flow 

during the closing auctions. Instead, the 

broker-dealer may place greater weight 

on execution quality or rebates received, 

to the ultimate benefit of the brokerdealer and the customer. Unbundling 

that weakens primary listing exchanges’ 

market power over intraday trading may 

also lead to lower average transaction 

fees for intraday trading, further 

benefitting broker-dealers. 

Banning volume-based transaction 

fees for both principal and agencyrelated order flow may expand the range 

of profitable opportunities for new and 

smaller exchanges while limiting 

persistent concentration across the 

largest exchanges. A ban on volumebased transaction pricing is likely to 

reduce the degree to which exchange 

members concentrate their order flow 

on exchanges by removing the incentive 

to concentrate order flow caused by 

volume-based pricing which is 

discussed in section IV.B.3. As also 

discussed in section IV.B.3 it is likely 

the case that principal order flow is 

more responsive to changes in 

transaction pricing and so extending the 

prohibition of volume-based pricing to 

principal order flow would likely result 

in less order flow concentration. 

Compared to the volume-based 

transaction pricing ban for agencyrelated volume under the proposal, a 

full ban on volume-based transaction 

pricing may result in greater dispersion 

of order flow across the exchanges, 

potentially leveling the playing field 

among larger and smaller exchanges in 

this regard, since a full ban would also 

remove the incentive to concentrate 

principal order flow on exchanges 

offering volume tiers.260 Unlike the 

proposal, eliminating volume-based 

pricing for all orders would reduce the 

incentive to concentrate order flow for 

all orders rather than potentially 

increase the concentration of principal 

order flow as a means of offsetting the 

effects of prohibiting volume-based 

pricing for agency-related order flow.261

Banning the tying of volume-based 

tiering in the closing auctions for both 

agency-related and principal order flow 

may further contribute to a dispersion of 

order flow across exchanges, to the 

benefit of the less dominant exchanges. 

Tying execution costs in the closing 

auction to the firm’s overall trading 

volume on the same platform can alter 

the level of competition for intraday 

trading across exchanges.262 It provides 

a way for primary listing exchanges, 

which facilitate closing auctions with 

large-scale liquidity, to extend their 

market power to intraday trading. 

Prohibiting tiers for both agency-related 

and principal order flow in the closing 

auctions may further contribute to a 

shift in order flow towards non-listing 

exchanges. 

A ban on both principal and agencyrelated flow would constrain the 

exchanges’ ability to adjust their pricing 

schedules for principal flow in a way 

that preserves their existing competitive 

advantages. Shutting down volumebased tiers for both agency-related and 

principal order flow would limit the 

potential for exchanges to employ 

strategic behavior under a ban on only 

agency-related order flow, since this 

behavior may otherwise serve to 

preserve the competitive advantage of 

the largest exchanges.263 For example, 

to counter the potential loss of agency 

volume, the higher-volume exchanges 

may re-adjust their pricing schedules for 

principal order flow. For instance, 

deeper discounts for increases in 

principal order flow may serve to both 

(1) further incentivize the submission of 

inframarginal principal limit orders and 

(2) constrain the newer, smaller 


ddrumheller on DSK120RN23PROD with PROPOSALS2
Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 76331 

264For a discussion concerning the incentive 

broker-dealers may have to carry larger inventory 

position with which to internalize customer orders 

see section IV.C.1.b.iv. 

265 Id. 

266See, e.g., NYSE Rule 104 (for an example of 

a rule that concerns quotation requirements). Such 

exchange rules would typically impose, for 

example, maximum quotation widths (i.e., the 

spread between the bid to buy and the offer to sell) 

as well as time at the inside requirements (i.e., time 

where the market maker must be quoting at least as 

good as the national best bid and offer). 

267See NYSE pricing schedule, available at 

https://www.nyse.com/publicdocs/nyse/markets/ 

nyse/NYSE_Price_List.pdf. 

268For additional discussion regarding the 

incentives introduced by volume-based pricing tiers 

see section IV.B.3. 

exchanges’ ability to effectively compete 

with the dominant exchanges. The 

dominant exchanges’ ability to 

consolidate principal flow increases the 

attractiveness of their exchange services, 

which in turn helps the exchanges 

better attract agency order flow. 

Exchanges may adapt to the proposal in 

a way that not only preserves their 

dominance over the smaller exchanges 

but also confers even more favorable 

rebates for top-tiered principal order 

flow. As previously noted, aside from 

high-frequency trading firms and 

market-makers, exchange members with 

the largest principal order flow also 

tend to be high-volume players in terms 

of their agency order flow. 

Consequently, increased discounts for 

principal trading activities may 

potentially offset some of their profit 

loss from higher transaction fees on 

agency order flow. The possibility of 

cross-subsidization where transaction 

fees on agency-related trading are used 

to subsidize better pricing for principal 

trading activities, along with the 

possibility that broker-dealers may 

effectively transform agency trades into 

principal trades if they switch from an 

agency model to a principal model, 

means that the high-volume brokerdealers’ competitive advantage may 

persist even under a ban on pricing tiers 

for agency flow. 

A by-product of the full ban on 

volume-based transaction pricing would 

be to dampen the possibility that brokerdealers transition to an inventoryholding model, thereby reducing 

systemic risk associated with holding 

inventory.264 A full volume-based ban 

may not only lessen the high-volume 

broker-dealers’ tier advantages from 

principal trading but also limit the 

increase in inventory risk across these 

players that shift towards greater 

reliance on principal trading. 

To the extent that volume-based 

transaction pricing helps exchanges 

better retain order flow, a ban on both 

agency-related and principal order flow 

may increase cost to exchanges in the 

form of forgone revenue and the cost to 

broker-dealers in the form of forgone 

surplus. Section IV.E.1 discusses how 

volume-based pricing, viewed as a price 

discrimination mechanism or in a 

mechanism-design (screening) context, 

can be an effective way for exchanges to 

extract increasing levels of order flow 

and expand total surplus. Some of the 

forgone order flow loss under a full ban 

would be order flow streamed to offexchange venues, as volume-based 

transaction pricing may help exchanges 

compete with off-exchange venues.265

The additional loss of such order flow 

would increase the costs of the rule for 

those exchanges, but this change in 

order flow would be a benefit to the offexchange venues that receive it instead. 

2. Ban Volume-Based Pricing for All 

Orders Except Registered Market Makers 

As an alternative to the proposed 

prohibition of volume-based transaction 

pricing for agency-related orders in 

NMS stocks, the Commission might 

instead prohibit exchanges from offering 

volume-based transaction pricing for all 

volume in NMS stocks, but subject to a 

carve-out only for displayed liquidity 

providing orders from exchange 

registered market makers in their 

registered or appointed symbols where 

the registered market maker is subject to 

minimum continuous quotation and 

minimum quote width standards that 

meet or exceed the highest such 

standards in place among national 

securities exchanges.266

In the current trading environment, 

many stock exchanges also offer 

separate volume-based rebates to their 

registered market makers as a means of 

incentivizing additional liquidity 

provision in the form of displayed 

quotations. For example, one exchange 

has rebate tiers for its market makers 

with qualification based on the percent 

of time the registered market maker 

quotes at the NBBO and the average size 

of those quotes in addition to the 

volume of liquidity provided.267 Similar 

to the volume-based pricing tiers offered 

to non-market-maker exchange members 

these volume-based market maker 

pricing tiers are designed to attract the 

order flow of high-volume market 

makers who contribute significantly to 

the overall liquidity on the exchange.268

As described in section IV.B.1.a, 

exchanges compete to attract 

competitively priced liquidity and they 

do so, in part, by offering variable 

pricing terms to their registered market 

makers which award them with better 

rebates/fees. 

This alternative would allow 

exchanges to incentivize their registered 

market makers, through transaction 

pricing incentives, to maintain 

displayed quotations. It would not 

permit volume-based exchange 

transaction pricing incentives for nondisplayed quoting activity, including 

non-displayed orders, orders not in the 

market maker’s assigned or registered 

symbols (which would not be subject to 

the quantitative and qualitative market 

making standards under an exchange’s 

rules). It also would not allow 

exchanges to determine volume-based 

transaction fees based on total orders or 

customer orders. Rather, the carve-out 

would allow volume-based transaction 

pricing only for the types of orders 

specified above. 

Allowing exchanges to incentivize 

displayed quotations from their 

registered market makers allows 

exchanges to continue to reward 

members for becoming, and remaining, 

registered market makers and for 

posting displayed quotations that are 

visible to and accessible by all market 

participants. Those displayed 

quotations provide an important and 

central public source of price 

transparency that can directly benefit 

investors, as displayed quotations are 

used for many purposes including 

informing trading decisions, 

establishing security valuations, and 

performing index calculations. Allowing 

exchanges to continue to offer 

transaction pricing incentives to 

encourage public displayed quotes, 

where those quotes are subject to 

quantitative and qualitative standards 

contained in exchange rules, could 

benefit the public interest. 

Because this alternative would 

involve a prohibition on volume-based 

exchange transaction pricing for all 

NMS stocks, the discussion and analysis 

above about extending the prohibition 

to also include proprietary volume, 

including the baseline, the costs and 

benefits, and the effects, applies equally 

to this alternative and is hereby 

incorporated by reference. This ban 

might also reduce excessive 

intermediation, i.e., excessive quoting 

from high-frequency traders looking to 

earn rebates, which may be exacerbated 

through the offer of large rebates, 

particularly amongst higher volume 

exchange members, though not from 

registered market makers. 

