Document ID: SEC-2018-0488-0001
Agency: sec
Document Type: Proposed Rule
Title: Transaction Fee Pilot for National Market System Stocks
Posted Date: 2018-03-26T04:00Z

[Federal Register Volume 83, Number 58 (Monday, March 26, 2018)]
[Proposed Rules]
[Pages 13008-13078]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-05545]

[[Page 13007]]

Vol. 83

Monday,

No. 58

March 26, 2018

Part II

 Securities and Exchange Commission

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17 CFR Parts 200 and 242

 Transaction Fee Pilot for NMS Stocks; Proposed Rule

  Federal Register / Vol. 83 , No. 58 / Monday, March 26, 2018 / 
Proposed Rules  

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200 and 242

[Release No. 34-82873; File No. S7-05-18]
RIN 3235-AM04

Transaction Fee Pilot for NMS Stocks

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'' or 
``SEC'') is proposing to conduct a Transaction Fee Pilot for National 
Market System (``NMS'') stocks to study the effects that transaction-
based fees and rebates may have on, and the effects that changes to 
those fees and rebates may have on, order routing behavior, execution 
quality, and market quality more generally. The data generated by the 
proposed pilot should help inform the Commission, as well as market 
participants and the public, about any such effects and thereby 
facilitate a data-driven evaluation of the need for regulatory action 
in this area.

DATES: Comments should be received on or before May 25, 2018.

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 email to [email protected]. Please include 
File Number S7-05-18 on the subject line.

Paper Comments

     Send paper comments to Brent J. Fields, Secretary, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549-1090.

All submissions should refer to File Number S7-05-18. This file number 
should be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's website (http://www.sec.gov/rules/proposed.shtml). 
Comments are also available for website viewing and printing in the 
Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549-1090 on official business days between the hours of 10:00 a.m. 
and 3:00 p.m. All comments received will be posted without change. 
Persons submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any materials will 
be made available on the Commission's website. To ensure direct 
electronic receipt of such notifications, sign up through the ``Stay 
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Richard Holley III, Assistant 
Director; Johnna Dumler, Special Counsel; Erika Berg, Special Counsel; 
or Benjamin Bernstein, Attorney-Advisor, each with the Division of 
Trading and Markets, Securities and Exchange Commission, 100 F Street 
NE, Washington, DC 20549, or at (202) 551-5777.

SUPPLEMENTARY INFORMATION: The Commission is proposing to adopt Rule 
610T to establish a Transaction Fee Pilot.

Table of Contents

I. Overview
II. Transaction Fees
    A. Background
    B. Calls for a Pilot
    C. Comments on the EMSAC Recommendation
III. Discussion of the Proposed Pilot
    A. Applicable Trading Centers
    B. Securities
    C. Proposed Pilot Design
    1. Test Group 1
    2. Test Group 2
    3. Test Group 3
    4. Control Group
    D. Duration
    E. Data
    1. Pilot Securities Exchange Lists and Pilot Securities Change 
Lists
    2. Exchange Transaction Fee Summary
    3. Order Routing Data
    F. Implementation Period
IV. Paperwork Reduction Act
    A. Summary of Collection of Information
    1. Pilot Securities Exchange Lists and Pilot Securities Change 
Lists
    2. Exchange Transaction Fee Summary
    3. Order Routing Data
    B. Proposed Use of Information
    C. Respondents
    D. Total Initial and Annual Reporting and Recordkeeping Burdens
    1. Pilot Securities Exchange Lists and Pilot Securities Change 
Lists
    2. Exchange Transaction Fee Summary
    3. Order Routing Data
    E. Collection of Information is Mandatory
    F. Confidentiality of Responses to Collection of Information
    G. Retention Period for Recordkeeping Requirements
    H. Request for Comments
V. Economic Analysis
    A. Background on Transaction-Based Fees and Potential Conflicts 
of Interest
    1. Overview of Transaction-Based Fees
    2. Potential Conflicts of Interest
    B. Baseline
    1. Current Information Baseline
    2. Current Market Environment
    C. Analysis of Benefits and Costs of Proposed Transaction Fee 
Pilot
    1. Benefits of Proposed Transaction Fee Pilot
    2. Costs of Proposed Transaction Fee Pilot
    D. Impact on Efficiency, Competition, and Capital Formation
    1. Efficiency
    2. Competition
    3. Capital Formation
    E. Alternatives
    1. Expand Proposed Transaction Fee Pilot To Include ATSs
    2. Trade-At Test Group
    3. No Overlap With Tick Size Pilot
    4. Adjustments to the Proposed Transaction Fee Pilot Structure
    F. Request for Comment
VI. Consideration of Impact on the Economy
VII. Regulatory Flexibility Analysis
VIII. Statutory Authority and Text of the Proposed Rule

I. Overview

    As an integral part of its oversight of the U.S. equities markets, 
where liquidity is dispersed across a large number of trading centers 
that are linked through technology and regulation into a national 
market system, the Commission assesses market developments, including 
changes in technology and business practices, as it seeks to ensure 
that the current regulatory framework continues to effectively and 
efficiently promote fair and orderly markets, investor protection, and 
capital formation. From a regulatory perspective, today's equity market 
structure has been shaped by, among other things, Regulation NMS, 
adopted in 2005, which established the regulatory framework within 
which the markets transitioned from a primarily manual to a primarily 
automated trading environment.\1\ Among other things, Regulation NMS 
put in place order protection requirements to govern intermarket 
trading in an electronically linked world of dispersed markets, and 
supplemented those requirements with rules addressing fair and 
efficient access to quotations and limits on fees charged to access 
newly protected quotations.\2\ Subsequent to the adoption of Regulation 
NMS, market practices, aided by technological innovation, including 
advancements in data

[[Page 13009]]

management and analysis, and competition, have continued to evolve.
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    \1\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496, 37543-46 (June 29, 2005) (``NMS Adopting 
Release'').
    \2\ See id.
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    Since the adoption of Regulation NMS, the Commission and its staff 
have undertaken a number of reviews of market structure and market 
events.\3\ In addition, the Commission has focused on initiatives to 
preserve the operational integrity of markets and market participants 
\4\ and pursued a number of initiatives to enhance regulatory oversight 
of the markets, improve the information available to market 
participants about execution activity and the operation of Alternative 
Trading Systems (``ATSs''), and explored options to improve how equity 
market structure works for small companies.\5\
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    \3\ See, e.g., Securities Exchange Act Release No. 61358 
(January 14, 2010), 75 FR 3594, 3600 and 3603 (January 21, 2010) 
(``Concept Release'') (evaluating broadly the performance of market 
structure since Regulation NMS, particularly for long-term investors 
and for businesses seeking to raise capital, and soliciting comment 
on whether regulatory initiatives to improve market structure are 
needed). See also Findings Regarding the Market Events of May 6, 
2010 (September 30, 2012), available at https://www.sec.gov/news/studies/2010/marketevents-report.pdf (a report of the staffs of the 
Commission and the Commodity Futures Trading Commission to the Joint 
Advisory Committee on Emerging Regulatory Issues on the events of 
May 6, 2010 (the ``Flash Crash''), which analyzed the extraordinary 
volatility experienced on that day and market participant behavior 
in response thereto). In response to lessons learned during the 
Flash Crash, the Commission and the self-regulatory organizations 
(``SROs'') focused on a number of critical market structure 
initiatives, including single stock circuit breakers for select NMS 
stocks and the Limit Up-Limit Down Plan successor thereto, which now 
serves as the primary volatility moderator in the U.S. equity 
markets. See, e.g., Securities Exchange Act Release Nos. 62252 (June 
10, 2010), 75 FR 34186 (June 16, 2010) (File Nos. SR-BATS-2010-014; 
SR-EDGA-2010-01; SR-EDGX-2010-01; SR-BX-2010-037; SR-ISE-2010-48; 
SR-NYSE-2010-39; SR-NYSEAmex-2010-46; SR-NYSEArca-2010-41; SR-
NASDAQ-2010-061; SR-CHX-2010-10; SR-NSX-2010-05; SR-CBOE-2010-047) 
(order approving rule changes to provide for trading pauses in 
individual stocks when the price moves ten percent or more in the 
preceding five minute period); 62251 (June 10, 2010), 75 FR 34183 
(June 16, 2010) (File No. SR-FINRA-2010-025) (order approving a rule 
to permit a halt trading otherwise than on an exchange where a 
primary listing market has issued a trading pause due to 
extraordinary market conditions); and 67091 (May 31, 2012), 77 FR 
33498 (June 6, 2012) (File No. 4-631) (order approving, on a pilot 
basis, the national market system plan to address extraordinary 
market volatility).
    \4\ See Securities Exchange Act Release Nos. 63241 (November 3, 
2010), 75 FR 69792 (November 15, 2010) (File No. S7-03-10) (Market 
Access Rule) and 73639 (November 19, 2014), 79 FR 72252 (December 5, 
2014) (File No. S7-01-13) (Regulation Systems Compliance and 
Integrity).
    \5\ See Securities Exchange Act Release Nos. 79318 (November 15, 
2016), 81 FR 84696 (November 23, 2016) (File No. 4-698) (order 
approving the National Market System Plan Governing the Consolidated 
Audit Trail); 78309 (July 13, 2016), 81 FR 49431 (July 27, 2016) 
(File No. S7-14-16) (proposed amendments to Rule 606 of Regulation 
NMS that would require broker-dealers to disclose additional data to 
their customers on their routing and execution of institutional 
orders); 76474 (November 18, 2015), 80 FR 80997 (December 28, 2015) 
(File No. S7-23-15) (proposed rule concerning operational 
transparency and regulatory oversight of ATSs); and 74892 (May 6, 
2015), 80 FR 27514, 27517-18 (May 13, 2015) (File No. 4-657) (order 
approving the NMS Plan to Implement a Tick Size Pilot Program) 
(``Tick Size Pilot Approval Order'').
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    In addition, the Equity Market Structure Advisory Committee 
(``EMSAC'') provided the Commission with diverse perspectives on the 
structure and operations of the U.S. equities markets, as well as 
advice and recommendations on matters related to equity market 
structure.\6\ In particular, the EMSAC's recommendations helped to 
shape the proposal contained herein--namely, a pilot program to produce 
data on the effect of equity exchange transaction fees and rebates, and 
changes to those fees and rebates, on order routing behavior, execution 
quality, and market quality. Informed by EMSAC's recommendation, the 
Commission believes that an appropriately constructed pilot should 
provide a valuable source of data to facilitate an informed data-driven 
discussion about potential alternative approaches to prevailing fee 
structures.
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    \6\ The EMSAC was a Federal Advisory Committee established as a 
broad-based group of experts charged with providing the Commission 
recommendations on a range of complex market structure issues. See 
Securities Exchange Act Release No. 74092 (January 20, 2015), 80 FR 
3673 (January 23, 2015) (File No. 265-29). See also Equity Market 
Structure Advisory Committee--Subcommittees, available at https://www.sec.gov/spotlight/equity-market-structure/equity-market-structure-advisory-committee-subcommittees.htm. The EMSAC and its 
four subcommittees discussed a variety of equity market structure 
issues, including Regulation NMS, trading venue regulation, market 
quality, and customer issues. One of the EMSAC's subcommittees 
focused exclusively on Regulation NMS, especially Rule 610(c) 
(access fees) and Rule 611 (order protection), and considered 
whether parts of Regulation NMS should be updated in light of the 
evolution of technology, markets, and market participants. As part 
of its ongoing review of market structure, the Commission is 
considering the EMSAC's recommendations as it assesses potential 
changes to Regulation NMS.
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    The discussion below references various types of ``trading 
centers,'' which is a collective term that refers broadly to the venues 
that trade NMS stocks.\7\ For purposes of this release, the term 
``trading center'' includes national securities exchanges that are 
registered with the Commission and that trade NMS stocks (referred to 
herein as ``equities exchanges'' or ``exchanges''), as well as other 
types of ``non-exchange venues'' that trade NMS stocks, including ATSs 
and broker-dealers that internalize orders by matching them off-
exchange with reference to the national best bid and offer.\8\ As 
discussed below, the proposed Pilot would apply only to equities 
exchanges.
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    \7\ See 17 CFR 242.600(b)(78) (defining ``trading center'' as 
``a national securities exchange or national securities association 
that operates an SRO trading facility, an alternative trading 
system, an exchange market maker, an OTC market maker, or any other 
broker or dealer that executes orders internally by trading as 
principal or crossing orders as agent.'').
    \8\ See 17 CFR 242.600(b)(42) (defining ``national best bid and 
national best offer'').
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II. Transaction Fees

