Document ID: SEC-2009-1642-0001
Agency: sec
Document Type: Proposed Rule
Title: Regulation of Non-Public Trading Interest
Posted Date: 2009-11-23T05:00Z

[Federal Register: November 23, 2009 (Volume 74, Number 224)]
[Proposed Rules]               
[Page 61207-61238]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23no09-27]                         

[[Page 61207]]

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Part II

Securities and Exchange Commission

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17 CFR Part 242

Regulation of Non-Public Trading Interest; Proposed Rule

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 242

[Release No. 34-60997; File No. S7-27-09]
RIN 3235-AK46

 
Regulation of Non-Public Trading Interest

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rules and amendments to joint-industry plans.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
proposing to amend the regulatory requirements of the Securities 
Exchange Act of 1934 (``Exchange Act'') that apply to non-public 
trading interest in National Market System (``NMS'') stocks, including 
so-called ``dark pools'' of liquidity. First, it is proposing to amend 
the definition of ``bid'' or ``offer'' in Exchange Act quoting 
requirements to apply expressly to actionable indications of interest 
(``IOIs'') privately transmitted by dark pools and other trading venues 
to selected market participants. The proposed definition would exclude, 
however, IOIs for large sizes that are transmitted in the context of a 
targeted size discovery mechanism. Second, the Commission is proposing 
amendments to the display obligations of alternative trading systems 
(``ATSs'') in Regulation ATS under the Exchange Act, including a 
substantial lowering of the trading volume threshold in Regulation ATS 
that triggers public display obligations for ATSs. Third, the 
Commission is proposing to amend the joint-industry plans for publicly 
disseminating consolidated trade data to require real-time disclosure 
of the identity of dark pools and other ATSs on the reports of their 
executed trades. The proposals are intended to promote the Exchange Act 
goals of transparency, fairness, and efficiency.

DATES: Comments should be received on or before February 22, 2010.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/proposed.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File No. S7-27-09 on the subject line; or
     Use the Federal eRulemaking Portal (http://
www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File No. S7-27-09. This file number 
should be included on the subject line if e-mail is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments 
are also available for public inspection and copying 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. 
All comments received will be posted without change; we do not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Actionable IOIs: Theodore S. Venuti, 
Special Counsel, at (202) 551-5658, Arisa Tinaves, Special Counsel, at 
(202) 551-5676, Gary M. Rubin, Attorney, at (202) 551-5669; ATS Display 
Obligations: Brian Trackman, Special Counsel, at (202) 551-5616, Edward 
Cho, Special Counsel, at (202) 551-5508; Post-Trade Transparency for 
ATSs: Natasha Cowen, Special Counsel, at (202) 551-5652, Mia Zur, 
Special Counsel, at (202) 551-5638, Nicholas Shwayri, Law Clerk, at 
(202) 551-5667, Division of Trading and Markets, Securities and 
Exchange Commission, 100 F Street, NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
II. Actionable IOIs
III. ATS Display Obligations
IV. Post-Trade Transparency for ATSs
V. Paperwork Reduction Act
VI. Consideration of Costs and Benefits
VII. Consideration of Burden on Competition, and Promotion of 
Efficiency, Competition and Capital Formation
VIII. Consideration of Impact on the Economy
IX. Regulatory Flexibility Act
X. Statutory Authority
XI. Text of Proposed Amendments to CTA Plan and Nasdaq UTP Plan
XII. Text of Proposed Rule Amendments

I. Introduction

    The Commission is proposing to amend the regulatory requirements of 
the Exchange Act that apply to non-public trading interest in NMS 
stocks,\1\ including so-called ``dark pools'' of liquidity. Such 
trading interest is considered non-public, or ``dark,'' primarily 
because it is not included in the consolidated quotation data for NMS 
stocks that is widely disseminated to the public.
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    \1\ Rule 600(b)(47) of Regulation NMS defines ``NMS stock'' to 
mean any NMS security other than an option. Rule 600(b)(46) defines 
``NMS security'' to mean any security for which trade reports are 
made available pursuant to an effective transaction reporting plan. 
In general, NMS stocks are those that are listed on a national 
securities exchange.
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    Consolidated market data is the primary vehicle for public price 
transparency in the U.S. equity markets. It includes both: (1) Pre-
trade transparency--real-time information on the best-priced quotations 
at which trades may be executed in the future (``consolidated quotation 
data''); and (2) post-trade transparency--real-time reports of trades 
as they are executed (``consolidated trade data'').\2\ The central 
processors for consolidated market data in NMS stocks collect quotation 
and trade information from the relevant self-regulatory organizations 
(``SROs'')--the equity exchanges and the Financial Industry Regulatory 
Authority (``FINRA'')--and distribute the information in a consolidated 
stream pursuant to joint-SRO plans. Rule 603(b) of Regulation NMS 
requires that consolidated market data for each NMS stock be 
disseminated through a single plan processor. Consolidated market data 
is designed to assure that the public has a single source of 
affordable, accurate, and reliable information on the best quoted 
prices and last sale prices for each NMS stock.\3\
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    \2\ 17 CFR 242.603(b).
    \3\ The consolidated quotation data streams and their policy 
objectives are fully described in the Commission's Concept Release 
on Regulation of Market Information Fees and Revenues. Securities 
Exchange Act Release No. 42208 (December 9, 1999), 64 FR 70613 
(December 17, 1999) (``Market Information Concept Release'').
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    In general, dark liquidity (that is, trading interest that is not 
included in the consolidated quotation data) is not a new phenomenon. 
Market participants that need to trade in large size, such as 
institutional investors, always have sought ways to minimize their 
transaction costs by completing their trades without prematurely 
revealing the full extent of their trading interest to the broader 
market.\4\ For many years,

[[Page 61209]]

the manual trading floors of exchanges were a primary source of dark 
liquidity in the form of floor traders that ``worked'' the large orders 
of their customers, executing each such order in a number of smaller 
transactions without revealing to counterparties the total size of the 
order. In addition, broker-dealers acting as over-the-counter (``OTC'') 
market makers and block positioners long have provided liquidity 
directly to their customers that is not reflected in the consolidated 
quotation data. Moreover, Rule 604 of Regulation NMS, which imposes 
limit order display requirements, recognizes the need of large 
investors to control the public display of their trading interest. Rule 
604(b)(4), for example, provides a general exception from the public 
display requirement for a block size order, unless the customer placing 
the order requests that the order be displayed.\5\ In general, the 
Commission has sought over the years to promote the public display of 
trading interest by attempting to provide positive incentives for 
display, but has never sought to prohibit trading venues from offering 
dark liquidity services to investors.\6\
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    \4\ The Commission previously has noted the interest of, and 
steps taken by, institutional investors to minimize the price impact 
of their trading:
    Another type of implicit transaction cost reflected in the price 
of a security is short-term price volatility caused by temporary 
imbalances in trading interest. For example, a significant implicit 
cost for large investors (who often represent the consolidated 
investments of many individuals) is the price impact that their 
large trades can have on the market. Indeed, disclosure of these 
large orders can reduce the likelihood of their being filled. 
Consequently, large investors often seek ways to interact with order 
flow and participate in price competition without submitting a limit 
order that would display the full extent of their trading interest 
to the market. Among the ways large investors can achieve this 
objective are: (1) To have their orders represented on the floor of 
an exchange market; (2) to submit their orders to a market center 
that offers a limit order book with a reserve size feature; or (3) 
to use a trading mechanism that permits some form of ``hidden'' 
interest to interact with the other side of the market. A market 
structure that facilitates maximum interaction of trading interest 
can produce price competition within displayed prices by providing a 
forum for the representation of undisclosed orders.
    Securities Exchange Act Release No. 42450 (February 23, 2000), 
65 FR 10577, 10581 (February 28, 2000) (SR-NYSE-99-48) (``Concept 
Release on Market Fragmentation'') (citations omitted) (emphasis in 
original). The Commission also noted the harm that short-term 
volatility can cause to investors:
    In theory, short-term price swings that hurt investors on one 
side of the market can benefit investors on the other side of the 
market. In practice, professional traders, who have the time and 
resources to monitor market dynamics closely, are far more likely 
than investors to be on the profitable side of short-term price 
swings (for example, by buying early in a short-term price rise and 
selling early before the price decline).
    Id. at 10581 n. 26.
    \5\ Rule 600(b)(9) of Regulation NMS defines ``block size'' to 
mean an order of at least 10,000 shares; or for a quantity of stock 
having a market value of at least $200,000.
    \6\ The Commission's recently proposed amendment to Rule 602 of 
Regulation NMS to eliminate an exception for the use of ``flash 
orders'' reflects this approach. See Securities Exchange Act Release 
No. 60684 (September 18, 2009), 74 FR 48632 (September 23, 2009). 
Although flash orders are used to access dark liquidity, the 
concerns that prompted the Commission's proposal relate to the use 
of the ``flash'' mechanism (that is, the dissemination of valuable 
order information to certain market participants rather than in the 
consolidated quotation data).
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    The term ``dark pool'' is not used in the Exchange Act or 
Commission rules. For purposes of this release, the term refers to ATSs 
that do not publicly display quotations in the consolidated quotation 
data. Although dark pools publicly report their executed trades in the 
consolidated trade data, the trade reports are not required to identify 
the particular ATS that executed the trade. In contrast, the trade 
reports of registered exchanges are required to identify the exchange 
that executed the trade and thereby provide more transparency about the 
location of liquidity in NMS stocks.\7\
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    \7\ See infra note 85 and accompanying text. See also the CTA 
Plan, Section VI(f) and the Nasdaq UTP Plan, Section VI(c)(3).
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    In recent years, an increasing number of dark pools have organized 
to provide their customers with electronic access to dark liquidity 
trading services. The number of active dark pools trading NMS stocks 
has increased from approximately 10 in 2002 to approximately 29 in 
2009.\8\ For the second quarter of 2009, the trading volume of these 
dark pools was approximately 7.2% of the total share volume in NMS 
stocks, with no individual dark pool executing more than 1.3%.\9\ By 
way of comparison, no single registered securities exchange currently 
executes more than 19% of volume in NMS stocks.\10\ Given this 
dispersal of volume among a large number of trading venues, dark pools 
with their 7.2% market share collectively represent a significant 
source of liquidity in NMS stocks.
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    \8\ Data compiled from Forms ATS submitted to the Commission for 
2d quarter 2009. Some trading venues, such as OTC market makers, 
offer dark liquidity primarily in a principal capacity and do not 
operate as ATSs. For purposes of this release, these trading venues 
are not defined as dark pools because they are not ATSs. These 
trading venues may, however, offer electronic dark liquidity 
services that are analogous to those offered by dark pools. If 
subject to the quoting requirements of Rule 602 of Regulation NMS, 
for example, an OTC market maker would be covered by the proposal to 
amend the definition of bid or offer to address actionable IOIs.
    \9\ Data compiled from Forms ATS submitted to the Commission for 
2d quarter 2009.
    \10\ See, e.g., market volume statistics reported by BATS 
Exchange, Inc., available at http://www.batstrading.com/market_
summary (no single national securities exchange executed more than 
19.0% of volume in NMS stocks during 5-day period ending September 
21, 2009).
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    The particular business models and trading mechanisms of dark pools 
can vary widely. For example, some dark pools, such as block crossing 
networks, offer specialized size discovery mechanisms that attempt to 
bring large buyers and sellers in the same NMS stock together 
anonymously and to facilitate a trade between them. The average trade 
size of these block crossing networks can be as high as 50,000 
shares.\11\ Most dark pools, though they may handle large orders, 
primarily execute trades with small sizes that are more comparable to 
the average size of trades in the public markets, which was less than 
300 shares in August 2009.\12\ These dark pools that primarily match 
smaller orders (though the matched orders may be ``child'' orders of 
much larger ``parent'' orders) execute more than 90% of dark pool 
trading volume.\13\
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    \11\ See, e.g., http://www.liquidnet.com/about/liquidStats.html 
(average U.S. execution size in July 2009 was 49,638 shares for 
manually negotiated trades via Liquidnet's negotiation product); 
http://www.pipelinetrading.com/AboutPipeline/CompanyInfo.aspx 
(average trade size of 50,000 shares in Pipeline).
    \12\ See, e.g., http://www.nasdaqtrader.com/trader/
aspx?id=marketshare (average size of NASDAQ matched trades in July 
2009 was 228 shares); http://nyxdata.com/nysedata/asp/factbook (NYSE 
Group average trade size in all stocks traded in July 2009 was 267 
shares).
    \13\ Data compiled from Forms ATS submitted to Commission for 2d 
quarter 2009.
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    The emergence of dark pools as a significant source of liquidity 
for NMS stocks raises a variety of important policy issues that deserve 
serious consideration. In this regard, the Commission has undertaken a 
broad review of equity market structure to assess its performance in 
recent years and whether market structure rules have kept pace with, 
among other things, changes in trading technology and practices. To 
help facilitate its review, the Commission intends to consider in the 
near future whether to publish a concept release requesting comment and 
data on a wide range of market structure topics. These likely would 
include the benefits and drawbacks of dark liquidity in all its forms, 
including dark pools, the order flow arrangements of OTC market makers, 
and undisplayed orders on exchanges.
    The proposals in this release accordingly do not attempt to address 
all of the issues regarding dark liquidity. The proposals instead 
address three issues with respect to dark liquidity that the Commission 
preliminarily believes warrant attention, are sufficiently discrete, 
and as to which the Commission has sufficient information to proceed 
with a proposal.
    One such issue arises from the messages, often called IOIs, that 
some

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dark pools privately transmit to selected market participants 
concerning their actionable orders in NMS stocks. As discussed further 
in section II below, these actionable IOIs are intended to attract 
immediately executable order flow to the trading venue, and, in this 
sense, they function quite similarly to displayed quotations. As a 
result, dark pools that distribute actionable IOIs are no longer 
completely dark on a pre-trade basis. Rather, they are ``lit'' to a 
select group of market participants and dark with respect to the rest 
of the public. By privately transmitting valuable order information 
concerning the best prices for NMS stocks to selected market 
participants, actionable IOIs create the potential for two-tiered 
access to information, something that has long been a serious concern 
of the Commission.\14\ It therefore is proposing two initiatives that 
would address this concern.
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    \14\ See infra note 59 and accompanying text.
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    First, the Commission is proposing to amend the definition of 
``bid'' or ``offer'' in Rule 600(b)(8) of Regulation NMS to apply 
explicitly to actionable IOIs. This definition of bid or offer is a key 
element that determines the public quoting requirements of exchanges 
and OTC market makers under Rule 602 of Regulation NMS, as well as ATSs 
under Rule 301(b) of Regulation ATS. In this respect, the revised 
definition would apply equally to all types of trading venues and help 
promote fair competition among them. Importantly, however, the proposed 
definition of bid or offer would recognize the need for targeted size 
discovery mechanisms that can enable investors to trade more 
efficiently in sizes much larger than the average size of trades in the 
public markets.\15\ Specifically, the proposed amendment to the 
definition would exclude any actionable IOIs ``for a quantity of NMS 
stock having a market value of at least $200,000 that are communicated 
only to those who are reasonably believed to represent current contra-
side trading interest of at least $200,000'' (``size-discovery 
IOIs'').\16\
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    \15\ See supra note 12 (average size of trades in public markets 
is less than 300 shares). The market value of a 300 share order in a 
$30 stock is $9,000.
    \16\ For purposes of this release, the term ``size discovery 
IOIs'' means IOIs that qualify for the proposed exclusion for 
certain IOIs with large size. The term ``actionable IOIs'' means any 
actionable IOI other than size discovery IOIs.
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    As a second initiative to address actionable IOIs, the Commission 
is proposing to lower substantially the trading volume threshold in 
Rule 301(b) of Regulation ATS that triggers the obligation for ATSs to 
display their best-priced orders in the consolidated quotation data. 
Currently, an ATS is not required to include its best-priced orders for 
an NMS stock in the consolidated quotation data (even if it widely 
disseminates such orders) when its trading volume in that NMS stock is 
less than 5%.\17\ Similarly, many, if not all, dark pools that transmit 
actionable IOIs would not be required to include this actionable order 
information in the consolidated quotation data if the Regulation ATS 
display threshold remains at 5%. The Commission is proposing to lower 
the volume threshold to 0.25% to help assure that the public, through 
the consolidated quotation data, has access to valuable order 
(including actionable IOI) information about the best prices and sizes 
for NMS stocks that trade on an ATS.
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    \17\ Those ATSs that operate as electronic communication 
networks (``ECNs'') and qualify for the ECN display alternative 
under Rule 602(b)(5)(ii) voluntarily have chosen to include their 
best-priced orders in the consolidated quotation data even when 
their volume in an NMS stock is less than 5%. The proposed 
amendments to Regulation ATS would not affect the display practices 
of these ECNs.
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    The practical result of the proposed amendment to the definition of 
bid or offer and the proposed lowering of the ATS volume threshold 
would be that ATSs could not privately display actionable IOIs only to 
select market participants and thereby create two-tiered access to 
information on the best available prices for NMS stocks. In addition, 
by lowering the trading volume threshold, more ATS quotes would be made 
available to the public by requiring their inclusion in the 
consolidated quotation data. As discussed below, the Commission 
preliminarily believes that this result would enhance price 
transparency and promote fairer and more efficient markets.
    Finally, the Commission is proposing an initiative to improve the 
post-trade transparency of dark pools and other ATSs. As ATSs that 
trade in the OTC market, dark pools must be members of FINRA, and they 
are required to report their trades to FINRA for inclusion in the 
consolidated trade data. These trade reports do not, however, identify 
the particular venue that executed the trade, unlike the trade reports 
of registered exchanges.\18\ To address this information gap, the 
Commission is proposing to amend the joint-SRO plans for publicly 
disseminating consolidated trade data to require real-time disclosure 
of the identity of ATSs on the reports of their executed trades. The 
proposal is designed to improve the quality of information about 
sources of liquidity in NMS stocks, as well as to increase public 
confidence in the integrity of the U.S. equity markets.\19\
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    \18\ See infra note 85 and accompanying text. ATSs are broker-
dealers that have chosen to comply with Regulation ATS and thus are 
exempt from the statutory definition of ``exchange.'' 17 CFR 
240.3a1-1(a)(2).
    \19\ See, e.g., Securities Exchange Act Release No. 30569 (April 
10, 1992), 57 FR 13396, 13398-13399 (April 16, 1992) (discussing 
benefits of transparency to the operation of fair and efficient 
capital markets).
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II. Actionable IOIs

A. Concerns About Actionable IOIs

    In recent years, a number of dark pools have begun to transmit IOIs 
to selected market participants that convey substantial information 
about their available trading interest.\20\ These messages are not 
included in the consolidated quotation data, although, like displayed 
quotations, they can be significant inducements for the routing of 
orders to a particular trading venue. Indeed, some exchanges, when they 
do not have available trading interest to execute orders at the best 
displayed prices, give participants a choice of routing their orders to 
undisplayed venues in response to IOIs rather than to public markets in 
response to the best displayed quotations.\21\
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    \20\ Data compiled from Forms ATS submitted to the Commission 
for 2d quarter 2009 suggest that approximately 11 of 29 active dark 
pools in NMS stocks use some form of IOI. See also Peter Chapman and 
Nina Mehta, 2008 Review: IOIs Expand and Do More Heavy Lifting, 
Traders Magazine (December 2008) (``The year just passed witnessed 
the transformation of the indication of interest. Long a plain 
vanilla communication tool between the sellside and the buyside, the 
IOI is being reinvented to meet the requirements of a new era of 
trading.''); John Hintz, Institutions and Sell Side Alike Grapple 
with Impact of IOIs, Securities Industry News, September 8, 2008 
(``The dozens of dark pools that have emerged in recent years have 
each sought to offer unique features to draw order flow and increase 
fill rates. But some of the platforms' ``special sauce'' may make 
them less than fully dark.'').
    \21\ See, e.g., NYSE Arca, ``Client Notice: NYSE Arca to Provide 
Indication of Interest (IOI) Routing'' (March 12, 2008) (routing 
service for ``non-displayed liquidity pools''); Rob Curran, NYSE, 
Nasdaq Expanding Roles as `Dark Pools' Converge, Dow Jones News 
Service (June 13, 2008) (``Only if the dark-pool partners give an 
indication they may have a better price on the security will Nasdaq 
route an order there.''); Nina Mehta, Arca Beats Nasdaq to Dark 
Pools, Traders Magazine Online News, March 14, 2008 (``Now, after a 
marketable order checks Arca's book for liquidity, it passes through 
what [Arca executive] calls a `cloud' of electronic indications from 
as many as 29 dark pools (not all are online yet). The order 
executes against indications pooled in the cloud before being routed 
to protected quotes on other markets. Customers that execute against 
the cloud are guaranteed NBBO-or-better executions.'').
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    Although these IOIs may not explicitly specify the price and size 
of available trading interest at the dark pool, the practical context 
in which they are transmitted renders them

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``actionable''--that is, the messages effectively alert the recipient 
that the dark pool currently has trading interest in a particular 
symbol, side (buy or sell), size (minimum of a round lot of trading 
interest), and price (equal to or better than the national best bid for 
buying interest and the national best offer for selling interest).
    For example, a dark pool may send an IOI to a group of market 
participants communicating an interest in buying a specific NMS stock. 
Given that Rule 611 of Regulation NMS generally prevents trading 
centers, including dark pools, from executing orders at prices inferior 
to the national best bid or offer (``NBBO''), the IOI recipient 
reasonably can assume that the price associated with the IOI is the 
NBBO or better. Moreover, the IOI may be part of a course of conduct in 
which the recipient has responded with orders to the sender and 
repeatedly received executions at the NBBO or better with a size of at 
least one round lot. With this information (both explicit and 
implicit), the recipient of the IOI can reasonably conclude that 
sending a contra-side marketable order \22\ responding to the IOI will 
result in an execution if the dark pool trading interest has not 
already been executed against or cancelled. In this respect, actionable 
IOIs are functionally quite similar to displayed quotations at the 
NBBO.
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    \22\ A ``marketable'' order is priced so that it is immediately 
executable at the best displayed quotations (that is, a buy order 
priced at the national best offer or higher and a sell order priced 
at the national best bid or lower).
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    The order information communicated by actionable IOIs can be 
extremely valuable. Actionable IOIs with prices (whether explicit or 
implicit) better than the NBBO would effectively narrow the quoted 
spread for an NMS stock, if included in the consolidated quotation 
data. For example, if the NBBO for an NMS stock were $20.10 and $20.14, 
an actionable IOI to buy with a price of $20.12 would, if included in 
the consolidated quotation data, create a new NBBO of $20.12 and $20.14 
and thereby reduce the quoted spread by 50%. Reducing quoted spreads is 
important not only for those that trade with the displayed quotations, 
but also for other investors, including those whose orders are routed 
to OTC market makers for executions that often are derived from NBBO 
prices.\23\ In addition, actionable IOIs with prices (whether explicit 
or implicit) equal to the NBBO could substantially improve the quoted 
depth at the best prices for an NMS stock. For example, an investor may 
wish to sell 500 shares of a stock when the size of the national best 
bid may be only 100 shares. The existence of multiple dark pools that 
contemporaneously had transmitted actionable IOIs to buy the stock 
would represent a substantial increase in the available size at NBBO 
prices or better.
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    \23\ See, e.g., Concept Release on Market Fragmentation, supra 
note 4, at 10582-10583 (discussing broker-dealer internalization and 
noting that ``a market maker with access to directed order flow 
often may merely match the displayed prices of other market centers 
and leave the displayed interest unsatisfied'').
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    The public, however, does not have access to this valuable 
information concerning the best prices and sizes for NMS stocks. 
Rather, dark pools transmit this information only to selected market 
participants. In this regard, actionable IOIs can create a two-tiered 
level of access to information about the best prices and sizes for NMS 
stocks that undermines the Exchange Act objectives for a national 
market system.\24\ The consolidated quotation data is intended to 
provide a single source of information on the best prices for a listed 
security across all markets, rather than force the public to obtain 
data from many different exchanges and other markets to learn the best 
prices.\25\ This objective is not met when dark pools or other trading 
venues disseminate information that is functionally quite similar to 
quotations, yet is not included in the consolidated quotation data.
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    \24\ See infra note 59 and accompanying text.
    \25\ See 17 CFR 242.603(b) (providing for the distribution of 
all consolidated information for an individual NMS stock through a 
single plan processor).
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    The Commission also is concerned that the private use of actionable 
IOIs may discourage the public display of trading interest and reduce 
quote competition among markets. The Commission long has emphasized the 
need to encourage displayed liquidity in the form of publicly displayed 
limit orders.\26\ Such orders establish the current ``market'' for a 
stock and thereby provide a critical reference point for investors. 
Actionable IOIs, however, often will be executed by dark pools at 
prices that match the best displayed prices for a stock at another 
market. In this respect, actionable IOIs at NBBO matching prices 
potentially deprive those who publicly display their interest at the 
best price from receiving a speedy execution at that price. The 
opportunity to obtain the fastest possible execution at a price is the 
primary incentive for the display of trading interest.\27\ Particularly 
if actionable IOIs continued to expand in trading volume, they could 
significantly undermine the incentives to display limit orders and to 
quote competitively, thereby detracting from the efficiency and 
fairness of the national market system.
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    \26\ See, e.g., Securities Exchange Release No. 51808 (June 9, 
2005), 70 FR 37496, 37527 (June 29, 2005) (``NMS Release'') (``The 
Commission believes, however, that the long-term strength of the NMS 
as a whole is best promoted by fostering greater depth and 
liquidity, and it follows from this that the Commission should 
examine the extent to which it can encourage the limit orders that 
provide this depth and liquidity to the market at the best 
prices.''); Securities Exchange Act Release No. 37619A (September 6, 
1996), 61 FR 48290, 48293 (September 12, 1996) (``Order Handling 
Rules Release'') (``[T]he display of customer limit orders advances 
the national market system goal of the public availability of 
quotation information, as well as fair competition, market 
efficiency, best execution, and disintermediation.'').
    \27\ See NMS Release, supra note 26, at 37505.
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    Moreover, for market participants that wish to supply liquidity in 
the form of non-marketable resting orders (such as those that match or 
improve NBBO prices), actionable IOIs provide a tool to achieve this 
result without displaying quotations publicly. The availability of 
these private messages as an alternative means to attract order flow 
may reduce the incentives of market participants to quote publicly. 
More generally, actionable IOIs divert a certain amount of order flow 
that otherwise might be routed directly to execute against displayed 
quotations in other markets.\28\ Given the importance of displayed 
quotations for market efficiency, the Commission is particularly 
concerned about additional marketable order flow that may be diverted 
from the public quoting markets and that could further reduce the 
incentives for the public display of quotations.
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    \28\ See supra note 21 and accompanying text.
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B. Description of Proposal