A prohibition on volume-based 

exchange transaction pricing for both 

agency-related and principal order flow 

that carves out displayed liquidity 

adding orders submitted by exchange 


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76332 Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 

269 In particular, being a market maker involves 

regulatory, technology and operational burdens 

such as having algorithmic trading strategies and 

servers in order to meet the quoting requirements, 

and other affirmative obligations of a registered 

market maker, while doing the fewest possible 

unwanted trades. 

registered market makers in their 

registered or assigned symbols, where 

the registered market maker is subject to 

minimum continuous quotation and 

minimum quote width standards that 

meet or exceed the highest such 

standards in place among national 

securities exchanges, would result in a 

number of differences in benefits and 

costs compared to the proposal. Those 

differences are identical to the 

differences discussed above for the 

alternative involving a prohibition on 

volume-based exchange transaction fees 

for both agency-related and principal 

order flow without a carve out, except 

where otherwise discussed directly 

below. 

Under a ban on volume-based 

exchange transaction pricing with a 

registered market maker displayed quote 

carve out, there would be less need for 

disclosures regarding the number of 

exchange members qualifying for 

volume-based tiers, as fewer members 

would be eligible for volume-based tiers 

and it would only apply to displayed 

quotes. This alternative could be 

implemented with a transparency 

measure for those tiers eligible for the 

displayed quote carve-out, or with no 

additional disclosures. We request 

comment on these different possibilities 

below. While this alternative would 

allow some volume-based exchange 

transaction pricing for displayed 

quoting activity of exchange registered 

market makers, that is only a subset of 

principal trading. Under this alternative, 

volume-based exchange transaction 

pricing would not be available for 

liquidity removing orders, nondisplayed orders, or orders not in one of 

the registered market maker’s assigned 

or registered symbols because those are 

not liquidity-adding quotations for 

which the registered market maker is 

subject to the exchanges’ quotation 

requirements. The significantly 

narrowed scope of what would be 

subject to the disclosures under Rule 

6b–1(c), and the limited subset of 

members and trading activity to which 

they would apply, could significantly 

limit the usefulness of the disclosures to 

a point where the benefits may not 

justify the costs. Accordingly, this 

alternative would not require the 

proposed transparency disclosures. 

Under this alternative, there would be 

no anti-evasion provision because 

members would not be able to evade a 

broad prohibition through activity such 

as mismarking orders to qualify for 

tiered pricing because volume-based 

tiered transaction pricing would no 

longer be permitted except for orders 

that exchanges closely track because 

exchanges need to identify, monitor, 

and count that activity for compliance 

with the applicable exchange market 

making requirements, including 

quantitative quotation standards. Thus, 

the same activity that counts towards 

the registered market maker’s quotation 

would be eligible for tiered pricing 

under the carve out. 

For the same reason, under this 

alternative, exchanges would not be 

required to have policies and 

procedures reasonably designed to 

detect and deter members from engaging 

in practices that evade the prohibition 

because the only type of activity that 

would be eligible for tiered pricing 

would be the specially designated 

activity that counts towards the market 

maker’s displayed quotation 

requirement. 

The Commission does not expect that 

there would be a substantial increase in 

the number of exchange registered 

market makers under this alternative 

even though the continued allowance of 

volume-based transaction pricing for 

exchange registered market makers 

could make becoming one attractive. 

The requirements and obligations 

associated with being a registered 

market maker likely make the prospect 

of becoming a registered market maker 

for the purpose of receiving volumebased pricing on liquidity providing 

orders not economically viable.269

Further, because the activity that would 

be subject to the carve-out would be 

subject to those exchange market 

making requirement rules, any attempt 

to evade the prohibition would result in 

members engaging in trading activity 

that would become subject to those 

market making quoting requirements. 

Accordingly, an anti-evasion provision 

would not serve a comparable purpose 

and would not be necessary with a 

broad ban that has a limited carve-out 

for registered market makers. 

Similar to the alternative discussed in 

section IV.E.1 featuring a prohibition on 

volume-based exchange transaction 

pricing for both agency-related and 

principal order flow, this alternative 

may result in less market fragmentation 

and simplify markets and that 

discussion applies equally to this 

alternative. 

As exchanges would continue to be 

able to offer volume-based transaction 

pricing to market makers in their 

registered or appointed symbols where 

the registered market maker is subject to 

qualitative and quantitative quotation 

standards that meet or exceed the 

highest such standards in place among 

national securities exchanges, 

exchanges would be incentivized to 

adopt more rigorous quantitative and 

qualitative market making requirements. 

Consequently, competition could 

increase for the provision of displayed 

quotes, which should promote price 

discovery and liquidity provision to the 

benefit of investors and the public 

interest. 

For a ban with a limited carve-out for 

registered market maker quoting, 

exchanges should readily be able to 

ascertain the applicable market-making 

activity because it is subject to existing 

quantitative exchange quoting 

requirements. Exchanges would not 

need to ascertain the capacity of other 

interest because those would be subject 

to the broader prohibition. Accordingly, 

a prohibition with a limited carve-out 

for registered market makers should also 

be simpler for exchanges to implement 

than a prohibition on tiered transaction 

pricing for agency-related volume. 

As discussed in the alternative for a 

prohibition on volume-based exchange 

transaction pricing for both agencyrelated and principal order flow, the 

prohibition with a limited carve out for 

registered market makers could also 

provide benefits to lower-volume 

exchange members that currently pay 

the highest prices if exchanges respond 

by offering lower fees and higher rebates 

for non-market making order flow. In 

turn, that could reduce these members’ 

transaction costs. However, members 

that receive the highest rebates and pay 

the lowest fees may see their transaction 

costs increase if exchanges reduce those 

incentives when they discontinue 

offering volume-based transaction 

pricing. A ban with a limited carve-out 

for registered market makers could 

preserve some, or all, of the incentivized 

fee and rebate levels that a registered 

market maker currently receives. 

A ban with a limited carve-out for 

registered market makers also would 

prohibit volume-based discounts for 

both agency-related and principal order 

flow in the closing auctions except for 

the registered market maker limited 

carve out. Similar to the first alternative, 

members who are not market makers 

may be less constrained to direct 

intraday order flow to a primary listing 

exchange so as to qualify for higher 

discounts during the closing auctions. 

Instead, the member may place greater 

weight on execution quality or rebates 

received for just intraday order flow, to 

the ultimate benefit of the broker-dealer 

and the customer. Unbundling that 

weakens primary listing exchanges’ 


ddrumheller on DSK120RN23PROD with PROPOSALS2
Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 76333 

270The SEC Investor Advisory Committee 

previously recommended that the Commission 

enhance disclosures to provide transparency about 

rebate tier practices at exchanges. Specifically, it 

recommended that the Commission receive 

monthly disclosures from exchanges concerning the 

volume of trades that receive a rebate and the rebate 

amounts broken down by volume ranges. In 

addition, it recommended public disclosure on an 

aggregated basis of rebate information broken down 

by tiers. See Recommendation of the SEC Investor 

Advisory Committee Regarding Exchange Rebate 

Tier Disclosure (Jan. 24, 2020), available at https:// 

www.sec.gov/spotlight/investor-advisorycommittee-2012/exchange-rebate-tierdisclosure.pdf. See also supra Request for Comment 

No. 24 (requesting comment on additional items for 

the monthly transparency disclosures, including the 

volume of shares qualifying for each tier, the dollar 

amounts involved, and the average transaction fee 

paid and rebate received by members). 

271The Commission also could expand the 

disclosures to all NMS securities, which would 

include listed options in addition to NMS stocks. 

272See supra section IV.C.3.a. 

273See supra section IV.C.3.b.ii for additional 

discussion of the possible effect that the proposed 

disclosures may have on exchange pricing. 

274As discussed in sections IV.B.1.b and IV.B.2, 

it would be more difficult for exchanges that do not 

employ volume-based pricing to effectively 

compete against those that do, since without 

volume-based pricing exchange members would not 

be incentivized to concentrate their order flow on 

those exchanges. Additionally, lower volume 

exchanges that are newer also face competitive 

hurdles because it would be more costly for them 

to offer higher tier rebates similar to the higher 

Continued 

market power over intraday trading may 

also lead to lower average transaction 

fees for intraday trading, further 

benefitting broker-dealers that are not 

market makers. 

The distortions in intraday routing 

decisions faced by principal traders, as 

mentioned in section IV.B.3, do not 

apply in the same manner to registered 

market makers, for whom market 

making requirements can provide 

incentives to concentrate order flow on 

particular exchanges. 

Because registered market maker 

quoting currently involves passive 

displayed liquidity provision, registered 

market makers cannot direct flow to an 

exchange intraday in the same manner 

that a non-market making member can, 

though they can increase their quoting 

activity in the expectation that they 

would receive more executions. Some 

types of exchange registered market 

makers face more significant quoting 

obligations and trading volume 

requirements than other types of 

exchange registered market makers. To 

meet stringent obligations, those types 

of market makers might be more 

reluctant to reroute orders to exchanges 

for which they are not designated 

market makers. Compared to nonmarket making broker-dealers, tying 

discounts in the closing auction on 

intraday volume might not have as large 

an effect at reducing market makers’ 

surplus. While a full ban could result in 

greater dispersion in trading activities 

across exchanges and a loss of order 

flow to off-exchange venues, a limited 

carve-out for registered market makers 

could induce these members to 

concentrate more quoting activities on 

certain exchanges. Under this 

alternative, new and lower-volume 

exchanges could offer incentives to 

attract registered market maker members 

and could combine that with higher 

market making standards. The 

adjustments in market makers’ 

obligations and benefits might result in 

the exchange more frequently setting the 

best prices and having more available 

liquidity, which would attract liquidityremoving order flow and increase the 

exchange’s market share. 