A. Background

    Exchanges and other trading centers aggregate orders to buy and 
sell securities from market participants and have historically charged 
their members and users fees when they match an order to buy against an 
order to sell, at which point an execution occurs. As competition among 
trading centers intensified in the late 1990s, ATSs, and then 
exchanges, began to offer rebates to attract order flow.\9\ The 
predominant model that has emerged in the U.S. equities markets is the 
``maker-taker'' fee model, in which, on the one hand, a trading center 
pays its broker-dealer participants a per share rebate to provide 
(i.e., ``make'') liquidity in securities and, on the other hand, the 
trading center assesses them a fee to remove (i.e., ``take'') 
liquidity.\10\ The trading center earns as revenue the difference 
between the fee paid by the ``taker'' of liquidity and the rebate paid 
to the provider or ``maker'' of liquidity. In a variation on this 
theme, some other trading centers have adopted a ``taker-maker'' 
pricing model (also called an inverted model), in which they charge

[[Page 13010]]

the provider of liquidity and pay a rebate to the taker of 
liquidity.\11\
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    \9\ See, e.g., Memorandum on Maker-Taker Fees on Equities 
Exchanges from the Commission's Division of Trading and Markets to 
the Market Structure Advisory Committee (October 20, 2015), 
available at https://www.sec.gov/spotlight/emsac/memo-maker-taker-fees-on-equities-exchanges.pdf (outlining the development of the 
maker-taker fee model in the U.S. and summarizing the current public 
debate about its impact on equity market structure) (``Staff Maker-
Taker Memo''). The memo traces the development of transaction fees 
and summarizes the potential benefits and limitations of maker-taker 
pricing by presenting market participants' divergent views.
    \10\ See id. New fees that an exchange seeks to impose on its 
members or persons using its facilities are effective on the day 
that the exchange files them with the Commission, and neither 
advance notice nor Commission action is required before an exchange 
may implement a fee change. See 15 U.S.C. 78s(b)(3)(A)(ii). Though 
Form 19b-4 fee filings are not subject to Commission approval, the 
Commission may, within 60 days after an exchange filed its fee 
change with the Commission, summarily suspend the new fee and 
institute proceedings to determine whether to disapprove it. See 15 
U.S.C. 78s(b)(3)(C). Exchange fees are subject to the statutory 
standards set forth in Section 6 of the Securities Exchange Act of 
1934 (``Exchange Act''), which require, among other things, that an 
exchange's fees be an ``equitable allocation'' of ``reasonable'' 
fees and that they not be ``designed to permit unfair 
discrimination.'' See 15 U.S.C. 78f(b)(4)-(5).
    \11\ See, e.g., Cboe BYX U.S. Equities Exchange Fee Schedule (as 
of March 2018), available at https://markets.cboe.com/us/equities/membership/fee_schedule/byx/.
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    The Commission periodically has addressed the ``access fees'' 
charged by trading centers to access their quotes.\12\ In 2005, the 
Commission again spoke to this issue by adopting Rule 610(c) under 
Regulation NMS, which prohibits trading centers from imposing, or 
permitting to be imposed, any fees for the execution of an order 
against a ``protected quotation'' \13\ that exceed or accumulate to 
more than $0.0030 per share.\14\ The $0.0030 per share cap largely 
codified the prevailing fee level set through competition among the 
various trading centers.\15\ The cap on access fees established by Rule 
610(c) sought in part to prevent high access fees in excess of the cap 
from undermining Regulation NMS's price protection and linkage 
requirements, while preserving the business model used by trading 
centers dependent upon revenue from fees.\16\
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    \12\ For example, in the mid-1990s, the Commission allowed an 
electronic communication network (``ECN'') to facilitate specialist 
and market maker quotation obligations by communicating to the 
public quotation system the best price and size of orders entered 
into the ECN by specialists or market makers as long as the ECN met 
certain conditions and noted that ECNs may impose fees for access to 
its system that are ``similar to the communications and systems 
charges imposed by various markets, if not structured to discourage 
access by non-subscriber broker-dealers.'' Securities Exchange Act 
Release No. 37619A (September 6, 1996), 61 FR 48290, 48314 n.272 
(September 12, 1996) (File No. S7-30-95). See also Securities 
Exchange Act Release No. 40760 (December 8, 1998), 63 FR 70844, 
70871 (December 22, 1998) (File No. S7-12-98). Commission staff 
subsequently issued a series of no-action letters with respect to 
access fees charged by ECNs to non-subscribers. These letters 
permitted fees in amounts equal to those that they charge a 
``substantial proportion'' of their active broker-dealer 
subscribers, but no more than $0.009 per share. See Securities 
Exchange Act Release No. 49325 (February 26, 2004), 69 FR 11126, 
11156 (March 9, 2004) (File No. S7-10-04) (``NMS Proposing 
Release'') (discussing the no-action relief and the inability of 
ECNs to charge fees that have the effect of creating barriers to 
access for non-subscribers).
    \13\ Rule 600(b)(58) of Regulation NMS defines a ``protected 
quotation'' as a ``protected bid or a protected offer.'' 17 CFR 
242.600(b)(58). Rule 600(b)(57) of Regulation NMS, in turn, defines 
a ``protected bid or protected offer'' as a quotation in an NMS 
stock that is: (i) Displayed by an ``automated trading center,'' 
(ii) disseminated pursuant to an effective national market system 
plan, and (iii) an ``automated quotation'' that is the best bid or 
best offer of a national securities exchange or national securities 
association. 17 CFR 242.600(b)(57). See also 17 CFR 242.600(b)(3) 
(defining ``automated quotation'').
    \14\ See 17 CFR 242.610(c). See also NMS Adopting Release, supra 
note 1, at 37543-46. In the Regulation NMS Proposing Release, the 
Commission initially proposed to cap the access fees that any 
individual market participant could charge for equities at $0.0010 
per share, with a total accumulated access fee limit of $0.0020 per 
share in any transaction. See NMS Proposing Release, supra note 12, 
at 11157-59. In its proposal, the Commission expressed concern that 
access fees added significant non-transparent costs to transactions, 
potentially encouraged locked markets, and created an unequal 
playing field as non-ECN broker-dealers were not permitted to charge 
access fees in addition to their posted quotations. See id. However, 
the Commission ultimately adopted an access fee cap of $0.0030, in 
order to simplify the initial proposal (see NMS Adopting Release, 
supra note 1, at 37502) and for the reasons outlined infra at notes 
15-16 and accompanying text. See 17 CFR 242.610(c). See also NMS 
Adopting Release, supra note 1, at 37545.
    \15\ See NMS Adopting Release, supra note 1, at 37545 (stating 
that ``the $0.003 fee limitation is consistent with current business 
practices, as very few trading centers currently charge fees that 
exceed this amount'').
    \16\ See id. at 37596 (``In the absence of a fee limitation, the 
adoption of the Order Protection Rule and private linkages could 
significantly boost the viability of the outlier business model. 
Outlier markets might well try to take advantage of intermarket 
price protection by acting essentially as a toll booth between price 
levels. The high fee market likely will be the last market to which 
orders would be routed, but prices could not move to the next level 
until someone routed an order to take out the displayed price at the 
outlier market. Therefore, the outlier market might see little 
downside to charging exceptionally high fees, such as $0.009, even 
if it is last in priority.''). See also 17 CFR 242.610(c). Maker-
taker fees also are subject to the proposed rule change process for 
fees under the Exchange Act. See 15 U.S.C. 78s(b)(3)(A) and 17 CFR 
240.19b-4(f)(2).
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    For maker-taker exchanges, the amount of the taker fee is bounded 
by the cap imposed by Rule 610(c) on the fees the exchange can charge 
to access its best bid/offer for NMS stocks.\17\ This cap applies to 
the fees assessed on an incoming order that executes against a resting 
order or quote, but does not directly limit rebates paid. The Rule 
610(c) cap on fees also typically indirectly limits the amount of the 
rebates that an exchange offers to less than $0.0030 per share in order 
to maintain net positive transaction revenues.\18\ For taker-maker 
exchanges, the amount of the maker fee charged to the provider of 
liquidity is not bounded by the Rule 610(c) cap, but such fees 
typically are no more than $0.0030, and the taker of liquidity earns a 
rebate.\19\
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    \17\ See 17 CFR 242.610(c).
    \18\ See, e.g., Staff Maker-Taker Memo, supra note 9, at 3. For 
example, a maker-taker equities exchange may charge a member $0.0030 
to remove liquidity and pay a rebate of $0.0025 to the member that 
adds liquidity. See, e.g., Cboe BZX U.S. Equities Exchange Fee 
Schedule (as of March 2018), available at https://markets.cboe.com/us/equities/membership/fee_schedule/bzx/. The revenue earned by a 
maker-taker exchange on transactions equals the difference between 
the fee charged and the rebate paid.
    \19\ See, e.g., Cboe BYX U.S. Equities Exchange Fee Schedule (as 
of March 2018), available at https://markets.cboe.com/us/equities/membership/fee_schedule/byx/ (where, for securities above $1.00, the 
fee for adding liquidity is $0.0019 and the rebate for removing 
liquidity is $0.0005). The make fee on a taker-maker exchange is not 
bounded by Rule 610(c) because such fee is not a charge to access 
the market's best bid/offer for NMS stocks.
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    As discussed below, the maker-taker and taker-maker fee models 
adopted by exchanges have attracted considerable attention.\20\ In 
recent years, a variety of concerns have been expressed about the 
maker-taker fee model, in particular the rebates they pay to attract 
orders. For example, some have questioned whether the prevailing fee 
structure has created a conflict of interest for broker-dealers, who 
must pursue the best execution of their customers' orders while facing 
potentially conflicting economic incentives to avoid fees or earn 
rebates--both of which typically are not passed through the broker-
dealer to its customers--from the trading centers to which they direct 
those orders for execution.\21\ One academic study of selected market 
data suggested that some broker-dealers route non-marketable orders to 
the trading center offering the highest rebate, and do so in a manner 
that the authors contended might not be consistent with the broker-
dealers' duty of best execution.\22\ Others have expressed concern that 
maker-taker access fees may (a) undermine market transparency since 
displayed prices do not account for exchange transaction fees or 
rebates and therefore do not reflect the net economic costs of a trade; 
(b) serve as a way to effectively quote in sub-penny increments on a 
net basis when the effect of a maker-taker exchange's sub-penny rebate 
is taken into account even though the minimum quoting increment is 
expressed in full pennies; (c) introduce unnecessary market complexity 
through the proliferation of new exchange order types (and new 
exchanges) designed solely to take advantage of pricing models; and (d) 
drive orders to non-exchange trading centers as market participants 
seek to avoid the higher