    To address these concerns, the Commission is proposing to amend the 
Exchange Act quoting requirements to apply expressly to actionable 
IOIs. In particular, it is proposing to amend the definition of ``bid'' 
or ``offer'' in Rule 600(b)(8) of Regulation NMS. ``Bid'' and ``offer'' 
are key terms that determine the scope of the two primary rules that 
specify the types of trading interest that must be included in the 
consolidated quotation data: Rule 602 of Regulation NMS and Rule 
301(b)(3) of Regulation ATS.
    Rule 602 of Regulation NMS specifies the public quoting 
requirements of national securities exchanges, national securities 
associations (currently, FINRA is the only national securities 
association that is subject to Rule 602), exchange members, and OTC 
market makers. In general, Rule 602 requires exchange members and 
certain OTC market makers to provide their best-priced bids and offers 
to their respective

[[Page 61212]]

exchanges or FINRA.\29\ The exchanges and FINRA, in turn, are required 
to make their best bids and offers available in the consolidated 
quotation data.\30\
---------------------------------------------------------------------------

    \29\ Under the definition of ``subject security'' in Rule 
600(b)(73)(ii)(A) of Regulation NMS, an OTC market maker is not 
required to provide its best bids and offers for an NMS stock if the 
executed volume of the firm during the most recent calendar quarter 
comprised one percent or less of the aggregate trading volume for 
such NMS stock.
    \30\ 17 CFR 242.603(b).
---------------------------------------------------------------------------

    Rule 600(b)(8) of Regulation NMS currently defines ``bid'' or 
``offer'' to mean ``the bid price or the offer price communicated by a 
member of a national securities exchange or member of a national 
securities association to any broker or dealer, or to any customer, at 
which it is willing to buy or sell one or more round lots of an NMS 
security, as either principal or agent, but shall not include 
indications of interest.'' \31\ This exclusion of IOIs was part of the 
definition of bid or offer when it was originally drafted in 1978 for 
inclusion in the predecessor of Rule 602.\32\ In the adopting release, 
the term ``indication of interest'' was not defined, discussed, or 
expressly limited to a non-actionable communication of trading 
interest.
---------------------------------------------------------------------------

    \31\ 17 CFR 242.600(b)(8) (emphasis added).
    \32\ Securities Exchange Act Release No. 14415 (January 26, 
1978), 43 FR 4342 (February 1, 1978) (``The terms ``bid'' or 
``offer'' shall mean the bid price of the offer price most recently 
communicated by an exchange member or third market maker to any 
broker or dealer, or to any customer, at which he is willing to buy 
or sell a particular amount of a reported security, as either 
principal or agent, but shall not include indications of 
interest.'').
---------------------------------------------------------------------------

    Rule 301(b)(3) of Regulation ATS specifies the order display and 
access requirements of ATSs.\33\ When an ATS exceeds a 5% trading 
volume threshold in an NMS stock, the ATS is required to provide its 
best-priced orders to an exchange or association for inclusion in the 
consolidated quotation data made available under Rule 602. The term 
``order'' is defined in Rule 300(e) of Regulation ATS to mean ``any 
firm indication of a willingness to buy or sell a security, as either 
principal or agent, including any bid or offer quotation, market order, 
limit order, or other priced order.'' \34\ This definition of ``order'' 
therefore includes, but is not limited to, ``bid or offer quotations.'' 
Although Regulation ATS does not define the term ``bid or offer 
quotation,'' the Commission considers it to have the same meaning as 
the terms ``bid'' or ``offer'' in Rule 600(b)(8) of Regulation NMS.\35\
---------------------------------------------------------------------------

    \33\ The requirements for ATS order display and access are 
discussed in section III below.
    \34\ 17 CFR 242.300(e) (emphasis added).
    \35\ Rule 600(b)(62) of Regulation NMS defines ``quotation'' to 
mean ``a bid or an offer.''
---------------------------------------------------------------------------

    When Regulation ATS was adopted in 1998, the Commission addressed 
the issue of whether IOIs were covered by the term ``order'' in the 
context of whether an IOI was ``firm'' or ``non-firm.'' It noted that 
``[w]hether or not an indication of interest is `firm' will depend on 
what actually takes place between a buyer or seller. The label put on 
an order--`firm' or `non-firm'--is not dispositive.'' \36\ The 
Commission further stated that ``a system that displays bona fide, non-
firm indications of interest--including, but not limited to, 
indications of interest to buy or sell a particular security without 
either prices or quantities associated with those indications--will not 
be displaying `orders'. * * * Nevertheless, the price or size of an 
indication of interest may be either explicit or may be inferred from 
the facts and circumstances accompanying the indication.'' \37\ The 
Regulation ATS Adopting Release also noted that the definition of order 
was ``intended to be broader than the terms bid and offer in [the 
predecessor of Rule 602].'' \38\
---------------------------------------------------------------------------

    \36\ Securities Exchange Act Release No. 40760 (December 8, 
1998), 63 FR 70844, 70850 (December 22, 1998) (``Regulation ATS 
Adopting Release''). The discussion in the Regulation ATS Adopting 
Release specifically referenced the definition of ``order'' in Rule 
3b-16(c) under the Exchange Act, which is relevant for purposes of 
the meaning of ``exchange.'' Rule 3b-16 was adopted at the same time 
as Regulation ATS, and their definitions of ``order'' are the same.
    \37\ Id.
    \38\ Id.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the quoting requirements 
of both Rule 602 and Regulation ATS should clearly cover actionable 
IOIs. It therefore is proposing to amend the definition of ``bid'' or 
``offer'' in Rule 600(b)(8) by expressly limiting its exclusion of IOIs 
to those ``that are not actionable.'' For example, an IOI would be 
considered actionable under the proposal if it explicitly or implicitly 
conveys all of the following information about available trading 
interest at the IOI sender: (1) Symbol; (2) side (buy or sell); (3) a 
price that is equal to or better than the NBBO (the national best bid 
for buy orders and the national best offer for sell orders); and (4) a 
size that is at least equal to one round lot. In determining whether or 
not an IOI conveys this information, all of the facts and circumstances 
surrounding the IOI should be considered, including the course of 
dealing between the IOI sender and the IOI recipient.\39\
---------------------------------------------------------------------------

    \39\ See supra note 36 and accompanying text.
---------------------------------------------------------------------------

    Under the proposal, when a quoting obligation under Rule 602 or 
Rule 301(b)(3) is triggered by the sending of an actionable IOI (i.e., 
sending an actionable IOI would be the communicating or displaying of a 
bid or an offer), the IOI sender would be considered a quoting venue 
and subject to the quoting requirements that generally apply to that 
type of venue, whether it be an exchange, an OTC market maker, or an 
ATS. These requirements would include, for example, restrictions on the 
display of locking or crossing quotations under Rule 610(d) of 
Regulation NMS. In addition, the IOI sender would be required to 
reflect accurate information about the underlying order or other 
trading interest in the consolidated quotation data. This required 
order information would include the specific limit price and size of 
the underlying order or other trading interest.\40\ The IOI sender also 
would be required to update the information as necessary, for example, 
to reflect executions or cancellations of the underlying order. Of 
course, customers of the dark pool would remain free, as they are 
entitled to do with quoting venues today, to control the release of 
their buying or selling interest.\41\ Customers could not, however, 
consent to the dissemination of information sufficient for the 
transmission of an actionable IOI, yet withhold this information from 
the consolidated quotation data that is made available to the 
public.\42\
---------------------------------------------------------------------------

    \40\ See, e.g., 17 CFR 242.301(b)(3)(ii) (requiring ATSs to 
provide the best prices and sizes of orders at the highest buy price 
and the lowest sell price for such NMS stock).
    \41\ Rule 604 of Regulation NMS, for example, explicitly 
recognizes the ability of customers to control whether their limit 
orders are displayed to the public. Rule 604(b)(2) provides an 
exception from the limit order display requirement for orders that 
are placed by customers who expressly request that the order not be 
displayed. Rule 604(b)(4) provides an exception for all block size 
orders unless the customer requests that the order be displayed.
    \42\ In addition, the Commission notes that existing Rule 
301(b)(10) of Regulation ATS, 17 CFR 242.301(b)(10), requires an ATS 
to establish adequate safeguards and procedures to protect 
subscribers' confidential trading information. To meet this 
requirement, an ATS that markets itself as a dark pool, yet sends 
IOIs to third parties regarding subscriber orders, should adequately 
explain its use of IOIs to its subscribers.
---------------------------------------------------------------------------

    The Commission recognizes that some trading venues, such as block 
crossing networks, may use actionable IOIs as part of a trading 
mechanism that offers significant size discovery benefits (that is, 
finding contra-side trading interest for large size without affecting 
prices). These benefits may be particularly valuable for institutional 
investors that need to trade efficiently in sizes much larger than 
those that are typically available in the public quoting markets. These 
size discovery mechanisms could be rendered unworkable, however, if 
their narrowly targeted IOIs for large size were required to be 
included in the

[[Page 61213]]

consolidated quotation data. Accordingly, the Commission is proposing a 
further amendment to the current definition of ``bid'' or ``offer'' in 
Rule 600(b)(8) to exclude any IOIs ``for a quantity of NMS stock having 
a market value of at least $200,000 that are communicated only to those 
who are reasonably believed to represent current contra-side trading 
interest of at least $200,000.''
    The purpose of this proposed exception for a targeted size 
discovery mechanism is to provide an opportunity for block crossing 
networks and other trading venues to offer new ways for investors that 
need to trade in large size to find contra-side trading interest of 
equally large size. The $200,000 figure is taken from the definition of 
``block size'' in Rule 600(b)(9) of Regulation NMS, which covers orders 
of at least 10,000 shares or for a quantity of stock having a market 
value of $200,000. The Commission does not believe, however, that the 
10,000 share alternative in the block size definition would be 
appropriate for the proposed size discovery exclusion from the 
definition of bid or offer, particularly with respect to low-priced 
stocks. For example, the market value of an IOI for 10,000 shares of a 
stock priced at $3 per share is only $30,000. To assure that the 
proposed size discovery exclusion would be limited to truly large size 
orders, the Commission is proposing to limit the exception to IOIs with 
a market value of at least $200,000.

C. Request for Comments

    The Commission seeks comment and data on all aspects of the 
proposed amendment of the definition of bid or offer in Rule 600(b)(8) 
to apply expressly to actionable IOIs. Would the proposal promote the 
transparency, fairness, and efficiency of the national market system? 
Would it promote fair competition among trading venues in NMS stocks? 
Do commenters believe that the Commission has provided sufficient 
information about the attributes of an actionable IOI for trading 
venues to comply? Should the rule text include an express definition of 
``actionable IOI,'' and, if so, what should it be? For example, should 
rule text incorporate the elements discussed above (symbol, side, 
price, and size), as well as a facts and circumstances analysis? Would 
an express definition be sufficient to address the full range of the 
policy concerns the Commission identifies in this release and prevent 
circumvention by market participants? Do actionable IOIs offer 
significant benefits for market participants that could not be realized 
if they were defined as bids or offers for purposes of Rule 602 of 
Regulation NMS and Rule 301(b) of Regulation ATS? If so, could similar 
benefits be achieved through other means? What is the typical size of 
an actionable IOI? How many large orders use actionable IOIs? What is 
the amount of order flow that is diverted from displayed quotations due 
to actionable IOIs? Please quantify and provide supporting data if 
possible.
    Comment also is requested on the proposed size discovery exclusion 
from the definition of bid or offer. Would the proposed exclusion 
promote more efficient trading for investors that need to trade in 
large size? Is the exclusion narrowly drafted to cover those trading 
mechanisms that offer valuable size discovery benefits without 
inappropriately excluding trading interest concerning the best prices 
and sizes for NMS stocks from the consolidated quotation data? Comment 
also is requested on whether market value is the appropriate criterion 
for size, and whether $200,000 is the appropriate figure. Should this 
figure be higher or lower? Please explain why. For example, is the 
$200,000 figure appropriate for high-priced stocks? Should the 
exclusion include a size criterion based on number of shares? If yes, 
should it be 10,000 shares, as in Rule 600(b)(9), or a larger or 
smaller number of shares? Finally, comment is requested on whether 
other criteria for size, such as percentage of average daily share 
volume in a security, would be more appropriate.

III. ATS Display Obligations

    The Commission is also proposing certain amendments to Regulation 
ATS.\43\ In conjunction with the Commission's proposed amendments to 
the definition of ``bid'' or ``offer'' in Rule 600(b)(8) of Regulation 
NMS, the proposed amendments to Regulation ATS would seek to further 
integrate the best-priced orders available on ATSs into the national 
market system by revising the order display requirements in Rule 
301(b)(3) of Regulation ATS.\44\ Specifically, the Commission is 
proposing to amend Rule 301(b)(3)(i)(B) of Regulation ATS \45\ to 
reduce the average daily trading volume threshold, that would trigger 
the order display and execution access requirements for an ATS, from 5% 
to 0.25%. The Commission is also proposing to amend Rule 301(b)(3)(ii) 
of Regulation ATS \46\ to clarify that an ATS must publicly display and 
provide access to its best-priced orders in NMS stocks when such orders 
are displayed to more than one person (other than ATS employees), 
regardless of whether such persons are subscribers of the ATS. Finally, 
the Commission is proposing to amend Rule 301(b)(3) to parallel the 
proposed size discovery exclusion from the definition of ``bid'' or 
``offer'' discussed in section II above.
---------------------------------------------------------------------------

    \43\ 17 CFR 242.300 et seq.
    \44\ 17 CFR 242.301(b)(3).
    \45\ 17 CFR 242.301(b)(3)(i)(B).
    \46\ 17 CFR 242.301(b)(3)(ii).
---------------------------------------------------------------------------

A. Lowering the Threshold for Display Requirement

    Rule 301(b)(3) of Regulation ATS imposes certain order display and 
execution access obligations on ATSs. Currently, the obligations apply 
to any ATS that ``(A) displays subscriber orders to any person (other 
than alternative trading system employees); and (B) during at least 4 
of the preceding 6 calendar months, had an average trading volume of 5 
percent or more of the aggregate average daily share volume for [an] 
NMS stock as reported by an effective transaction reporting plan.'' 
\47\ If an ATS meets these criteria, it is required to comply with Rule 
301(b)(3)(ii),\48\ which requires the ATS to provide to a national 
securities exchange or national securities association (each of which 
is a ``self-regulatory organization'' or ``SRO'') the prices and sizes 
of the orders at the highest buy price and the lowest sell price for 
that NMS stock, displayed to more than one subscriber of the ATS, for 
inclusion in the quotation data made available by the SRO to vendors. 
An ATS that meets the volume threshold also is required to comply with 
Rule 301(b)(3)(iii), which sets forth certain access standards 
regarding the orders that the ATS is required to provide to an SRO 
pursuant to Rule 301(b)(3)(ii).
---------------------------------------------------------------------------

    \47\ 17 CFR 242.301(b)(3)(i).
    \48\ 17 CFR 242.301(b)(3)(ii).
---------------------------------------------------------------------------

    The Commission is proposing to amend Rule 301(b)(3)(i)(B) by 
reducing the average daily trading volume threshold from 5% to 0.25%. 
Thus, under the proposed amendment, the display and access requirements 
of Rules 301(b)(3)(ii) and 301(b)(3)(iii), respectively, would apply if 
the ATS's average daily volume in an NMS stock were 0.25% or more 
during at least four of the preceding six calendar months. Average 
daily trading volume would continue to be based on volumes reported by 
an effective transaction reporting plan.
    The Commission preliminarily believes that lowering the volume 
threshold would further the goals of the national market system by 
reducing the potential for two-tiered markets and

[[Page 61214]]

improving the quality of quotation data made available to the public. 
As discussed above, the Commission is proposing to amend the 
definitions of ``bid'' or ``offer'' in Rule 600(b)(8) of Regulation NMS 
in a manner that would, among other things, make these sections 
consistent with the Commission's policy statements in adopting 
Regulation ATS that actionable IOIs are orders for purposes of that 
regulation.\49\
---------------------------------------------------------------------------

    \49\ See supra note 36 and accompanying text.
---------------------------------------------------------------------------

    The Commission believes that broker-dealers operating ATSs should 
be subject to quoting requirements that broadly parallel those 
applicable to other market participants. Currently, the order display 
and execution access requirements in Regulation ATS do not apply to an 
ATS unless, among other things, the ATS has an average daily trading 
volume in an NMS stock of 5% or more. Few if any dark pool ATSs exceed 
the 5% threshold for any NMS stocks although, as explained above,\50\ 
ATSs collectively account for a significant share of trading volume. 
Many dark pool ATSs communicate order information via actionable IOIs 
that could, if appropriately integrated, contribute to the overall 
efficiency and quality of the national market system. Without any 
attendant change to Regulation ATS to lower the 5% threshold, the 
proposed amendments to the definitions of ``bid'' or ``offer'' in Rule 
600(b)(8) of Regulation NMS would have less effect, because most ATSs 
could remain under the 5% threshold and thus continue to communicate 
actionable IOIs only to selected market participants. Therefore, in 
conjunction with the proposed amendments to Rule 600(b)(8), the 
Commission is proposing to substantially lower the threshold at which 
an ATS incurs an obligation under Regulation ATS to provide orders to 
an SRO for inclusion in the public quote stream. The Commission 
preliminarily believes that such amendment would be consistent with the 
mandate set forth in Section 11A of the Exchange Act \51\ to promote a 
national market system.
---------------------------------------------------------------------------

    \50\ See supra notes 9 and 10 and accompanying text.
    \51\ 15 U.S.C. 78k-1.
---------------------------------------------------------------------------

    Congress in 1975 endorsed the development of a national market 
system and granted the Commission broad authority to implement it.\52\ 
Chief among the objectives of the national market system are 
coordinating markets, reducing fragmentation, and limiting the 
possibility of tiered markets where the best trading opportunities are 
available only to selected market participants.\53\ As the Commission 
has long recognized, proper coordination of markets requires 
transparency and access across the national market system.\54\ Market 
participants must be able to know where the best trading opportunities 
exist, and have the ability to execute orders in response to those 
opportunities. The Commission has taken a number of actions designed to 
further these goals,\55\ such as by providing, through Regulation ATS, 
a regulatory framework that promotes competition among and innovation 
by exchange and non-exchange trading centers while attempting to 
minimize detrimental market fragmentation. As the Commission observed 
in 1997, the failure ``to fully coordinate trading on alternative 
trading systems into national market systems mechanisms has impaired 
the quality and pricing efficiency of secondary equity markets. * * * 
Although these systems are available to some institutions, orders on 
these systems frequently are not available to the general investing 
public.'' \56\ The Commission noted that such ``hidden markets''--where 
superior quotations might be available to a subset of market 
participants--impeded the goals of the national market system.\57\
---------------------------------------------------------------------------

    \52\ See Public Law 94-29, 89 Stat. 97 (1975) (adopting Section 
11A of the Exchange Act).
    \53\ See 15 U.S.C. 78k-1(a)(1)(D) (``The linking of all markets 
for qualified securities through communication and data procession 
facilities will foster efficiency, enhance competition, increase the 
information available to brokers, dealers, and investors, facilitate 
the offsetting of investors' orders, and contribute to best 
execution of such orders''). See also Securities Exchange Act 
Release No. 39884 (April 21, 1998), 63 FR 23504, 23514 (April 29, 
1998) (``Regulation ATS Proposing Release''); Securities Exchange 
Act Release No. 38672 (May 23, 1997), 62 FR 30485, 30492 (June 4, 
1997) (``Concept Release'') (citing inter alia SEC, Statement of the 
Securities and Exchange Commission on the Future Structure of the 
Securities Markets (February 2, 1972), 37 FR 5286 (March 14, 1972)); 
Securities Exchange Act Release No. 36310 (September 29, 1995), 60 
FR 52792 (October 10, 1995).
    \54\ See, e.g., Regulation ATS Proposing Release, supra note 53, 
63 FR at 23511.
    \55\ See, e.g., Rules 610 and 611 of Regulation NMS, 17 CFR 
242.610 and 242.611; Order Handling Rules Release, supra note 26 and 
accompanying text. See also H.R. Rep. 94-123, 94th Cong., 1st Sess. 
50 (1975) (concluding that ``Investors must be assured that they are 
participants in a system which maximizes the opportunities for the 
most willing seller to meet the most willing buyer'').
    \56\ Concept Release, supra note 53, 63 FR at 30492. See also 
Regulation ATS Proposing Release, supra note 53, 63 FR at 23514.
    \57\ See Regulation ATS Proposing Release, supra note 53, 63 FR 
at 23514-15 (``The use of these systems to facilitate transactions 
in securities at prices not incorporated into the [national market 
system] has resulted in fragmented and incomplete dissemination of 
quotation information. Recent evidence suggests that the failure of 
the current regulatory approach to fully integrate trading on 
alternative trading systems into [the national market system] 
mechanisms has impaired the quality and pricing efficiency of 
secondary equity markets, particularly in light of the explosive 
growth in trading volume on such alternative trading systems'').
---------------------------------------------------------------------------

    Later, when adopting Regulation ATS in 1998, the Commission stated 
that ``it is inconsistent with congressional goals for a national 
market system if the best trading opportunities are made accessible 
only to those market participants who, due to their size or 
sophistication, can avail themselves of prices in alternative trading 
systems. The vast majority of investors may not be aware that better 
prices are disseminated to alternative trading system subscribers and 
many do not qualify for direct access to these systems and do not have 
the ability to route their orders, directly or indirectly, to such 
systems. As a result, many customers, both institutional and retail, do 
not always obtain the benefit of the better prices entered into an 
alternative trading system.'' \58\ The Commission further stated that, 
``in light of the significant trading volume on some alternative 
trading systems, integration of institutional and non-market maker 
broker-dealer orders into the national market system is essential to 
prevent the development of a two-tiered market.'' \59\ Beyond the 
general benefits of such integration, the Commission specifically noted 
that ``prices displayed only on alternative trading systems are 
immediately known to key market players who can adjust their trading to 
take advantage of their information advantage.'' \60\
---------------------------------------------------------------------------

    \58\ Regulation ATS Adopting Release, supra note 36, 63 FR at 
70865.
    \59\ Id. at 70866.
    \60\ Id. at 70869. See also Order Handling Rules Release, supra 
note 26, 61 FR at 48308 (``[T]he ECN amendment is intended to 
integrate into the public quote the prices of market makers and 
specialists that are now widely disseminated to ECN subscribers but 
are not available to the rest of the market'').
---------------------------------------------------------------------------

    While initially proposing a 10% threshold,\61\ the Commission 
ultimately adopted a 5% threshold. As noted in the Regulation ATS 
Adopting Release: ``The Commission believes that lowering the threshold 
to five percent will provide more benefits to investors, promote 
additional market integration, and further discourage two-tier markets. 
At the same time, the Commission believes that those alternative 
trading systems with less than five percent of the volume would not add 
sufficiently to transparency to justify the costs associated with 
linking to a market.'' \62\

[[Page 61215]]

The Commission continues to have the same concerns about fragmentation, 
two-tiered markets, and lack of transparency potentially caused by ATSs 
as it did when adopting Regulation ATS. However, as explained below, it 
now preliminarily believes that the 5% threshold for triggering ATS 
display obligations is too high, and that developments in technology, 
communications, and market structure warrant a substantial reduction of 
the ATS display threshold, to 0.25%.
---------------------------------------------------------------------------

    \61\ See Regulation ATS Proposing Release, supra note 53, 63 FR 
at 23515.
    \62\ Regulation ATS Adopting Release, supra note 36, 63 FR at 
70867.
---------------------------------------------------------------------------

    Since the Commission adopted Regulation ATS, the equity markets 
have evolved significantly and trading activity has become 
substantially less concentrated. The market shares of major national 
securities exchanges have declined over the last several years.\63\ 
More recently adopted national market system rules require robust 
intermarket linkages and protection of best-priced quotations.\64\ As 
noted above,\65\ a large number of ATSs operating as dark pools have 
commenced operations and collectively represent a significant source of 
liquidity for NMS stocks. Many dark pool ATSs send actionable IOIs 
regarding subscriber orders held in their systems. Such actionable IOIs 
typically represent orders that are at or inside the NBBO, which--if 
incorporated into the public quote stream--could substantially benefit 
the national market system by, among other things, providing additional 
liquidity and promoting vigorous price competition between orders and 
between markets.
---------------------------------------------------------------------------