Under the ban with a limited carveout for registered market makers, 

competitive advantages for high-volume 

broker-dealers might still exist, but the 

advantage would be largely limited to 

registered market makers. Unlike 

ordinary principal trading that only 

involves the proprietary trading 

member, displayed liquidity providing 

orders from exchange registered market 

makers in their registered or appointed 

symbols benefits investors and markets 

by contributing to price formation and 

liquidity provision. Accordingly, a 

limited carve-out for registered market 

makers could allow exchanges to 

continue to incentivize their members to 

become and remain registered market 

makers and quote and thereby confer a 

broader benefit to the market generally 

compared to an incentive on nonmarket-making principal trading. 

To the extent that volume-based 

transaction pricing helps exchanges 

better retain order flow, a prohibition on 

volume-based exchange transaction fees 

for both agency-related and principal 

order flow with a limited carve out for 

registered market makers may, as is the 

case for the first alternative, increase 

costs to dominant exchanges in the form 

of forgone revenue and the cost to highvolume members in the form of forgone 

surplus. A ban with a limited carve-out 

for registered market makers would 

mitigate these increased costs by 

allowing exchanges to offer volumebased pricing to their registered market 

makers on their displayed liquidityadding volume in their registered or 

assigned symbols where applicable 

market making standards apply, thus 

potentially retaining some of that 

transaction volume. 

3. Proceed With Transparency 

Provisions for All Orders Without Tiers 

Prohibition 

The proposal would prohibit volumebased transaction pricing for agencyrelated flow and would mandate 

transparency for principal-flow. 

Alternatives 1 and 2 would broaden the 

volume-based transaction pricing 

prohibition, making transparency 

irrelevant for Alternative 1, though 

possibly relevant for Alternative 2. 

Alternatively, the Commission could 

opt not to prohibit volume-based tiers 

for either agency or principal-related 

volume in NMS stocks, but rather 

expand the disclosures under proposed 

Rule 6b–1(c) to all orders.270

Specifically, under this alternative, the 

Commission would require exchanges to 

disclose periodically certain 

information if they offer volume-based 

transaction pricing for any NMS stocks, 

for both principal and agency-related 

orders.271

Expanding the disclosure under 

proposed Rule 6b–1(c) to all volume in 

NMS stocks, the added transparency 

would have benefits similar to those of 

Rule 6b–1(c) described in the 

proposal.272 It would allow interested 

persons greater access to information 

about the eligibility of each exchange’s 

members for its volume-based 

transaction pricing tiers. It would 

improve the information set for those 

commenting during the SRO filing 

process. These comments, in turn, might 

assist the Commission in determining 

whether a filing is consistent with the 

Exchange Act. As the impact of their 

transaction pricing schedules would 

become evident to other members and 

the commenting public, greater 

transparency could perhaps place 

pressure on exchanges to adopt less 

‘‘bespoke’’ volume-based transaction 

pricing.273 It is possible that the 

appearance of a pricing scheme which 

appears to disproportionately favor a 

small number of exchange members 

might make an exchange more likely to 

voluntarily adopt price schedules with 

a more even distribution of tier 

qualification. 

One issue that is unlikely to be 

addressed by transparency alone would 

be the self-reinforcing competitive 

advantage for high-volume exchange 

members, including high-volume firms 

that trade in a principal capacity. 

Among lower-volume broker-dealers, 

those who route some or all of their 

orders through higher-volume exchange 

members serve to reinforce the 

competitive advantage of high-volume 

exchange members. Compared to 

Alternatives 1 and 2, transparency alone 

might not help level the playing field 

between exchanges that employ volumebased tiers and those that do not.274 In 


ddrumheller on DSK120RN23PROD with PROPOSALS2
76334 Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 

volume exchanges due to their lower trading 

volume. 

275 Dennis W. Carlton and Michael Waldman, 

‘‘The Strategic Use of Tying to Preserve and Create 

Market Power in Evolving Industries’’, 33 RAND J. 

Econ. 194(Summer 2002). Michael D. Whinston, 

‘‘Tying, Foreclosure, and Exclusion’’, 80 Am. Econ. 

Rev. 837 (Sept. 1990). See also a discussion of tying 

from W. Kip Viscusi, Joseph E. Harrington, and 

David E. M. Sappington, Economics of Regulation 

and Antitrust, Chapter 7 Vertical Mergers and 

Vertical Restraints, pages 296–312 (5th ed. 2018). 

276See supra section IV.B.4.a. 

277Meghan Busse and Marc Rysman, 

‘‘Competition and Price Discrimination in Yellow 

Pages Advertising’’, 36 Rand J. Econs. 378 (2005). 

addition, the transparency-only 

alternative might not address the 

incentive for members of more than one 

exchange to concentrate their trading, 

particularly agency-related orders, on 

one particular exchange in order to 

qualify for that exchange’s volumebased tiers, so as to achieve lower fees 

and higher rebates. Likewise, this 

alternative would be unlikely to address 

the related conflict of interest between 

members and customers that can arise 

when the member executes an agencyrelated order (i.e., the incentive for a 

member to route the order to one 

particular exchange over others and 

retain the benefit for itself, assuming it 

does not pass through that better 

exchange transaction pricing to its 

customer). Finally, this alternative is 

unlikely to address the incentive for a 

listing exchange to exploit demand for 

participating in the closing auction by 

offering discounts on auction orders to 

members who send volume, particularly 

agency-related volume, into the intraday 

trading session—a practice that may 

contribute to listing exchanges 

preserving or extending their market 

power at the expense of non-listing 

exchanges and potentially exchange 

members. However, compared to the 

proposal, this alternative would not lead 

to an advantage of principal brokerage 

models over agency ones. We request 

comment below on the relative benefits 

of the proposed ban versus transparency 

and mechanisms through which 

transparency would address the 

problems identified in the proposal. 

4. Banning the Linking of Volume-Based 

Tiers for Closing Auctions to 

Consolidated Volume 

The Commission might ban 

conditioning closing auctions’ 

transaction fees on consolidated 

volume. Under this alternative, current 

volume-based discounts for trading 

during regular hours would continue, 

but execution costs for the closing 

auction would no longer be based on a 

member’s continuous order book 

volume. Offering discounts for closing 

auction pricing linked to overall volume 

is a practice known as ‘‘auction linked 

pricing.’’ 

This ban would likely alter the level 

of inter-exchange competition, diverting 

more intraday order flow to small, nonlisting exchanges. Conditional pricing, 

or qualifications for price discounts on 

one product depending on the purchase 

levels of other products, has been 

shown to harm competition when 

firm(s) with market power are able to 

foreclose rival(s) from a portion of the 

market or drive rivals out of the market 

entirely.275 Similar intuition may apply 

to an exchange context under the 

current baseline, where price discounts 

for participation in the closing auctions 

are conditioned on consolidated 

volume. Because conditional pricing for 

closing auctions provides incentive for 

broker-dealers to stream intraday 

volume to the same listing exchanges, 

tying provides a way for listing 

exchanges with market power over their 

closing auctions to partially expand 

their dominance to intraday trading. A 

ban on conditional pricing may provide 

a more level playing field for interexchange competition and result in 

lower transaction fees for the average 

broker-dealer participating during 

regular trading hours. 

The ban would likely benefit small, 

non-listing exchanges at the cost of 

primary listing exchanges. Tying 

provides a way for listing exchanges to 

soften competition and potentially 

charge higher transaction fees for 

trading during regular hours, compared 

to a regime where exchanges compete 

for order flow for the ‘‘standalone’’ 

market for intraday trading. Un-tying 

execution cost in the closing auction to 

total volume reduces a broker-dealer’s 

incentive to route to a primary listing 

exchange during regular hours, in 

anticipation of participating in the 

closing auction on the same platform. 

Unbundling the auction and continuous 

order book trading decisions could 

increase non-listing exchanges’ profits 

at the expense of the listing exchanges’ 

profits. 

Prohibiting tying auction fees to 

broker-dealers’ overall volume may alter 

consumers’ choices in a way that leads 

to improvement of broker-dealers’ 

welfare. To qualify for lower fees during 

closing auctions, broker-dealers may 

make intraday order routing decisions 

that are suboptimal. Unbundling the 

closing auction trading decisions and 

order routing choices during regular 

hours may ultimately be in the brokerdealers’ best interests, especially in 

combination with the fact that 

competition across exchanges may 

lower average transaction fees during 

regular trading hours. 

Removing the conditioning of closing 

auction tiers on consolidated volume 

removes an additional pricing advantage 

for high-volume broker-dealers, who 

may already be trading at dramatically 

reduced prices because of their tier 

qualifications from intraday trading. 

Tiers applied to trading volume from 

broker-dealers’ continuous order book 

confers an outsized pricing advantage to 

the high-volume broker-dealers. One 

concern is that the interaction of the 

high-volume broker-dealers’ tiered 

pricing advantage and high fixed market 

data and connectivity costs creates 

significant disadvantage for lowervolume firms.276 Pricing tiers for the 

closing auctions may accentuate the 

barrier-to-entry for lower-volume firms, 

in an industry that has seen no salient 

growth of nascent firms in recent years. 

Prohibiting volume-based pricing for the 

closing auctions removes one potential 

source of barrier-to-entry for lowervolume broker-dealers. 

Among incumbent exchange members 

participating in the closing auctions, 

prohibiting ‘‘auction linked pricing’’ 

may increase low-volume brokerdealers’ profits derived from closing 

auctions while decreasing high-volume 

broker-dealers’ profits. Unlinking 

transaction fees for closing auctions to 

member’s overall trading volume may 

induce exchanges to reduce the 

execution cost differentials between 

high- and low-volume participants in 

the closing auctions. Because the 

execution cost for low-volume members 

may be reduced, these members who 

share their reduced input costs with 

customers can better attract agency 

order flow from investors and nonmembers. On the other hand, 

prohibiting ‘‘auction linked pricing’’ 

may lessen high-volume members’ 

advantage in directing agency order 

flow to the closing auctions. 