[[Page 13011]]

fees that exchanges charge to subsidize the rebates they offer.\23\
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    \20\ See infra notes 21-28 and accompanying text. See also U.S. 
Dep't of the Treasury, A Financial System that Creates Economic 
Opportunity: Capital Markets 62-63 (2017).
    \21\ See, e.g., Stanislav Dolgopolov, ``The Maker-Taker Pricing 
Model and its Impact on the Securities Market Structure: A Can of 
Worms for Securities Fraud?,'' 8 Va. L. & Bus. Rev. 231, 270 (2014), 
available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2399821.
    \22\ Robert H. Battalio, Shane A. Corwin, and Robert H. 
Jennings, ``Can Brokers Have It All? On the Relation Between Make-
Take Fees and Limit Order Execution Quality,'' Journal of Finance 
71, 2193-2237 (2016), available at http://onlinelibrary.wiley.com/doi/10.1111/jofi.12422/full (``Battalio Equity Market Study''). A 
non-marketable order is an order with a limit price that prevents 
its immediate execution at current market prices. See also infra 
note 229 (discussing non-marketable orders).
    \23\ See, e.g., Curt Bradbury, Market Structure Task Force 
Chair, Board of Directors, SIFMA, and Kenneth E. Bentsen Jr., 
President and Chief Executive Officer, SIFMA, Opinion, ``How to 
Improve Market Structure,'' N.Y. Times (July 14, 2014), available at 
http://dealbook.nytimes.com/2014/07/14/how-to-improve-market-structure/?_r=0; Larry Harris, ``Maker-Taker Pricing Effects on 
Market Quotations,'' at 24-25 (November 14, 2013), available at 
http://bschool.huji.ac.il/.upload/hujibusiness/Maker-taker.pdf 
(``Harris''); Dolgopolov, supra note 21; Letter from Richard 
Steiner, Global Equities Liaison to Regulatory & Government Affairs, 
RBC Capital Markets, to Elizabeth Murphy, Secretary, Commission, at 
4 (November 22, 2013) (``RBC Capital Markets Letter I''), available 
at https://www.sec.gov/;comments/s7-02-10/s70210-411.pdf.
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    By contrast, others have indicated that the maker-taker model may 
have positive effects by enabling exchanges to compete with non-
exchange trading centers and narrowing quoted spreads by subsidizing 
posted prices.\24\ In particular, maker-taker fees may narrow displayed 
spreads in some securities insofar as the liquidity rebate effectively 
subsidizes the prices of displayed liquidity.\25\ In turn, that 
displayed liquidity may establish the national best bid and offer, 
which is often used as the benchmark for marketable order flow, 
including retail order flow, that is executed off-exchange by either 
matching or improving upon those prices.\26\ Accordingly, retail orders 
may benefit indirectly from the subsidy provided by maker-taker 
exchanges.
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    \24\ See, e.g., Michael Brolley & Katya Malinova, ``Informed 
Trading and Maker-Taker Fees in a Low Latency Limit Order Market,'' 
at 2 (October 24, 2013), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2178102 (``If a maker rebate is introduced in 
competitive markets, the bid-ask spread will decline by (twice) the 
maker rebate.'') (``Brolley and Malinova''); Shawn O'Donoghue, ``The 
Effect of Maker-Taker Fees on Investor Order Choice and Execution 
Quality in U.S. Stock Markets'' (January 23, 2015), available at 
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2607302 
(``O'Donoghue''); and Jean-Edouard Colliard & Thierry Foucault, 
``Trading Fees and Efficiency in Limit Order Markets,'' Oxford 
University Press, at n.13 (September 1, 2012), available at http://thierryfoucault.com/publications/research-papers/ (arguing that 
maker-taker rebates may help equities exchanges compete with off-
exchange payment for order flow arrangements, in which wholesale 
broker-dealers purchase retail order flow for trading off-exchange).
    \25\ See, e.g., Letter from Richie Prager, Managing Director, 
Head of Trading and Liquidity Strategies, BlackRock, Inc., to Mary 
Jo White, Chair, SEC, at 2 (September 12, 2014), available at: 
http://www.sec.gov/comments/s7-02-10/s70210-419.pdf (``Some 
participants have called for elimination of rebates and maker-taker 
pricing in its entirety in conjunction with access fees, but 
BlackRock believes that incentives for providing liquidity 
positively impact market structure. Incentives promote price 
discovery in public markets, increase available liquidity and 
tighten spreads. Rebates compensate liquidity providers for exposing 
orders to adverse selection and information leakage.''). See also 
Harris, supra note 23, at 1-2 (noting that while economic theory 
suggests that maker-taker pricing should have narrowed average bid-
ask spreads, intervening factors, such as the growth in electronic 
trading, make it difficult to ``entirely attribute[ ]'' the observed 
reduction in bid-ask spreads to maker-taker pricing; in addition, 
spreads cannot decrease for stocks that already trade at penny-wide 
spreads).
    \26\ See Concept Release, supra note 3, at 3600.
---------------------------------------------------------------------------

    Some have urged the Commission to gather data to assess the 
potential impact of transaction fees and rebates in the U.S. 
markets.\27\ Most recently, as discussed below, the EMSAC recommended 
that the Commission conduct a pilot to study the impact of transaction 
fees on market quality and order routing behavior.\28\ Informed by that 
recommendation, the views of those submitting comment letters on the 
EMSAC's proposal, and the information and research described herein, 
the Commission is proposing that a pilot program be conducted that 
would produce data on the effects of equity exchange transaction fees 
and rebates, and possible effects of changes in those fees and rebates, 
on order routing behavior, execution quality, and market quality.
---------------------------------------------------------------------------

    \27\ See infra note 29 and accompanying text. Limited 
experiments on a single market with a limited subset of securities, 
like the test performed by The Nasdaq Stock Market LLC (``Nasdaq'') 
discussed below, where order flow can quickly move to other 
exchanges that are not taking part in the experiment, do not offer 
the same insights as a comprehensive market-wide study on 
transaction fees. See infra notes 30-34 and accompanying text.
    \28\ See Recommendation for an Access Fee Pilot (July 8, 2016), 
available at https://www.sec.gov/spotlight/emsac/recommendation-access-fee-pilot.pdf (``EMSAC Pilot Recommendation''); see also 
supra note 38 and accompanying text.
---------------------------------------------------------------------------

B. Calls for a Pilot

    The concept of a pilot program to gather data to study the effects 
of the maker-taker model on market quality and order routing behavior 
has attracted increasing attention in recent years.\29\ Nasdaq 
experimented with changes to its transaction fees when it lowered 
access fees and rebates in 14 stocks over a four-month period in 
2015.\30\ Through its experiment, Nasdaq observed that ``[l]iquidity 
providers [were] the primary responders to the fee changes during the 
experiment,'' whereas there were ``no significant changes in the nature 
of liquidity taking during the pilot.'' \31\ While liquidity providers 
could readily route orders to other trading centers offering higher 
maker rebates, Nasdaq offered a number of possible explanations for why 
liquidity takers did not appear to respond to its experiment, including 
the fact that order routing decisions were primarily driven by best 
execution parameters not by exchange fees.\32\ For these reasons, 
Nasdaq itself observed that ``the results for Nasdaq would not 
necessarily be duplicated industry-wide if access fees and rebates were 
reduced across the board.'' \33\ In other words, Nasdaq's experiment 
involved a small sample of stocks on a single market for a short 
duration, all of which make it difficult to draw inferences about what 
would happen if all exchanges participated in the same experiment 
simultaneously. The Commission preliminarily believes, therefore, that 
a pilot is necessary to gather data to facilitate analysis of the