    \63\ See supra notes 9 and 10 and accompanying text.
    \64\ See, e.g., Rules 610 and 611 of Regulation NMS, 17 CFR 
242.610 and 242.611; NMS Release, supra note 26, 70 FR at 37501-
37503 (summary of basis for requirements).
    \65\ See supra notes 8-10 and accompanying text.
---------------------------------------------------------------------------

    Because the number of trading centers has increased and the 
concentration of trading activity has become more dispersed, even 
smaller trading centers can now, collectively, have a substantial 
impact on price discovery for the overall market. For this reason, the 
Commission preliminarily believes that, to maintain a fair and 
efficient national market system, the majority of information about 
orders in NMS stocks communicated by ATSs to selected market 
participants--whether via actionable IOIs or otherwise--should 
participate in the public price discovery process. To accomplish this 
goal, the Commission is proposing to substantially lower the trading 
volume threshold in Rule 301(b)(3) of Regulation ATS. At the same time, 
consistent with the goals it articulated in adopting Regulation 
ATS,\66\ the Commission continues to believe that competition is 
important to a successful national market system, and that ATSs help 
promote competition among trading centers. Accordingly, rather than 
proposing to reduce the threshold to 0% and, thereby, effectively 
requiring that any orders communicated by an ATS to more than one 
person be made available to the market as a whole, the Commission is 
proposing a new threshold of 0.25%.
---------------------------------------------------------------------------

    \66\ See Regulation ATS Adopting Release, supra note 36, 63 FR 
at 70846-47 (``The final rules seek to establish a regulatory 
framework that makes sense both for current and future securities 
markets. This regulatory framework should encourage market 
innovation while ensuring basic investor protections * * *. The 
Commission believes the framework it is adopting meets the varying 
needs and structures of market participants and is flexible enough 
to accommodate the business objectives of, and the benefits provided 
by, alternative trading systems'').
---------------------------------------------------------------------------

    Regulation ATS was designed to balance the benefits of reducing 
barriers to entry for non-exchange trading venues with the need for 
appropriate regulation and coordination among exchange and non-exchange 
trading venues.\67\ The proposed display threshold of 0.25% is designed 
to keep barriers to entry for new ATSs low so as to promote 
competition, while reducing the amount of important price information 
that is selectively displayed outside the public quote stream. A new 
ATS that has not yet reached the 0.25% threshold in an NMS stock would, 
under the proposed amendments, be permitted to communicate orders in 
NMS stocks--whether via actionable IOIs or otherwise--to selected 
market participants. Such an ATS would be able to commence operations 
without, at least initially, incurring linkage and other costs 
associated with the requirement to provide order display and execution 
access. Although the Commission preliminarily believes that these costs 
are not unduly burdensome, the Commission is sensitive to these costs 
and preliminarily believes that it is not appropriate at this time to 
impose such costs on new ATSs that display subscriber orders outside 
the public quote stream, whether by communicating actionable IOIs or 
otherwise.\68\
---------------------------------------------------------------------------

    \67\ See Regulation ATS Adopting Release, supra note 36, 63 FR 
at 70847 (``The Commission believes the framework it is adopting 
meets the varying needs and structures of market participants and is 
flexible enough to accommodate the business objectives of, and the 
benefits provided by, alternative trading systems'').
    \68\ If the proposed changes to Rule 301(b)(3) are adopted, a 
new ATS could engage in limited display of orders in any NMS stock 
until it reached an average daily trading volume of 0.25% or more in 
that NMS stock over four of the preceding six months. The Commission 
preliminarily believes that this proposed threshold should provide a 
new ATS entrant sufficient opportunity to initiate and develop its 
business. A new ATS also could structure its business to avoid any 
display of orders, and thus any impact of the proposed amendments. 
Consequently, the Commission does not anticipate that the proposed 
amendments would lessen competition among or innovation by 
securities markets.
---------------------------------------------------------------------------

    Although the Commission preliminarily believes that most 
established ATSs that communicate actionable IOIs would be covered by 
the proposed trading volume threshold,\69\ it also preliminarily 
believes that the proposed amendments to Rule 301(b)(3)(ii) of 
Regulation ATS would not impose significant costs or inappropriate 
compliance burdens on such ATSs. As discussed below,\70\ for those ATSs 
that would become subject to Regulation ATS's order display and 
execution access requirements because of the lowering of the display 
threshold, and that would comply with that obligation by providing 
their best-priced orders to an SRO for inclusion in the public quote 
stream, the Commission preliminarily believes that the costs of linking 
to an SRO are not substantial. The communications and order-routing 
systems necessary to comply with Regulation ATS's order display and 
execution access requirements have improved significantly since they 
were originally adopted. The Commission believes that robust and 
extremely fast linkages that were not available at that time are now 
widely offered on commercially reasonable terms. It also appears that 
the market for these services is highly competitive, further reducing 
their cost. The Commission notes that for ATSs currently operating as 
ECNs, even those with relatively small market shares, already incur the 
costs associated with providing their best-priced orders to an SRO for 
inclusion in the public quote stream.\71\
---------------------------------------------------------------------------

    \69\ Based on information provided to the Commission by dark 
pool ATSs on their quarterly Forms R-31, many such ATSs are above 
0.25% of total national volume in all NMS stocks. If an ATS has over 
0.25% of total national volume in all NMS stocks, it likely exceeds 
0.25% in many individual NMS stocks--and thus would become subject 
to Regulation ATS's display and execution access requirements with 
respect to such NMS stocks, if the 0.25% threshold were to be 
adopted by the Commission.
    \70\ See infra in section VI.B.
    \71\ Some ECNs display or have in the past displayed their 
orders in FINRA's Alternative Display Facility (``ADF''). Market 
participants that wish to trade against an ECN order displayed on 
the ADF must route a contra-side order to the ECN, as the ADF itself 
does not provide execution functionality. Other ECNs display or have 
in the past displayed their orders on national securities exchanges 
that provide an ``order delivery'' functionality. When an order 
arrives at the exchange seeking to execute against an ECN order that 
is displayed on the exchange, the exchange will ``deliver'' the 
contra-side order to the ECN for execution. This order delivery 
functionality is designed to eliminate the possibility of a double 
execution of the ECN order (once against an order sent to the 
exchange and once against an order sent directly to the ECN). To be 
competitive and comply with relevant regulatory requirements, 
including Regulation NMS, the exchange and ECN trading systems must 
be closely integrated and have very high reliability and speed. The 
prevalence of these order display and routing arrangements employed 
by ECNs suggests that it would not be inappropriately burdensome for 
other ATSs to undertake similar order display and routing 
arrangements to include their trading interest in the consolidated 
quotation data.

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[[Page 61216]]

    Any ATS would be able to avoid any direct impact from the proposed 
amendments by ceasing to send actionable IOIs to more than one person. 
Such an ATS would not incur any costs to link to an SRO for the purpose 
of providing its best-priced orders to an SRO for inclusion in the 
public quote stream. The Commission understands that some ATSs already 
operate on a completely dark basis, which suggests that this may be a 
viable business strategy for additional ATSs.\72\
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    \72\ Certain ATSs generate executions by communicating 
actionable IOIs to selected market participants and thereby benefit 
from the current regulatory structure. The Commission acknowledges 
that the proposed amendments could impact such ATSs. However, as 
explained in this Release (see infra section VI.B), the Commission 
preliminarily believes that the potential benefits to the broader 
market of the proposed changes to Rule 301(b)(3) would justify these 
impacts.
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    The proposed amendments are designed to create a more level playing 
field with respect to order display and execution access for all market 
participants that receive and attempt to execute orders, including 
exchanges, ATSs, and OTC market makers. By amending Rule 301(b)(3) to 
make the order display and execution access requirements of ATSs more 
closely parallel those of other market participants, the Commission 
preliminarily believes that the national market system would be fairer, 
more transparent, and more competitive--to the benefit of all 
investors.

B. Elimination of ``in the alternative trading system'' Limitation

    In its current form, the display requirement of Regulation ATS 
applies only with respect to orders that are displayed to more than one 
person in the alternative trading system.\73\ As the Commission noted 
in the Regulation ATS Adopting Release, the term ``person in the 
alternative trading system'' means a subscriber of the ATS.\74\ The 
Commission noted that this language would permit ATSs that operated a 
negotiation feature from incurring any order display obligations 
pursuant to Regulation ATS.\75\
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    \73\ See 17 CFR 240.301(b)(3)(ii) (``[s]uch alternative trading 
system shall provide to a national securities exchange or national 
securities association the prices and sizes of orders at the highest 
buy price and the lowest sell price for such NMS stock, displayed to 
more than one person in the alternative trading system, for 
inclusion in the quotation data made available by the national 
securities exchange or national securities association'').
    \74\ See Regulation ATS Adopting Release, supra note 36, 63 FR 
at 70866 (``alternative trading systems are not required to provide 
to the public quote stream orders displayed to only one other 
alternative trading system subscriber''); id. at 70867 (``Rule 
301(b)(3) only requires alternative trading systems to publicly 
disseminate the best priced orders that are displayed to other 
alternative trading subscribers'').
    \75\ See id. at 70866. Using a negotiation feature, two 
subscribers of an ATS would communicate with each other using the 
facilities of the ATS in an attempt to reach agreement on the terms 
of a transaction. The negotiation could result in one subscriber 
communicating a firm order to another subscriber, which the latter 
could accept or reject.
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    The Commission proposes to amend Rule 301(b)(3)(ii) by eliminating 
the phrase ``in the alternative trading system'' and replacing it with 
the phrase ``(other than alternative trading system employees).'' The 
purpose of eliminating the phrase ``in the alternative trading system'' 
would be to make an ATS that meets the volume threshold subject to the 
display obligation whenever it displays an order in an NMS stock to 
more than one person, regardless of whether those persons are 
subscribers of the ATS. When the Commission adopted Regulation ATS in 
1998, trading technology and business strategies had not yet evolved to 
the point where communicating order information to anyone other than a 
subscriber of an ATS was feasible or even desirable. Given the state of 
the market in 1998, the Commission did not consider imposing, and thus 
did not adopt, a display obligation with respect to order information 
communicated to non-subscribers.
    More recent technological developments require the Commission to 
revisit this issue. As markets have become highly automated and systems 
for sending, receiving, and processing large numbers of electronic 
messages have grown more robust and more widely available, many market 
participants--including some ATSs--now communicate actionable IOIs to 
attract potential counterparties for subscriber orders that they 
hold.\76\ In many cases, the recipients of those IOIs are not 
subscribers of the ATS and thus are not ``in'' the ATS. In its current 
form, however, Rule 301(b)(3) does not cover this type of display, even 
if the ATS exceeds the current 5% threshold.
---------------------------------------------------------------------------

    \76\ The recipient of such information can respond by sending a 
firm order back to the sender with the goal of interacting with the 
contra-side order held by the sender.
---------------------------------------------------------------------------

    The development and implementation of new technology--particularly 
the ability of third-party vendors to provide fast and robust order-
routing services to a wide number of venues on commercially attractive 
terms--support extending Regulation ATS's display requirements to 
instances where orders are displayed to more than one person, 
regardless of whether such persons are subscribers of the ATS. Whether 
or not a recipient of such order information is deemed to be ``in'' the 
ATS, communication of such information to a limited subgroup of market 
participants has the potential to create a two-tiered market.\77\ Thus, 
the Commission preliminarily believes that the phrase ``in the 
alternative trading system'' unduly restricts the order display and 
execution access obligations of ATSs, and that the proposed amendment 
to Rule 301(b)(3)(ii) is appropriate to further the objectives of a 
national market system.
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    \77\ However, under the proposal, a negotiation system that 
allowed one subscriber to communicate an order to a second 
subscriber in an attempt to reach agreement on the terms of a 
transaction would continue to be exempt from any order display or 
execution access requirements under Regulation ATS, because the 
system is not displaying subscriber orders to more than one person.
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    While the Commission is proposing to delete the phrase ``in the 
alternative trading system'' from Rule 301(b)(3)(ii), it is proposing 
to replace it with the phrase ``(other than alternative trading system 
employees).'' The ability of ATS employees to see such order 
information should not affect whether the ATS is required to provide 
its best-priced orders to an SRO for inclusion in the public quote 
stream. Existing Rule 301(b)(3)(i)(A) already contains the language 
``(other than alternative trading system employees).'' By inserting the 
same phrase in Rule 301(b)(3)(ii), the Commission would clarify that no 
display obligations are triggered because ATS employees can see 
subscribers' order information.

C. Size Discovery Exclusion

    The Commission proposes to revise Rule 301(b)(3)(ii) of Regulation 
ATS to add an exclusion for certain large orders to make it consistent 
with the proposed amendments to the definition of ``bid'' or ``offer'' 
discussed in section II above. Rule 301(b)(3)(ii) currently states that 
an ATS is required to provide to an SRO the prices and sizes of the 
orders at the highest buy price and the lowest sell price for any NMS 
stock for inclusion in the public quote stream that are, among

[[Page 61217]]

other things, displayed to more than one person in the ATS. The 
Commission proposes to amend Rule 301(b)(e)(ii) to exclude ``orders 
having a market value of at least $200,000 that are displayed only to 
those who are reasonably believed to represent current contra-side 
trading interest of at least $200,000.''
    With respect to such ``size discovery orders,'' \78\ this proposed 
amendment to Rule 301(b)(3)(ii) would make the exception from the order 
display and execution access requirements applicable to ATSs consistent 
with the proposed exception in Rule 602 applicable to exchanges and 
responsible brokers and dealers. If Rule 301(b)(3)(ii) were not amended 
in this manner, the proposed exception to display requirements for size 
discovery IOIs in Rule 602 would not apply to ATSs. Rule 300(e) of 
Regulation ATS \79\ defines the term ``order'' for purposes of 
Regulation ATS as including ``any bid or offer quotation'' which, if 
the Commission adopts this proposal, would no longer include size 
discovery IOIs. However, Rule 300(e) also defines the term ``order'' to 
include any ``other priced order.'' Because a size discovery order 
could be an ``other priced order,'' a size discovery order could be 
subject to the order display and execution access requirements of Rule 
301(b)(3)(ii), regardless of any change to the definition of ``bid'' or 
``offer'' in Rule 602. Therefore, the Commission is proposing to amend 
Rule 301(b)(3)(ii) to explicitly provide that ``orders having a market 
value of at least $200,000 that are displayed only to those who are 
reasonably believed to represent current contra-side trading interest 
of at least $200,000'' would not be subject to Regulation ATS's order 
display and execution access requirements.\80\ For the same reasons 
discussed in section II above,\81\ the Commission preliminarily 
believes that the proposed amendment to Rule 301(b)(3)(ii) would 
appropriately balance preventing two-tiered markets and encouraging the 
public display of limit orders with affording certain large orders some 
opportunity for size discovery without having to be displayed in the 
public quote stream.
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    \78\ The Commission notes that the proposed exclusion from Rule 
301(b)(3)(ii) would apply to ``orders'' meeting certain criteria 
rather than to ``indications of interest,'' which are the subject of 
the proposed exception to Rule 600(b)(8) of Regulation NMS discussed 
above. Because the term ``order'' is defined broadly in Regulation 
ATS and incorporated into multiple aspects of the regulation (i.e., 
recordkeeping and reporting requirements), the Commission 
preliminarily believes that an effort to distinguish and exclude 
size discovery IOIs from the definition of ``order'' under 
Regulation ATS would have additional and unintended effects on 
Regulation ATS.
    \79\ 17 CFR 242.300(e).
    \80\ Because the Commission's objective in the present proposal 
relates only to order display and execution access required by Rule 
301(b)(3)(ii), no change to the definition in Rule 300(e) is being 
proposed. Therefore, other requirements relating to orders in 
Regulation ATS--including fair access; capacity, integrity, and 
security; recordkeeping; reporting; and the confidential treatment 
of trading information (see 17 CFR 242.301(b)(5), (b)(6), (b)(8), 
(b)(9), and (b)(10), respectively--would continue to apply with 
respect to all orders, whatever their size. In addition, executions 
of all orders, whatever their size, would continue to count toward 
an ATS's trading volume threshold for purposes of Rule 301(b)(3).
    \81\ See supra section II.
---------------------------------------------------------------------------

D. Request for Comment

    The Commission requests the views of commenters on all aspects of 
the proposed amendments to Regulation ATS described above. The 
Commission also requests particular comment on the following:
    1. Is 0.25% of aggregate average daily share volume in an NMS stock 
an appropriate threshold to trigger the order display and execution 
access requirements of Regulation ATS? Why or why not? Should the 
Commission adopt a higher or lower threshold? If so, what should that 
threshold be and why? Should the Commission leave the threshold at 5%? 
Would a threshold of 0.25% achieve the desired balance of not creating 
a barrier to entry for new ATSs while capturing most established ATSs 
that communicate actionable IOIs? Are there other considerations and 
goals the Commission should take into account in establishing a new 
threshold?
    2. Should the Commission adopt a threshold based on additional or 
different criteria other than trading volume (e.g., adjusting the 
trading volume threshold based on the liquidity of an NMS stock)? If 
the Commission were to do so, how should that threshold be determined 
and calculated? For example, what would be the appropriate time period 
for a liquidity-based threshold?
    3. Is it consistent with the Commission's goals to permit very low 
volume ATSs to display orders to more than one person outside the 
public quote stream (by communicating actionable IOIs or otherwise) as 
would be the case with a display threshold of 0.25%, or should the 
display threshold be 0%? Are such IOIs typically used for more or less 
liquid NMS stocks? Should the types of NMS stocks that are typically 
associated with IOI usage affect the setting of the display threshold? 
If so, how?
    4. Would lowering the average daily trading volume threshold to 
0.25% promote price transparency and price discovery in the national 
market system? Why or why not? Are there other rule amendments the 
Commission could adopt that would achieve the Commission's goals?
    5. Should the order display requirements of Rule 301(b)(3) include 
a size discovery exclusion for large orders? Is a principal amount of 
$200,000 an appropriate value to define large orders for this purpose? 
Should the Commission adopt a higher or lower threshold? If so, what 
should that threshold be and why? Are there other or additional 
criteria, such as number of shares, on which the exclusion should be 
based? If so, what are those criteria?
    6. Is the amendment to Rule 301(b)(3)(ii) eliminating the phrase 
``in the alternative trading system'' appropriate? Should the 
application of the order display requirements of Rule 301(b)(3)(ii) 
remain limited to orders that are displayed only to subscribers of an 
ATS? If so, why?
    7. What would be the most likely method of compliance by ATSs were 
the Commission to adopt the proposed amendments to Rule 301(b)(3)? Do 
you believe that ATSs that currently send actionable IOIs would choose 
to comply with the proposed amendments to Regulation ATS by submitting 
subscriber orders to an SRO for inclusion in the public quote stream or 
by going completely dark (i.e., not disclosing any information about 
subscriber orders, whether via IOIs or otherwise)? What percentage of 
ATSs (whether by number or by the percentage of ATS trading volume that 
they represent) do you estimate would choose each option? Are there 
other options not discussed here that ATSs might pursue? Are there 
other policy implications that the Commission should consider regarding 
the likely responses by ATSs if the Commission were to adopt the 
proposed amendments?
    8. Do you believe that subscribers of ATSs would change how they 
use ATSs if the Commission were to adopt the proposed amendments to 
Regulation ATS? If so, how?
    9. How would the proposed amendments affect ATS revenues and the 
ability of ATSs to offer new products and services?
    10. How would the proposed amendments affect internalization and 
payment-for-order-flow arrangements? Would the proposed amendments 
provide greater incentives to initiate internalization programs in lieu 
of developing a new ATS?
    11. Would the proposed amendments increase or decrease trading 
costs for

[[Page 61218]]

institutional investors? If so, please describe and quantify.
    12. What would be the effects, if any, on the price discovery 
process for NMS stocks, their overall liquidity, or other trading 
characteristics if more ATSs went completely dark?
    13. What costs would an ATS incur as a result of the proposed 
amendments to Rule 301(b)(3)? If an ATS that communicates actionable 
IOIs chose to comply with amended Rule 301(b)(3) by providing orders to 
an SRO for inclusion in the public quote stream, what would be the 
costs of the attendant linkage and order-routing systems (on both an 
initial and ongoing basis) and their related costs (e.g., compliance 
costs)? Do you agree with the Commission's preliminary assessment that 
fast and robust linkage and order-routing systems are widely available 
to market participants on commercially reasonable terms?
    14. Would the proposed amendments to Rule 301(b)(3) have any impact 
(positive or negative) beyond those described in this release? Would 
the proposed amendments raise any additional issues that the Commission 
should consider?

IV. Post-Trade Transparency for ATSs

A. Background

1. Joint-SRO Arrangements for Disseminating Market Information
    Section 11A(a)(2) of the Exchange Act, adopted by the Securities 
Acts Amendments of 1975 (``1975 Amendments''),\82\ directs the 
Commission, having due regard for the public interest, the protection 
of investors and the maintenance of fair and orderly markets, to use 
its authority under the Exchange Act to facilitate the establishment of 
a national market system for securities in accordance with the 
Congressional findings and objectives set forth in Section 11A(a)(1) of 
the Exchange Act. Among those findings and objectives is ``the 
availability to brokers, dealers, and investors of information with 
respect to quotations for and transactions in securities.'' \83\
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    \82\ Public Law 94-29, 89 Stat. 97 (1975).
    \83\ Section 11A(a)(1)(C)(iii) of the Exchange Act, 15 U.S.C. 
78k-1(a)(1)(C)(iii).
---------------------------------------------------------------------------

    Using this authority, the Commission has required the SROs to act 
jointly pursuant to various national market system plans in 
disseminating consolidated market information.\84\ Under this 
regulatory framework, the SROs have developed and funded, and presently 
operate, the systems that disseminate a highly-reliable, real-time 
stream of consolidated market information throughout the United States 
and the world.
---------------------------------------------------------------------------

    \84\ See, e.g., 17 CFR 242.601. This rule requires exchanges to 
file a transaction reporting plan concerning transactions in listed 
equity securities executed through their facilities and imposes a 
parallel requirement on associations for transactions effected 
otherwise than on a national securities exchange.
---------------------------------------------------------------------------

    The joint-industry plans that provide for the dissemination of last 
sale information for equity securities are the Consolidated Tape 
Association Plan (``CTA Plan'') and 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 (``Nasdaq UTP Plan'') (collectively ``the Plans'').\85\ These 
plans govern the arrangements for disseminating consolidated trade 
information. Among other things, the plans require the individual SROs 
to provide trade information for an NMS stock to a securities 
information processor (``SIP''), which then consolidates the 
information into a single stream for dissemination to the public. In 
this way, the public has access to a highly reliable source of 
information that is consolidated from all the market centers that trade 
a particular security.\86\
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    \85\ The CTA Plan is available at http://www.nyxdata.com/cta and 
the Nasdaq UTP Plan is available at http://www.utpdata.com. These 
plans are transaction reporting plans as well as National Market 
System Plans and were submitted by the plan participants for notice, 
comment, and approval by the Commission. The CTA Plan was originally 
declared effective pursuant to Section 17(a) of the Act and Rule 
17a-15 thereunder. See Securities Exchange Act Release No. 10787 
(May 10, 1974), 39 FR 17799 (May 20, 1974). It was subsequently 
approved, as amended, under Section 11A of the Act. See Securities 
Exchange Act Release No. 16589 (February 19, 1980), 45 FR 12377 
(February 26, 1980). The Nasdaq UTP Plan was approved pursuant to 
Section 11A(a)(3)(B). See Securities Exchange Act Release No. 28146 
(June 26. 1990), 55 FR 27917 (July 6, 1990).
    \86\ For a more detailed description of the Plans, see Market 
Information Concept Release, supra note 3, 64 FR at 70616.
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    The CTA Plan provides for the dissemination of trade information 
for any CTA ``Eligible Security'' which is defined as any common stock, 
long-term warrant, preferred stock, or right admitted to dealings on 
the New York Stock Exchange LLC (``NYSE''), NYSE Amex LLC (``NYSE 
Amex'') or the ``regional exchanges.'' \87\ The CTA Plan is 
administered by the Consolidated Tape Association (``CTA''), which 
consists of a representative from each of the twelve U.S. equities 
markets.\88\
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    \87\ Nasdaq securities are expressly excluded from this 
definition. See CTA Plan, Sections I(p) and (q), and VII. The 
Consolidated Quotation Plan provides for the consolidation of 
quotations from the markets trading the securities covered by the 
CTA Plan.
    \88\ The participants are: BATS Exchange, Inc.; Chicago Board 
Options Exchange, Inc.; Chicago Stock Exchange, Inc.; Financial 
Industry Regulatory Authority, Inc.; International Securities 
Exchange, LLC; The NASDAQ Stock Market LLC; NASDAQ OMX BX, Inc.; 
NASDAQ OMX PHLX, Inc.; National Stock Exchange, Inc.; New York Stock 
Exchange LLC; NYSE Amex LLC; and NYSE Arca, Inc. (collectively, the 
``Participants'').
---------------------------------------------------------------------------

    The Nasdaq UTP Plan was approved on a pilot basis in 1990;\89\ it 
became operational in 1994.\90\ The Nasdaq UTP Plan governs the 
collection, processing, and dissemination on a consolidated basis of 
quotation information and transaction reports in Eligible Securities 
for each of its Participants.\91\ Eligible Securities under the Nasdaq 
UTP Plan means any Nasdaq Global Market or Nasdaq Capital Market 
security (``Nasdaq securities'') as defined in Nasdaq Rule 4200, but 
does not include any security that is defined as an ``Eligible 
Security'' within Section VII of the CTA Plan.\92\ This consolidated 
information provides investors with the current quotation and last sale 
information in Nasdaq securities. It enables investors to ascertain 
from one data source the current prices in all the markets trading 
Nasdaq securities. The Nasdaq UTP Plan serves as the transaction 
reporting plan for its Participants and is a prerequisite for their 
trading of Nasdaq securities.\93\ The Nasdaq UTP Plan is administered 
by the participating exchanges and association, and applies to all of 
the markets that trade equity securities.\94\ Amendments submitted by 
SROs to the Plans are subject to Commission review under Rule 608 of 
Regulation NMS.\95\ Further, the Commission may itself amend National 
Market System plans, pursuant to Rule 608(b)(2) of Regulation NMS.
---------------------------------------------------------------------------

    \89\ See supra note 85.
    \90\ See Securities Exchange Act Release No. 34371 (July 13, 
1994), 59 FR 37103 (July 20, 1994). Before 1994, the Commission had 
to grant unlisted trading privileges (``UTP'') to an exchange in 
order for the exchange to trade an over-the-counter (``OTC'') 
security. Before the Nasdaq UTP Plan was approved, the Commission 
approved a limited pilot for exchanges to trade OTC securities. See 
Securities Exchange Act Release No. 22412 (September 16, 1985), 50 
FR 38640 (September 24, 1985). In 1994, the Exchange Act was amended 
to permit exchanges to trade OTC securities on a UTP basis without 
Commission action.
    \91\ See Nasdaq UTP Plan, Section II.
    \92\ See Nasdaq UTP Plan, Section III (B).
    \93\ See 17 CFR 242.608; See also Securities Exchange Act 
Release No. 55647 (April 19, 2007), 72 FR 20891 (April 26, 2007).
    \94\ See supra note 7.
    \95\ See 17 CFR 242.608.