Removing only the closing auctions’ 

volume criteria that are tied to overall 

trading volume preserves the volumebased pricing schemes for intraday 

trading, a potential dimension along 

which firms compete and a practice that 

may be welfare-enhancing. For a 

different market setting where the 

authors examine pricing schedules that 

embody discounts for greater demand or 

utilization, the authors find that firms 

compete more aggressively to offer size 

discounts in response to increased 

competition from rivals.277 The paper 

highlights volume-based discount as a 

channel through which newspaper firms 

compete with one another as means to 

retain orders for advertising. This 


ddrumheller on DSK120RN23PROD with PROPOSALS2
Federal Register / Vol. 88, No. 213 / Monday, November 6, 2023 / Proposed Rules 76335 

278See supra section IV.D.1. 

279 Gregory S. Crawford, ‘‘The Discriminatory 

Incentives to Bundle in the Cable Television 

Industry’’, 6 Quantitative Mktg. & Econ. 41 (2008). 

280See Katherine Ho, Justin Ho, & Julie Holland 

Mortimer, ‘‘The Use of Full-Line Forcing Contracts 

in the Video Rental Industry’’, 102 Am. Econ. Rev. 

686 (2012), for an empirical analysis. See Dennis W. 

Carlton and Michael Waldman, ‘‘The Strategic Use 

of Tying to Preserve and Create Market Power in 

Evolving Industries’’, 33 Rand J. Econ. 194 (Summer 

2002), for theoretic analysis. Michael D. Whinston, 

‘‘Tying, Foreclosure, and Exclusion’’, 80 Am. Econ. 

Rev. 837 (Sept. 1990). See also a discussion of tying 

from W. Kip Viscusi, Joseph E. Harrington, and 

David E. M. Sappington, Economics of Regulation 

and Antitrust, Chapter 7 Vertical Mergers and 

Vertical Restraints, 296–312 (5th ed. 2018). 

281Certain Commission rules require registrants 

to post structured disclosures on their individual 

websites. For example, market centers (including 

equities exchanges) are required to post order 

execution disclosures on their websites in pipedelimited ASCII. See 17 CFR 242.605(a)(1) and (2); 

Securities and Exchange Commission File No. 4– 

518 (National Market System Plan Establishing 

Procedures Under Rule 605 of Regulation NMS). 

Broker-dealers are required to post order routing 

disclosures on their websites using a custom XML 

schema designed by the Commission for those 

disclosures. See 17 CFR 242.606. Nationally 

recognized statistical rating organizations are 

required to post credit rating history disclosures on 

their websites in XBRL. See 17 CFR 240.17g–7(b)(3). 

282The Commission recently proposed rules to 

require certain registered entities, including 

exchanges, to file new cybersecurity risk and 

incident history disclosures in EDGAR and post 

copies of those disclosures on their individual 

websites. See Cybersecurity Risk Management Rule 

for Broker-Dealers, Clearing Agencies, Major 

Security-Based Swap Participants, the Municipal 

Securities Rulemaking Board, National Securities 

Associations, National Securities Exchanges, 

Security-Based Swap Data Repositories, SecurityBased Swap Dealers, and Transfer Agents, 

Securities Exchange Act Release No. 97142 (Mar. 

15, 2023), 88 FR 20212 (Apr. 5, 2023). In the 

proposing release, the Commission stated its belief 

that retail investors (as well as other market 

participants) would have an interest in accessing 

the cybersecurity disclosures. See id. at 20308. 

283For example, security-based swap entities file 

Form SBSE in a custom XML language specific to 

that form. See section 8.2.19 of the EDGAR Filer 

Manual (Volume II) version 66 (Jun. 2023). 

observation, along with the fact that 

price discrimination schemes may 

enhance both the price-setting firms’ 

and the customers’ overall welfare if 

they lead to greater demand,278 suggests 

that volume-based tiers may potentially 

be a welfare-enhancing outcome of 

competition across exchanges. Despite 

the caveat that high-volume brokerdealers may disproportionately benefit 

from volume-based discounts, pricing 

tiers for intraday trading may be worth 

preserving because of their welfareenhancing potentials. On the other 

hand, a number of studies have shed 

light on ways in which tying prices for 

complementary goods (or markets) can 

be effectively used by firms to (1) extract 

more surplus from customers 279 or (2) 

expand its market power from a 

dominant market to complementary 

markets.280 Without salient cost 

synergies from bundling (i.e., 

concentrating limit book order flow and 

participation in closing auction on the 

same listing exchange) or an 

enhancement in overall demand for 

broker-dealers, welfare-reducing tying 

justifies a ban on linking tiers for 

closing auctions to intraday trading 

volumes. 

5. Require Disclosures of Volume-Based 

Pricing in Proprietary Volume in NMS 

Stocks To Be Posted on Exchange 

Websites or Submitted Through a 

Different System 

The Commission considered requiring 

equities exchanges post the fee and 

rebate tiers disclosures in Inline XBRL 

on their websites, either in addition to, 

or instead of, filing the disclosures in 

EDGAR.281 Requiring exchanges to 

place the structured fee tiers disclosures 

only on exchange websites would 

relieve exchanges of the need to apply 

for EDGAR filing access and adjust their 

compliance systems to submit the 

disclosures in EDGAR, thus reducing 

costs on exchanges. However, a website 

posting requirement would also 

decrease the ease of retrieving and 

consolidating the new disclosures, 

because data users would need to visit 

each equities exchange’s website to 

retrieve the disclosed information and 

manually incorporate those disclosures 

into datasets (or pay a third party to do 

so). In addition, the data quality 

associated with the disclosures could 

decrease under a website-only 

requirement, because website postings 

would not be subject to programmatic 

checks for nondiscretionary errors (such 

as text where there should only be 

numbers). Such accessibility and data 

quality issues could impede the 

objective of the proposal, which is to 

provide the Commission and the public 

with insight into the application of an 

exchange’s volume-based transaction 

pricing schedule and to provide 

information that could facilitate 

assessment of the level of competition 

among exchanges and the impact of 

pricing tiers on intermarket 

competition. Requiring exchanges to 

place the structured fee tiers disclosures 

only on exchange websites would 

relieve exchanges of the need to apply 

for EDGAR filing access and adjust their 

compliance systems to submit the 

disclosures through EDGAR, thus 

reducing burdens on exchanges. 

Requiring exchanges to place the 

structured disclosures both on exchange 

websites and on EDGAR would not 

relieve exchanges of the need to apply 

for EDGAR filing access and adjust their 

compliance systems to submit the 

disclosures in EDGAR, and thus would 

not reduce costs on exchanges. In 

addition, while adding a website 

disclosure requirement may make it 

likelier that investors accustomed to 

accessing exchange websites for 

transaction pricing schedules would 

access those disclosures, the 

Commission believes the fee and rebate 

tiers information, when submitted 

electronically to the Commission, likely 

would be equally accessible to the 

parties most likely to access the 

information on a regular basis (e.g., 

broker-dealer exchange members, 

financial data aggregators and other 

market participants).282

Alternatively, the Commission could 

require the disclosures to be submitted 

through another filing system, 

specifically the Electronic Form Filing 

System (‘‘EFFS’’) through which 

exchanges presently file their proposed 

pricing changes on Form 19b–4. Using 

EFFS would reduce the burdens on 

exchanges by relieving them from the 

need to apply for EDGAR filing access 

and adjust their compliance systems to 

submit the disclosures using EDGAR. 

Use of EFFS would allow the 

Commission to centralize the collection 

of the disclosures and could still allow 

for the application of programmatic 

checks for nondiscretionary errors. 

However, EFFS would need to be 

expanded to accept the disclosures in 

Inline XBRL format, and a mechanism 

would need to be implemented to make 

the disclosures available to the public. 

6. Require a Different Structured Data 

Language for the Disclosures of VolumeBased Pricing in Proprietary Volume in 

NMS Stocks 

The Commission also considered 

requiring that exchanges make the 

disclosures in a different machinereadable structured data language than 

Inline XBRL. The Commission 

considered requiring equities exchanges 

to submit the proposed disclosures in an 

eXtensible Markup Language (‘‘XML’’)- 

based data language specific to that form 

(‘‘custom XML’’ or, here, ‘‘Tiers-specific 

XML’’). Currently, certain registrants 

make filings in EDGAR in custom XML 

data languages that are specific to 

particular forms.283 For custom XML 

filings, filers typically are provided the 

option to either submit the filing 

directly to the EDGAR system in the 

relevant custom XML data language, or 

to manually input the information into 

a fillable web-based form developed by 

the Commission that converts the 


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284See Donna Johaneman & Louis Matherne, 

Harmonizing Accounting and Data Standards, 

XBRL.us, Dec. 23, 2019, available at https://xbrl.us/ 

harmonizing-accounting-data-standards/ (‘‘As a 

data standard, [XBRL] is designed to support an 

existing accounting standard by unambiguously 

conveying details about that accounting standard 

reporting requirement.’’). For example, the 

Financial Accounting Standards Board assumed the 

ongoing development of the Generally Accepted 

Accounting Principles (‘‘GAAP’’) Taxonomy from 

the SEC in 2010 to keep it current with GAAP. 