[[Page 13012]]

impact of fees and rebates on the equities exchanges broadly.\34\
---------------------------------------------------------------------------

    \29\ See, e.g., Letter from Micah Hauptman, Financial Services 
Counsel, Consumer Federation of America, to Brent J. Fields, 
Secretary, Commission, at 2 (December 22, 2014), available at 
https://www.sec.gov/comments/4-657/4657-64.pdf (recommending an 
access fee pilot as an alternative to a tick size pilot); and RBC 
Capital Markets Letter I, supra note 23, at 3.
    \30\ See Securities Exchange Act Release No. 73967 (December 30, 
2014), 80 FR 594 (January 6, 2015) (SR-NASDAQ-2014-128) (``Nasdaq 
Pilot'') (lowering the access fee to remove liquidity from $0.0030 
to $0.0005 and reducing the credit paid to display liquidity to 
$0.0004 (such credits otherwise ranged from $0.0015 to $0.00305)).
    \31\ See Nasdaq Access Fee Experiment May 2015 Report, at 1, 
available at http://www.nasdaqomx.com/digitalAssets/98/98718_accessfeereporttwo.pdf (``Nasdaq May Report''). Nasdaq noted 
that one of the aims of its experiment was to ``examine the 
importance of liquidity provider rebates to participant firms' 
posting behavior on Nasdaq.'' Id. Nasdaq's experiment showed what it 
characterized as statistically significant effects on the Nasdaq 
Stock Market. For example, Nasdaq observed the following initial 
impact on its market share: ``In aggregate, Nasdaq's equally-
weighted market share in the experiment stocks declined by 2.9 
percentage points from January to February. This compares to a 
decline of 0.9 percentage points in Nasdaq market share in the 
control stocks. The change observed in the experiment stocks is 
statistically significant using the diff-in-diff measure.'' See 
Nasdaq Access Fee Experiment March 2015 Report, at 1, available at 
http://images.qnasdaqomx.com/Web/NASDAQOMX/%7Be737af7a-07e8-4119-859c-096b306fc6f2%7D_Fee_Cap_Report_3-6-15v3.pdf (``Nasdaq March 
Report''). It also observed the following impact on its displayed 
liquidity: ``Nasdaq's time at the NBBO in the experiment stocks 
declined 4.9 percentage points from 93.0% in January to 88.1% 
February (Figure 2). This compares to a decline of 0.3 percentage 
points in the control stocks. The difference between the experiment 
and control stocks is statistically significant.'' See id. at 2.
    \32\ See, e.g., Nasdaq May Report, supra note 31, at 3. Other 
possible explanations offered by Nasdaq include, for example, the 
fact that the number of stocks in its experiment was too low to 
justify broker-dealers recoding their liquidity taking algorithms in 
response to the experiment, the possibility that liquidity taking 
activity for some firms may not consider access fees, or that some 
liquidity taking algorithms may be based on displayed size. See id. 
(``. . . a fifth conjecture is that the economic incentives for 
taking liquidity from sources other than Nasdaq are not materially 
affected by the reduction in Nasdaq's access fees'').
    \33\ Nasdaq May Report, supra note 31, at 1. See also EMSAC 
Pilot Recommendation, supra note 28, at 3 (``Limited experiments, 
such as the recent Nasdaq pilot, have shown that individual market 
experiments do not yield conclusive results about the potential 
impact of market-wide policy reform on access fees.'').
    \34\ See, e.g., Nasdaq May Report, supra note 31, at 1 (noting 
that ``. . . the results for Nasdaq would not necessarily be 
duplicated industry-wide if access fees and rebates were reduced 
across the board.''). See also EMSAC Pilot Recommendation, supra 
note 28, at 3 (``Limited experiments, such as the recent Nasdaq 
pilot, have shown that individual market experiments do not yield 
conclusive results about the potential impact of market-wide policy 
reform on access fees.''); Nasdaq March Report, supra note 31, at 3 
(``Some commentators on the access fee experiment have indicated 
that a voluntary change in the access fee by one exchange in 
fourteen stocks does not tell you what would happen if there were a 
mandatory change in the regulatory maximum access fee across all 
exchanges in a considerable number of stocks of NMS stocks. We do 
not disagree with that point. Nasdaq believed in launching the 
experiment that fourteen stocks were enough to induce behavioral 
changes with statistically and economically measurable changes. The 
results from February have proven that belief was correct.''); and 
Letter from Theodore R. Lazo, Managing Director and Associate 
General Counsel, SIFMA, to Brent J. Fields, Secretary, Commission 
(January 30, 2015), at 2, available at http://www.sec.gov/comments/sr-nasdaq-2014-128/nasdaq2014128-1.pdf (``In particular, the 
proposal's limited scope and application cannot act as a substitute 
for a market-wide access fee reduction that would change the 
dynamics of access fees and rebates across the entire market. For 
the proposal to accurately measure the structural impact of reduced 
access fees, the proposal should be carried out across all exchanges 
and with a larger sampling of symbols.''). See also Section 
V.B.1.b.i infra for additional discussion of the Nasdaq study.
---------------------------------------------------------------------------

    More recently, the EMSAC's Regulation NMS Subcommittee 
(``Subcommittee'') \35\ prepared an outline for a potential access fee 
pilot, and the EMSAC discussed that outline, and the topic of access 
fees in general, at its April 2016 meeting.\36\ Following that meeting, 
the Subcommittee revised its recommendation and prepared a formal 
recommendation for consideration by the EMSAC.\37\ The EMSAC considered 
that revised proposal and recommended that the Commission pursue an 
access fee pilot.\38\ The EMSAC's recommendation stated:
---------------------------------------------------------------------------

    \35\ The Subcommittee first convened in November 2015, and began 
by focusing on maker-taker access fees. In a series of meetings over 
the following months, the Subcommittee assembled an outline of 
proposed terms for an access fee pilot. It identified general goals 
and prepared a recommendation for the consideration of the full 
EMSAC for the scope of a potential pilot, including stock selection, 
pricing buckets, and duration, and it also considered the potential 
inclusion of non-exchange markets, taker-maker exchanges, and a 
trade-at component. Minutes of those meetings and other information 
are available at https://www.sec.gov/spotlight/equity-market-structure/equity-market-structure-advisory-committee-subcommittees.htm.
    \36\ See Framework for a Potential Access Fee Pilot (April 19, 
2016), available at https://www.sec.gov/spotlight/emsac/emsac-regulation-nms-subcommittee-recommendation-041916.pdf. At its April 
2016 meeting, EMSAC discussed the topic of maker-taker fees and 
heard from a number of outside experts. See EMSAC Transcript, April 
26, 2016, available at https://www.sec.gov/spotlight/emsac/emsac-042616-transcript.txt.
    \37\ See Regulation NMS Subcommittee Recommendation for an 
Access Fee Pilot (June 10, 2016), available at https://www.sec.gov/spotlight/emsac/emsac-regulation-nms-recommendation-61016.pdf 
(``June Recommendation'').
    \38\ The EMSAC considered the Subcommittee's June Recommendation 
and adopted it, by a vote of 15-1, with slight modifications that 
preserved the basic structure of the June Recommendation but 
incorporated additional detail, for example, settling on a two-year 
term and recommending 100 securities in each test bucket. See EMSAC 
Pilot Recommendation, supra note 28. See also EMSAC Transcript, July 
8, 2016, available at https://www.sec.gov/spotlight/emsac/emsac-070816-transcript.txt. The EMSAC member who voted against the EMSAC 
Pilot Recommendation noted his concern that ``capping access fees is 
going to discourage liquidity provision and increase spreads'' 
before voting against the EMSAC Pilot Recommendation. See id. at 
22:24-23:6.

    The intent of the proposed pilot is to better understand, within 
the context of our current market structure, the effect of access 
fees on liquidity provision, liquidity taking and order routing with 
the ultimate goal of improving market quality. The Committee does 
not believe that there are any certain or predetermined outcomes 
from the pilot, and the net effect of many counterbalancing factors 
are not believed to be significantly beneficial or detrimental to 
any single group. Ultimately, the findings from the pilot are purely 
intended to inform the broader debate on how to improve market 
quality for issuers, investors and market participants.\39\
---------------------------------------------------------------------------

    \39\ EMSAC Pilot Recommendation, supra note 28, at 1.

    The EMSAC's pilot recommendation featured four buckets of common 
stocks and Exchange-Traded Funds (``ETFs'') \40\ with a market 
capitalization of at least $3 billion: A control bucket and three test 
buckets with successively lower access fee caps of $0.0020, $0.0010, 
and $0.0002.\41\ Consistent with the scope of Rule 610(c) of Regulation 
NMS, the EMSAC recommendation did not include an outright prohibition 
on rebates or include taker-maker exchanges in the pilot.\42\ The EMSAC 
recommended a two-year term for a pilot and outlined a number of 
metrics that could be assessed in connection with the pilot.\43\
---------------------------------------------------------------------------

    \40\ See infra note 96 (discussing ETFs).
    \41\ See EMSAC Pilot Recommendation, supra note 28, at 2. The 
EMSAC noted that it ``intentionally selected $.0002 as the rate in 
Bucket 4 in order to create a bucket where any rebate should result 
in a de minimis economic incentive.'' Id. at 4.
    \42\ In addition, consistent with the framework of Rule 610(c), 
the EMSAC's proposed fee caps would apply to protected quotations 
and not depth of book quotations, and would have no direct 
application to ATSs. See id. at 2.
    \43\ See id. at 2. The recommendation did not include a ``trade-
at'' provision that would restrict price matching of protected 
quotations, but mentioned an option to include ATSs in the pilot. 
See id. at 5 (noting that if trade-at were included, ``the likely 
shift of flows as a result of trade-at would both make the pilot 
more complex and impact the effective measurement of the access fee 
change''). The EMSAC also noted that ``[t]he tick pilot will yield 
some trade-at results that can be further studied; thus duplication 
is not warranted.'' See id. See also Tick Size Pilot Approval Order, 
supra note 5, at 27517-18 (discussing a trade-at prohibition that, 
subject to certain exceptions, prevents a trading center that was 
not quoting from price matching protected quotations and permits a 
trading center that was quoting at a protected quotation to execute 
orders at that level, but only up to the amount of its displayed 
size).
---------------------------------------------------------------------------