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[[Page 61219]]

2. Alternative Trading Systems and Their Arrangements for Disseminating 
Market Information
    Rules applicable to ATSs are set forth in Regulation ATS.\96\ ATSs 
can choose whether to register as national securities exchanges or to 
register as broker-dealers and comply with additional requirements 
under Regulation ATS, depending on their activities and trading 
volume.\97\ ATSs that register as broker-dealers \98\ are required to 
be SRO members.\99\ Because ATSs effect transactions in the OTC market, 
they must be members of FINRA.\100\
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    \96\ See 17 CFR 242.300 et seq.
    \97\ See 17 CFR 242.301.
    \98\ See Section 15(b) of the Act, 15 U.S.C. 78o(b).
    \99\ See Section 15(b)(8) of the Act, 15 U.S.C. 78o(b)(8).
    \100\ Id.
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    Rule 601(b) of Regulation NMS under the Exchange Act, which governs 
the dissemination of transaction reports and last sale information in 
national market system securities, requires SRO members to transmit the 
information required by the transaction reporting plans to the 
SRO.\101\ OTC trades, including trades executed by ATSs, are reported 
to the consolidated trade streams through one of the trade reporting 
facilities (``TRFs'') operated by FINRA on behalf of exchanges,\102\ or 
through FINRA's ADF.\103\ The published trade reports identify the 
trades as OTC trades; they do not identify the particular ATS or other 
broker-dealer that reported the trade.\104\
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    \101\ See 17 CFR 242.601(b).
    \102\ See FINRA Rules 6300 et seq. FINRA has established the 
following TRFs (each in conjunction with the pertinent Exchange): 
the FINRA/NASDAQ TRF and the FINRA/NYSE TRF.
    \103\ See FINRA Rules 6200 et seq. The ADF is both a trade 
reporting and quotation display and collection facility for purposes 
of transactions in NMS stocks effected otherwise than on an 
exchange.
    \104\ Members reporting trades to FINRA attach their unique 
Market Participant Symbols (``MPIDs'') for reporting a trade to a 
TRF or the ADF, but the MPID is not disseminated publicly on trade 
reports. Trades reported to one of the two FINRA TRFs are 
transmitted to the SIPs for CTA or Nasdaq UTP (and disseminated to 
the public) with a market center identifier of FINRA and a sub-
indicator for the relevant exchange TRF (i.e., NYSE or NASDAQ).
---------------------------------------------------------------------------

B. Proposed Amendments to the Plans

    The Commission has long believed that one of the most important 
functions it can perform for investors is to ensure that they have 
access to the information they need to protect and further their own 
interests.\105\ The Commission has consistently supported making timely 
and accurate reports of transactions available to the public.\106\ A 
transparent market is a market in which investors and their brokers 
have information about the current buying and selling interest in a 
security, as well as information about the price and size of recent 
transactions and where those transactions have taken place.\107\ In 
particular, the Commission has long been an advocate of post-trade 
transparency and has encouraged the markets to enhance the information 
made available to the public regarding transactions effected on 
exchanges and in the OTC market.\108\ As the Commission has stated in 
the past, transparency allows all market participants to assess overall 
supply and demand, substantially counteracts the effects of 
fragmentation that necessarily characterize a decentralized market 
structure, without forcing all executions into one market, and can 
reduce the ``information gap'' between investors with differing degrees 
of sophistication.\109\ Nationwide disclosure of market information is 
necessary to assure the efficient pricing of securities, to maximize 
the depth and liquidity of the securities markets and to provide 
investors with the opportunity to receive the best possible execution 
of their orders.\110\
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    \105\ See, e.g., Market Information Concept Release, supra note 
3, at 70614.
    \106\ See, e.g., Securities Exchange Act Release No. 16589 
(February 19, 1980), 45 FR 12377 (February 26, 1980) (amending the 
rule governing the collection and dissemination of transaction 
reports and last sale data).
    \107\ See, e.g., Securities Exchange Act Release No. 50700 
(November 18, 2004), 69 FR 71256, 71271 (December 8, 2004).
    \108\ See, e.g., Securities Exchange Act Release No. 30569 
(April 10, 1992), 57 FR 13396 (April 16, 1992) (stating, among other 
things, that real-time publicly disseminated trade reporting is 
crucial to the efficient and fair operation of capital markets).
    \109\ See id.
    \110\ See, e.g., SEC, Statement of the Securities and Exchange 
Commission on the Future Structure of the Securities Markets 
(February 2, 1972), 37 FR 5286, 5287 (March 14, 1972).
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    Since the adoption of Regulation ATS, the equity markets have 
evolved and, among other things, trading activity has become less 
concentrated. The share of trading volume at certain major national 
securities exchanges has declined over the last several years.\111\ 
ATSs, including those that are ECNs and those that are dark pools, have 
gained a growing share of equity trading in the past several 
years.\112\ Currently, approximately 38 percent of trading volume in 
NMS stocks is reported as OTC (which includes ATS trades).\113\ The 
lack of information concerning the ATS on which trades are executed 
makes it difficult, if not impossible, for the public to assess ATS 
trading in real-time, and to reliably identify the volume of executions 
in particular stocks on individual ATSs.
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    \111\ See supra notes 9-10 and accompanying text.
    \112\ See Securities Exchange Act Release No. 59248 (January 14, 
2009), 74 FR 4357, 4361 (January 26, 2009); see also Regulation ATS 
Adopting Release, supra note 36, at 70844.
    \113\ See, e.g., market volume statistics available at http://
www.batstrading.com/market_summary (OTC volume in NMS stocks was 
37.7% during 5-day period ending September 21, 2009).
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    The Commission preliminarily believes that the current level of 
post-trade transparency for ATSs is inadequate. Requiring ATS trades to 
carry a specific identifier that would be disseminated publicly would 
equalize the trade reporting requirements for exchanges and ATSs, both 
of which operate systems that bring together orders of multiple buyers 
and sellers on an agency basis. Accordingly, the Commission is 
proposing to amend the Plans to require the disclosure of the identity 
of individual ATSs on trade reports in the public data stream, the same 
way exchange trades are identified. Requiring the public disclosure of 
the individual ATS that executed a trade should enable market 
participants to better assess in real-time where executions in 
particular securities are occurring among various ATSs in the over-the-
counter market. In addition, the proposal should allow more reliable 
trading volume statistics to be calculated for individual ATSs. The 
Commission preliminarily believes this should enhance the ability of 
broker-dealers and their customers to more effectively find liquidity 
and achieve best execution in the over-the-counter market.
    However, the Commission is sensitive to the need of investors 
executing large size trades to control the information flow concerning 
their transactions, and preliminarily believes that the disclosure of 
the identity of the ATS that has executed a particular large size trade 
could potentially cause undue information leakage about that trading. 
Identification of an ATS that focuses on such block trading, for 
example, could signal to the market that the entity trading may plan to 
execute more trades in the same securities, with the risk that other 
market participants may attempt to take advantage of this information, 
to the detriment of the entity engaged in those large trades. The 
Commission preliminarily believes that the benefits of not disclosing 
the identity of ATSs that execute large size trades justify not 
providing such post-trade information about large size trades. The 
Commission also preliminarily believes that the exception for large 
size trades strikes the appropriate balance between the need of 
investors executing large size trades to

[[Page 61220]]

minimize significant information leakage and the right of the investing 
public to have this identifying post-trade information. Therefore, the 
Commission is not proposing to require the identification of ATSs on 
trade reports in the public data stream for large size trades.\114\
---------------------------------------------------------------------------

    \114\ As with the other proposed amendments discussed above in 
the release, the Commission is proposing to use the $200,000 figure 
to define large size trades. It is a figure that is well recognized 
as constituting a large size order. The Commission is concerned that 
with these large size trades there is more potential for information 
leakage. For a more detailed discussion of large size trades and the 
$200,000 figure, see section II.
---------------------------------------------------------------------------

    Specifically, the Commission is proposing to revise the definition 
in the CTA Plan of Last Sale Price Information, to add language at the 
end of the first paragraph of Section VI(f) (Market Identifiers) of the 
CTA Plan, and to revise the second and third sentences of Section 
VIII(a) (Responsibility of Exchange Participants). Together, these 
changes would amend the CTA Plan to require that all last sale prices 
collected by FINRA from each ATS be accompanied by an identifier unique 
to the ATS and distributed by the SIP, unless the trade has a market 
value of at least $200,000. Such trades would continue to be reported 
as OTC trades without an ATS identifier.
    The Commission also is proposing to amend the Nasdaq UTP Plan to 
achieve the same result. Specifically, the Commission is proposing to 
revise the definition of ``Transaction Reports'' in Section III (U), 
the language in Section VI(C)(3) regarding processor dissemination of 
information via transaction reports, and Section VIII(B) regarding 
Transaction Reports. Together, these changes would amend the Nasdaq UTP 
Plan to require that all last sale prices collected by FINRA from each 
ATS be accompanied by an identifier unique to the ATS and distributed 
by the SIP, unless the trade has a market value of at least $200,000. 
Such trades would continue to be reported as OTC trades without an ATS 
identifier.
    Currently, as discussed above, the identity of the ATSs is not 
reported to the public data stream. Recognizing the changes that have 
taken place in the marketplace and the increased share of equity 
trading by ATSs in the last number of years, the Commission 
preliminarily believes that requiring the disclosure of the identity of 
ATSs on their trade reports in the public data stream should be 
beneficial to investors. The proposed amendments would augment 
available trade information, provide important information about 
trading volumes of ATSs, including dark pools, as well as information 
on which ATSs may have liquidity in particular stocks. The Commission 
also preliminarily believes that the resulting improved transparency 
would help ensure that publicly available prices fully reflect overall 
supply and demand, equip the investing public with tools to make better 
investment decisions, increase the perception of fairness that is 
necessary for the healthy functioning of the national market system, 
and, as a result, enhance public confidence in the securities 
markets.\115\
---------------------------------------------------------------------------

    \115\ See supra notes 107-109 and accompanying text.
---------------------------------------------------------------------------

C. Request for Comment on Proposed Plan Amendments

    The Commission invites interested persons to submit written 
comments on any aspect of the proposed Plan amendments. The Commission 
seeks comment on whether there are alternative approaches to improving 
ATS post-trade transparency that the Commission should consider that 
would achieve the Commission's stated goals. The Commission 
specifically seeks comment on whether the amendment of the Plans is the 
best way to address the matter. If there are alternative approaches, 
such as requiring the TRFs to make the identity of ATSs that submit 
trade reports available to the public as part of their proprietary data 
streams, please discuss your suggested approach, its feasibility, and 
how it would achieve the Commission's goals. In addition, the 
Commission seeks comment on the timing and level of detail that ATSs 
should be required to provide about their trading activity. Would 
summary information, such as end-of-day volume statistics be preferable 
to real-time, trade-by-trade disclosure? If so, please explain your 
reasoning. Would real-time identification of ATS trades cause 
inappropriate information leakage concerning customer orders or result 
in other unintended consequences? What modifications could the 
Commission make to its proposal to address any such concerns? Will the 
proposed change affect trading on exchanges, where no large trade 
exception applies? The Commission also seeks comment on whether the 
proposed exception to the ATS trade reporting requirement for large 
size trades is justified and would help minimize concerns about 
information leakage. If a large size trade exception is not 
appropriate, please explain why you believe such an exception is not 
necessary. Further, is the proposed threshold the appropriate one, or 
should it be higher or lower? Should the Commission consider using a 
threshold other than a dollar threshold, such as a certain number of 
shares? How should the Commission establish such a threshold; for 
example, should it use other existing thresholds? If the Commission 
adopts the Plan amendments with the exemption for large size trades, 
should the Commission require that the information with respect to 
which ATS effected the large size trades be made public at the end of 
the day (or at other time intervals), rather than in real-time as would 
occur if this were included in the consolidated data stream? In 
addition, comment is requested on the effect of the proposed post-trade 
disclosure on investors, ATSs, vendors and others that may be affected 
by the proposed amendments, as well as the effect on the market place 
and any competitive effect the proposed Plan changes may have.

V. Paperwork Reduction Act

A. Actionable IOIs

    The proposed amendment of Rule 600(b)(8) of Regulation NMS does not 
contain any ``collection of information requirements'' within the 
meaning of the Paperwork Reduction Act of 1995 (``PRA'').\116\ Rule 600 
of Regulation NMS contains all of the defined terms used in Regulation 
NMS. The proposed amendment of Rule 600(b)(8) would revise the 
definition of ``bid'' or ``offer'' by expressly limiting its exclusion 
of IOIs to those ``that are not actionable and indications of interest 
for a quantity of NMS stock having a market value of at least $200,000 
that are communicated only to those who are reasonably believed to 
represent current contra-side trading interest of at least $200,000.'' 
The practical result of the amendment would be that actionable IOIs 
that do not qualify for the size discovery exclusion would be ``bids'' 
or ``offers.''
---------------------------------------------------------------------------

    \116\ 44 U.S.C. 3501, et seq.
---------------------------------------------------------------------------

    While the amendment to Rule 600(b)(8) does not contain any 
collection of information requirements within the meaning of the PRA, 
the proposed change in the definition of ``bid'' or ``offer'' could 
affect the collection of information burdens under Rule 602 of 
Regulation NMS.\117\ ``Bid''

[[Page 61221]]

and ``offer'' are key terms that determine the scope of Rule 602 of 
Regulation NMS. In general, Rule 602 requires exchange members and OTC 
market makers to provide their best-priced bids and offers to their 
respective exchanges and FINRA. The exchanges and FINRA, in turn, are 
required to make their best bids and offers available in the 
consolidated quotation data. The Commission does not believe that the 
proposed amendment to Rule 600(b)(8) would require any new or 
additional collection of information under Rule 602. Exchange members 
and certain OTC market makers would continue to be required to provide 
their best-priced bids and offers to their respective exchanges and 
FINRA.\118\ The proposed amendment to Rule 600(b)(8) could increase the 
number of ``bids'' or ``offers'' that exchange members and OTC market 
makers would be required to review to determine their best-priced bids 
and offers. It is the Commission's understanding that all exchange 
members and OTC market makers have systems and procedures in place to 
make this determination today. As a result, the Commission believes 
that any burden increase in determining their best-priced bids and 
offers due to the proposed inclusion of actionable IOIs in the 
definition of ``bid'' or ``offer'' would not substantively or 
materially change existing collection burdens.\119\ The Commission 
encourages comment on all aspects of this issue. In addition, the 
Commission encourages specific comment on:
---------------------------------------------------------------------------

    \117\ The proposed amendment to Rule 600(b)(8) of Regulation NMS 
also may affect the obligations imposed by Rule 301(b)(3) of 
Regulation ATS on ATSs that meet the specified trading volume 
threshold. Rule 301(b)(3) does not, however, currently contain a 
collection of information requirement as defined by the PRA because 
it currently affects fewer than ten entities. However, the proposal 
to lower the trading volume threshold contained in Rule 
301(b)(3)(i)(B) could affect the number of entities subject to Rule 
301(b)(3) so that the amended rule would contain a collection of 
information. The PRA burden associated with the proposed amendment 
to, and amendments affecting the application of, Rule 
301(b)(3)(i)(B) are discussed below in section V.B.
    \118\ Under the definition of ``subject security'' in Rule 
600(b)(73)(ii)(A) of Regulation NMS, an OTC market maker is not 
required to provide its best bids and offers for an NMS stock if the 
executed volume of the firm during the most recent calendar quarter 
comprised one percent or less of the aggregate trading volume for 
such NMS stock.
    \119\ The information collection contained in Rule 602, entitled 
``Dissemination of Quotations--Rule 11Ac1-1,'' the precursor to Rule 
602, has been assigned control number 3235-0461. The Commission, 
however, will be updating the overall burden estimate for this 
collection of information to account for an increase in the number 
of self-regulatory organizations subject to the Rule.
---------------------------------------------------------------------------

    1. To what extent, if at all, would the proposed amendment to Rule 
600(b)(8) increase the number of bids or offers that exchange members 
and OTC market makers would be required to review and report to their 
respective exchanges and FINRA for inclusion in the consolidated 
quotation data? Please provide data and specific quantifications.
    2. To what extent, if at all, would system changes or increases in 
system capacities be necessary to exchange members or OTC market makers 
to comply with the requirements of Rule 602, if the Commission were to 
adopt the proposed amendments to Rule 600(b)(8)?

B. ATS Display Obligations

    Certain provisions of the proposed amendments to Regulation ATS 
rules contain ``collection of information requirements'' within the 
meaning of the PRA.\120\ The Commission has submitted the information 
to the Office of Management and Budget (``OMB'') for review in 
accordance with 44 U.S.C. 3507 and 5 CFR 1320.11. An agency may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a currently valid control 
number. The title of this collection is ``Rule 301, Form ATS and Form 
ATS-R'' (OMB Control Number 3235-0509).
---------------------------------------------------------------------------

    \120\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

1. Summary of Collection of Information
    Rule 301(b)(3) of Regulation ATS governs order display and 
execution access for ATSs. Currently, the rule provides that an ATS 
incurs order display and execution access obligations if it displays 
subscriber orders in an NMS stock to more than one person in the ATS 
and the ATS has 5% or more of the average daily trading volume in such 
NMS stock, as reported by an effective transaction reporting plan. An 
ATS meeting these criteria must provide to an SRO the prices and sizes 
of the orders at the highest buy price and the lowest sell price for 
such NMS stock for inclusion in the public quote stream.
    The proposed amendment to Rule 301(b)(3)(i)(B) of Regulation ATS 
would broaden the applicability of these order display and execution 
access requirements by reducing the trading volume threshold from 5% of 
the aggregate average daily share volume to 0.25%. The proposed 
amendment to Rule 301(b)(3)(ii) would clarify that the order display 
and execution access requirements apply when a subscriber order is 
displayed to more than one person (other than ATS employees), 
regardless of whether such persons are subscribers of the ATS. The 
proposed amendments to Rule 301(b)(3)(i)(A) and (ii) would provide an 
exception to the order display and execution access requirements for 
orders that have a market value of at least $200,000 and are 
communicated only to those who are reasonably believed to represent 
current contra-side trading interest of at least $200,000.
    The proposed amendments would not impact Form ATS or Form ATS-R. 
ATSs would continue to evaluate and submit the same information on 
these forms. Accordingly, the proposed amendments, if adopted, would 
not result in any revision to those collections of information. 
However, the proposed amendments could result in more ATSs being 
required to establish connections to SROs in order to display their 
best-priced orders. Each such ATS also could be required to expand or 
modify its systems capacity, internal controls, and compliance policies 
and procedures to provide orders to an SRO in a manner consistent with 
the SRO's rules and enable market participants to access such orders 
for execution. These requirements would constitute a ``collection of 
information'' that would be subject to the PRA.
    The current collection of information, ``Rule 301, Form ATS and 
Form ATS-R'' (OMB Control Number 3235-0509), does not contain a 
collection of information with respect to Rule 301(b)(3) of Regulation 
ATS. When adopted, Rule 301(b)(3) did not contain a collection of 
information because fewer than ten entities were affected by Rule 
301(b)(3).\121\ In addition, under the current 5% volume threshold, it 
remains the case that fewer than ten ATSs are required to send best-
priced orders to an SRO for inclusion in the consolidated public quote 
system.\122\
---------------------------------------------------------------------------

    \121\ See supra note 117.
    \122\ This information is based on discussions of Commission 
staff with certain potential ATS respondents and other market 
participants.
---------------------------------------------------------------------------

    Since the adoption of Regulation ATS, the number of ATSs has grown 
significantly, and the national market system and the nature of order 
interaction have evolved considerably. Currently, there are numerous 
dark pool ATSs, many of which use actionable IOIs as a means to attract 
order flow. The proposed amendment to Rule 600(b)(8) of Regulation NMS 
to include actionable IOIs within the definition of ``bid'' or 
``offer'' and the proposed lowering of the trading volume threshold in 
Rule 301(b)(3) from 5% to 0.25% might impose collection of information 
requirements on ten or more ATSs. For this reason, the Commission has 
prepared an estimate of the associated compliance burdens on ATSs for 
purposes of the PRA, as further detailed below.
    The Commission preliminarily believes that the proposed amendment 
to Rule 301(b)(3) of Regulation ATS would not, if adopted, 
substantively or materially change collection burdens for SROs under 
the requirements of Rule

[[Page 61222]]

602 of Regulation NMS.\123\ Under the proposal, order information that 
is communicated by ATSs to more than one person outside the public 
quote stream (whether via actionable IOIs or otherwise) could be 
required to be incorporated into the public quote stream. As described 
above, to do so an ATS would send the order information to an SRO, and 
that SRO would then be responsible under Rule 602 for incorporating the 
information into the consolidated public quote stream.\124\ The 
Commission preliminarily believes, however, that the additional burden 
on the SRO of including such ATS orders with the large volume of 
quotations that the SRO already includes in the public quote stream 
under Rule 602 would not be substantive or material. The Commission 
encourages comment on this point.
---------------------------------------------------------------------------

    \123\ See supra notes 117 and 118 and accompanying text.
    \124\ See id.
---------------------------------------------------------------------------

2. Proposed Use of Information
    Rule 301(b)(3) of Regulation ATS requires an ATS to provide to an 
SRO the prices and sizes of the orders at the highest buy price and the 
lowest sell price in an NMS stock upon the satisfaction of certain 
threshold conditions under Rules 301(b)(3)(i)(A) and (B). If the 
Commission adopts the proposed amendments to Rule 301(b)(3), more than 
ten entities could become subject to the requirement to provide this 
order information to an SRO. Such information would be used by the SRO 
to determine the SRO's best bid, best offer, and aggregate quotation 
sizes. The SRO must make that information public, pursuant to Rule 602 
of Regulation NMS.\125\ This information is used, among other ways, by 
market participants to understand the market and to inform their 
trading decisions. The Commission also may use this information as part 
of its general market oversight and regulatory functions.
---------------------------------------------------------------------------

    \125\ 17 CFR 242.602.
---------------------------------------------------------------------------

3. Respondents
    There are approximately 73 ATSs that are subject to Regulation ATS. 
Of these, approximately 11 are dark pool ATSs that use actionable IOIs. 
Approximately one other ATS that is not an ECN displays subscriber 
orders in NMS stocks on a limited basis in some other fashion.\126\ 
Therefore, the Commission preliminarily believes that up to 12 ATS 
respondents could be impacted by the proposed amendments to Rule 
301(b)(3).\127\ The remaining 61 ATSs likely would not be impacted for 
PRA purposes by the proposed amendments, because they: (a) do not 
display subscriber orders in NMS stocks to more than one person 
(whether by communicating actionable IOIs or otherwise), (b) are ECNs 
and already publicly display subscriber orders, or (c) do not effect 
transactions in NMS stocks.\128\ The Commission seeks comment on the 
number of ATSs that could be impacted by the proposed changes and the 
nature of such impacts.
---------------------------------------------------------------------------

    \126\ The Commission notes that there are presently four ATSs 
operating as ECNs, as defined in Rule 600(b)(23) of Regulation NMS, 
17 CFR 242.600(b)(23). These ATSs already display customer orders in 
the public quote stream and permit market participants to access 
such orders. Accordingly, these systems would not have new burdens 
under Rule 301(b)(3), as the Commission is proposing to amend it.
    \127\ The Commission notes that, of these 12 potential 
respondents, any could choose to avoid Regulation ATS's order 
display and execution access requirements by choosing not to display 
subscriber orders to more than one person (or by displaying to more 
than one person only size discovery orders). Nevertheless, as set 
forth above, the Commission preliminarily believes that the proposed 
changes to Rule 301(b)(3) constitute a ``collection of information'' 
under the PRA. The proposed amendments also could impact new ATSs or 
existing ATSs that expand their business activities.
    \128\ The Commission obtains information on the securities that 
are traded by ATSs from the Forms ATS filed with the Commission by 
ATSs.
---------------------------------------------------------------------------