XBRL: What Is it? Why the FASB? Who Uses It?, 

FASB.org, available at https://www.fasb.org/page/ 

PageContent?pageId=/staticpages/what-isxbrl.html&isstaticpage=true; see also IFRS 

Accounting Taxonomy 2023, XBRL.org, available at 

https://www.xbrl.org/news/ifrs-accountingtaxonomy-2023/. 

285See, e.g., Standard Taxonomies, SEC.gov, 

available at https://www.sec.gov/info/edgar/ 

edgartaxonomies; Taxonomies, XBRL.us, available 

at https://xbrl.us/home/filers/sec-reporting/ 

taxonomies/. 

286 XBRL International is a global, nonprofit 

consortium that oversees the XBRL standard. 

Introduction to XBRL, XBRL.org, available at 

https://www.xbrl.org/the-standard/what/anintroduction-to-xbrl/. XBRL US is a jurisdiction of 

XBRL International. See also Membership 

Organizations, XBRL.us, available at https://xbrl.us/ 

join-us/membership/xusmembers/; Membership 

List, XBRL.org, available at https://www.xbrl.org/ 

the-consortium/about/membership-list/. 

completed form into a custom XML 

document. 

As with the proposed Inline XBRL 

requirement, a custom XML 

requirement would allow the 

Commission to download the proposed 

information in a structured, machinereadable form, facilitating efficient 

access, organization, and evaluation of 

the disclosed information. Furthermore, 

if any filers were to use the fillable webbased form to provide their information 

under a custom XML requirement, those 

filers would forgo the compliance costs 

related to structuring their fee and tierbased disclosures. 

However, the Commission believes 

the use of Inline XBRL for the fee and 

rebate tiers disclosures would provide 

advantages that the use of Tiers-specific 

XML would not. First, XBRL uses and 

implements existing accounting and 

reporting standards,284 which facilitates 

the coordination and sharing of 

financial information. Thus, Inline 

XBRL would be well-suited to handle 

data about proprietary volume-based 

pricing tiers on equities exchanges. 

Second, the Commission believes 

creating a custom XML schema for the 

fee and rebate tiers disclosures would be 

less efficient than leveraging the 

existing Inline XBRL architecture, 

because doing so would involve recreating features that XBRL already 

offers through its taxonomies and 

related data elements within those 

taxonomies.285 Lastly, the use of a 

standard structured data language such 

as Inline XBRL would allow equities 

exchanges and market participants to 

leverage an existing ecosystem of 

software tools, service providers and 

related infrastructure that support XBRL 

tagging.286 Thus, the Commission 

believes the use of a custom XML 

schema designed specifically for a 

particular regulatory form, while an 

improvement over unstructured forms, 

would not provide the same level of 

benefit as the use of a global, 

interoperable standard data language 

such as Inline XBRL. 

7. Remove Structured Data Language 

Requirement for Disclosures of VolumeBased Pricing in Proprietary Volume in 

NMS Stocks 

The Commission also considered not 

including the proposed requirement that 

exchanges submit the disclosures in a 

structured data language. Such an 

alternative would result in an 

incremental reduction in cost to equities 

exchanges associated with filing the fee 

tiers disclosures. However, the absence 

of any structured data language 

requirement would significantly reduce 

the benefits of the proposal because the 

fee tiers data would be more difficult for 

the Commission and market participants 

to assemble, review, and analyze. The 

use of HTML, ASCII, PDF, or another 

unstructured format for the proposed 

disclosures would force user of the data, 

including Commission staff and market 

participants, to manually transcribe 

information from the disclosures into 

datasets for aggregation, analysis, and 

comparison of the proprietary volumebased pricing data, or pay a third party 

to do so. This would impede data users 

such as financial analysts from 

producing reports and analyses about 

equities exchange fee tiers practices and 

trends that market participants could 

find useful. 

F. Request for Comment 

The Commission is sensitive to the 

potential economic effects, including 

costs and benefits, of the proposed rule. 

The Commission has identified certain 

costs and benefits associated with the 

proposal and requests comment on all 

aspects of its preliminary economic 

analysis, including with respect to the 

specific questions below. The 

Commission encourages commenters to 

identify, discuss, analyze, and supply 

relevant data, information, or statistics 

regarding any such costs or benefits. In 

addition, the Commission has the 

following specific requests: 

31. Is there a lack of transparency for 

exchange price schedules? Does a lack 

of information on how many exchange 

members qualify for each volume-based 

tier in a given month inhibit public 

comment on exchange fees? 

32. The Commission discussed above 

how the presence of volume-based 

transaction pricing on exchanges 

introduces a potential conflict of 

interest, because it gives broker-dealers 

an incentive to route agency-based 

volume in a way that minimizes 

exchange fees for the broker-dealer. Is 

such a conflict of interest present? The 

Commission requests comment on the 

impact of such potential conflicts of 

interest. 

33. Does volume-based transaction 

pricing promote concentration in the 

broker-dealer business? Specifically, 

does it offer an advantage to larger 

broker-dealers that makes it harder for 

small broker-dealers to compete? Does 

this make it more difficult for new 

broker-dealers to enter the NMS equity 

brokerage business than it would be 

without volume-based transaction 

pricing? 

34. Do commenters believe that there 

are relevant factors which were not 

discussed in the Commission’s 

characterization of the relevant baseline 

for the proposed rule? Please describe 

any additional baseline details that you 

believe are relevant for understanding 

the impact of the proposed rule. 

35. Is the Commission’s description of 

current exchange pricing accurate, 

including the practice of volume tiering 

and using auction linked pricing to 

attract volume outside of the auction? 

Are there additional details about these 

practices which you believe are relevant 

to understanding their impact? 

36. Do fees and rebates play a role in 

attracting order flow to exchanges? How 

sensitive are market participants to fees 

and rebates when making decisions 

about where to route orders? Do 

transaction fees and rebates significantly 

influence an exchange’s market share? 

37. What is the role of volume-based 

transaction pricing and its impact on 

what different market participants pay? 

38. Does tying closing auction prices 

to intraday volume have an impact on 

the market share exchanges are able to 

obtain for intraday volume? 

39. How does volume-based 

transaction pricing impact order routing 

incentives for broker-dealers? Does the 

impact involve a potential conflict of 

interest? 

40. Is the Commission’s 

characterization of the market to 

provide access to exchanges to nonmembers through things like sponsored 

access and direct market access 

accurate? Are there any relevant factors 

which were not discussed in the 

Commission’s characterization of the 


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baseline for the market to provide 

exchange access? 

41. What is the current effect of 

volume-based tiering on broker-dealer 

services? Does current volume-based 

tiering create a barrier to entry in the 

market for NMS equity brokerage 

services? 

42. Is there substantial dispersion in 

the size of broker-dealer exchange 

members? What effect does such 

dispersion have on the market to 

provide exchange access and the role of 

volume-based transaction pricing in that 

market? 

43. What is the current level of tier 

transparency? Does the lack of public 

knowledge of the number of exchange 

members that qualify for each tier affect 

the ability of the public to submit 

informed comments on exchange fees? 

44. Are there any additional benefits 

from increased transparency the 

Commission did not discuss? 

45. Is the Commission’s assessment of 

the benefits of EDGAR and Inline XBRL 

requirements accurate? 

46. What other benefits or costs to 

investors may arise from exchanges 

voluntarily adopting different price 

schedules after the implementation of 

the transparency provisions? 

47. Do commenters agree with the 

Commission’s assessment of the 

implementation costs associated with 

the transparency provision of the 

proposed rule? Are there any technical 

aspects which were not discussed 

which would affect any implementation 

costs? Do commenters agree with how 

the Commission has characterized the 

costs associated with the requirement 

for structured data, and the EDGAR 

filing requirement? 

48. Will there be reputation costs and 

other monetary costs related to changes 

exchanges may make to their tiered 

pricing in response to the transparency 

requirements, as the Commission 

describes above? 

49. Are there any additional benefits 

or costs of the transparency provisions 

that the Commission did not discuss? 

50. Do commenters agree with the 

Commission’s assessment of the benefits 

stemming from the effects of the 

volume-based prohibition on agencyrelated order pricing and competition 

among broker-dealers? In particular, 

would lower-volume exchange members 

end up with lower fees and higher 

rebates under such a ban? Would a flat 

fee and rebate for agency-related volume 

increase competition among brokerdealers to provide exchange access? 

Would investors benefit from the lower 

prices for lower-volume exchange 

members and lower barriers to entry in 

the NMS equity brokerage business? 

51. Would prohibiting the application 

of volume-based pricing for agencyrelated order flow and the proposed 

disclosure provisions promote or 

impede competition between 

exchanges? Does the Commission 

adequately capture the costs and 

benefits resulting from the effect of the 

proposed rule on competition among 

exchanges? 

52. What impact would an 

elimination of volume-based pricing on 

agency-related order flow have on the 

NBBO, including the spread width and 

depth of displayed interest at the 

NBBO? 

53. Would the prohibition of volumebased pricing for agency-related order 

flow affect order-routing decisions by 

reducing the conflict of interest between 

members and customers in agency order 

routing? 

54. Would the execution quality of 

agency-related orders improve by 

reducing the incentive to concentrate 

order flow on a small number of 

exchanges? 

55. Do commenters agree with the 

Commission’s assessment of the costs 

from the effect of the rule on 

competition among broker-dealers? Do 

you agree that the rebates earned will 

likely decrease and the fees paid will 

increase for the higher-volume brokerdealer members? Would these costs also 

affect non-members that work with 

higher-volume exchange members to 

trade? 

56. Do commenters agree with the 

Commission’s description of the 

indirect costs and reduction in 

efficiency which may result from a 

reduction of order-flow executed by 

higher-volume exchange members on 

exchanges? 