C. Comments on the EMSAC Recommendation

    Following the establishment of the EMSAC, the Commission received a 
number of comment letters regarding the impact of access fees and 
rebates in the equities markets.\44\ Several

[[Page 13013]]

commenters voiced support for a pilot in general or for the various 
proposals considered by the Subcommittee and the EMSAC that culminated 
in the EMSAC Pilot Recommendation. One commenter, for example, 
expressed support for an access fee pilot and characterized the 
Subcommittee's recommendation as ``an excellent roadmap'' for such a 
pilot.\45\ Other commenters that support an access fee pilot remarked 
that the maker-taker pricing model contributes to opaque, non-
transparent markets, increases market complexity and fragmentation, and 
generates conflicts of interest that may impede best execution of 
orders, and they urged the Commission to act promptly on a pilot that 
could produce useful data on these issues.\46\
---------------------------------------------------------------------------

    \44\ Letter from Haim Bodek, Managing Principal, and Stanislav 
Dolgopolov, Regulatory Consultant, Decimus Capital Markets, LLC, to 
Brent J. Fields, Secretary, Commission (April 25, 2016), available 
at https://www.sec.gov/comments/265-29/26529-63.pdf (``Decimus 
Capital Markets Letter''); Letter from Elizabeth King, NYSE, to 
Brent J. Fields, Secretary, Commission (May 13, 2016), available at 
https://www.sec.gov/comments/265-29/26529-66.pdf (``NYSE Letter''); 
Letter from Joan C. Conley, Senior Vice President and Corporate 
Secretary, Nasdaq, to Brent J. Fields, Secretary, Commission (May 
24, 2016), available at https://www.sec.gov/comments/265-29/26529-71.pdf (``Nasdaq Letter''); Letter from Richard Steiner, RBC Capital 
Markets, to The Honorable Mary Jo White, Chair, Commission (May 24, 
2016), available at https://www.sec.gov/comments/265-29/26529-70.pdf 
(``RBC Capital Markets Letter II''); Letter from Security Traders 
Association to SEC EMSAC (June 15, 2016), available at https://www.sec.gov/comments/265-29/26529-74.pdf (``Security Traders 
Association Letter''); Letter from Kermit Kubitz to SEC EMSAC (July 
5, 2016), available at https://www.sec.gov/comments/265-29/26529-73.htm (``Kubitz Letter''); Letters from J A to Chair White, 
Commissioners, and SEC EMSAC (May 23, 2016, & September 13, 2016), 
available at https://www.sec.gov/comments/265-29/26529-68.htm & 
https://www.sec.gov/comments/265-29/26529-85.htm (``J A Letters''); 
Letter from Richard Steiner, Electronic Trading Strategist, RBC 
Capital Markets, to Mary Jo White, Chair, Commission (September 23, 
2016), available at https://www.sec.gov/comments/265-29/26529-86.pdf 
(``RBC Capital Markets Letter III''); Letter from Tyler Gellasch, 
Executive Director, Healthy Markets Association, to Brent J. Fields, 
Secretary, Commission (December 23, 2016), available at https://www.sec.gov/comments/265-29/26529-1441899-130023.pdf (``Healthy 
Markets Letter I''); Letter from Theodore R. Lazo, Managing Director 
& Associate General Counsel, SIFMA, to Brent J. Fields, Secretary, 
Commission (March 29, 2017), available at https://www.sec.gov/comments/265-29/26529-1674696-149276.pdf (``SIFMA Letter''); Letter 
from Tyler Gellasch, Executive Director, Healthy Markets 
Association, to Brent J. Fields, Secretary, Commission (April 3, 
2017), available at https://www.sec.gov/comments/265-29/26529-1681516-149500.pdf (``Healthy Markets Letter II''); Letter from 
Tyler Gellasch, Executive Director, Healthy Markets Association, to 
Hon. W. Jay Clayton, Chairman, Commission (June 13, 2017), available 
at https://www.sec.gov/comments/265-29/26529-1801830-153704.pdf 
(``Healthy Markets Letter III''); Letter from Chris Concannon, 
President and Chief Operating Officer, Cboe, Thomas Wittman, CEO, 
The Nasdaq Stock Market LLC, and Thomas W. Farley, President, NYSE, 
to Hon. Jay Clayton, Chairman, Commission (October 13, 2017), 
available at https://www.sec.gov/comments/265-29/26529-2641078-161300.pdf (``Joint Exchange Letter''); Letter from Brad Katsuyama, 
Chief Executive Officer, and John Ramsay, Chief Market Policy 
Officer, Investors Exchange LLC, to Hon. Jay Clayton, Chairman, 
Commission (November 15, 2017), available at https://www.sec.gov/comments/265-29/26529-2691444-161491.pdf (``IEX Letter''); Email 
from Tim Quast, President, ModernNetworks IR LLC, to Hon. Jay 
Clayton, Chairman, Commission (December 5, 2017), available at 
https://www.sec.gov/comments/265-29/26529-2777697-161622.pdf.
    \45\ See Decimus Capital Markets Letter, supra note 44, at 2.
    \46\ See, e.g., Letter from Ari Burstein, Associate General 
Counsel, Investment Company Institute, to Brent Fields, Secretary, 
Commission (May 11, 2015), available at https://www.sec.gov/comments/265-29/26529-10.pdf (recommending that the Commission 
establish a pilot program that would prohibit rebates and reduce 
access fees) (``Investment Company Institute Letter I''); Letter 
from Managed Funds Association to SEC EMSAC (September 29, 2015), 
available at https://www.sec.gov/comments/265-29/26529-28.pdf 
(urging ``a disciplined, data-driven study'' and calling for 
analysis of access fees' effects on market liquidity, order routing, 
execution transparency, transaction costs, and competition); Letter 
from David W. Blass, General Counsel, Investment Company Institute, 
to SEC EMSAC (January 20, 2016), available at https://www.sec.gov/comments/265-29/26529-48.pdf (urging the Commission to establish a 
phased pilot program for highly liquid stocks that would reduce 
access fees and prohibit rebates) (``Investment Company Letter 
II''); Letter from the Trading Issues Committee, Canadian Security 
Traders Association, Inc., to Brent Fields, Secretary, Commission 
(April 6, 2016), available at https://www.sec.gov/comments/265-29/26529-61.pdf (proposing a cross-border study on the effect of 
rebates on market quality in conjunction with the Canadian 
Securities Administrators); J A Letters, supra note 44 (retail 
investor supporting proposed pilot but suggesting test of payment 
for order flow and inclusion of ``trade-at'' provision); Security 
Traders Association Letter, supra note 44 (supporting a pilot of 
limited number of securities with varying access fee caps and ``no 
other variables''); RBC Capital Markets Letter III, supra note 44 
(concluding that an access fee pilot based on the EMSAC 
recommendation would be ``a positive step'' and further suggesting a 
no-rebate bucket and the inclusion of taker-maker exchanges and 
ATSs); Healthy Markets Letter I, supra note 44 (applauding many 
aspects of the EMSAC recommendation, but suggesting that it include 
all trading venues and a ``trade-at'' provision); SIFMA Letter, 
supra note 44 (proposing, as one alternative, that the Commission 
adopt the EMSAC recommendation); IEX Letter, supra note 44 
(supporting the concept of a fee pilot conducted by the SEC, but 
recommending that the pilot include a no-rebate bucket and apply to 
inverted exchanges).
---------------------------------------------------------------------------

    Some of these same commenters suggested modifications to the ideas 
ultimately embodied in the EMSAC Pilot Recommendation. For example, one 
commenter suggested including a wider range of securities with lower 
market capitalizations, instead of focusing only on the highly liquid 
securities proposed by the EMSAC.\47\ Several other commenters argued 
that any pilot should either ban rebates altogether or include a ``no-
rebate'' test bucket--an approach that the EMSAC considered, but did 
not ultimately recommend.\48\ Finally, a number of commenters advocated 
for applying a pilot to taker-maker exchanges as well as ATSs.\49\
---------------------------------------------------------------------------

    \47\ See Decimus Capital Markets Letter, supra note 44, at 11. 
But cf. Investment Company Institute Letter II, supra note 46, at 6-
7 (asserting that pilot securities should be highly liquid stocks, 
as measured by average daily trading volume); Joint Exchange Letter, 
supra note 44, at 5 (expressing concern that liquidity in less 
active stocks could be negatively impacted by a pilot, but 
acknowledging that, ``if less active stocks are omitted, it is 
difficult to envision the securities that should be selected . . 
.''). See also infra Section III.B (discussing the securities to be 
included in the proposed pilot, which incorporates a broader range 
of securities than the EMSAC recommendation, including NMS stocks 
with market capitalizations below $3 billion).
    \48\ See Investment Company Institute Letter II, supra note 46, 
at 7 (recommending that the Commission establish a phased pilot 
program for highly liquid stocks that would reduce access fees and 
prohibit rebates); RBC Capital Markets Letter III, supra note 44, at 
3 (advocating for the inclusion of a ``no-rebate'' bucket in the 
pilot); Healthy Markets Letter II, supra note 44, at 6 n.15 
(suggesting that the Commission establish a pilot that eliminates 
rebates); SIFMA Letter, supra note 44, at 9-10 (suggesting, as an 
alternative to an access fee pilot, that the Commission eliminate 
rebates); IEX Letter, supra note 44, at 3-4 (stating that 
restrictions on access fees may not help the Commission to evaluate 
alternatives to the current exchange pricing system, which is driven 
primarily by rebates, and advocating for the inclusion of a ``no-
rebate'' bucket in the pilot). See also Nasdaq Letter, supra note 
44, at 3 (asserting that any pilot should apply to both fees and 
rebates). But cf. NYSE Letter, supra note 44, at 3-4 (arguing that 
elimination of rebates, without any other offsetting incentives, may 
reduce market-maker incentives to provide liquidity). See also infra 
Section III.C (discussing the design of the proposed pilot, which 
includes a ``no-rebate'' bucket).
    \49\ See RBC Capital Markets Letter III, supra note 44, at 4 
(suggesting that the pilot should be applied to taker-maker 
exchanges and ATSs); Healthy Markets Letter I, supra note 44, at 3-4 
(taking the view that ``all relevant exchanges'' and ATSs should be 
included in the pilot). See also Nasdaq Letter, supra note 44, at 3 
(recommending that the Commission establish a pilot that applies to 
all trading centers, including ATSs); Joint Exchange Letter, supra 
note 44, at 5 (recommending that the pilot apply to trading in all 
off-exchange venues); IEX Letter, supra note 44, at 4 (suggesting 
that the access fee pilot should include taker-maker exchanges). See 
also infra Section III.A (discussing the Commission's decision to 
include taker-maker exchanges, but not ATSs, in the proposed pilot).
---------------------------------------------------------------------------