4. Total Initial and Annual Reporting and Recordkeeping Burdens
    The proposed amendments to Rule 301(b)(3) of Regulation ATS would, 
if adopted, increase the collection of information burdens only with 
respect to those ATSs with sufficient volume in an NMS stock (0.25% or 
more of the aggregate average daily share volume) that choose to 
communicate actionable IOIs or that otherwise display order information 
to more than one person. An ATS crossing the 0.25% threshold would be 
required to provide its best-priced orders to an SRO for inclusion in 
the public quote stream. As stated previously, ATSs that are completely 
dark (i.e., that do not display any subscriber order information, 
whether by communicating actionable IOIs or otherwise) would not be 
impacted by the proposed amendments to Rule 301(b)(3).
    The Commission preliminarily believes that including actionable 
IOIs as bids or offers under Rule 600(b)(8) of Regulation NMS and 
reducing the average daily trading volume threshold in Rule 301(b)(3) 
of Regulation ATS from 5% to 0.25% could increase the order display and 
execution access obligations of ATSs that transmit actionable IOIs or 
otherwise display order information to selected market participants. 
These obligations could entail the initial burdens of re-programming 
their current systems to monitor the ATS's percentage of trading in NMS 
stocks, establishing linkages to an SRO for the purpose of submitting 
orders to the SRO for public display and of providing access to market 
participants wishing to trade against such orders, and expanding 
systems capacity and internal controls, including establishing or 
modifying applicable compliance policies and procedures, to carry out 
these functions in a manner consistent with the SRO's rules.\129\ The 
Commission preliminarily believes that such obligations could include 
ATS staff time to build new systems or re-program current systems, as 
well as ongoing ATS staff time to maintain such systems and carry out 
their associated functions.
---------------------------------------------------------------------------

    \129\ Currently, under Rule 301(b)(3) of Regulation ATS, an ATS 
that displays subscriber orders to any person (other than ATS 
employees) and has an average daily trading volume of 5% or more of 
the aggregate daily share volume for an NMS stock is required to 
provide to an SRO the best priced orders for such NMS stock for 
inclusion in the public quote stream. Thus, ATSs are already 
required to monitor trading levels in NMS stocks and have policies 
and procedures in place to do so. As a result of the proposed 
amendments to Rule 301(b)(3), which would lower the average daily 
trading volume threshold from 5% to 0.25% and provide for an 
exception to the display obligation for orders that have a market 
value of at least $200,000 and are communicated only to those who 
are reasonably believed to represent current contra-side trading 
interest of at least $200,000, ATSs could be required to re-program 
their respective systems that monitor trading levels in NMS stocks 
to reflect this change in the average daily trading volume 
threshold.
---------------------------------------------------------------------------

    The Commission preliminarily estimates that the one-time, initial 
annualized expense for potential ATS respondents to establish 
connectivity to an SRO would be approximately $3,900,000.\130\ In 
addition, the Commission preliminarily estimates that the one-time, 
initial annualized burdens for all potential ATS respondents to comply 
with the proposed amendments to Rule 301(b)(3) would be approximately 
17,880 burden hours.\131\ This figure is based on the

[[Page 61223]]

estimated number of hours for initial internal development and 
implementation by an ATS to re-program its system, expand system 
capacity, and adjust internal controls, including costs to establish or 
modify applicable compliance policies and procedures.
---------------------------------------------------------------------------

    \130\ This figure is the total initial, one-time annualized 
expense to establish electronic connections with an SRO for all 
potential ATS respondents and is based on discussions of Commission 
staff with certain potential ATS respondents and other market 
participants. The Commission derived the total estimated expense 
from the following: (($25,000 relating to hardware- and software-
related expenses) + ($25,000 monthly ongoing costs to maintain the 
connection x 12 months)) x (12 potential ATS respondents) = 
$3,900,000.
    \131\ This figure is based on discussions of Commission staff 
with certain potential ATS respondents and other market 
participants. The Commission derived the total estimated one-time 
burdens from the following: [((Sr. Programmer at 320 hours) + 
(Compliance Manager at 20 hours) + (Compliance Attorney at 20 hours) 
+ (Programmer Analyst at 20 hours) + (Sr. Systems Analyst at 30 
hours)) x (2 months) + ((Sr. Programmer at 2 hours) + (Compliance 
Manager at 6 hours) + (Compliance Attorney at 4 hours) + (Compliance 
Clerk at 40 hours) + (Sr. Systems Analyst at 2 hours) + (Director of 
Compliance at 5 hours) + (Sr. Computer Operator at 8 hours)) x (10 
months)] x (12 potential ATS respondents) = 17,880 burden hours.
---------------------------------------------------------------------------

    The Commission also has estimated the ongoing expenses of complying 
with the proposed amendments to Rule 301(b)(3), which could include, 
among other things, maintaining connectivity with an SRO, monitoring 
daily trade activity, and ensuring compliance. The Commission 
preliminarily estimates that the ongoing annualized expense for all 
potential ATS respondents to maintain connectivity to an SRO would be 
approximately $3,600,000.\132\ In addition, the Commission 
preliminarily estimates that the ongoing annualized burdens for all 
potential ATS respondents to comply with the proposed amendments to 
Rule 301(b)(3) would be approximately 9,648 burden hours.\133\ This 
figure includes the estimated number of internal professional staff 
hours for running compliance policies and procedures (including 
monitoring daily trading activity), ongoing system maintenance and 
development, and personnel costs associated with maintaining 
connectivity to an SRO.
---------------------------------------------------------------------------

    \132\ This figure is the total ongoing annualized expense to 
maintain electronic connections with an SRO for all potential ATS 
respondents and is based on discussions of Commission staff with 
certain potential ATS respondents and other market participants. The 
Commission derived the total estimated expense from the following: 
(($25,000 monthly ongoing costs to maintain the connection x 12 
months)) x (12 potential ATS respondents) = $3,600,000.
    \133\ This figure is based on discussions of Commission staff 
with certain potential ATS respondents and other market 
participants. The Commission derived the total estimated ongoing 
burdens from the following: ((Sr. Programmer at 2 hours) + 
(Compliance Manager at 6 hours) + (Compliance Attorney at 4 hours) + 
(Compliance Clerk at 40 hours) + (Sr. Systems Analyst at 2 hours) + 
(Director of Compliance at 5 hours) + (Sr. Computer Operator at 8 
hours)) x (12 months) x (12 potential ATS respondents) = 9,648 
burden hours.
---------------------------------------------------------------------------

    The Commission is also proposing a change to Rule 301(b)(3)(ii) 
that would add an exception to the display and execution access 
requirements for orders that have a market value of at least $200,000 
and are communicated only to those who are reasonably believed to 
represent current contra-side trading interest of at least $200,000. 
The Commission preliminarily believes that no ATS would incur any 
increased burdens because of the proposed exception. An ATS would incur 
either the same burdens (because it communicated no orders that met the 
terms of the proposed exception) or fewer burdens (because some or all 
of the orders that it communicated met the terms of the proposed 
exception, thus reducing the number of orders under the proposed 
amendments to Rule 301(b)(3) that the ATS would otherwise have to 
provide to an SRO for inclusion in the public quote stream). Some ATSs 
that might avail themselves of the proposed exception already have in 
place the functionality to communicate size discovery orders, have 
average execution sizes above $200,000, and have developed strategies 
to identify market participants that are reasonably believed to 
represent current contra-side trading interest of at least 
$200,000.\134\ Thus, the Commission preliminarily believes that such 
ATSs would not incur any costs if the Commission were to adopt the 
proposed exception.
---------------------------------------------------------------------------

    \134\ The Commission obtains information about ATSs' trading 
methods from the Forms ATS submitted to it by ATSs.
---------------------------------------------------------------------------

    The Commission seeks comment on the reporting and recordkeeping 
collection of information burdens associated with the proposed 
amendments. In particular:
    1. How many ATSs would incur collection of information burdens if 
the proposed amendments to Regulation ATS were adopted by the 
Commission?
    2. Would ATSs respond to the proposed amendments by linking to an 
SRO for the purpose of displaying their best-price orders in the public 
quote stream or by going completely dark? If the former, what would the 
initial and ongoing PRA burdens be of linking to an SRO to provide such 
orders and to offer execution access to those orders consistent with 
the SRO's rules?
    3. What are the burdens, both initial and annual, that an ATS would 
incur for programming, establishing connectivity to an SRO, expanding 
systems capacity, and establishing compliance programs if the 
Commission were to adopt the proposed amendments? Would there be 
additional burdens associated with the collection of information under 
these proposed amendments?
    4. What additional burdens, both initial and annual, if any, would 
an ATS incur related to the proposed exception for size discovery 
orders?
5. Retention Period of Recordkeeping Requirements
    An ATS would be required to retain records and information 
pertaining to its operations, including information that would have to 
be disclosed under the proposed amendments to Rule 301(b)(3), pursuant 
to, and for the periods specified in, Regulation ATS.\135\ In addition, 
the broker-dealer operating an ATS is subject to the recordkeeping 
requirements specified in Section 17 of the Exchange Act and the rules 
and regulations thereunder.\136\
---------------------------------------------------------------------------

    \135\ See, e.g., 17 CFR 242.302; 17 CFR 242.303.
    \136\ See 15 U.S.C. 78q; 17 CFR 240.17a-1 et seq.
---------------------------------------------------------------------------

6. Collection of Information is Mandatory
    Any collection of information pursuant to the proposed amendments 
to Rule 301(b)(3) would be a mandatory collection of information.
7. Responses to Collection of Information Will Not Be Kept Confidential
    The collection of information resulting from the proposed 
amendments to Rule 301(b)(3) would not be confidential and would be 
publicly available.
8. Request for Comment
    Pursuant to 44 U.S.C. 3505(c)(2)(B), the Commission solicits 
comment to:
    1. Evaluate whether the proposed collection of information is 
necessary for the performance of the functions of the agency, including 
whether the information shall have practical utility;
    2. Evaluate the accuracy of the agency's estimate of the burden of 
the proposed collection of information;
    3. Enhance the quality, utility, and clarity of the information to 
be collected; and
    4. Minimize the burden of collection of information on those who 
are to respond, including through the use of automated collection 
techniques or other forms of information technology.

C. Post-Trade Transparency for ATSs

    Certain provisions of the proposed amendments to the CTA Plan and 
the Nasdaq UTP Plan would result in a new ``collection of information 
requirement'' within the meaning of the PRA.\137\ The Commission is 
therefore submitting this proposal to the Office of Management and 
Budget (``OMB'') for review in accordance with 44 U.S.C. 3507 and 5 CFR 
1320.11. The title for the collection of information requirements is 
the ``CTA Plan and the Nasdaq UTP Plan, `Post-trade Transparency for 
ATSs.'''

[[Page 61224]]

Compliance with the collection of information requirements would be 
mandatory. An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid control number. OMB has not yet assigned a control 
number to the new collection requirements in the proposed amendments to 
the CTA Plan and Nasdaq UTP Plan.
---------------------------------------------------------------------------

    \137\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

1. Summary
    The CTA Plan and the Nasdaq UTP Plan are the joint-industry plans 
that provide for the dissemination of last sale information for equity 
securities and set forth the arrangements for dissemination of 
consolidated trade information. Currently, trades executed in the OTC 
market, including trades executed by ATSs, are reported to the 
consolidated trade streams through one of the TRFs operated by FINRA on 
behalf of the exchanges or to the ADF. As ATSs effect transactions in 
the OTC market, they must be FINRA members and the trade reports 
currently identify their trades as OTC trades. The ATS that executed 
the trade, however, is not currently identified in the public data 
streams.
    The proposed amendments to the CTA Plan and the Nasdaq UTP Plan 
would require the disclosure of the identity of those ATSs subject to 
Regulation ATS on trade reports in the public data steam. Specifically, 
the proposed amendments to the CTA Plan and the Nasdaq UTP Plan would 
require that all last sale prices collected by FINRA from each ATS 
subject to Regulation ATS be accompanied by an identifier unique to the 
ATS and be transmitted to the SIP, unless the trade is a large size 
trade with a market value of at least $200,000.
    The proposed Plan amendments by redefining terms in the Plans, 
indirectly would require ATSs to include a unique identifier when 
transmitting last sale price data to FINRA. All ATSs currently report 
their transactions to FINRA, under FINRA rules, using an MPID, but the 
Commission understands some ATSs currently use the MPID of their 
sponsoring broker-dealer. As a result, some ATSs may need to obtain a 
unique MPID from FINRA, which FINRA provides at no cost.\138\ Those 
ATSs would need to re-program their systems to substitute the new MPID 
for their sponsoring broker-dealer's MPID when transmitting last sale 
price data to FINRA. The Commission believes that the proposed 
amendments to the CTA Plan and the Nasdaq UTP Plan with respect to the 
ATSs would result in a ``collection of information,'' but would not 
trigger a burden outside the ordinary and customary business of the ATS 
for purposes of the PRA.
---------------------------------------------------------------------------

    \138\ ATSs can obtain an additional MPID from FINRA. See FINRA 
Rules 6160 and 6170.
---------------------------------------------------------------------------

    The proposed Plan amendments would require FINRA to transmit to the 
SIPs a unique identifier from each ATS subject to Regulation ATS, 
unless the trade is a large size trade (a trade with a market value of 
at least $200,000). Currently, FINRA receives the MPID information from 
the ATSs as required by FINRA rules. FINRA, however, currently removes 
the MPID from the trade reports before submitting them to the SIPs. 
Under the proposed Plan amendments, FINRA would need to re-program its 
systems to transmit the MPIDs for ATS trades to the SIPs, except for 
large size trades with market value of at least $200,000. The 
Commission believes that the proposed amendments to the CTA Plan and 
the Nasdaq UTP Plan with respect to FINRA would result in a 
``collection of information,'' as well as a minor burden for purposes 
of the PRA.
    The proposed Plan amendments would require the SIPs, for the CTA 
Plan and the Nasdaq UTP Plan, to disseminate information provided to 
them by FINRA. Under the proposed Plan amendments, the SIPs would need 
to re-program their systems to enable them to accept as well as 
transmit trade reports with the additional data element, the MPID, for 
those ATS transactions that have a market value of less than $200,000. 
The Commission believes that the proposed amendments to the CTA Plan 
and the Nasdaq UTP Plan with respect to the SIPs would result in a 
minor burden for purposes of the PRA.
    The Commission encourages comment on all of these points.
2. Proposed Use of Information
    The proposed amendments to the CTA Plan and the Nasdaq UTP Plan 
would require that all last sale prices collected by FINRA from each 
ATS subject to Regulation ATS be accompanied by an identifier unique to 
the ATS and be transmitted to the SIP, unless the trade is a large size 
trade with a market value of at least $200,000. If the Commission 
adopts the proposed amendments to the Plans, some ATSs would now be 
required to get a unique identifier, rather than use the identifier of 
their sponsoring broker-dealer. Such information should enable the 
public to determine more accurately the volume of executions occurring 
on any particular ATS, as well as on ATSs in general. The SIPs must 
make this information public, pursuant to the CTA Plan and Nasdaq UTP 
Plan. This information is used, among other ways, by market 
participants to understand the market and to inform their trading 
decisions. The Commission also may use this information as part of its 
general market oversight and regulatory functions.
3. Respondents
    There are approximately 73 ATSs that are subject to Regulation ATS. 
Of these, approximately 30 are dark pool ATSs. The Commission 
understands that some of these ATSs disseminate market data using the 
identifier of their sponsoring broker-dealer while others already use a 
unique identifier for their trades. Those using their sponsoring 
broker-dealer's identifier would have to acquire another identifier and 
incur a one-time systems cost to change the identifier that gets 
affixed to their trade reports. The ATSs using a unique identifier 
would not be affected for PRA purposes by the proposed Plan amendments, 
because they currently use a unique identifier. All last sale prices 
for OTC transactions are collected by FINRA and then transmitted to the 
SIP. The Commission seeks comment on the number of ATSs that could be 
affected by the proposed changes and the nature of such effects on the 
ATSs, FINRA, and the SIP.
4. Total Initial and Annual Reporting and Recordkeeping Burdens
    The proposed amendments to the CTA Plan and Nasdaq UTP Plan would, 
if adopted, to varying degrees, increase the collection of information 
burdens for ATSs, FINRA, and the SIPs.
a. Burden on ATSs
    The Commission understands that all ATSs currently report their 
transactions to FINRA pursuant to FINRA's rules using an MPID, with 
some ATSs reporting their transactions using an MPID of their 
sponsoring broker-dealer, while other ATSs use a unique MPID. The Plan 
changes would require that each ATS have a unique MPID. Therefore, some 
ATSs would have to acquire an MPID from FINRA. The Commission 
preliminarily believes that ATSs that already use a unique MPID would 
not incur additional collection of information burdens related to the 
transmission of unique MPIDs. Those ATSs that currently use an MPID of 
their sponsoring broker-dealer may incur a de minimis cost in re-
programming their systems to substitute the new MPID for the one 
currently used in transmitting their transactions to FINRA.

[[Page 61225]]

    The Commission preliminarily believes that this collection of 
information would not involve any substantive or material change in the 
burden that already exists as part of the ATSs' ordinary and customary 
activities in providing MPID information to FINRA in the normal course 
of business, pursuant to FINRA's rules.\139\
---------------------------------------------------------------------------

    \139\ See 5 CFR 1320.3(b)(2) (``The time, effort, and financial 
resources necessary to comply with a collection of information that 
would be incurred by persons in the normal course of their 
activities * * * would be excluded from the `burden' if the agency 
demonstrates that the reporting, recordkeeping, or disclosure 
activities needed to comply are usual and customary.'').
---------------------------------------------------------------------------

b. Burden on FINRA
    Currently, when FINRA reports transactions to the SIPs, the MPID is 
dropped from every transaction report and an identifier is appended 
indicating the trade was executed OTC. Under the proposed amendments, 
each ATS trade report would carry a unique ATS indicator, in addition 
to the OTC indicator, unless the trade is a large size trade. FINRA, 
upon the receipt of an ATS trade report with a unique indicator would 
retransmit the trade report to the SIP, after excluding the ATS 
identifier from trade reports for large size trades. FINRA would have 
to re-program its systems to allow for the trade report message to 
carry the unique identifier for each ATS and to exclude the identifier 
for large size trades from the transmission to the SIPs.
    The Commission preliminarily estimates that the one-time, initial 
annualized expense for FINRA for development, including re-programming 
and testing of the systems would be approximately $1,175,000.\140\
---------------------------------------------------------------------------

    \140\ This figure is the total initial, one-time annualized 
expense to add unique ATS identifiers to trade report messages 
transmitted to the SIPs. This figure includes the development and 
testing expenses of the FINRA/NASDAQ TRF, FINRA/NYSE TRF, and the 
ADF, to which ATS trades are reported. The figure is based on 
discussions of Commission staff with FINRA staff.
---------------------------------------------------------------------------

    The Commission preliminarily estimates that the one-time, initial 
annualized burden for FINRA development, including re-programming and 
testing of the systems to comply with the proposed amendments to the 
Plans would be approximately 100 burden hours.\141\
---------------------------------------------------------------------------

    \141\ This figure is based on discussions of Commission staff 
with FINRA staff. This figure includes the FINRA development and 
testing. The Commission derived the total estimated one-time burden 
from the following: [(Programmer Analyst at 25 hours) x 2 + 
(Computer Operator at 25 hours) x 2] = 100 burden hours.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the ongoing annualized 
expense for FINRA would not result in a burden for purposes of the PRA, 
as FINRA currently transmits trade report messages to the SIPs in the 
normal course of business.\142\
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    \142\ See supra notes 104 and 139.
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c. Burden on the SIPs
    Currently, the SIPs do not receive an MPID from FINRA for the ATS 
trades. FINRA removes the MPID and an identifier is appended indicating 
the trade was executed OTC. Under the proposed Plan amendments, the 
SIPs would receive from FINRA a trade report identifying the specific 
ATS on which a trade was executed, unless the trade is a large size 
trade. The SIPs would need to re-program their systems to allow for the 
trade report message that carries the unique identifier for each ATS to 
be received by the SIPs and then later allow for the transmission of 
the information to the vendors.
    The Commission preliminarily estimates that the one-time, initial 
annualized burden for the Securities Industry Automation Corporation 
(``SIAC''), which serves as a SIP for the CTA Participants, to comply 
with the proposed Plan amendments would be approximately 320 burden 
hours.\143\ This figure is based on the estimated number of hours for 
SIAC to provide planning, development, implementation, testing, and 
quality assurance.
---------------------------------------------------------------------------

    \143\ This figure is based on discussions of Commission staff 
with SIAC.
---------------------------------------------------------------------------

    The Commission further preliminarily estimates that the one-time, 
initial annualized burden for the Nasdaq SIP, which serves as a SIP for 
the UTP Participants, to comply with the proposed Plan amendments would 
be approximately 800 burden hours.\144\ This figure is based on the 
estimated number of hours for the Nasdaq SIP to develop and test the 
software and work with the UTP participants and vendors regarding the 
enhancement.
---------------------------------------------------------------------------

    \144\ This figure is based on discussions of Commission staff 
with Nasdaq SIP.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the ongoing annualized 
expense for the SIPs would not result in a burden for purposes of the 
PRA, as SIPs currently transmit trade report messages in the normal 
course of business.\145\
---------------------------------------------------------------------------

    \145\ See supra note 86 and accompanying text; see also note 
139.
---------------------------------------------------------------------------

    The Commission seeks comment on the reporting and recordkeeping 
collection of information burdens associated with the proposed 
amendments. In particular:
    1. Would ATSs incur any collection of information burdens if the 
proposed Plan amendments were adopted by the Commission? How many ATSs 
would be required to obtain a new MPID under the proposed Plan 
amendments? What would be the costs, if any, to an ATS required to 
obtain a new MPID to substitute the new MPID for the one it currently 
uses in transmitting last sale price data to FINRA?
    2. What are the burdens, both initial and annual, that FINRA 
(including the two TRFs and the FINRA ADF) and the SIPs would incur for 
programming, expanding systems capacity, and establishing compliance 
programs if the Commission were to adopt the proposed amendments? Would 
there be additional burdens associated with the collection of 
information under these proposed Plan amendments?
5. Retention Period of Recordkeeping Requirements
    The proposed amendments to the Plans do not contain any new record 
retention requirements. As an SRO subject to Rule 17a-1 under the 
Exchange Act, FINRA is required to retain records of the collection of 
information for a period of not less than five years, the first two 
years in an easily accessible place.\146\
---------------------------------------------------------------------------

    \146\ 17 CFR 240.17a-1.
---------------------------------------------------------------------------

    As registered broker-dealers, all ATSs that would be subject to the 
proposed amendments are currently required to retain records in 
accordance with Rule 17a-4 of the Exchange Act.\147\
---------------------------------------------------------------------------

    \147\ 17 CFR 240.17a-4.
---------------------------------------------------------------------------

6. Collection of Information is Mandatory
    Any collection of information pursuant to the proposed amendments 
to the CTA Plan and the Nasdaq UTP Plan would be a mandatory collection 
of information.
7. Responses to Collection of Information Will Not Be Kept Confidential
    The collection of information resulting from the proposed 
amendments to the CTA Plan and the Nasdaq UTP Plan would not be 
confidential and would be publicly available.
8. Request for Comment
    Pursuant to 44 U.S.C. 3505(c)(2)(B), the Commission solicits 
comment to:
    1. Evaluate whether the proposed collection of information is 
necessary for the performance of the functions of the agency, including 
whether the information shall have practical utility;
    2. Evaluate the accuracy of the agency's estimate of the burden of 
the proposed collection of information;

[[Page 61226]]

    3. Enhance the quality, utility, and clarity of the information to 
be collected; and
    4. Minimize the burden of collection of information on those who 
are to respond, including through the use of automated collection 
techniques or other forms of information technology.
    Persons wishing to submit comments on the collection of information 
requirements should direct them to the following persons: (1) Desk 
Officer for the Securities and Exchange Commission, Office of 
Information and Regulatory Affairs, OMB, Room 3208, New Executive 
Office Building, Washington, DC 20503; and (2) Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090 
with reference to File No. S7-27-09. OMB is required to make a decision 
concerning the collection of information between 30 and 60 days after 
publication, so a comment to OMB is best assured of having its full 
effect if OMB receives it within 30 days of publication. The Commission 
has submitted the proposed collection of information to OMB for 
approval. Requests for the materials submitted to OMB by the Commission 
with regard to this collection of information should be in writing, 
refer to File No. S7-27-09, and be submitted to the Securities and 
Exchange Commission, Records Management, Office of Filings and 
Information Services, 100 F Street, NE., Washington, DC 20549.