57. How likely is the proposed 

prohibition of volume-based pricing for 

agency-related order flow to result in 

broker-dealers moving to an inventory 

model? Do commenters agree with the 

Commission’s assessment of the costs of 

the proposed rule resulting from 

increased principal trading? 

58. Would the proposed rule affect the 

ability of exchanges to compete with offexchange venues? Do commenters agree 

with the Commission’s assessments of 

the costs from order flow potentially 

moving to off-exchange venues? 

59. Are there any additional benefits 

or costs from the prohibition of volumebased transaction pricing for agencyrelated volume that you believe the 

Commission did not discuss? 

60. Do commenters agree with the 

Commission’s assessment of the benefits 

and costs from the proposed rule’s 

requirements that exchanges adopt rules 

and policies and procedures to prevent 

evasion? 

61. Do commenters agree with the 

Commission’s assessment of the impact 

of the proposed rule on efficiency, 

competition, and capital formation? 

62. The Commission requests 

comment on the effects of an alternative 

that implements a ban on volume-based 

transaction pricing for all exchange 

order types. 

63. How important are the various 

privileges afforded to registered market 

makers by the exchanges to their 

willingness to participate and ability to 

function effectively? What is the effect 

of registered market makers on exchange 

liquidity? 

64. Do commenters believe that 

volume-based transaction pricing serves 

a unique role in the function of 

registered market makers? In particular, 

do such tiers improve the participation 

of registered market makers, or improve 

their performance on exchange as a 

market maker? Do such tiers create a 

barrier to entry for smaller registered 

market makers? What is the effect of 

volume-based tiering on competition 

among registered market makers to 

provide liquidity in a given security? 

65. If the Commission prohibited the 

application of volume-based pricing for 

all order types with a carve-out for the 

application of volume-based pricing 

only for registered market makers, 

would requiring the monthly disclosure 

of the number of members which 

qualify for any tiers which fall within 

the carve-out provide meaningful 

information? Could knowledge of the 

distribution of tier qualification across 

registered market makers influence 

order-routing decisions? 

66. How impactful would the 

proposed disclosure provisions, 

expanded to apply to all volume-based 

tiers, without any prohibition on the 

application of volume-based pricing, be 

on addressing competitive imbalances 

between broker-dealers? Do there exist 

data to support conclusions on such 

impacts? Would the proposed 

disclosure provisions influence order 

routing decisions by exchange 

members? 

67. Would the information revealed 

through the monthly disclosure of the 

number of exchange members qualifying 

for each pricing tier, absent any 

prohibition of the application of 

volume-based pricing, meaningfully 

influence future exchange transaction 

price schedules? Would the disclosures 

promote exchange competition? Do 

there exist data to support conclusions 

on such influence? 

68. The Commission requests 

comment on all aspects of the costs of 


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287 5 U.S.C. 601 et seq. 

288 5 U.S.C. 603(a). 

289 5 U.S.C. 551 et seq. 

290The Commission has adopted definitions for 

the term ‘‘small entity’’ for purposes of Commission 

rulemaking in accordance with the RFA. Those 

definitions, as relevant to this proposed rulemaking, 

are set forth in 17 CFR 240.0–10 (Rule 0–10). See 

Securities Exchange Act Release No. 18451 (Jan. 28, 

1982), 47 FR 5215 (Feb. 4, 1982) (File No. AS–305). 

291See 5 U.S.C. 605(b). 

292See 17 CFR 240.0–10(e). 

293See also Securities Exchange Act Release Nos. 

82873 (Mar. 14, 2018), 83 FR 13008, 13074 (Mar. 

26, 2018) (File No. S7–05–18) (Transaction Fee Pilot 

for NMS Stocks Proposing Release); 55341 (May 8, 

2001), 72 FR 9412, 9419 (May 16, 2007) (File No. 

S7–06–07) (Proposed Rule Changes of SelfRegulatory Organizations proposing release); Access 

Fee Proposal, supra note 17, at 87 FR at 80357. 

294Public Law 104–121, Title II, 110 Stat. 857 

(1996) (codified in various sections of 5 U.S.C., 15 

U.S.C. and as a note to 5 U.S.C. 601). 

the proposal to require equities 

exchanges to provide the proposed tiers 

disclosures electronically on EDGAR in 

Inline XBRL. Are there costs that the 

Commission has over- or understated? 

Are there additional costs that the 

Commission has not mentioned? Please 

explain your answer. 

69. Are the Commission’s assessment 

of the costs of the requirements to 

provide the proposed disclosures in 

Inline XBRL correct? Please explain 

why or why not. Would the use of a 

different structured data language 

impact the cost of the structuring 

requirement? Please explain why or 

why not. 

70. Is the Commission’s assessment of 

the costs of the requirements to provide 

the disclosures to the public using 

EDGAR correct? Please explain why or 

why not. How would the costs change 

if the Commission required exchanges 

to post the disclosures on their 

individual websites rather than submit 

the disclosures using EDGAR? 

71. Should the proposed fee tiers 

disclosures be provided in a structured 

data language other than Inline XBRL? 

For example, should exchanges 

structure the proposed fee tiers 

disclosures using a custom XML schema 

specific to those disclosures? Why or 

why not? Alternatively, should 

exchanges structure the proposed fee 

tiers disclosures using a pipe-delimited 

ASCII format rather than Inline XBRL? 

Why or why not? Should the 

Commission instead require the 

proposed fee tiers disclosures be 

provided in an unstructured format? Are 

there other alternatives related to 

structured data languages that would be 

appropriate? How would the use of a 

different language impact the usability 

and accessibility of the tables for data 

users? What time or expense is 

associated with the recommended 

structured data language? Would a 

particular structured data language 

require any filers or users to license 

commercial software they otherwise 

would not, and, if so, at what expense? 

V. Regulatory Flexibility Act 

Certification 

The Regulatory Flexibility Act 

(‘‘RFA’’) 287 requires Federal agencies, in 

promulgating rules, to consider the 

impact of those rules on small entities. 

Section 603(a) 288 of the Administrative 

Procedure Act,289 as amended by the 

RFA, generally requires the Commission 

to undertake a regulatory flexibility 

analysis of all proposed rules, or 

proposed rule amendments, to 

determine the impact of such 

rulemaking on ‘‘small entities.’’ 290

Section 605(b) of the RFA states that 

this requirement shall not apply to any 

proposed rule or proposed rule 

amendment which, if adopted, would 

not have a significant economic impact 

on a substantial number of small 

entities.291

The proposed rule would apply only 

to national securities exchanges 

registered with the Commission that 

trade NMS stocks. Rule 0–10(e) states 

that the term ‘‘small business,’’ when 

referring to an exchange, means any 

exchange that has been exempted 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 

as defined in Rule 0–10.292 The 

exchanges subject to this proposed 

rulemaking do not satisfy this standard. 

Therefore, none of the exchanges that 

would be subject to the proposed rule 

are ‘‘small entities’’ for purposes of the 

RFA.293

For the above reasons, the 

Commission certifies that proposed Rule 

6b–1 would not have a significant 

economic impact on a substantial 

number of small entities for purposes of 

the RFA. 

The Commission requests comment 

regarding this certification. In 

particular, the Commission solicits 

comment on the following: 

72. Do commenters agree with the 

Commission’s certification? If not, 

please describe the nature of any impact 

on small entities and provide empirical 

data to illustrate the extent of the 

impact. 

VI. Consideration of Impact on the 

Economy 

For purposes of the Small Business 

Regulatory Enforcement Fairness Act of 

1996, or ‘‘SBREFA,’’ 294 the Commission 

must advise OMB whether a proposed 

regulation constitutes a ‘‘major’’ rule. 

Under SBREFA, a rule is considered 

‘‘major’’ where, if adopted, it results in 

or is likely to result in (1) an annual 

effect on the economy of $100 million 

or more; (2) a major increase in costs or 

prices for consumers or individual 

industries; or (3) significant adverse 

effects on competition, investment, or 

innovation. The Commission requests 

comment on whether this proposal 

would be a ‘‘major rule’’ for purposes of 

the SBREFA. The Commission also 

requests comment on the potential effect 

of proposed Rule 6b–1 on the U.S. 

economy on an annual basis; any 

potential increase in costs or prices for 

consumers or individual industries; and 

any potential effect on competition, 

investment, or innovation. Commenters 

are requested to provide empirical data 

and other factual support for their views 

to the extent possible. 

Statutory Authority 

Pursuant to the Exchange Act (15 

U.S.C. 78a et seq.), and particularly 

sections 2, 3(b), 5, 6, 11, 11A, 15, 15A, 

17, 19, 23(a), 24, and 36 thereof, 15 

U.S.C. 78b, 78c(b), 78e, 78f, 78k, 78k– 

1, 78o, 78o–1, 78q, 78s, 78w(a), 78x, and 

78mm, the Commission is proposing to 

amend §§ 232.101 and 232.405 and is 

proposing new § 240.6b–1, as set forth 

below. 

List of Subjects 

17 CFR Part 232 

Electronic filing, Reporting and 

recordkeeping requirements, Securities. 

17 CFR Part 240 

Fees, Reporting and recordkeeping 

requirements, Securities. 

Text of the Proposed Rules 

In accordance with the foregoing, the 

Securities and Exchange Commission 

proposes to amend title 17, chapter II of 

the Code of Federal Regulations as 

follows: 

PART 232—REGULATION S–T— 

GENERAL RULES AND REGULATIONS 

FOR ELECTRONIC FILINGS 

■ 1.The general authority citation for 

part 232 continues to read as follows: 

Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 

77j, 77s(a), 77z–3, 77sss(a), 78c(b), 78l, 78m, 

78n, 78o(d), 78w(a), 78ll, 80a–6(c), 80a–8, 

80a–29, 80a–30, 80a–37, 80b–4, 80b–6a, 80b– 

10, 80b–11, 7201 et seq.; and 18 U.S.C. 1350, 

unless otherwise noted. 