    In a joint letter, three exchanges recommended several other 
changes \50\ if the Commission proceeds with a pilot based on the 
EMSAC's recommendation.\51\ These commenters suggested that such a 
pilot should, among other things: (1) Study ``all forms of 
remuneration,'' in part by adding measures specifically to study ATS 
and broker-dealer remuneration and to show how the savings realized by 
broker-dealers from lowered exchange transaction fees are ``returned to 
customers,'' \52\ (2) measure costs to issuers and shareholders and 
allow issuers to have a voice in whether they are included in a 
pilot,\53\ (3) pre-announce the measures for benchmarking and tracking 
the impact of a pilot,\54\ and (4) ``measure gross shifts in trading 
from exchange to off-exchange venues and among off-exchange venues.'' 
\55\
---------------------------------------------------------------------------

    \50\ See notes 47 and 49 supra, and note 62 infra, for a 
discussion of other changes recommended by these three exchanges.
    \51\ See Joint Exchange Letter, supra note 44, at 4-5.
    \52\ But cf. IEX Letter, supra note 44, at 2 (``The idea that a 
substantial conflict of interest cannot be addressed unless all 
other conflicts are addressed simultaneously is not viable.'').
    \53\ See Section III.B infra (discussing the Commission's 
decision to include a broader range of securities than the EMSAC 
recommendation, including NMS stocks with market capitalizations 
below $3 billion). See also Sections V.C.2.b and V.D.3 infra 
(discussing the potential costs to small and mid-capitalization 
issuers).
    \54\ See Section III.E infra (discussing the measures that the 
Commission intends to use to benchmark and track the impact of the 
proposed Pilot).
    \55\ See Joint Exchange Letter, supra note 44, at 4-5. See also 
Section III.E.3 infra (discussing the order routing data that the 
Commission intends to use to measure shifts in trading); Section 
V.E.1 infra (noting that the Commission can use existing data 
sources to track shifts in trading between equities exchanges and 
ATSs).
---------------------------------------------------------------------------

    Other commenters expressed concern regarding the impact of a 
pilot.\56\ For example, the New York Stock Exchange LLC (``NYSE'') 
believed that, while the pilot's lowered fee caps in the three test 
groups would reduce the direct costs paid by broker-dealers to access 
displayed exchange quotations, it also would effectively limit the 
rebates paid

[[Page 13014]]

by exchanges to attract liquidity, which could ``reduce the 
competitiveness of exchanges relative to dark pools. . . .'' \57\ NYSE 
further argued that the Subcommittee's concept for a pilot was 
``designed to test investors' and listed companies' tolerance for 
worsening market quality'' since market making and market quality ``are 
largely driven by incentives and corresponding obligations.'' \58\ NYSE 
recommended an alternative initiative that would lower access fee caps, 
prohibit maker-taker pricing models, and institute a ``trade-at'' 
rule.\59\
---------------------------------------------------------------------------

    \56\ See, e.g., Letter from David M. Weisberger, Managing 
Director and Global Head, RegOne Solutions, a Markit company, to 
Brent Fields, Secretary, Commission (October 9, 2015), available at 
https://www.sec.gov/comments/265-29/26529-30.pdf (raising various 
questions about proposals to modify access fees, including risks 
that such proposals could hurt retail investors and lower available 
liquidity); Letter from John I. Sanders & Benjamin Leighton, Wake 
Forest School of Law Community Law and Business Clinic (October 20, 
2015), at 6-7, available at https://www.sec.gov/comments/265-29/26529-33.pdf (opining that a shift away from maker-taker pricing 
could affect liquidity and suggesting that the Commission instead 
focus on utilizing market manipulation rules, limiting order types, 
and regulating colocation).
    \57\ NYSE Letter, supra note 44, at 3. NYSE was critical of the 
potential application of access fee caps to non-displayed liquidity, 
an idea considered but not recommended by the EMSAC, because it 
believed that such caps on exchanges would advantage ATSs. Id. at 5-
6.; but cf. RBC Capital Markets Letter III, supra note 44, at 4 
(asserting that the pilot program should cover non-displayed orders 
on exchanges to ensure complete and accurate data). See also infra 
Section III.C (discussing the design of the proposed pilot).
    \58\ See NYSE Letter, supra note 44, at 3.
    \59\ See id. at 6. Some commenters seemed to agree with NYSE 
that a ``trade-at'' rule should be included in the pilot. See Nasdaq 
Letter, supra note 44, at 2. Others opposed inclusion of a ``trade-
at'' rule. See RBC Capital Markets Letter III, supra note 44 
(stating that a ``trade-at'' rule would be duplicative, given the 
inclusion of such a component in the Tick Size Pilot, and opining 
that a ``trade-at'' rule could obscure data showing the impact of 
pricing); Healthy Markets Letter I, supra note 44, at 4 (noting that 
inclusion of a ``trade-at'' rule would increase the pilot's 
complexity and decrease its utility, but opining that all trading 
venues should be included in the pilot if a ``trade-at'' rule is 
excluded). See also infra Section III.C (discussing the design of 
the proposed pilot).
---------------------------------------------------------------------------

    Nasdaq suggested the Commission pursue an alternative pilot that 
caps both fees and rebates, as it believed that more meaningful data 
would result by removing price from market participants' routing 
decisions.\60\ Nasdaq also argued that the pilot should apply to all 
trading centers.\61\ Finally, Nasdaq thought that a two-year term for a 
pilot would be too long, observing that its own transaction fee 
experiment suggested that the impact on liquidity provision was evident 
quickly.\62\
---------------------------------------------------------------------------

    \60\ See Nasdaq Letter, supra note 44, at 3. See also infra 
Section III.C.3 (discussing the Pilot's inclusion of a ``no-rebate'' 
bucket).
    \61\ See Nasdaq Letter, supra note 44, at 3. See also infra 
Section III.A (discussing the Commission's decision to expand on the 
EMSAC Pilot Recommendation to apply the Pilot to all equities 
exchanges, but not to ATSs).
    \62\ See Nasdaq Letter, supra note 44, at 3; Joint Exchange 
Letter, supra note 44, at 5 (recommending that the proposed pilot 
last no more than one year and that the Commission develop criteria 
for evaluating the possibility of the pilot's early termination). 
See also, e.g., Nasdaq May Report, supra note 31, at 1 (summarizing 
some of Nasdaq's explanations regarding the results of its 
transaction fee experiment); and infra Section III.D (discussing the 
Commission's decision to limit the two-year term recommended by 
EMSAC with an automatic sunset at the end of the first year).
---------------------------------------------------------------------------

    One commenter, the Chicago Board Options Exchange, Incorporated, 
now known as Cboe Exchange, Inc. (``Cboe''), recommended against doing 
a pilot, and instead suggested abolishing the equity fee cap and 
requiring ATSs to file fee changes with the Commission.\63\ Similarly, 
Nasdaq, NYSE, and Cboe jointly suggested that the Commission should 
forgo conducting a pilot that only touches on one aspect of Regulation 
NMS and instead recommended a broader review of the impact of 
remuneration on routing and trading.\64\ Alternatively, Nasdaq, NYSE, 
and Cboe recommended that, if the Commission seeks to conduct an access 
fee pilot, it should first (1) articulate a strong and clear duty of 
best execution to ameliorate the conflict of interest between a broker 
and its customer, (2) require improved disclosures regarding execution 
quality and routing practices to deter potential conflicts, and (3) 
adopt its proposed amendments to Regulation ATS \65\ to enhance the 
operational transparency of ATSs.\66\
---------------------------------------------------------------------------

    \63\ See Letter from Edward T. Tilly, CEO, Cboe, to SEC EMSAC 
(January 28, 2016), available at https://www.sec.gov/comments/265-29/26529-51.pdf. Cboe opined that ``broad and arbitrary price 
controls'' are a ``drastic measure'' that conflicts with ``the very 
concept of a market-based system.'' Id. at 9-10. As another 
alternative, one commenter proposed that the Commission require 
venues to include ``all-in'' costs in their visible quotes. See 
Letter from Michael J. Friedman, General Counsel, Trillium, to Brent 
J. Fields, Secretary, Commission (May 14, 2015), available at 
https://www.sec.gov/comments/265-29/26529-18.pdf.
    \64\ See Joint Exchange Letter, supra note 44, at 2 and 6. 
Investors Exchange LLC (``IEX''), disagreed with this suggestion and 
pointed out that the Commission ``has been engaged in a holistic 
review of market structure at least since the issuance of its Equity 
Market Structure Concept Release in 2010,'' which ``has led to 
consideration of the Fee Pilot.'' See IEX Letter, supra note 44, at 
3. IEX further opined that maker-taker pricing need not be addressed 
simultaneously with all other market structure issues, given ``the 
amount of fees and rebates involved (over $2.5 billion in 2016), the 
inefficiencies that result from hundreds of pricing tiers, and the 
proven negative consequences to investors that result from routing 
orders to high rebate exchanges.'' Id. at 2-3.
    \65\ Securities Exchange Act Release No. 40760 (December 8, 
1998), 63 FR 70844 (December 22, 1998).
    \66\ See Joint Exchange Letter, supra note 44, at 2-4. But cf. 
IEX Letter, supra note 44, at 3 (characterizing this recommendation 
as one with ``no logic other than commercial protectionism in 
delaying action on fees and rebates'').
---------------------------------------------------------------------------