VI. Consideration of Costs and Benefits

A. Actionable IOIs

    The Commission is sensitive to the costs and benefits associated 
with the proposed amendment to the definition of ``bid'' and ``offer'' 
in Rule 600(b)(8) of Regulation NMS to apply expressly to certain 
actionable IOIs. We request comment on the costs and benefits 
associated with the proposed amendment. The Commission has identified 
certain costs and benefits of the proposal and requests comment on all 
aspects of its preliminary cost-benefit analysis, including 
identification and assessments of any costs and benefits not discussed 
in this analysis. The Commission also seeks comments on the accuracy of 
any of the benefits identified and also welcomes comments on the 
accuracy of any of the costs estimates. Finally, the Commission 
encourages commenters to identify, discuss, analyze, and supply 
relevant data, information or statistics regarding any such costs or 
benefits.
1. Benefits
    The Commission preliminarily believes that the proposed amendment 
would benefit market participants by increasing transparency and 
reducing the potential for a two-tiered market. The Commission also 
preliminarily believes that the proposed amendment would help encourage 
displayed liquidity in the form of publicly displayed limit orders.
    As discussed above, a number of dark pools transmit IOIs to 
selected market participants that convey substantial information about 
their available trading interest.\148\ These messages are not included 
in the consolidated quotation data, although, like displayed 
quotations, they can be significant inducements for the routing of 
orders to a particular trading venue. Indeed, some exchanges, when they 
do not have available trading interest to execute orders at the best 
displayed prices, give participants a choice of routing their orders to 
undisplayed venues in response to IOIs rather than to public markets in 
response to the best displayed quotations.\149\
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    \148\ See supra note 20.
    \149\ See supra note 21.
---------------------------------------------------------------------------

    Although these IOIs may not explicitly specify the price and size 
of available trading interest at the dark pool, the practical context 
in which they are transmitted may render them ``actionable.'' For 
example, an IOI would be actionable if it effectively alerted the 
recipient that the dark pool currently has trading interest in a 
particular symbol, side (buy or sell), size (minimum of a round lot of 
trading interest), and price (equal to or better than the national best 
bid for buying interest and the national best offer for selling 
interest).
    This might occur if a dark pool sent an IOI to a group of market 
participants communicating an interest in buying a specific NMS stock. 
Given that Rule 611 of Regulation NMS generally prevents trading 
centers, including dark pools, from executing orders at prices inferior 
to the national best bid or offer (``NBBO''), the IOI recipient 
reasonably can assume that the price associated with the IOI is the 
NBBO or better. Moreover, the IOI may be part of a course of conduct in 
which the recipient has responded with orders to the sender and 
repeatedly received executions at the NBBO or better with a size of at 
least one round lot. With this information (both explicit and 
implicit), the recipient of the IOI can reasonably conclude that 
sending a contra-side marketable order responding to the IOI will 
result in an execution if the dark pool trading interest has not 
already been executed against or cancelled. In this respect, actionable 
IOIs are functionally quite similar to displayed quotations at the 
NBBO.
    The order information communicated by actionable IOIs can be 
extremely valuable. Actionable IOIs with implicit prices better than 
the NBBO effectively narrow the quoted spread for an NMS stock. For 
example, if the NBBO for an NMS stock were $20.10 and $20.14, an 
actionable IOI to buy with an implicit price of $20.12 would, if 
included in the consolidated quotation data, create a new NBBO of 
$20.12 and $20.14 and thereby reduce the quoted spread by 50%. Reducing 
quoted spreads is important not only for those that trade with the 
displayed quotations, but also for other investors including those 
whose orders are routed to OTC market makers for executions that often 
are derived from NBBO prices. In addition, actionable IOIs with 
implicit prices equal to the NBBO can substantially improve the quoted 
depth at the best prices for an NMS stock. For example, an investor may 
wish to sell 500 shares of a stock when the size of the national best 
bid may be only 100 shares. The existence of multiple dark pools that 
contemporaneously had transmitted actionable IOIs to buy the stock 
would represent a substantial increase in the available size at NBBO 
prices or better.
    The public, however, does not have access to this valuable 
information concerning the best prices for NMS stocks. Rather, dark 
pools transmit this information only to selected market participants. 
In this regard, actionable IOIs can create a two-tiered level of access 
to information about the best prices for NMS stocks that is contrary to 
the Exchange Act objectives for a national market system.\150\ The 
consolidated quotation data is intended to provide a single source of 
information on the best prices for a listed security across all 
markets, rather than force the public to obtain data from many 
different exchanges and other markets to learn the best prices. This 
objective is not met if dark pools or other trading venues disseminate 
pricing information that is functionally quite similar to quotations, 
yet is not required to be included in the consolidated quotation data. 
The proposal is designed to promote transparency by requiring that the 
valuable pricing information provided to selected market participants 
through actionable IOIs is also made

[[Page 61227]]

available to the public in the consolidated quotation data.
---------------------------------------------------------------------------

    \150\ See supra note 59.
---------------------------------------------------------------------------

    The Commission also is concerned that the private use of actionable 
IOIs may discourage the public display of trading interest and harm 
quote competition among markets. The Commission long has emphasized the 
need to encourage displayed liquidity in the form of publicly displayed 
limit orders.\151\ Such orders establish the current ``market'' for a 
stock and thereby provide a critical reference point for investors. 
Actionable IOIs, however, often will be executed by dark pools at 
prices that match the best displayed prices for a stock at another 
market. In this respect, actionable IOIs at NBBO matching prices 
potentially deprive those who publicly display their interest at the 
best price from receiving a speedy execution at that price. The 
opportunity to obtain the fastest possible execution at a price is the 
primary incentive for the display of trading interest.\152\ 
Particularly if actionable IOIs continue to expand in trading volume, 
they could significantly undermine the incentives to display limit 
orders and to quote competitively, and thereby detract from the 
efficiency and fairness of the national market system.
---------------------------------------------------------------------------

    \151\ See supra note 26.
    \152\ See supra note 27.
---------------------------------------------------------------------------

    Moreover, for market participants that wish to supply liquidity in 
the form of non-marketable resting orders (such as those that match or 
improve NBBO prices), actionable IOIs provide a tool to achieve this 
result without displaying quotations publicly. The availability of 
these private messages as an alternative means to attract order flow 
may reduce the incentives of market participants to quote publicly. 
More generally, actionable IOIs divert a certain amount of order flow 
that otherwise might be routed directly to execute against displayed 
quotations in other markets. Given the importance of displayed 
quotations for market efficiency, the Commission is particularly 
concerned about additional marketable order flow that may be diverted 
from the public quoting markets and that could further reduce the 
incentives for the public display of quotations. The proposal is 
designed to promote the display of public quotations by eliminating a 
practice that diverts order flow to private markets and by requiring 
that actionable IOIs be included in the consolidated quotation data.
    By excepting IOIs with a market value of at least $200,000 that are 
displayed only to those who are reasonably believed to represent 
current contra-side trading interest of at least $200,000, the proposal 
is also tailored to maintain the significant size discovery benefits 
offered by some trading venues such as block crossing networks. In 
particular, market participants such as institutional investors would 
be able to find contra-side trading interest for large size without 
causing price impact. In addition, the proposed exception for a 
targeted size discovery mechanism would provide an opportunity for 
block crossing networks and other trading venues to offer innovative 
ways for investors that need to trade in large size to find contra-side 
trading interest of equally large size.
    The Commission seeks comment on the anticipated benefits of the 
proposed amendment. Would the proposal promote the transparency, 
fairness, and efficiency of the national market system? Would it 
promote fair competition among trading venues in NMS stocks? Do 
commenters believe that the Commission has provided sufficient 
information about the attributes of an actionable IOI for trading 
venues to comply with the proposed definition? What is the typical size 
of an actionable IOI? How many large orders use actionable IOIs? What 
is the amount of order flow that is diverted from displayed quotations 
due to actionable IOIs? Please quantify and provide supporting data if 
possible.
    Comment also is requested on the proposed size discovery exclusion 
from the definition of bid or offer. Would the proposed exclusion 
promote more efficient trading for investors that need to trade in 
large size? Is the exclusion narrowly drafted to cover those trading 
mechanisms that offer valuable size discovery benefits without 
inappropriately excluding trading interest concerning the best prices 
and sizes for NMS stocks from the consolidated quotation data? Comment 
also is requested on whether market value is the appropriate criterion 
for size, and whether $200,000 is the appropriate figure. Should this 
figure be higher or lower? Please explain why. For example, is the 
$200,000 figure appropriate for high-priced stocks? Should the 
exclusion include a size criterion based on number of shares? If yes, 
should it be 10,000 shares, as in Rule 600(b)(9), or a larger or 
smaller number of shares? Finally, comment is requested on whether 
other criteria for size, such as percentage of average daily share 
volume in a security, would be more appropriate.
2. Costs
    The Commission preliminarily anticipates that market participants 
could incur certain costs if the proposed amendment is adopted. The 
change in the definition of ``bid'' and ``offer'' would affect 
compliance with Rule 602 of Regulation NMS.\153\ ``Bid'' and ``offer'' 
are key terms that determine the scope of Rule 602 of Regulation NMS. 
In general, Rule 602 requires exchange members and certain OTC market 
makers to provide their best-priced bids and offers to their respective 
exchanges and FINRA.\154\ The exchanges and FINRA, in turn, are 
required to make their best bids and offers available in the 
consolidated quotation data. The Commission does not believe that the 
amendment to Rule 600(b)(8) would create significant new compliance 
burdens under Rule 602. Exchange members and OTC market makers would 
continue to be required to provide their best-priced bids and offers to 
their respective exchanges and FINRA. The proposed amendment to Rule 
600(b)(8) may increase the number of ``bids'' and ``offers'' that 
exchange members and OTC market makers must review to determine their 
best-priced bids and offers. It is the Commission's understanding that 
all exchange members and OTC market makers have systems and procedures 
in place to make this determination today. As a result, the Commission 
believes that any increased burden in determining their best-priced 
bids and offers due to the inclusion of actionable IOIs in the 
definition of ``bid'' and ``offer'' would not be significant.
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    \153\ The proposed amendment to Rule 600(b)(8) of Regulation NMS 
also may affect the obligations imposed by Rule 301(b)(3) of 
Regulation ATS on ATSs that meet the specified trading volume 
threshold. Given the current threshold of 5%, the Commission does 
not believe that the proposed amendment of Rule 600(b)(8) would 
substantially affect the quoting requirements of ATSs. The proposal 
to lower the volume threshold contained in Rule 301(b)(3), however, 
could affect this view. The costs associated with the proposed 
amendment to Rule 301(b)(3) are discussed below.
    \154\ Under the definition of ``subject security'' in Rule 
600(b)(73)(ii)(A) of Regulation NMS, an OTC market maker is not 
required to provide its best bids and offers for an NMS stock if the 
executed volume of the firm during the most recent calendar quarter 
comprised one percent or less of the aggregate trading volume for 
such NMS stock.
---------------------------------------------------------------------------

    The Commission is aware that actionable IOIs may offer benefits to 
certain market participants. For example, some market participants 
choose to trade in dark pools in an effort to minimize the effect of 
their trading on quoted prices. The use of actionable IOIs to attract 
order flow may increase the amount of volume executed in dark pools and 
thereby further the trading strategies of these market participants. If 
actionable IOIs were included in the consolidated quotation data, these 
types of trading strategies would not be

[[Page 61228]]

possible because the actionable IOIs themselves would be included in 
publicly quoted prices. In addition, some market participants may be 
willing to allow dark pools to transmit information about their 
actionable orders to selected recipients, but not be willing to provide 
this information in the consolidated quotation data that is widely 
disseminated to the public. If adopted, the proposal could cause these 
market participants to choose not to transmit this information to 
anyone and thereby reduce available pricing information for an NMS 
stock (albeit, information that was only privately available).
    These potential costs of reduced trading in dark liquidity venues 
and reduced availability of liquidity information would be mitigated by 
the availability of the size discovery exception. The Commission 
recognizes that some trading venues, such as block crossing networks, 
may use actionable IOIs as part of a trading mechanism that offers 
significant size discovery benefits. These benefits may be particularly 
valuable for institutional investors that need to trade efficiently in 
sizes much larger than those that are typically available in the public 
quoting markets. These size discovery mechanisms could be rendered 
unworkable, however, if their IOIs for large size were required to be 
included in the consolidated quotation data. Accordingly, the 
Commission's proposed amendment would exclude certain IOIs with a 
market value of $200,000 or more communicated to those reasonably 
believed to represent equivalent contra-side trading interest from the 
current definition of ``bid'' and ``offer'' in Rule 600(b)(8). This 
would maintain the significant size discovery benefits offered by 
certain trading venues. Also, the Commission expects that the 
compliance costs to restrict communication to large size contra-side 
trading interest would be minimal because trading venues that offer 
size discovery mechanisms currently have systems in place to achieve 
this objective. In particular, these systems typically incorporate 
minimum trade size functionalities, as well as mechanisms to help 
assure that the valuable, actionable information concerning a 
participant's trading interest is transmitted only to those with whom 
there is a reasonable opportunity for obtaining an execution in large 
size.
    In addition, the Commission expects that the negative effects of 
requiring actionable IOIs to be included in the consolidated quotation 
data would be mitigated by the ability of market participants to adapt 
their trading strategies to the new rules. Higher incentives to display 
liquidity and alternative forms of competition for order flow also 
could mitigate any negative effect of the proposal. Customers of dark 
pools would remain free, as they are entitled to do with quoting venues 
today, to control the release of their order information.\155\ 
Customers could not, however, consent to the dissemination of order 
information sufficient for the transmission of an actionable IOI under 
$200,000, yet withhold information about their orders from the 
consolidated quotation data that is made available to the public.
---------------------------------------------------------------------------

    \155\ See supra note 41 and accompanying text.
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    The Commission generally requests comment on any direct or indirect 
costs of the proposed amendment and asks commenters to quantify those 
costs, where possible. In addition, the Commission requests specific 
comments on the following questions:
    1. What are some of the trading strategies that employ actionable 
IOIs? Is the use of such actionable IOIs in the best interest of these 
traders and how would the inability to use those actionable IOIs impact 
traders, markets, or investors more generally? Could similar benefits 
be achieved through other means?
    2. How are market participants likely to change their behavior if 
actionable IOIs must be included in the consolidated quotation data? 
What are the likely effects of these changes? For example, would a 
significant percentage of dark pools that currently use actionable IOIs 
go completely dark? What would be the effects on traders, markets, and 
investors were that to occur?
    3. How would the proposal affect competition between trading 
venues?
    4. Would the size discovery exception maintain the existing 
opportunities of block crossing networks and other trading venues to 
offer benefits to market participants that need to trade in large size? 
Do these venues currently have systems in place that would enable them 
to comply at minimal cost with the terms of the exception?
    5. To what extent, if at all, would the proposed amendment to Rule 
600(b)(8) increase the number of bids or offers that exchange members 
and OTC market makers would be required to review and report to their 
respective exchanges and FINRA for inclusion in the consolidated 
quotation data?
    6. To what extent, if at all, would system changes or increases in 
system capacities be necessary for exchange members or OTC market 
makers to comply with the requirements of Rule 602, if the Commission 
were to adopt the proposed amendments to Rule 600(b)(8)?

B. ATS Display Obligations

    The Commission is sensitive to the costs and benefits associated 
with the proposed amendments to Rule 301(b)(3) of Regulation ATS. The 
Commission requests comment on the costs and benefits associated with 
these proposed amendments. The Commission has identified certain costs 
and benefits of the proposal and requests comment on all aspects of its 
preliminary cost-benefit analysis, including identification and 
assessments of any costs and benefits not discussed in this analysis. 
The Commission also seeks comments on the accuracy of any of the 
benefits identified and also welcomes comments on the accuracy of any 
of the cost estimates. Finally, the Commission encourages commenters to 
identify, discuss, analyze, and supply relevant data, information, or 
statistics regarding any such costs or benefits.
1. Benefits
    The emergence of dark pools as a significant source of liquidity 
for NMS stocks raises a variety of important policy issues that deserve 
consideration. Some dark pools transmit actionable IOIs to selected 
market participants for the purpose of attracting contra-side order 
flow to the ATS.\156\ Such actionable IOIs function quite similarly to 
displayed quotations and, as a result, dark pools that distribute such 
actionable IOIs are no longer truly dark; rather they are ``lit'' to a 
select group of market participants but dark with respect to the rest 
of the public. The Commission preliminarily believes that this practice 
is creating a two-tiered market and an inequitable distribution of 
price information.\157\
---------------------------------------------------------------------------

    \156\ See supra section II (describing the use of actionable 
IOIs).
    \157\ See id.
---------------------------------------------------------------------------

    It has been a longstanding Commission concern to avoid two-tiered 
markets, whereby certain market participants have access to information 
or order flow that others do not.\158\ The public quote stream is 
intended to provide a single source of information on the best prices 
for NMS stocks across all markets, rather than force the public to 
obtain data from many different exchanges and other trading venues to 
learn the best prices.\159\ This objective is not being met if dark 
pools or other markets disseminate pricing information

[[Page 61229]]

that is functionally quite similar to quotations, yet is not required 
to be included in the public quote stream.\160\
---------------------------------------------------------------------------

    \158\ See supra section II (describing the purpose of the 
consolidated quotation data stream).
    \159\ See id.
    \160\ See id.
---------------------------------------------------------------------------

    Congress in 1975 endorsed the development of a national market 
system and granted the Commission broad authority to implement it.\161\ 
Chief among the objectives of the national market system are 
coordinating markets, reducing fragmentation, and limiting the 
possibility of tiered markets where the best trading opportunities are 
available only to selected market participants.\162\ As the Commission 
has long recognized, proper coordination of markets requires 
transparency and access across the national market system.\163\ Market 
participants must be able to know where the best trading opportunities 
exist and have the ability to execute orders in response to those 
opportunities. The Commission has taken a number of actions designed to 
further these goals,\164\ including by providing, through Regulation 
ATS, a regulatory framework that permits competition among and 
innovation by exchange and non-exchange trading centers while 
attempting to minimize detrimental market fragmentation. As the 
Commission observed in 1997, the failure ``to fully coordinate trading 
on alternative trading systems into national market systems mechanisms 
has impaired the quality and pricing efficiency of secondary equity 
markets. * * * Although these systems are available to some 
institutions, orders on these systems frequently are not available to 
the general investing public.''\165\ The Commission noted that such 
``hidden markets''--where superior quotations might be available to a 
subset of market participants--impeded the goals of the national market 
system.\166\
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    \161\ See Public Law 94-29, 89 Stat. 97 (1975) (adopting Section 
11A of the Exchange Act).
    \162\ See 15 U.S.C. 78k-1(a)(1)(D) (``The linking of all markets 
for qualified securities through communication and data procession 
facilities will foster efficiency, enhance competition, increase the 
information available to brokers, dealers, and investors, facilitate 
the offsetting of investors' orders, and contribute to best 
execution of such orders.'') See also Regulation ATS Proposing 
Release and Concept Release (citing inter alia SEC, Statement of the 
Securities and Exchange Commission on the Future Structure of the 
Securities Markets (February 2, 1972), 37 FR 5286 (March 14, 1972)); 
Securities Exchange Act Release No. 36310 (September 29, 1995), 60 
FR 52792 (October 10, 1995).
    \163\ See, e.g., Regulation ATS Proposing Release, supra note 
53, 63 FR at 23511.
    \164\ See supra note 55.
    \165\ Concept Release, supra note 53, 63 FR at 30492. See also 
Regulation ATS Proposing Release, supra note 53, 63 FR at 23514.
    \166\ See Regulation ATS Proposing Release, 63 FR at 23514-15 
(``The use of these systems to facilitate transactions in securities 
at prices not incorporated into the [national market system] has 
resulted in fragmented and incomplete dissemination of quotation 
information. Recent evidence suggests that the failure of the 
current regulatory approach to fully integrate trading on 
alternative trading systems into [the national market system] 
mechanisms has impaired the quality and pricing efficiency of 
secondary equity markets, particularly in light of the explosive 
growth in trading volume on such alternative trading systems'').
---------------------------------------------------------------------------

    The proposed amendments to Rule 301(b)(3), together with the 
proposed changes to Rule 600(b)(8) of Regulation NMS, seek to inhibit 
the development of ``hidden'' or partially lit markets that result in a 
tiered market structure, and thus strengthen the national market system 
for the benefit of public investors. By more fully coordinating trading 
on ATSs into the national market system, the proposed amendments are 
designed to improve pricing efficiency and execution quality in NMS 
stocks.
    As described above, the Commission is proposing to amend Rule 
301(b)(3)(i)(B) of Regulation ATS \167\ to reduce the average daily 
trading volume threshold that would trigger display obligations for an 
ATS from 5% to 0.25%. The Commission is also proposing to amend Rule 
301(b)(3)(ii) of Regulation ATS \168\ to clarify that an ATS must 
publicly display and provide execution access to its best-priced orders 
in NMS stocks when such orders are displayed to more than one person 
(other than ATS employees), regardless of whether such persons are 
subscribers of the ATS. In addition, the Commission is proposing to 
amend Rule 301(b)(3)(ii) to mirror the proposed exception in the 
definition of ``bid'' or ``offer'' in Rule 600(b)(8) for orders having 
a market value of at least $200,000 and which are communicated only to 
market participants who are reasonably believed to represent current 
contra-side trading interest of at least $200,000. Together with the 
proposal to amend the definition of ``bid'' or ``offer'' in Rule 
600(b)(8) to explicitly include actionable IOIs, these proposed 
amendments to Rule 301(b)(3) of Regulation ATS are designed to increase 
the opportunity for all market participants to discover and interact 
with the best-priced orders, while offering certain large orders the 
opportunity for size discovery.
---------------------------------------------------------------------------

    \167\ 17 CFR 242.301(b)(3)(i)(B).
    \168\ 17 CFR 242.301(b)(3)(ii).
---------------------------------------------------------------------------

    The Commission believes that broker-dealers operating ATSs should 
be subject to quoting requirements that broadly parallel those 
applicable to other market participants. Currently, the order display 
and execution access requirements in Regulation ATS do not apply unless 
an ATS has an average daily trading volume threshold in an NMS stock of 
5% or more. Few if any ATSs exceed the 5% threshold for any NMS stocks 
although, as explained above,\169\ ATSs collectively account for a 
significant share of trading volume. Many dark pool ATSs communicate 
order information via actionable IOIs that could, if appropriately 
integrated, contribute to the overall efficiency and quality of the 
national market system. Without any attendant change to Regulation ATS 
to lower the 5% threshold, the proposed amendments to the definitions 
of ``bid'' or ``offer'' in Rule 600(b)(8) of Regulation NMS would have 
less effect, because most ATSs could continue to communicate actionable 
IOIs only to selected market participants. Therefore, in conjunction 
with the proposed amendments to Rule 600(b)(8), the Commission is 
proposing to substantially lower the threshold at which an ATS incurs 
an obligation under Regulation ATS to provide orders to an SRO for 
inclusion in the public quote stream. The Commission preliminarily 
believes that such amendment would be consistent with the mandate set 
forth in Section 11A of the Exchange Act \170\ to promote a national 
market system.
---------------------------------------------------------------------------

    \169\ See supra notes 9 and 10 and accompanying text.
    \170\ 15 U.S.C. 78k-1.
---------------------------------------------------------------------------

    The Commission also preliminarily believes that, by expanding the 
pool of orders that would be required to be incorporated into the 
consolidated public quote stream, the proposed amendments to Rule 
301(b)(3) would have the potential in many cases to narrow the NBBO or 
to increase the quoted size at the existing NBBO.\171\ As noted above, 
requiring that actionable IOIs be incorporated into the public quote 
stream is particularly important now given their increasing 
prevalence.\172\ Thus, although 0.25% is only a small portion of 
average daily trading volume, actionable IOIs sent by even small ATSs, 
when aggregated, may represent a significant percentage of the orders 
that would set the price of, or increase the size available at, the 
NBBO.\173\ The Commission preliminarily believes that making most such 
orders visible and available to the market as a whole could represent a 
substantial benefit to investors. Furthermore, incorporating the best-
priced orders from all but the smallest ATSs into the public quote 
stream

[[Page 61230]]

would increase the value of the public quote stream.
---------------------------------------------------------------------------

    \171\ See supra section II.
    \172\ Id.
    \173\ See id. (noting dark pools in the aggregate account for 
7.2% of aggregate trading volume in the NMS).
---------------------------------------------------------------------------

    The Commission is also proposing to amend Rule 301(b)(3) to include 
an exception from the order display and execution access requirements 
for certain large orders, which would mirror the proposed exception 
with respect to the definition of ``bid'' or ``offer'' in Rule 
600(b)(8) of Regulation NMS. This exception would apply to orders with 
a market value of $200,000 or more that are communicated only to those 
who are reasonably believed to represent current contra-side trading 
interest of at least $200,000. Pursuant to the proposed exception, an 
ATS could display these large orders to potential counterparties 
reasonably believed to represent contra-side trading interest of at 
least $200,000 without triggering the order display and execution 
access requirements of Rule 301(b)(3).
    As noted earlier, the Commission recognizes that some trading 
venues, such as block crossing networks, may use actionable IOIs as 
part of a trading mechanism that offers significant size discovery 
benefits.\174\ These benefits may be particularly valuable for 
institutional investors that need to trade efficiently in sizes much 
larger than those that are typically available in the public quoting 
markets.\175\ These size discovery mechanisms could be rendered 
unworkable, however, if their narrowly targeted IOIs for large size 
were required to be included in the public quote stream.\176\ The 
Commission preliminarily believes that the proposed exception would 
facilitate greater opportunity for ATS subscribers to discover size 
without generating adverse market impact.
---------------------------------------------------------------------------

    \174\ See supra Section VI.A.1.
    \175\ See id.
    \176\ See id.
---------------------------------------------------------------------------

2. Costs
    The Commission preliminarily anticipates that ATSs could incur 
certain costs if the proposed amendments were adopted. Under the 
proposed amendments, ATSs that display orders in NMS stocks (except for 
orders that have a market value of at least $200,000 and are 
communicated only to those who are reasonably believed to represent 
current contra-side trading interest of at least $200,000) to more than 
one person, whether by communicating actionable IOIs or otherwise, and 
meet the proposed average daily trading volume threshold of 0.25% would 
be subject to the order display and execution access requirements of 
Rule 301(b)(3) of Regulation ATS.\177\
---------------------------------------------------------------------------