* * * * * 

■ 2. Amend § 232.101: 


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■ a. In paragraph (a)(1)(xxx), by 

removing the word ‘‘and’’ from the end 

of the paragraph; 

■ b. In paragraph (a)(1)(xxxi), by 

removing the period and adding it its 

place ‘‘; and’’; and 

■ c. By adding paragraph (a)(1)(xxxii). 

The addition reads as follows: 

§ 232.101 Mandated electronic 

submissions and exceptions. 

(a) * * * 

(1) * * * 

(i) * * * 

(xxxii) Disclosures provided pursuant 

to § 240.6b–1(c) of this chapter. 

* * * * * 

■ 3. Amend § 232.405 by: 

■ a. Revising the introductory text, and 

paragraphs (a)(2), (a)(3)(i) introductory 

text, (a)(3)(ii), (a)(4), and (b)(1) 

introductory text; 

■ b. Adding paragraph (b)(6); and 

■ c. Revising Note 1 to § 232.405. 

The revisions and addition read as 

follows: 

§ 232.405 Interactive Data File 

submissions. 

This section applies to electronic 

filers that submit Interactive Data Files. 

Section 229.601(b)(101) of this chapter 

(Item 601(b)(101) of Regulation S–K), 

General Instruction F of Form 11–K 

(§ 249.311 of this chapter); paragraph 

(101) of Part II—Information Not 

Required to be Delivered to Offerees or 

Purchasers of Form F–10 (§ 239.40 of 

this chapter), § 240.13a–21 of this 

chapter (Rule 13a–21 under the 

Exchange Act), paragraph 101 of the 

Instructions as to Exhibits of Form 20– 

F (§ 249.220f of this chapter), paragraph 

B.(15) of the General Instructions to 

Form 40–F (§ 249.240f of this chapter), 

paragraph C.(6) of the General 

Instructions to Form 6–K (§ 249.306 of 

this chapter), § 240.17Ad–27(d) of this 

chapter (Rule 17Ad–27(d) under the 

Exchange Act), Note D.5 of § 240.14a– 

101 of this chapter (Rule 14a–101 under 

the Exchange Act), Item 1 of § 240.14c– 

101 of this chapter (Rule 14c–101 under 

the Exchange Act), General Instruction I 

of Form F–SR (§ 249.333 of this 

chapter), General Instruction C.3.(g) of 

Form N–1A (§§ 239.15A and 274.11A of 

this chapter), General Instruction I of 

Form N–2 (§§ 239.14 and 274.11a–1 of 

this chapter), General Instruction C.3.(h) 

of Form N–3 (§§ 239.17a and 274.11b of 

this chapter), General Instruction C.3.(h) 

of Form N–4 (§§ 239.17b and 274.11c of 

this chapter), General Instruction C.3.(h) 

of Form N–6 (§§ 239.17c and 274.11d of 

this chapter), General Instruction 2.(l) of 

§ 274.12 of this chapter (Form N–8B–2), 

General Instruction 5 of § 239.16 of this 

chapter (Form S–6), General Instruction 

C.4 of Form N–CSR (§§ 249.331 and 

274.128 of this chapter), and § 240.6b– 

1(c) of this chapter (Rule 6b–1(c) under 

the Exchange Act) specify when 

electronic filers are required or 

permitted to submit an Interactive Data 

File (§ 232.11), as further described in 

note 1 to this section. This section 

imposes content, format, and 

submission requirements for an 

Interactive Data File, but does not 

change the substantive content 

requirements for the financial and other 

disclosures in the Related Official Filing 

(§ 232.11). 

(a) * * * 

(2) Be submitted only by an electronic 

filer either required or permitted to 

submit an Interactive Data File as 

specified by Item 601(b)(101) of 

Regulation S–K, General Instruction F of 

Form 11–K (§ 249.311 of this chapter); 

paragraph (101) of Part II—Information 

Not Required to be Delivered to Offerees 

or Purchasers of Form F–10 (§ 239.40 of 

this chapter), § 240.13a–21 of this 

chapter (Rule 13a–21 under the 

Exchange Act), paragraph 101 of the 

Instructions as to Exhibits of Form 20– 

F (§ 249.220f of this chapter), paragraph 

B.(15) of the General Instructions to 

Form 40–F (§ 249.240f of this chapter), 

paragraph C.(6) of the General 

Instructions to Form 6–K (§ 249.306 of 

this chapter), Rule 17Ad–27(d) under 

the Exchange Act, Note D.5 of Rule 14a– 

101 under the Exchange Act, Item 1 of 

Rule 14c–101 under the Exchange Act, 

General Instruction I to Form F–SR 

(§ 249.333 of this chapter), General 

Instruction C.3.(g) of Form N–1A 

(§§ 239.15A and 274.11A of this 

chapter), General Instruction I of Form 

N–2 (§§ 239.14 and 274.11a–1 of this 

chapter), General Instruction C.3.(h) of 

Form N–3 (§§ 239.17a and 274.11b of 

this chapter), General Instruction C.3.(h) 

of Form N–4 (§§ 239.17b and 274.11c of 

this chapter), General Instruction C.3.(h) 

of Form N–6 (§§ 239.17c and 274.11d of 

this chapter), General Instruction 2.(l) of 

§ 274.12 of this chapter (Form N–8B–2), 

General Instruction 5 of § 239.16 of this 

chapter (Form S–6), General Instruction 

C.4 of Form N–CSR (§§ 249.331 and 

274.128 of this chapter), or Rule 6b–1(c) 

under the Exchange Act (§ 240.6b–1(c) 

of this chapter), as applicable; 

(3) * * * 

(i) If the electronic filer is not a 

management investment company 

registered under the Investment 

Company Act of 1940 (15 U.S.C. 80a et 

seq.), a separate account as defined in 

section 2(a)(14) of the Securities Act (15 

U.S.C. 77b(a)(14)) registered under the 

Investment Company Act of 1940, a 

business development company as 

defined in section 2(a)(48) of the 

Investment Company Act of 1940 (15 

U.S.C. 80a–2(a)(48)), a unit investment 

trust as defined in Section 4(2) of the 

Investment Company Act of 1940 (15 

U.S.C. 80a–4), a national securities 

exchange as defined in 17 CFR 

242.600(b)(53) (Rule 600(b)(53) of 

Regulation NMS), or a clearing agency 

that provides a central matching service, 

and is not within one of the categories 

specified in paragraph (f)(1)(i) of this 

section, as partly embedded into a filing 

with the remainder simultaneously 

submitted as an exhibit to: 

* * * * * 

(ii) If the electronic filer is a 

management investment company 

registered under the Investment 

Company Act of 1940 (15 U.S.C. 80a et 

seq.), a separate account (as defined in 

section 2(a)(14) of the Securities Act (15 

U.S.C. 77b(a)(14)) registered under the 

Investment Company Act of 1940, a 

business development company as 

defined in section 2(a)(48) of the 

Investment Company Act of 1940 (15 

U.S.C. 80a–2(a)(48)), a unit investment 

trust as defined in Section 4(2) of the 

Investment Company Act of 1940 (15 

U.S.C. 80a–4), a national securities 

exchange as defined in 17 CFR 

242.600(b)(53) (Rule 600(b)(53) of 

Regulation NMS), or a clearing agency 

that provides a central matching service, 

and is not within one of the categories 

specified in paragraph (f)(1)(ii) of this 

section, as partly embedded into a filing 

with the remainder simultaneously 

submitted as an exhibit to a filing that 

contains the disclosure this section 

requires to be tagged; and 

(4) Be submitted in accordance with 

the EDGAR Filer Manual and, as 

applicable, Item 601(b)(101) of 

Regulation S–K, General Instruction F of 

Form 11–K (§ 249.311 of this chapter), 

paragraph (101) of Part II—Information 

Not Required to be Delivered to Offerees 

or Purchasers of Form F–10 (§ 239.40 of 

this chapter), Rule 13a–21 under the 

Exchange Act, paragraph 101 of the 

Instructions as to Exhibits of Form 20– 

F (§ 249.220f of this chapter), paragraph 

B.(15) of the General Instructions to 

Form 40–F (§ 249.240f of this chapter), 

paragraph C.(6) of the General 

Instructions to Form 6–K (§ 249.306 of 

this chapter), Rule 17Ad–27(d) under 

the Exchange Act, Note D.5 of Rule 14a– 

101 under the Exchange Act, Item 1 of 

Rule 14c–101 under the Exchange Act, 

General Instruction I to Form F–SR 

(§ 249.333 of this chapter), General 

Instruction C.3.(g) of Form N–1A 

(§§ 239.15A and 274.11A of this 

chapter), General Instruction I of Form 

N–2 (§§ 239.14 and 274.11a–1 of this 

chapter), General Instruction C.3.(h) of 


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Form N–3 (§§ 239.17a and 274.11b of 

this chapter), General Instruction C.3.(h) 

of Form N–4 (§§ 239.17b and 274.11c of 

this chapter), General Instruction C.3.(h) 

of Form N–6 (§§ 239.17c and 274.11d of 

this chapter); Instruction 2.(l) of 

§ 274.12 of this chapter (Form N–8B–2); 

General Instruction 5 of § 239.16 of this 

chapter (Form S–6); General Instruction 

C.4 of Form N–CSR (§§ 249.331 and 

274.128 of this chapter), or Rule 6b–1(c) 

under the Exchange Act (§ 240.6b–1(c) 

of this chapter). 