    Investors' Exchange LLC (``IEX'') responded to the comments jointly 
submitted by Nasdaq, NYSE, and Cboe by characterizing those exchanges' 
arguments as ``part of a familiar playbook to stave off market 
reform.'' \67\ While IEX agreed that Nasdaq, NYSE, and Cboe had 
identified important areas for consideration, IEX did not support 
delaying action on a transaction fee pilot \68\ and disputed whether 
the broad review suggested by Nasdaq, NYSE, and Cboe was necessary.\69\ 
Rather, IEX strongly supported the idea of a transaction fee pilot, but 
recommended that any such pilot include a ``no-rebate'' bucket and 
apply to inverted exchanges.\70\
---------------------------------------------------------------------------

    \67\ See IEX Letter, supra note 44, at 2.
    \68\ See id. at 3.
    \69\ See id. at 2-3; see also notes 52 and 64 supra.
    \70\ See id. at 1-4; see also notes 48-49 supra.
---------------------------------------------------------------------------

III. Discussion of the Proposed Pilot

    The Commission is proposing to conduct a Transaction Fee Pilot (the 
``Pilot'' or ``Transaction Fee Pilot'') for NMS stocks, as described 
below. In formulating this proposal, the Commission has taken into 
consideration the recommendation of the EMSAC for an access fee pilot, 
the views of those submitting comment letters on the EMSAC's proposal, 
and the information and research described throughout this release. The 
Commission's proposal, in an effort to more broadly test the impact of 
transaction fees and rebates, differs from the EMSAC's recommendation 
in several respects, as discussed further below.\71\ The Commission 
notes that the proposed Pilot is not designed to test the impact of 
transaction fees and rebates on all aspects of equities market 
structure, including market fragmentation and the proliferation of 
complex order types, but rather focuses on order routing behavior, 
execution quality, and market quality.
---------------------------------------------------------------------------

    \71\ Because the proposed Pilot would apply more broadly to more 
types of transaction fees beyond only fees to access a protected 
quotation, the Commission therefore is not characterizing the 
proposal as an ``Access Fee Pilot.''
---------------------------------------------------------------------------

    The following chart summarizes the proposed terms of the Pilot, 
which are discussed in more detail below:

[[Page 13015]]

[GRAPHIC] [TIFF OMITTED] TP26MR18.000

A. Applicable Trading Centers

    The proposed Pilot, consistent with the EMSAC's recommendation, 
would apply solely to the equities exchanges. The fee cap under Rule 
610(c), on which the proposed Pilot is largely based, does not apply to 
options exchanges.\72\ Specifically, the fee cap under Rule 610(c) 
applies to NMS stocks on a per share basis whereas options contracts 
are derivatives that represent a number of shares, typically 100 shares 
of stock per options contract for a single-stock option, and the 
current fee cap under Rule 610(c) is not calibrated to account for that 
difference.\73\ Because options and equities are materially different 
types of securities, the current fee cap applicable to equities 
exchanges does not apply, and cannot readily be applied, to options 
exchanges. If options exchanges were to be included in a pilot, the 
Commission would first need to create a new type of fee cap to apply to 
options exchanges and then consider how that cap would impact current 
options exchange fee models, which would introduce considerable 
additional complexity.\74\ For these reasons, the Commission is not 
proposing to include options exchanges in the proposed Pilot.
---------------------------------------------------------------------------

    \72\ See 17 CFR 242.610(c) (addressing ``fees for the execution 
of an order . . . in an NMS stock,'' where ``NMS stock'' is defined 
as ``any NMS security other than an option'' under 17 CFR 
242.600(b)(47)).
    \73\ As a result, options exchange fees for the execution of one 
options contract typically far exceed the Rule 610(c) cap of 
$0.0030. See, e.g., NYSE Arca Options Fee Schedule, available at 
https://www.nyse.com/publicdocs/nyse/markets/arca-options/NYSE_Arca_Options_Fee_Schedule.pdf (including fees, as of September 
2017, of $0.50 for electronic executions that take liquidity in 
Penny Pilot Issues for Broker-Dealer orders).
    \74\ See also EMSAC Pilot Recommendation, supra note 28, at 5. 
None of the comment letters submitted to the EMSAC advocated for 
including options exchanges in an access fee pilot.
---------------------------------------------------------------------------

    However, the scope of the proposed Pilot would be broader than both 
the EMSAC's recommendation and Rule 610(c), in that it would include 
all equities exchanges--including taker-maker exchanges. For example, 
the proposed Pilot's fee cap in Test Groups 1 and 2 (detailed below) 
would apply the cap to the take fee on a maker-taker exchange and also 
would apply the cap to the maker fee on a taker-maker exchange.\75\ The 
EMSAC did not recommend including taker-maker exchanges or ATSs in an 
access fee pilot because it endeavored to remain consistent with the 
current market structure, including the Rule 610(c) access fee cap, 
which only caps fees for removing a protected quotation and does not 
apply to ATSs.\76\ A number of commenters disagreed with the approach 
recommended by the EMSAC.\77\ These commenters asserted that a pilot 
would provide more meaningful data if applied more broadly; \78\ one 
commenter explained that a broader approach would reduce the 
possibility of ``gaming,'' as well as provide more accurate testing of 
order flows.\79\ Another commenter believed that liquidity and market 
quality on traditional, maker-taker exchanges would suffer unless 
taker-maker exchanges and ATSs were included in the proposed Pilot.\80\ 
Another

[[Page 13016]]

commenter believed that a pilot should include all equities exchanges 
and ATSs, but acknowledged that a pilot based on the current parameters 
of Rule 610(c) would be difficult to apply to taker-maker exchanges and 
ATSs.\81\
---------------------------------------------------------------------------

    \75\ See supra note 19 (discussing Rule 610(c) and the taker-
maker model). The proposed fee caps in Test Groups 1 and 2 (detailed 
below) would not apply to rebates. For example, the proposed Pilot's 
fee cap in Test Group 2 would not apply the cap to the maker rebate 
on a maker-taker exchange, nor would it apply the cap to the taker 
rebate on a taker-maker exchange.
    \76\ See EMSAC Pilot Recommendation, supra note 28, at 5.
    \77\ See supra note 49.
    \78\ See, e.g., Nasdaq Letter, supra note 44, at 3; IEX Letter, 
supra note 44, at 4 (arguing that inverted exchanges should be 
included in a pilot because the pilot otherwise would test ``only 
how much distortive pricing can be transferred to these venues'').
    \79\ See RBC Capital Markets Letter III, supra note 44, at 4. 
But cf. infra notes 86-93 and accompanying text (acknowledging the 
potential for ``gaming,'' but discussing the Commission's decision 
to exclude ATSs from the Pilot).
    \80\ See Nasdaq Letter, supra note 44, at 2. But cf. infra notes 
89-93 and accompanying text (noting that Nasdaq's fee experiment 
results would not necessarily be duplicated in an industry-wide 
pilot and explaining that the Pilot could potentially improve the 
competitive position of exchanges vis-[agrave]-vis ATSs).
    \81\ See Healthy Markets Letter I, supra note 44, at 4; see also 
Section III.A infra (discussing the difficulties of applying the 
Pilot to ATSs).
---------------------------------------------------------------------------

    The Commission believes that the proposed Pilot should be designed 
to broadly study the impact of transaction fees and rebates on order 
routing behavior, execution quality, and market quality. To achieve a 
broader study, the Commission preliminarily believes that including all 
equities exchanges, including taker-maker exchanges, in the proposed 
Pilot is appropriate. Including all equities exchanges in the proposed 
Pilot will ensure that the Pilot will collect data on all equities 
markets that are registered national securities exchanges, whose fees 
are all subject to the requirements of the Exchange Act and the rule 
filing requirements thereunder, thus treating equally all similarly 
situated entities.
    However, expanding the proposed Pilot to non-exchange trading 
centers, such as ATSs, whose fees currently are not subject to Rule 
610(c) would have the effect of imposing, in the terms of a pilot, an 
entirely new regulatory regime on entities whose fees are not currently 
subject to the substantive and process requirements applicable to 
exchanges, and that are currently not subject to access fee caps in any 
respect. The Commission, therefore, believes that doing so would 
introduce a number of complexities that it preliminarily does not 
believe are warranted for purposes of this proposed Pilot. In 
particular, while equities exchanges charge transaction-based fees, 
ATSs, especially ``dark pool'' ATSs that are part of a large broker-
dealer order handling business, may not charge separate transaction-
based fees for executions in their ATSs, and instead might use bundled 
pricing that does not associate particular orders with particular 
fees.\82\ Consequently, incorporating ATSs into the proposed Pilot 
would be substantially more complex if the proposed Pilot required ATSs 
to radically change their fee models and renegotiate their pricing 
arrangements with their customers in order to assess fees differently 
than they do today solely to accommodate the proposed Pilot.\83\
---------------------------------------------------------------------------

    \82\ See, e.g., Letter from William P. Neuberger and Andrew F. 
Silverman, Managing Directors and Global Co-Heads of Morgan Stanley 
Electronic Trading, to Brent J. Fields, Secretary, Commission (May 
19, 2016), available at https://www.sec.gov/comments/s7-23-15/s72315-37.pdf (commenting on File No. S7-23-15 concerning regulation 
of NMS Stock Alternative Trading Systems and noting that ATS fees 
may be bundled with brokerage services).
    \83\ See infra Section V.E.1. (noting that the inclusion of ATSs 
in the proposed Pilot may not be practical and is likely to 
substantially increase the costs of the proposed Pilot).
---------------------------------------------------------------------------

    Because the proposed Pilot is designed to study, among other 
things, the potential conflicts of interest faced by broker-dealers 
when routing orders as a result of transaction fees and rebates, it is 
necessary to be able to directly observe the effects of changes in 
transaction fees and rebates on their trading. As discussed above, some 
have questioned whether a broker-dealer's economic incentive to avoid 
transaction-based fees and earn transaction-based rebates impacts its 
order routing decisions in a manner that creates a misalignment between 
the broker-dealer's economic interests and its obligation to seek the 
best execution for its customer's order.\84\ To the extent ATSs do not 
charge transaction-based fees, it is not practicable to include them in 
a pilot that is structured to test the impact of changes in transaction 
fees. Accordingly, the Commission preliminarily believes that excluding 
ATSs from the proposed Pilot is appropriate, and that broadly applying 
the Pilot to all equities exchanges, regardless of their pricing model, 
will allow the proposed Pilot to collect data on the effects of changes 
in transaction fees and rebates, which will permit the study of, among 
other things, potential conflicts of interest faced by broker-dealers 
when routing orders.\85\
---------------------------------------------------------------------------