    \177\ The Commission is not proposing to amend Rule 
301(b)(3)(iii) of Regulation ATS. For an ATS that is required to 
display orders pursuant to Rule 301(b)(3)(ii), Rule 301(b)(3)(iii) 
requires such ATS to provide to any broker-dealer that has access to 
the SRO to which the ATS provides the prices and sizes of its best-
priced orders the ability to effect a transaction with such orders 
that is: (a) equivalent to the ability of such broker-dealer to 
effect a transaction with other orders displayed on the SRO; and (b) 
at the price of the highest priced buy order or lowest priced sell 
order displayed for the lesser of the cumulative size of such priced 
orders entered therein at such price, or the size of the execution 
sought by such broker-dealer. See 17 CFR 242.301(b)(3)(iii).
---------------------------------------------------------------------------

    The Commission does not preliminarily expect that the costs of 
monitoring daily trade volume associated with the proposed amendments 
to Rule 301(b)(3) would be significant. Each ATS is already required to 
monitor its trading volumes. However, ATSs might incur some costs to 
adjust their current monitoring programs to take account of the 
proposed reduction in the display threshold from 5% to 0.25%. In 
addition, as described above, the proposed amendments might impose 
certain costs, both initial and ongoing, on dark pool ATSs that 
currently transmit actionable IOIs and could be required to change 
their business models. Likewise, the proposed amendments could impose 
costs, both initial and ongoing, on any ATS that is currently 
displaying, or might in the future decide to display, order information 
and that might, if the Commission adopts the proposed amendments, 
decide instead to operate as a completely dark ATS. The Commission 
notes that each ATS could avoid any such costs by not displaying orders 
at all, or by selectively displaying only large orders that qualify for 
the proposed exception.
    For an ATS that is impacted by the proposed amendment to Rule 
301(b)(3), initial adjustment costs could include system re-programming 
to monitor the ATS's percentage of trading in NMS stocks,\178\ 
establishing linkages to an SRO for the purpose of submitting orders to 
the SRO for public display and of providing access to market 
participants wishing to trade against such orders, and expanding 
systems capacity and internal controls, including establishing or 
modifying applicable compliance policies and procedures, to carry out 
these functions in a manner consistent with the SRO's rules. The 
Commission preliminarily believes that such adjustment costs could 
include ATS staff time to build new systems or re-program current 
systems, as well as ongoing ATS staff time to maintain such systems and 
carry out their associated functions.
---------------------------------------------------------------------------

    \178\ Currently, under Rule 301(b)(3) of Regulation ATS, an ATS 
that displays subscriber orders to any person (other than ATS 
employees) and has 5% or more of the aggregate daily share volume 
for an NMS stock is required to provide to an SRO its best-priced 
orders for such NMS stock for inclusion into the public quote 
stream. Thus, ATSs are already required to monitor trading levels in 
NMS stocks. As a result of the proposed amendments to Rule 
301(b)(3), which would lower the average daily trading volume 
threshold from 5% to 0.25%, ATSs could be required to re-program 
their respective systems that monitor trading levels in NMS stocks 
to reflect the lower threshold. Based on discussions of Commission 
staff with certain potential ATS respondents and other market 
participants, the Commission preliminarily believes that costs of 
such re-programming would not be significant, although it requests 
comment on that point.
---------------------------------------------------------------------------

    For purposes of the PRA, the Commission preliminarily estimated 
that the initial annualized expense for all potential ATS respondents 
to establish connectivity to an SRO would be approximately 
$3,900,000.\179\ In addition, the Commission preliminarily estimated 
that the initial annualized expense to comply with the proposed 
amendments to Rule 301(b)(3) would be approximately $3,815,520.\180\ 
This figure is based on the estimated number of hours and hourly costs 
\181\ for initial internal development and implementation by an ATS to 
re-program the system, expand the system capacity, and adjust internal 
controls, including costs to establish or modify applicable compliance 
policies and procedures for an initial implementation period of two 
months, plus the estimated costs associated with running compliance 
policies and procedures (including monitoring daily trading activity), 
ongoing system maintenance and development, and estimated internal 
costs associated with maintaining connectivity to an SRO,

[[Page 61231]]

and ensuring compliance for a period of ten months, multiplied by 12 
(the Commission's estimate of the number of potentially impacted ATSs).
---------------------------------------------------------------------------

    \179\ See supra note 130.
    \180\ This figure is based on discussions of Commission staff 
with certain potential ATS respondents and other market 
participants. The Commission derived the total estimated initial 
annualized expense from the following: [((Sr. Programmer (320 hours) 
at $292 per hour) + (Compliance Manager (20 hours) at $258 per hour) 
+ (Compliance Attorney (20 hours) at $270 per hour) + (Programmer 
Analyst (20 hours) at $193 per hour) + (Sr. Systems Analyst (30 
hours) at $244 per hour)) x (2 months) + ((Sr. Programmer (2 hours) 
at $292 per hour) + (Compliance Manager (6 hours) at $258 per hour) 
+ (Compliance Attorney (4 hours) at $270 per hour) + (Compliance 
Clerk (40 hours) at $63 per hour) + (Sr. Systems Analyst (2 hours) 
at $244 per hour) + (Director of Compliance (5 hours) at $388 per 
hour) + (Sr. Computer Operator (8 hours) at $75 per hour)) x (10 
months)] x (12 potential ATS respondents) = $3,815,520.
    \181\ Hourly figures are from SIFMA's Management & Professional 
Earnings in the Securities Industry 2008 and SIFMA's Office Salaries 
in the Securities Industry 2008, modified by Commission staff to 
account for an 1,800-hour work-year and multiplied by 5.35 or 2.93, 
as appropriate, to account for bonuses, firm size, employee 
benefits, and overhead.
---------------------------------------------------------------------------

    The Commission also preliminarily estimated the ongoing expenses of 
complying with the proposed amendments to Rule 301(b)(3), which could 
include, among other things, maintaining connectivity with an SRO, 
monitoring daily trade activity, and ensuring compliance. For purposes 
of the PRA, the Commission preliminarily estimated that the ongoing 
annualized expense for all potential ATS respondents to maintain 
connectivity to an SRO would be approximately $3,600,000.\182\ In 
addition, the Commission preliminarily estimated that the ongoing 
annualized expense for all potential ATS respondents to comply with the 
proposed amendments to Rule 301(b)(3) would be approximately 
$1,261,440.\183\ This figure is based on the estimated number of hours 
and hourly costs \184\ for running compliance policies and procedures 
(including monitoring daily trading activity), ongoing system 
maintenance and development, and estimated internal costs associated 
with maintaining connectivity to an SRO, and ensuring compliance for a 
period of 12 months, multiplied by 12 (the Commission's estimate of the 
number of potentially impacted ATSs).
---------------------------------------------------------------------------

    \182\ See supra note 132.
    \183\ This figure is based on discussions of Commission staff 
with certain potential ATS respondents and other market 
participants. The Commission derived the total estimated ongoing 
burdens from the following: ((Sr. Programmer (2 hours) at $292 per 
hour) + (Compliance Manager (6 hours) at $258 per hour) + 
(Compliance Attorney (4 hours) at $270 per hour) + (Compliance Clerk 
(40 hours) at $63 per hour) + (Sr. Systems Analyst (2 hours) at $244 
per hour) + (Director of Compliance (5 hours) at $388 per hour) + 
(Sr. Computer Operator (8 hours) at $75 per hour)) x (12 months) x 
(12 potential ATS respondents) = $1,261,440.
    \184\ See supra note 181.
---------------------------------------------------------------------------

    The Commission is also proposing a change to Rule 301(b)(3)(ii) 
that would add an exception to the order display and execution access 
requirements for orders that have a market value of at least $200,000 
and are communicated only to those who are reasonably believed to 
represent current contra-side trading interest of at least $200,000. 
The Commission preliminarily believes that an ATS would not incur any 
costs relating to order display and execution access because of the 
proposed exception. An ATS would incur either the same costs as it 
would otherwise (because it communicated no orders that met the terms 
of the proposed exception) or fewer costs (because some or all of the 
orders that it communicated met the terms of the proposed exception, 
thus reducing the number of orders that would otherwise have to be 
publicly disseminated under the proposed amendments to Rule 301(b)(3)). 
Each ATS is already required under Rule 301(b)(3) to monitor its order 
flow; the Commission preliminarily believes that tracking which orders 
qualify for the proposed exception would require no additional costs 
beyond those otherwise required, although it requests comment on that 
point.
    The proposed amendments to Rule 301(b)(3) of Regulation ATS are 
designed to balance the benefits of technology and flexible regulation 
with the need for appropriate coordination among trading centers. The 
Commission understands that linkage costs have fallen substantially 
since it adopted Regulation ATS. Nevertheless, the Commission is 
sensitive to the costs of its regulation and the proposed amendments on 
current and new ATSs, as well as the potential effect on their 
development. The Commission preliminarily believes that reducing the 
average daily trading volume threshold to 0.25% would provide an 
appropriate level under which ATSs could display subscriber orders to 
more than one person (whether by sending actionable IOIs or otherwise) 
without imposing substantial costs associated with linking to an SRO.
    Consistent with the reasons enunciated in the Regulation ATS 
Adopting Release for establishing the 5% threshold and as discussed in 
this release, the Commission preliminarily believes that proposing a 
reduction of the ATS display threshold to 0.25% is warranted at this 
time. The Commission also preliminarily believes that the goals and 
objectives of lowering the threshold justify the costs associated with 
linking to an SRO. For ATSs that would be subject to the order display 
and execution requirements if the Commission were to adopt the 0.25% 
threshold, the Commission preliminarily believes that the current costs 
of linking to an SRO are not significant.\185\ Communications and 
order-routing systems have improved significantly since Regulation ATS 
was originally adopted. Robust and extremely fast linkages that were 
not available at that time are now widely offered on commercially 
reasonable terms, and the market for these services is highly 
competitive, further reducing their cost.\186\
---------------------------------------------------------------------------

    \185\ This information is based on discussions of Commission 
staff with certain potential ATS respondents and other market 
participants.
    \186\ See id.
---------------------------------------------------------------------------

    In addition, the Commission preliminarily believes that the 
proposed amendments to Rule 301(b)(3) of Regulation ATS would not, if 
adopted, impose any substantive or material costs on SROs under the 
requirements of Rule 602 of Regulation NMS. Under the proposal, order 
information that is communicated by ATSs to more than one person 
outside the public quote stream (whether via actionable IOIs or 
otherwise) could be required to be incorporated into the public quote 
stream. As described above, to accomplish this, the ATS would be 
required to send the order information to an SRO, and that SRO would be 
responsible under Rule 602 for the incorporation of the information in 
the consolidated public quote stream. The Commission preliminarily 
believes that any costs associated with including such ATS orders with 
the large volume of quotations that SROs already include in the public 
quote stream under Rule 602 would not be material.
    As noted previously, an ATS that sends actionable IOIs or otherwise 
displays subscriber orders to more than one person (other than ATS 
employees) and exceeds the proposed 0.25% threshold for an NMS stock 
could avoid the direct costs of linking to an SRO by going completely 
dark. The Commission recognizes that such a choice could be viewed as a 
potential cost of the proposed amendments. An ATS that, under the 
existing 5% threshold, generates contra-side interest for its 
subscriber orders by communicating actionable IOIs might--if it ceased 
to do so--effect fewer executions, which could lead to a loss of 
revenue and market share for the ATS. The Commission is sensitive to 
this potential cost, but preliminarily believes that it would be 
mitigated by the proposed exception for size discovery orders and 
justified by the overall benefits of the proposal to the national 
market system.
    The proposed amendment to Rule 301(b)(3) could also impose costs on 
ATS subscribers that currently receive executions arising from ATSs' 
use of actionable IOIs. If the proposal is adopted, such subscribers 
might incur costs to re-evaluate their order execution strategies. For 
example, if a subscriber currently uses an ATS that communicates 
actionable IOIs, and the ATS is above the proposed display threshold of 
0.25% in one or more NMS stocks, the subscriber would have to evaluate 
whether it is better served by having its orders in displayed markets

[[Page 61232]]

or in completely dark pools. The strategies that they adopt in response 
to the proposal might not be as profitable as those they are employing 
currently. In addition, market participants that currently receive 
actionable IOIs might no longer have access to such trading 
opportunities and could incur costs to adapt their strategies if the 
number of IOIs that they receive decreases.
    Nevertheless, the Commission preliminarily believes that the costs 
to such subscribers and to recipients of actionable IOIs would be 
justified by the benefits to the national market system as a whole. For 
the reasons discussed in this release, the Commission preliminarily 
believes that the proposal would reduce the possibility of a tiered 
market structure and provide better access for all investors to the 
best-priced orders in NMS stocks. This outcome would benefit all market 
participants.
    The Commission requests comment on the costs and benefits of the 
proposed amendments to Rule 301(b)(3) of Regulation ATS discussed 
above, as well as any costs and benefits not already described which 
could result from them. The Commission also requests data to quantify 
any potential costs or benefits. In addition, the Commission requests 
specific comment on the following questions:
    1. Currently, ATSs can display orders in NMS stocks to more than 
one person without triggering the order display and execution access 
requirements in Rule 301(b)(3) if they do not exceed the 5% threshold. 
Under the proposed amendments to Rule 301(b)(3), many ATSs would lose 
the ability to display orders in this manner, and would have to either 
publicly display those orders or go completely dark. What are the costs 
and benefits of eliminating the ability of ATSs to communicate 
actionable IOIs to only a limited group?
    2. Would the proposed amendments likely result in an increase in 
the number of ATSs that submit their best-priced orders to an SRO for 
inclusion in the public quote stream? Why or why not? What benefits 
would result from more ATSs submitting their best-priced orders in NMS 
stocks to an SRO for inclusion in the public quote stream? Can those 
benefits be quantified? If so, how? What are the potential adverse 
effects?
    3. If ATSs respond to the proposed amendments by going completely 
dark, what costs or benefits would result for: (a) those ATSs, (b) 
market participants that currently receive actionable IOIs from those 
ATSs, and (c) the national market system as a whole?
    4. For ATSs that would choose to respond to the proposed amendments 
by submitting their best-priced orders in NMS stocks to an SRO for 
inclusion in the public quote stream, what are the costs of 
establishing the necessary linkages to an SRO? To what extent do those 
ATSs already have the capability to submit orders to an SRO? Could 
existing systems and communications infrastructure be adapted for that 
purpose and, if so, at what cost? Please describe and quantify in terms 
of both initial and ongoing costs.
    5. What would be the costs and benefits of setting the display 
threshold at 0.25%? Would this change achieve the Commission's goals of 
increasing price competition in the national market system? Why or why 
not? Would there be greater benefits to the market as a whole by 
eliminating the threshold altogether (i.e., setting the threshold at 
0%) and thereby requiring any ATS that displays a subscriber order to 
more than one person to include that order in the public quote stream?
    6. What costs would be imposed on new ATSs if the Commission were 
to adopt the proposed 0.25% threshold or to eliminate it entirely? 
Would a low or no threshold create a barrier to entry for new ATSs? Why 
or why not?
    7. Under the proposed amendments, an ATS could continue to 
communicate customer orders in NMS stocks outside the public quote 
stream if those orders had a market value of at least $200,000 and were 
displayed only to those who are reasonably believed to represent 
current contra-side trading interest of at least $200,000. What would 
be the benefits of allowing such display by ATSs of these orders? Would 
the execution quality of such orders decline if they instead had to be 
placed (either in full or in smaller pieces) in displayed markets or 
completely dark pools? What are the costs to the market of allowing 
such orders to be displayed by ATSs without requiring their inclusion 
in the public quote stream?

C. Post-Trade Transparency for ATSs

    The Commission is sensitive to the costs and benefits associated 
with the proposed Plan amendments. The Commission has identified 
certain costs and benefits of the proposed Plan amendments and requests 
comment on all aspects of this cost-benefit analysis, including 
identification and assessment of any costs and benefits not discussed 
in the analysis. The Commission seeks comment and data on the value of 
the benefits identified. The Commission also requests those commenters 
to provide data so the Commission can improve the cost estimates, 
including identification of statistics relied on by commenters to reach 
conclusions on cost estimates.
1. Benefits
    The proposed Plan amendments would require the disclosure of the 
identity of ATSs on their trade reports in the public data stream to 
improve post-trade transparency. The proposed Plan amendments would 
require that all ATSs subject to Regulation ATS use a unique 
identifier, and would require that the identity of the ATS that 
executed a trade be included in the public data stream. The Commission 
believes this proposal to improve post-trade transparency would enhance 
public confidence in the securities markets by providing accurate 
information regarding the volume of transactions effected by ATSs as 
trading venues. This disclosure of information would provide the 
marketplace with a more complete and accurate picture of trading 
activity in ATSs thereby improving the quality and pricing efficiency 
of the equity markets. The Commission preliminarily believes that such 
information would help investors to assess trading volume of ATSs 
(including ECNs and dark pools) and to evaluate which ATSs may have 
liquidity in particular stocks, enabling orders to be more efficiently 
routed to trading venues. ATSs with more liquidity may receive 
additional orders from investors. The proposed Plan amendments are 
intended to address the Commission's long held belief that transparency 
promotes efficient securities markets.\187\
---------------------------------------------------------------------------

    \187\ The Commission has held the view that transparency not 
only allows all market participants to assess overall supply and 
demand, but also counteracts the effects of fragmentation without 
forcing all executions into one market. In particular, transparency 
reduces the information gap between investors with differing degrees 
of sophistication because all investors can monitor the quality of 
executions they receive. Additionally, the Commission has held the 
view that transparency reduces the likelihood of transactions at 
non-competitive prices and provides more immediate and useful 
information for investigating questionable conduct. See supra note 
108.
---------------------------------------------------------------------------

    Commenters should provide specific data and analysis to support any 
comments they submit with respect to these benefit estimates.
2. Costs
    The Commission believes that ATSs would not incur significant costs 
in connection with the proposed Plan amendments in addition to those 
already created by the requirements of Rule 601 of the Exchange 
Act.\188\ Currently FINRA rules require each trade to include an MPID. 
The Commission understands that some

[[Page 61233]]

ATSs report their transactions using an MPID of their sponsoring 
broker-dealer, while other ATSs use a unique MPID. The Plan changes 
would require that each ATS have a unique MPID, necessitating some ATSs 
to acquire an MPID from FINRA. ATSs can obtain an additional MPID from 
FINRA at no cost.\189\ Those ATSs that currently use an MPID of their 
sponsoring broker-dealer could incur a de minimis cost in re-
programming their systems to substitute the new MPID for the one 
currently used in transmitting their transactions to FINRA.
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    \188\ See supra, note 84.
    \189\ See FINRA Rules 6160 and 6170.
---------------------------------------------------------------------------

    FINRA, upon receipt of this unique indicator would retransmit the 
trade report to the SIP, after excluding the ATS identifier from trade 
reports for large size trades. For purposes of the PRA, the Commission 
preliminarily estimated that the initial annualized expense for the 
FINRA/NASDAQ TRF, FINRA/NYSE TRF, and the ADF would be approximately 
$1,175,000.\190\ In addition, the Commission preliminarily estimated 
that the initial annualized expense for FINRA internal development and 
testing would be approximately $13,400.\191\ Therefore, the grand total 
of the one-time, initial annualized expense for FINRA's development, 
re-programming, and testing of the systems to comply with the proposed 
Plan amendments would be approximately $1,188,400. The Commission 
preliminarily believes that the ongoing annualized expense for FINRA 
would be de minimis, as FINRA currently transmits trade report messages 
to the SIPs in the normal course of business.
---------------------------------------------------------------------------

    \190\ This figure is the total initial, one-time annualized 
expense to add unique ATS identifiers to trade report messages 
transmitted to SIPs. This figure includes the development and 
testing expenses of the FINRA/NASDAQ TRF, FINRA/NYSE TRF, and the 
ADF, to which ATS trades are reported. The figure is based on 
discussions of Commission staff with FINRA staff. See supra section 
V.C.4.b.
    \191\ This figure is based on discussion of Commission staff 
with FINRA staff. This figure includes FINRA internal development 
and testing. The Commission derived the total estimated one-time 
burdens from the following: [(Programmer Analyst at 25 hours) x 2 at 
$193 per hour] + [(Computer Operator at 25 hours) x 2 at $75 per 
hour] = $13,400. See supra section V.C.4.b.
---------------------------------------------------------------------------

    The SIPs (SIAC and Nasdaq SIP) would need to modify their trade 
report message to carry the unique identifier for each ATS. Currently, 
when transactions are reported to the SIP by FINRA, the MPID is dropped 
and an identifier is appended indicating the trade was executed OTC. 
Under the proposed Plan amendments, each ATS trade report would carry 
an ATS indicator, in addition to the OTC indicator, unless the trade is 
a large size trade. The Commission preliminarily estimated that the 
initial annualized expense for SIAC and Nasdaq SIP would be 
approximately $175,000.\192\ The Commission preliminarily believes that 
the ongoing annualized expense for the SIPs would be de minimis, as the 
SIPs currently transmit trade report messages in the normal course of 
business. The Commission notes that the proposed Plan amendments could 
affect order routing as investors may choose to change their routing 
strategies based on the additional disclosure under the proposed 
amendments of the ATS where the trade was executed.
---------------------------------------------------------------------------

    \192\ This figure is the total initial, one-time annualized 
expense to provide planning, development, implementation, testing, 
and quality assurance for the SIPs. The figure is based on 
discussions of Commission staff with SIAC and Nasdaq SIP staff. See 
supra section V.C.4.c.
---------------------------------------------------------------------------

    The Commission generally requests comment on all aspects of these 
cost estimates for the proposed amendments to the Plans. Commenters 
should provide specific data and analysis to support any comments they 
submit with respect to these cost estimates.

VII. Consideration of Burden on Competition, and Promotion of 
Efficiency, Competition and Capital Formation

    Section 3(f) of the Exchange Act \193\ requires the Commission, 
whenever it engages in rulemaking and is required to consider or 
determine whether an action is necessary or appropriate in the public 
interest, to consider whether the action would promote efficiency, 
competition, and capital formation. In addition, Section 23(a)(2) of 
the Exchange Act \194\ requires the Commission, when making rules under 
the Exchange Act, to consider the impact of such rules on competition. 
Section 23(a)(2) also prohibits the Commission from adopting any rule 
that would impose a burden on competition not necessary or appropriate 
in furtherance of the purposes of the Exchange Act. As discussed below, 
the Commission's preliminary view is that the proposed amendments 
should promote efficiency and competition. It preliminarily believes 
that the proposals would have minimal impact, if any, on promotion of 
capital formation.
---------------------------------------------------------------------------

    \193\ 15 U.S.C. 78c(f).
    \194\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

A. Actionable IOIs

    The proposed amendment to the definition of ``bid'' or ``offer'' in 
Rule 600(b)(8) of Regulation NMS would expressly limit its exclusion of 
IOIs to those ``that are not actionable'' and those that are actionable 
but involve a market value of at least $200,000 that are communicated 
only to those who are reasonably believed to represent current contra-
side trading interest of at least $200,000. The definition of bid or 
offer is a key element in determining the public quoting requirements 
of exchanges and OTC market makers. As discussed above, the proposed 
amendments are designed to help promote fair competition by providing a 
definition of ``bid'' or ``offer'' that would apply to all types of 
trading venues and, thereby, treat actionable IOIs similarly in those 
venues. The proposal is further designed to promote competition and 
enhance efficiency by including all actionable IOIs in the consolidated 
quotation stream, thereby eliminating the potential that IOIs create 
for two-tiered access to information on the best prices for NMS stocks. 
Given that actionable IOIs provide explicit or implicit information 
regarding symbol, side (buy or sell), size and price, there is little 
practical reason to treat actionable IOIs differently from displayed 
quotations at the NBBO.
    Currently, dark pools' IOIs often are executed at prices that match 
the best displayed prices for a stock at another market, potentially 
depriving those who publicly display their interest at the best price 
from receiving a speedy execution at that price. The opportunity to 
obtain the fastest possible execution at a price is the primary 
incentive for the display of trading interest.\195\ If adopted, the 
proposal could encourage the public display of trading interest and 
promote quote competition among markets by eliminating a practice that 
diverts order flow to private markets. Increasing the volume of order 
flow routed to public quoting markets could reward market participants 
for displaying their trading interest, thus leading to an increase in 
the display of trading interest. Such a result would be consistent with 
the Commission's emphasis on the need to encourage displayed 
liquidity--a critical reference point for investors.\196\ Moreover, 
increasing the volume of order flow directed to public quotations could 
increase the incentives for markets to compete by displaying the 
quotations that would attract such order flow. The proposal thereby 
could promote competition for the displayed liquidity that is vital to 
the fairness and efficiency of the market for NMS stocks. Encouraging 
the use of displayed limit orders could help improve the price 
discovery process, and in turn,

[[Page 61234]]

contribute to increased liquidity and depth in the market.\197\
---------------------------------------------------------------------------

    \195\ See NMS Release, supra note 26.
    \196\ See supra note 26.
    \197\ See Order Handling Rules Release, supra note 26, at 48293 
(``[T]he display of customer limit orders advances the national 
market system goal of the public availability of quotation 
information, as well as fair competition, market efficiency, best 
execution, and disintermediation.'').
---------------------------------------------------------------------------

    Further, the proposed amendment to the current definition of 
``bid'' or ``offer'' would exclude any IOIs ``for a quantity of NMS 
stock having a market value of at least $200,000 that are communicated 
only to those who are reasonably believe to represent current contra-
side trading interest of at least $200,000.'' This exception is 
designed to benefit investors trading in large sizes by allowing them 
to trade more efficiently than they could if these quotes were required 
to be included in the public quotation stream. As discussed above, some 
trading venues may use actionable IOIs as part of a trading mechanism 
that locates contra-side trading interest for large size orders without 
causing price impact on the markets. It also could promote competition 
by enabling trading venues to continue to offer existing size discovery 
mechanisms, as well as leaving room for trading venues to innovate and 
offer additional types of size discovery mechanisms.
    Based on the analysis above, the Commission preliminarily believes 
that the proposed amendment to the definition of ``bid'' or ``offer'' 
in Rule 600(b)(8) to apply expressly to actionable IOIs would not 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act. The Commission also 
believes, as discussed above, that the proposed amendment would promote 
efficiency and competition, and would have minimal impact, if any, on 
promotion of capital formation.
    The Commission requests comment on all aspects of this analysis 
and, in particular, on whether the proposed amendment would place a 
burden on competition, as well as the effect of the proposal on 
efficiency, competition, and capital formation. Commenters are 
requested to provide empirical data and other factual support for their 
views if possible.