(b) * * * 

(1) If the electronic filer is not a 

management investment company 

registered under the Investment 

Company Act of 1940 (15 U.S.C. 80a et 

seq.), a separate account (as defined in 

section 2(a)(14) of the Securities Act (15 

U.S.C. 77b(a)(14)) registered under the 

Investment Company Act of 1940, a 

business development company as 

defined in section 2(a)(48) of the 

Investment Company Act of 1940 (15 

U.S.C. 80a–2(a)(48)), a unit investment 

trust as defined in Section 4(2) of the 

Investment Company Act of 1940 (15 

U.S.C. 80a–4), a clearing agency that 

provides a central matching service, or 

a national securities exchange as 

defined in 17 CFR 242.600(b)(53) (Rule 

600(b)(53) of Regulation NMS), an 

Interactive Data File must consist of 

only a complete set of information for 

all periods required to be presented in 

the corresponding data in the Related 

Official Filing, as applicable, no more 

and no less, from all of the following 

categories: 

* * * * * 

(6) If the electronic filer is a national 

securities exchange as defined in 17 

CFR 242.600(b)(53) (Rule 600(b)(53) of 

Regulation NMS), an Interactive Data 

File must consist of the disclosure 

provided pursuant to § 240.6b–1(c) of 

this chapter (Rule 6b–1(c) under the 

Exchange Act). 

* * * * * 

Note 1 to § 232.405: 

Item 601(b)(101) of Regulation S–K 

specifies the circumstances under 

which an Interactive Data File must be 

submitted and the circumstances under 

which it is permitted to be submitted, 

with respect to §§ 239.11 (Form S–1), 

239.13 (Form S–3), 239.25 (Form S–4), 

239.18 (Form S–11), 239.31 (Form F–1), 

239.33 (Form F–3), 239.34 (Form F–4), 

249.310 (Form 10–K), 249.308a (Form 

10–Q), and 249.308 (Form 8–K) of this 

chapter. General Instruction F of Form 

11–K (§ 249.311 of this chapter) 

specifies the circumstances under 

which an Interactive Data File must be 

submitted, and the circumstances under 

which it is permitted to be submitted, 

with respect to Form 11–K. Paragraph 

(101) of Part II—Information not 

Required to be Delivered to Offerees or 

Purchasers of Form F–10 (§ 239.40 of 

this chapter) specifies the circumstances 

under which an Interactive Data File 

must be submitted and the 

circumstances under which it is 

permitted to be submitted, with respect 

to Form F–10. Paragraph 101 of the 

Instructions as to Exhibits of Form 20– 

F (§ 249.220f of this chapter) specifies 

the circumstances under which an 

Interactive Data File must be submitted 

and the circumstances under which it is 

permitted to be submitted, with respect 

to Form 20–F. Paragraph B.(15) of the 

General Instructions to Form 40–F 

(§ 249.240f of this chapter) and 

Paragraph C.(6) of the General 

Instructions to Form 6–K (§ 249.306 of 

this chapter) specify the circumstances 

under which an Interactive Data File 

must be submitted and the 

circumstances under which it is 

permitted to be submitted, with respect 

to §§ 249.240f (Form 40–F) and 249.306 

of this chapter (Form 6–K). Rule 17Ad– 

27(d) under the Exchange Act specifies 

the circumstances under which an 

Interactive Data File must be submitted 

with respect the reports required under 

Rule 17Ad–27. Note D.5 of § 240.14a– 

101 of this chapter (Schedule 14A) and 

Item 1 of § 240.14c–101 of this chapter 

(Schedule 14C) specify the 

circumstances under which an 

Interactive Data File must be submitted 

with respect to Schedules 14A and 14C. 

Rule 13a–21 under the Exchange Act 

and General Instruction I to Form F–SR 

(§ 249.333 of this chapter) specify the 

circumstances under which an 

Interactive Data File must be submitted, 

with respect to Form F–SR. Item 

601(b)(101) of Regulation S–K, 

paragraph (101) of Part II—Information 

not Required to be Delivered to Offerees 

or Purchasers of Form F–10, paragraph 

101 of the Instructions as to Exhibits of 

Form 20–F, paragraph B.(15) of the 

General Instructions to Form 40–F, and 

paragraph C.(6) of the General 

Instructions to Form 6–K all prohibit 

submission of an Interactive Data File 

by an issuer that prepares its financial 

statements in accordance with §§ 210.6– 

01 through 210.6–10 of this chapter 

(Article 6 of Regulation S–X). For an 

issuer that is a management investment 

company or separate account registered 

under the Investment Company Act of 

1940 (15 U.S.C. 80a et seq.) or a 

business development company as 

defined in section 2(a)(48) of the 

Investment Company Act of 1940 (15 

U.S.C. 80a–2(a)(48)), or a unit 

investment trust as defined in Section 

4(2) of the Investment Company Act of 

1940 (15 U.S.C. 80a–4), General 

Instruction C.3.(g) of Form N–1A 

(§§ 239.15A and 274.11A of this 

chapter), General Instruction I of Form 

N–2 (§§ 239.14 and 274.11a–1 of this 

chapter), General Instruction C.3.(h) of 

Form N–3 (§§ 239.17a and 274.11b of 

this chapter), General Instruction C.3.(h) 

of Form N–4 (§§ 239.17b and 274.11c of 

this chapter), General Instruction C.3.(h) 

of Form N–6 (§§ 239.17c and 274.11d of 

this chapter), General Instruction 2.(l) of 

Form N–8B–2 (§ 274.12 of this chapter), 

General Instruction 5 of Form S–6 

(§ 239.16 of this chapter), and General 

Instruction C.4 of Form N–CSR 

(§§ 249.331 and 274.128 of this chapter), 

as applicable, specifies the 

circumstances under which an 

Interactive Data File must be submitted. 

For national securities exchanges as 

defined in 17 CFR 242.600(b)(53) (Rule 

600(b)(53) of Regulation NMS), Rule 6b– 

1(c) under the Exchange Act (§ 240.6b– 

1(c) of this chapter) specifies the 

circumstances under which an 

Interactive Data File must be submitted. 

PART 240—GENERAL RULES AND 

REGULATIONS, SECURITIES 

EXCHANGE ACT OF 1934 

■ 4. The general authority citation for 

part 240 continues to read as follows: 

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 

77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 

77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f, 

78g, 78i, 78j, 78j–1, 78j–4, 78k, 78k–1, 78l, 

78m, 78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 

78q, 78q–1, 78s, 78u–5, 78w, 78x, 78dd, 78ll, 

78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b– 

3, 80b–4, 80b–11, 7201 et seq., and 8302; 7 

U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 

U.S.C. 1350; and Pub. L. 111–203, 939A, 124 

Stat. 1376 (2010); and Pub. L. 112–106, sec. 

503 and 602, 126 Stat. 326 (2012), unless 

otherwise noted. 

* * * * * 

■ 5. Add § 240.6b–1 to read as follows: 

§ 240.6b–1 Volume-Based Exchange 

Transaction Pricing for NMS Stocks. 

(a) A national securities exchange 

shall not offer volume-based transaction 

fees, rebates, or other incentives in 

connection with the execution of agency 

or riskless principal orders in NMS 

stocks, as defined in 17 CFR 

242.600(b)(55) (Rule 600(b)(55) of 

Regulation NMS). For purposes of this 

section, the term riskless principal 

means a transaction in which, after 

having received an order to buy from a 

customer, the broker or dealer 

purchased the security from another 

person to offset a contemporaneous sale 

to such customer or, after having 

received an order to sell from a 

customer, the broker or dealer sold the 


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security to another person to offset a 

contemporaneous purchase from such 

customer. 

(b) A national securities exchange that 

offers volume-based transaction fees, 

rebates, or other incentives in 

connection with the execution of 

proprietary orders in NMS stocks for the 

account of a member shall: 

(1) Have rules to require members to 

engage in practices that facilitate the 

exchange’s ability to comply with the 

prohibition in paragraph (a) of this 

section; and 

(2) Establish, maintain, and enforce 

written policies and procedures 

reasonably designed to detect and deter 

members from receiving volume-based 

transaction pricing in connection with 

the execution of agency or riskless 

principal orders in NMS stocks. 

(c) A national securities exchange that 

offers volume-based transaction fees, 

rebates, or other incentives in 

connection with the execution of 

proprietary orders in NMS stocks for the 

account of a member shall submit 

electronically to the Commission the 

following information each calendar 

month within five calendar days after 

the end of the month, which will be 

made publicly available: 

(1) The number of members that 

executed proprietary orders in NMS 

stocks for the member’s account on the 

exchange during the month; and 

(2) For each volume-based transaction 

fee, rebate, and other incentive, a 

summary table that includes the 

following information: 

(i) A label to identify the base fee or 

rebate; 

(ii) A label to identify each pricing 

tier that corresponds to the label used in 

the exchange’s pricing schedule; 

(iii) The amount of the fee, rebate, or 

other incentive identified; 

(iv) An explanation of the tier 

requirements; and 

(v) The total number of members that 

qualified for the base fee, base rebate, or 

each tier during the month. 

(3) The disclosures required under 

this paragraph (c) shall be provided in 

an Interactive Data File in accordance 

with 17 CFR 232.405 (Rule 405 of 

Regulation S–T). 

By the Commission. 

Dated: October 18, 2023. 

J. Matthew DeLesDernier, 

Deputy Secretary. 

[FR Doc. 2023–23398 Filed 11–3–23; 8:45 am] 

BILLING CODE 8011–01–P 


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