B. ATS Display Obligations

    As discussed above, the proposed amendments to Rule 301(b)(3) are 
intended to reduce the potential for two-tiered markets and further 
integrate the best-priced orders available on ATSs into the national 
market system. By revising the order display and execution access 
requirements in Rule 301(b)(3) to reflect proposed revisions to the 
definition of ``bid'' or ``offer'' in Rule 600(b)(8) of Regulation NMS, 
the Commission aims to foster greater price transparency, more vigorous 
competition, and stronger, more integrated markets.\198\
---------------------------------------------------------------------------

    \198\ See supra section II.
---------------------------------------------------------------------------

    ATSs that currently use actionable IOIs could respond to the 
proposed amendments to Regulation ATS by displaying some of these 
orders in the public quote stream. The proposed amendments to Rule 
301(b)(3) are designed to incorporate more order information into the 
public quote stream and promote quote competition. Actionable IOIs 
communicated by ATSs to selected market participants often provide 
important pricing information and could improve the NBBO or add to the 
size available at the NBBO if they were included in the public quote 
stream. Both of these impacts could improve the pricing efficiency and 
overall execution quality available in the national market system. 
Requiring more such IOIs to be integrated into the public quote stream 
also could further competition among orders and among markets.
    ATSs that currently use actionable IOIs could respond to the 
proposed amendments to Regulation ATS by going completely dark. This 
outcome could reduce the potential benefits to efficiency and quote 
competition. Nevertheless, this response would reduce the likelihood of 
two-tiered markets, where some market participants have information 
about and access to the best-priced orders that others do not. In 
addition, such a response would reduce the fraction of order flow that 
is diverted from market participants that publicly display their 
interest.
    Moreover, the Commission preliminarily believes that the proposed 
amendments to Rule 301(b)(3) would strike an appropriate balance 
between encouraging competition among market centers and the need for 
appropriate coordination among them. The Commission's proposal to lower 
the trading volume threshold in Rule 301(b)(3) from 5% to 0.25% is 
designed to recognize significant changes in market structure and 
practice among market participants that have occurred since Regulation 
ATS was adopted, while at the same time not lowering the volume 
threshold to a level that would create an inappropriate barrier to 
entry for new ATSs.
    The Commission also preliminarily believes that, by keeping 
barriers to entry reasonably low for new ATSs and strengthening the 
national market system, the proposed amendments to Rule 301(b)(3) would 
promote competition. A significant number of ATSs have been launched 
since the Commission adopted Regulation ATS in 1998. Competition 
between ATSs and exchanges, and between ATSs, has yielded numerous 
benefits for investors and the national market system as a whole, 
including faster and more robust trading technology, new trading 
strategies, and lower transaction costs, which in turn support highly 
liquid markets with wide investor participation. The Commission thus 
believes that reasonably low barriers to entry for ATSs has generally 
helped to promote competition and efficiency.
    For these reasons, the Commission preliminarily believes that the 
changes to Rule 301(b) would likely have a positive impact on 
competition and efficiency, would have minimal impact, if any, on 
promotion of capital formation, and would not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act. The Commission generally requests comment on the 
competitive effects of the proposed amendments to Rule 301(b)(3) on any 
market participant. The Commission also requests comment on what impact 
the proposed amendments to Rule 301(b)(3) would have on competition, 
efficiency, and capital formation. The Commission requests comment on 
all aspects of this analysis and, in particular, on whether the 
proposed amendments to Rule 301(b)(3) would place a burden on 
competition, as well as the effect of the proposal on efficiency, 
competition, and capital formation. Commenters are requested to provide 
empirical data and other factual support for their views, if possible.

C. Post-Trade Transparency for ATSs

    The Commission's preliminary view is that the proposed amendments 
to post-trade transparency requirements for ATSs should promote 
efficiency and competition. The Commission believes that the proposed 
amendments to the Plans would improve post-trade transparency as Plan 
Participants would be required to include identifying information, 
specifying the trading center that executed the trade in the 
consolidated data stream disseminated to the public. This information 
should lead to more efficient order routing, as investors would know on 
which ATS a particular security has been traded. This improved post-
trade transparency should promote competition among trading venues as 
the public would be better able to assess where trading volume is being 
executed. Furthermore,

[[Page 61235]]

such uniform and reliable reporting practices may promote efficiency by 
facilitating the flow of information among ATSs, broker-dealers, 
exchanges, investors, and other market participants. As discussed, the 
Commission preliminarily believes that this change would bring the 
trade reporting requirements for ATSs in line with the trade reporting 
requirements for exchanges. Requiring the public disclosure of which 
ATS executed a trade should enable the public to determine more 
accurately the volume of executions occurring on any particular ATS, as 
well as on ATSs in general. The Commission expects that investors would 
direct orders to ATSs that provided liquidity in a particular issue. 
Greater transparency should also enhance the ability of investors to 
receive best execution for their orders. Transparency should result in 
more efficient routing of orders to venues with liquidity. The 
Commission preliminarily believes that some ATSs could receive 
additional trading interest when investors are able to identify that 
the ATS has liquidity in a particular stock.
    The Commission preliminarily believes the proposed Plan amendments 
would promote efficiency and competition and would have minimal impact, 
if any, on promotion of capital formation. In addition, the Commission 
preliminarily believes that the proposed Plan amendments would not 
impose any burden on competition not necessary or appropriate in the 
furtherance of the purposes of the Exchange Act.
    The Commission requests comment on all aspects of this analysis 
and, in particular, on whether the proposed amendments would place a 
burden on competition, as well as the effect of the proposal on 
efficiency, competition, and capital formation. Commenters are 
requested to provide empirical data and other factual support for their 
views if possible.

VIII. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, or ``SBREFA,'' \199\ the Commission must advise the OMB as 
to whether the proposed regulation constitutes a ``major'' rule. Under 
SBREFA, a rule is considered ``major'' where, if adopted, it results or 
is likely to result in: (1) An annual effect on the economy of $100 
million or more (either in the form of an increase or a decrease); (2) 
a major increase in costs or prices for consumers or individual 
industries; or (3) significant adverse effect on competition, 
investment or innovation. If a rule is ``major,'' its effectiveness 
will generally be delayed for 60 days pending Congressional review.
---------------------------------------------------------------------------

    \199\ Public 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 Commission requests comment on the potential impact of the 
proposed rule amendments on the economy on an annual basis, on the 
costs or prices for consumers or individual industries, and on 
competition, investment or innovation. Commenters are requested to 
provide empirical data and other factual support for their view to the 
extent possible.

IX. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \200\ requires Federal 
agencies, in promulgating rules, to consider the impact of those rules 
on small entities. Section 603(a) \201\ of the Administrative Procedure 
Act,\202\ 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.'' \203\ 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.'' \204\
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    \200\ 5 U.S.C. 601 et seq.
    \201\ 5 U.S.C. 603(a).
    \202\ 5 U.S.C. 551 et seq.
    \203\ Although Section 601(b) of the RFA defines the term 
``small entity,'' the statute permits agencies to formulate their 
own definitions. The Commission has adopted definitions for the term 
small entity for the purposes of Commission rulemaking in accordance 
with the RFA. Those definitions, as relevant to this proposed 
rulemaking, are set forth in Rule 0-10, 17 CFR 240.0-10. See 
Securities Exchange Act Release No. 18451 (January 28, 1982), 47 FR 
5215 (February 4, 1982) (File No. AS-305).
    \204\ See 5 U.S.C. 605(b).
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A. Actionable IOIs

    Pursuant to Rule 605(b) of the RFA, the Commission certifies that 
the proposed amendment of Rule 600(b)(8) of Regulation NMS, if adopted, 
would not have a significant economic impact on a substantial number of 
small entities. The proposed amendment of Rule 600(b)(8) of Regulation 
NMS would revise the definition of ``bid'' or ``offer'' by expressly 
limiting its exclusion of IOIs to those ``that are not actionable and 
indications of interest for a quantity of NMS stock having a market 
value of at least $200,000 that is communicated only to those who are 
reasonably believed to represent current contra-side trading interest 
of at least $200,000.'' The practical result of the amendment would be 
that actionable IOIs that do not meet the size discovery exclusion 
would be ``bids'' or ``offers.''
    ``Bid'' and ``offer'' are key terms that determine the scope of 
Rule 602 of Regulation NMS. In general, Rule 602 requires exchange 
members and OTC market makers to provide their best-priced bids and 
offers to their respective exchanges and FINRA. The exchanges and 
FINRA, in turn, are required to make their best bids and offers 
available in the consolidated quotation data. The exchanges subject to 
the requirements of Rule 602 are not small entities as defined by 
Commission rules,\205\ and FINRA, a national securities association, is 
not a small entity.
---------------------------------------------------------------------------

    \205\ See 17 CFR 240.0-10(e).
---------------------------------------------------------------------------

    The proposed amendment to Rule 600(b)(8) could increase the number 
of ``bids'' and ``offers'' exchange members and certain OTC market 
makers must review to determine their best-priced bids and offers. Some 
exchange members and OTC market makers may be small entities pursuant 
to Rule 0-10(c) under the Exchange Act.\206\ It is the Commission's 
understanding that all exchange members and OTC market makers currently 
have systems and procedures in place to determine their best-priced 
bids and offers. As a result, the Commission believes that the proposed 
amendment would not result in a significant economic impact on a 
substantial number of exchange members and OTC market makers when 
determining their best-priced bids and offers due to the proposed 
inclusion of actionable IOIs in the definition of ``bid'' or ``offer.''
---------------------------------------------------------------------------

    \206\ See 17 CFR 240.0-10(c).
---------------------------------------------------------------------------

    The Commission encourages written comments regarding this 
certification. The Commission requests that commenters describe the 
nature of any impact on small entities and provide empirical data to 
support the extent of the impact.

B. ATS Display Obligations

    The Commission also certifies that the proposed amendments to Rule 
301(b)(3) of Regulation ATS would not, if adopted, have a significant 
economic impact on a substantial number of small entities.
    For purposes of Commission rulemaking in connection with the RFA, a 
small entity includes a broker-dealer with total capital (net worth 
plus subordinated liabilities) of less than $500,000 on the date in the 
prior fiscal year as of which its audited financial

[[Page 61236]]

statements were prepared pursuant to Rule 17a-5(d) under the Exchange 
Act,\207\ or, if not required to file such statements, a broker-dealer 
with total capital (net worth plus subordinated liabilities) of less 
than $500,000 on the last day of the preceding fiscal year (or in the 
time that it has been in business, if shorter); and is not affiliated 
with any person (other than a natural person) that is not a small 
business or small organization.\208\ An entity that complies with 
Regulation ATS must, among other things, register as a broker-
dealer.\209\ Thus, the Commission's definition of small entity as it 
relates to broker-dealers also applies to ATSs.
---------------------------------------------------------------------------

    \207\ See 17 CFR 240.17a-5(d).
    \208\ See 17 CFR 240.0-10(c).
    \209\ See 17 CFR 242.301(b)(1).
---------------------------------------------------------------------------

    The proposed amendments to Rule 301(b)(3) would lower the average 
daily trading volume threshold that triggers the order display and 
execution access requirements applicable to ATSs. Accordingly, the 
proposed amendments to Rule 301(b)(3) could result in more ATSs being 
subject to these requirements.
    The Commission notes that there are approximately 73 ATSs that are 
subject to Regulation ATS. Of these, approximately 11 communicate 
actionable IOIs in NMS stocks to more than one person and approximately 
one other ATS displays subscriber orders in NMS stocks on a limited 
basis in some other fashion. Therefore, the Commission preliminarily 
believes that approximately 12 respondents could be impacted by the 
proposed amendments to Rule 301(b)(3).\210\ The Commission 
preliminarily does not believe that any of these 12 ATSs would be a 
``small entity'' as defined above.\211\ Therefore, the Commission 
certifies that the proposed amendments to Rule 301(b)(3), if adopted, 
would not have a significant economic impact on a substantial number of 
small entities for purposes of the RFA.
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    \210\ The Commission preliminarily believes that the remaining 
61 ATSs would not be affected by the proposed amendments because 
they: (a) do not display subscriber orders in NMS stocks to more 
than one person (whether by communicating actionable IOIs or 
otherwise), (b) are ECNs and already publicly display subscriber 
orders, or (c) do not effect transactions in NMS stocks.
    \211\ This preliminary estimate is based on discussions with 
industry participants, including ATSs that could be impacted by the 
proposed changes to Rule 301(b)(3) and information provided in Forms 
ATS and ATS-R, as filed with the Commission. The Commission notes 
that most of the 12 potential ATS respondents are affiliated with 
large broker-dealer firms, none of which is a ``small entity'' under 
the RFA.
---------------------------------------------------------------------------

    The Commission encourages written comments regarding this 
certification. The Commission requests that commenters describe the 
nature of any impact on small entities and provide empirical data to 
support the extent of the impact.

C. Post-Trade Transparency for ATSs

    The Commission also certifies that the proposed amendments to the 
CTA Plan and Nasdaq UTP Plan, would not, if adopted, have a significant 
economic impact on a substantial number of small entities.
    Rule 608,\212\ adopted by the Commission under Section 11A, 
establishes procedures for proposing amendments to national market 
system plans such as the CTA Plan and the Nasdaq UTP Plan. Paragraph 
(b)(2) states that the Commission may propose amendments to an 
effective national market system plan by publishing the text of the 
amendment together with a statement of purpose of the amendments.
---------------------------------------------------------------------------

    \212\ 17 CFR 242.608.
---------------------------------------------------------------------------

    The CTA Plan and the Nasdaq UTP Plan amendments apply to the twelve 
Plan Participants, none of which is a small entity. The requirement for 
trade reports to now include a unique identifier for ATS transactions, 
which would be included on the trade reports in the public data stream, 
would require FINRA, for trades effected by ATSs, to include an 
additional data element in the trade report that is submitted to the 
SIPs. FINRA, a national securities association, and the SIPs are not 
small entities.
    The Commission's definition of small entity as it relates to 
broker-dealers also applies to ATSs.\213\ The Commission preliminarily 
believes that there would be no significant economic impact on any of 
the 73 ATSs that are subject to Regulation ATS that meet the definition 
of small entity as defined above. Currently, the identity of an ATS 
transaction is not disseminated with the trade information they report 
to the public data stream. The CTA Plan and the Nasdaq UTP Plan 
amendments would require that each ATS use a unique MPID to report its 
transactions to FINRA, rather than report its transactions using the 
MPID of its sponsoring broker-dealer. The ATSs that do not already use 
a unique MPID would need to replace the MPID for their sponsoring 
broker-dealer with a unique MPID at no significant economic cost to the 
ATS. Therefore, the Commission certifies that the proposed amendments 
to the Plans, if adopted, would not have a significant economic impact 
on a substantial number of small entities for purposes of the RFA.
---------------------------------------------------------------------------

    \213\ See supra notes 207-209 and accompanying text.
---------------------------------------------------------------------------

    The Commission encourages written comments regarding this 
certification. The Commission requests that commenters describe the 
nature of any effect on small entities and provide empirical data to 
support the extent of the impact.

X. Statutory Authority

    Pursuant to the Exchange Act and particularly, Sections 2, 3(b), 5, 
6, 11, 11A, 15, 15A, 17(a) and (b), 19, 23(a), and 36 thereof, 15 
U.S.C. 78b, 78c(b), 78e, 78f, 78k, 78k-1, 78o, 78o-3, 78q(a) and (b), 
78s, 78w(a), and 78mm, the Commission proposes to amend Rule 600 of 
Regulation NMS, Rule 301 of Regulation ATS, and the CTA Plan and Nasdaq 
UTP Plan.

XI. Text of Proposed Amendments to the CTA Plan and Nasdaq UTP Plan

A. The CTA Plan

    The Commission hereby proposes to amend the CTA Plan to amend the 
definition of trade report to provide for a unique identifier on each 
trade report of a trade effected by an Alternative Trading System.
    Set forth below are the changes the Commission is proposing to the 
language of the CTA Plan. Additions are italicized and deletions are in 
brackets.

I. Definitions

    (m) ``Last sale price information'' means (i) the last sale prices 
reflecting completed transactions in Eligible Securities, (ii) the 
volume and other information related to those transactions, (iii) the 
identifier of the Participant furnishing the prices, (iv) the 
identifier of the Alternative Trading System furnishing the prices to 
FINRA, and [iv] (v) other related information.

VI. Consolidated Tape

    (f) Market Identifiers. Each such last sale price when made 
available by means of the high speed line shall be accompanied by the 
appropriate alphabetic symbol identifying the market of execution; 
provided, however, that all last sale prices collected by FINRA and 
reported to the Processor shall, when so made available by the 
Processor, be accompanied by a distinctive alphabetic symbol 
distinguishing such last sale prices from those reported by any 
exchange or other reporting party, and all last sale prices reported by 
brokers or dealers required to file a plan with the SEC pursuant to the 
Rule shall, when so made available by the Processor, be accompanied by 
a distinctive alphabetic symbol distinguishing such last sale prices 
from

[[Page 61237]]

those reported by FINRA or any exchange.
    All last sale prices collected by FINRA from Alternative Trading 
Systems that are subject to Regulation ATS shall be accompanied by a 
unique identifier identifying the Alternative Trading System that 
executed the trade (``ATS Identifier''). All last sale prices collected 
by FINRA from Alternative Trading Systems that are subject to 
Regulation ATS shall, when reported to the Processor by FINRA and when 
made available by the Processor, be accompanied by a unique ATS 
Identifier, unless the last sale price is for a transaction with a 
market value of at least $200,000.

VIII. Collection and Reporting of Last Sale Data

    (a) Responsibility of Exchange Participants. The AMEX, BATS, the 
BSE, the CBOE, the CHX, the ISE, Nasdaq, the NSX, the NYSE, NYSE Arca 
and the PHLX will each collect and report to the Processor all last 
sale price information to be reported by it relating to transactions in 
Eligible Securities taking place on its floor. In addition, FINRA shall 
collect from its members all last sale price information to be included 
in the consolidated tape relating to transactions in Eligible 
Securities not taking place on the floor of an exchange and shall 
report all such last sale price information to the Processor in 
accordance with the provisions of Section VIII(b) hereof, unless the 
last sale price is collected by FINRA from an Alternative Trading 
System subject to Regulation ATS for a transaction with a market value 
of at least $200,000, in which case FINRA shall not report an ATS 
Identifier as part of the last sale price. It will be the 
responsibility of each Participant and each other reporting party, as 
defined in Section III(d) hereof, to (i) report all last sale prices 
relating to transactions in Eligible Securities as promptly as 
possible, unless the last sale price is collected by FINRA from an 
Alternative Trading System subject to Regulation ATS for a transaction 
with a market value of at least $200,000, in which case FINRA shall not 
report an ATS Identifier as part of the last sale price, (ii) establish 
and maintain collection and reporting procedures and facilities such as 
to assure that under normal conditions not less than 90% of such last 
sale prices will be reported within that period of time (not in excess 
of one and one-half minutes) after the time of execution as may be 
determined by CTA from time to time in light of experience, and (iii) 
designate as ``late'' any last sale price not collected and reported in 
accordance with the above-referenced procedures or as to which the 
reporting party has knowledge that the time interval after the time of 
execution is significantly greater than the time period referred to 
above. CTA shall seek to reduce the time period for reporting last sale 
prices to the Processor as conditions warrant.

B. The Nasdaq UTP Plan

    The Commission hereby proposes to amend the Nasdaq UTP Plan to 
amend the definition of trade report to provide for a unique identifier 
on each trade report of a trade effected by an Alternative Trading 
System.
    Set forth below are the changes the Commission is proposing to the 
language of the Nasdaq UTP Plan. Additions are italicized and deletions 
are in brackets.

III. Definitions

    U. ``Transaction Reports'' means reports required to be collected 
and made available pursuant to this Plan containing the stock symbol, 
price, and size of the transaction executed, the Market in which the 
transaction was executed, and related information, including a buy/
sell/cross indicator and trade modifiers, reflecting completed 
transactions in Eligible Securities and, in the case of FINRA, the 
FINRA member that entered the report, if such member is an alternative 
trading system subject to Regulation ATS.

VI. Functions of the Processor

C. Dissemination of Information

3. Transaction Reports
    The Processor shall disseminate on the UTP Trade Data Feed a data 
stream of all Transaction Reports in Eligible Securities received from 
Participants. Each transaction report shall be designated with a symbol 
identifying the Participant in whose Market the transaction took place, 
and in the case of FINRA, with the identity of the FINRA member 
reporting the transaction if such member is an alternative trading 
system subject to Regulation ATS, unless the last sale price is for a 
transaction with a market value of at least $200,000.

VIII. Transmission of Information to Processor by Participants

B. Transaction Reports

    Each Participant shall, during the time it is open for trading, be 
responsible promptly to collect and transmit to the Processor 
Transaction Reports in Eligible Securities executed in its Market by 
means prescribed herein. With respect to orders sent by one Participant 
Market to another Participant Market for execution, each Participant 
shall adopt procedures governing the reporting of transactions in 
Eligible Securities specifying that the transaction will be reported by 
the Participant whose member sold the security. This provision shall 
apply only to transactions between Plan Participants.
    Transaction Reports shall include:
    1. Identification of the Eligible Security, using the Nasdaq 
Symbol;
    2. The number of shares in the transaction;
    3. The price at which the shares were purchased or sold;
    4. The buy/sell/cross indicator;
    5. The Market of execution; [and,]
    6. Through appropriate codes and messages, late or out-of-sequence 
trades, corrections and similar matters[.]; and,
    7. In the case of FINRA, the identity of the FINRA member reporting 
the transaction if such member is an alternative trading system subject 
to Regulation ATS, unless the last sale price is for a transaction with 
a market value of at least $200,000.

XII. Text of Proposed Rule Amendments

List of Subjects in 17 CFR Part 242

    Brokers, Reporting and recordkeeping requirements, Securities.

    For the reasons set out in the preamble, the text of Title 17, 
Chapter II, of the Code of Federal Regulations is proposed to be 
amended as follows.

PART 242--REGULATIONS M, SHO, ATS, AC, AND NMS AND CUSTOMER MARGIN 
REQUIREMENTS FOR SECURITY FUTURES

    1. The authority citation for Part 242 continues to read in part as 
follows:

    Authority:  15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2), 
78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g), 
78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29, and 
80a-37.

    2. Revise Sec.  242.301(b)(3)(i) and (ii) to read as follows:

Sec.  242.301  Requirements for alternative trading systems.

* * * * *
    (b) * * *
    (3) * * *
    (i) An alternative trading system shall comply with the 
requirements set forth in paragraph (b)(3)(ii) of this section, with 
respect to any NMS stock in which the alternative trading system:
    (A) Displays subscriber orders to any person (other than 
alternative trading system employees); and
    (B) During at least 4 of the preceding 6 calendar months, had an 
average daily

[[Page 61238]]

trading volume of 0.25 percent or more of the aggregate average daily 
share volume for such NMS stock as reported by an effective transaction 
reporting plan.
    (ii) Such alternative trading system shall provide to a national 
securities exchange or national securities association the prices and 
sizes of the orders (other than orders having a market value of at 
least $200,000 that are displayed only to those who are reasonably 
believed to represent current contra-side trading interest of at least 
$200,000) at the highest buy price and the lowest sell price for such 
NMS stock, displayed to more than one person (other than alternative 
trading system employees), for inclusion in the quotation data made 
available by the national securities exchange or national securities 
association to vendors pursuant to Sec.  242.602.
* * * * *
    3. Section 242.600 is amended by revising paragraph (b)(8) to read 
as follows:

Sec.  242.600  NMS security designation and definitions.

* * * * *
    (b) * * *
    (8) Bid or offer means the bid price or the offer price 
communicated by a member of a national securities exchange or member of 
a national securities association to any broker or dealer, or to any 
customer, at which it is willing to buy or sell one or more round lots 
of an NMS security, as either principal or agent, but shall not include 
indications of interest that are not actionable and indications of 
interest for a quantity of NMS stock having a market value of at least 
$200,000 that are communicated only to those who are reasonably 
believed to represent current contra-side trading interest of at least 
$200,000.
* * * * *

    By the Commission.

    Dated: November 13, 2009.
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-27951 Filed 11-20-09; 8:45 am]

BILLING CODE 8011-01-P