    \84\ See supra notes 21-22 and accompanying text.
    \85\ While ATSs would not be subject to the proposed Pilot, data 
on ATS market share are available from FINRA, available at https://otctransparency.finra.org, which could provide an indication of 
whether routing to ATSs increase or decrease during the proposed 
Pilot. See infra Section V.C.1.b. (discussing possible changes in 
routing to ATSs during the proposed Pilot).
---------------------------------------------------------------------------

    The Commission acknowledges the concerns raised by Nasdaq about 
excluding ATSs from the proposed Pilot.\86\ Specifically, Nasdaq noted 
that during its fee experiment, when Nasdaq lowered its rebates, 
liquidity providers ``immediately moved their quotes to other 
exchanges.'' \87\ As a result, Nasdaq stated that unless ATSs are 
included in the pilot ``we are likely to find that liquidity and market 
quality on exchanges will be fundamentally harmed, ultimately to the 
detriment of public investors'' and ``[i]ssuers included in the pilot 
would see a diminishment of transparent quotes, widening of quoted 
spreads, and an inferior overall trading experience.'' \88\ However, as 
discussed above, unlike for liquidity adding orders, Nasdaq found ``no 
significant changes in the nature of liquidity taking'' during its fee 
experiment.\89\ The Commission believes, as discussed above and as 
Nasdaq itself observes, that ``the results for Nasdaq would not 
necessarily be duplicated industry-wide if access fees and rebates were 
reduced across the board.'' \90\ For example, the fact that some market 
participants ``immediately moved their quotes to other exchanges'' may 
be because other equities exchanges did not participate in Nasdaq's fee 
experiment and those market participants who specifically sought to 
quote on an equities exchange, and not an ATS, responded accordingly by 
moving some of their activity to equities exchanges that continued to 
offer rebates. The Commission notes that the proposed Pilot would not 
impact the ability of an equities exchange to maintain a ``protected 
quote,'' an advantage that an ATS does not enjoy, and to the extent 
that the demand associated with liquidity taking on exchanges remains 
stable, it could continue to attract liquidity providers desiring that 
protection despite changes to rebates. Further, the Commission notes 
that some have argued that high equities exchange maker rebates 
necessitate high offsetting taker fees, which may cause some liquidity 
taking order flow to migrate to non-exchange trading centers in search 
of lower transaction costs.\91\ The proposed Pilot's lower fee caps in 
Test Groups 1 and 2, discussed below, could possibly improve the 
competitive position of exchanges vis-[agrave]-vis ATSs.\92\
---------------------------------------------------------------------------

    \86\ See Nasdaq Letter, supra note 44, at 2.
    \87\ Id.
    \88\ Id.
    \89\ See Nasdaq May Report, supra note 31, at 1.
    \90\ Nasdaq May Report, supra note 31, at 1. See also EMSAC 
Pilot Recommendation, supra note 28, at 3 (``Limited experiments, 
such as the recent Nasdaq pilot, have shown that individual market 
experiments do not yield conclusive results about the potential 
impact of market-wide policy reform on access fees.'').
    \91\ See, e.g., BlackRock Inc. Viewpoint, U.S. Equity Market 
Structure: An Investor Perspective, at 7 (April 2014), available at 
https://www.blackrock.com/corporate/en-us/literature/whitepaper/viewpoint-us-equity-market-structure-april-2014.pdf (``Reducing the 
access fee caps is one solution that would narrow the price 
disparity and lessen the impact of cost in routing decisions. This 
may also curb the usage of off-exchange venues, such as dark pools 
and internalizers, as a major benefit of these trading platforms is 
their cost efficiency relative to exchanges.'') (``BlackRock 
Viewpoint'').
    \92\ See id.
---------------------------------------------------------------------------

    Accordingly, the Commission preliminarily believes that it is 
appropriate to exclude ATSs from the proposed Pilot, which also is 
consistent

[[Page 13017]]

with the EMSAC's recommendation.\93\ The Commission further notes that 
the inclusion of ATSs is discussed as an alternative in the economic 
analysis below.
---------------------------------------------------------------------------

    \93\ See EMSAC Pilot Recommendation, supra note 28, at 5 (``. . 
. the Committee does not believe that extending the application of 
Rule 610(c) to ATSs would be a beneficial part of the pilot given 
that (i) such limitation does not apply today, (ii) ATSs are not 
afforded a protected quote, and (iii) ATS transaction fees generally 
take the form of an institutional commission.'').
---------------------------------------------------------------------------

    The Commission requests comment on the trading centers to be 
included in the proposed Pilot. In particular, the Commission solicits 
comment on the following. To the extent possible, please provide 
specific data, analyses, or studies for support.
    1. The proposed Pilot would apply to all equities exchanges. Should 
the scope be expanded or reduced? If so, what should the scope be? What 
would be the anticipated impacts of the revised scope?
    2. Should the Commission include taker-maker equities exchanges in 
the proposed Pilot? Why or why not? What would be the anticipated 
impact of excluding taker-maker equities exchanges from the proposed 
Pilot?
    3. Should the proposed Pilot be expanded to include ATSs? Why or 
why not? What would be the anticipated impact of including ATSs in the 
proposed Pilot? If the proposed Pilot were expanded to include ATSs, 
should all ATSs be included or only certain ATSs? What, if any, are the 
potential competitive impacts of excluding ATSs from the proposed 
Pilot? Would including ATSs in the proposed Pilot have any likely 
effect on ATS business models? To what extent do ATSs charge fees that 
are not transaction-based? If the proposed Pilot includes ATSs, how 
should it apply to ATS fees that are not transaction-based? Also, to 
apply the proposed Pilot to ATSs, would the Commission need to impose 
other new requirements on ATSs, such as fee disclosure requirements? If 
ATSs were to be included in the proposed Pilot, would they be able to 
collect and report the proposed data \94\ or would changes be necessary 
to accommodate ATSs?
---------------------------------------------------------------------------

    \94\ See Section III.E infra for a description of the proposed 
data.
---------------------------------------------------------------------------

    4. Should the proposed Pilot include options exchanges? Why or why 
not? What would be the anticipated impact of including options 
exchanges in the proposed Pilot? How would the quality and extent of 
the data be impacted by including or excluding options exchanges? What, 
if any, are the potential impacts, including competitive impacts, of 
excluding options exchanges from the proposed Pilot? What, if any, are 
the potential competitive impacts of subjecting options exchanges to 
fee caps?

B. Securities

    The Commission proposes to include in the Pilot all NMS stocks, 
which includes common stocks and Exchange-Traded Products (``ETPs''), 
among other securities,\95\ with an initial share price at the time the 
pre-Pilot Period commences of at least $2, an unlimited duration or a 
duration beyond the end of the post-Pilot Period, and no restrictions 
on market capitalization (collectively, ``Pilot Securities'').\96\ As 
discussed below, throughout the duration of the proposed Pilot, 
including the pre- and post-Pilot Periods, if a Pilot Security in one 
of the Test Groups closes below $1, the security would be removed from 
the Test Group and would no longer be subject to the Pilot pricing 
restrictions.\97\
---------------------------------------------------------------------------

    \95\ See 17 CFR 242.600(b)(47) (defining ``NMS stock''). The 
Commission notes that although the EMSAC recommended limiting the 
access fee pilot to common stocks and ETFs, because Rule 610(c) 
applies to all NMS stocks, and not just common stocks and ETPs 
(including ETFs), the Commission preliminarily believes it is 
appropriate to extend the Pilot to all NMS stocks.
    \96\ The EMSAC recommended including ETFs, which are open-end 
fund vehicles or unit investment trusts that are registered as 
investment companies under the Investment Company Act of 1940. The 
Commission's proposal uses the broader term of ETPs, which, in 
addition to ETFs, also includes trust or partnership vehicles that 
are not registered under the 1940 Act because they do not invest 
primarily in securities, as well as Exchange-Traded Notes 
(``ETNs''). ETNs are senior debt instruments that pay a return based 
on the performance of a reference asset. Unlike the two other 
categories of ETPs, ETNs are not pooled vehicles, and they do not 
hold an underlying portfolio of securities or other assets. See 
generally Securities Exchange Act Release No. 75165 (June 12, 2015), 
80 FR 34729, 34731 (June 17, 2015) (Request for Comment on Exchange-
Traded Products). The EMSAC record, including transcripts of EMSAC 
meetings, does not contain any substantive discussion of the 
distinction between ETFs and ETPs. However, all such securities are 
``NMS stocks'' subject to Rule 610(c), and the Commission 
preliminarily does not believe there is a meaningful basis to 
justify excluding any of them from the proposed Pilot. See 17 CFR 
242.600(b)(47) (defining ``NMS stock''). See also proposed Rule 
610T(b)(1)(ii) (defining ``Pilot Securities'').
    \97\ See also proposed Rule 610T(b)(3)(ii)(D) (concerning the 
Pilot Securities Change List and the capture of the date on which 
any Pilot Security closes below $1).
---------------------------------------------------------------------------

    While the EMSAC did not specify a minimum price threshold, the 
Commission is proposing an initial $2 threshold that would apply at the 
time of the initial Pilot Securities selection, as was done for the 
Tick Size Pilot. On a continuing basis, the price threshold would be 
$1, also as was done for the Tick Size Pilot. If a Test Group 
security's share price closes below $1 at the end of a trading day 
during the proposed Pilot, it would be dropped from the Test Group and 
removed from the proposed Pilot.\98\ Under Rule 610(c), stocks with 
quotations of less than $1 are subject to a structurally different fee 
cap (based on a percentage of the quoted price) than stocks with 
quotations of $1 or greater (based on a fixed dollar amount),\99\ and 
equities exchanges typically also assess fees differently for stocks 
priced less than $1 (i.e., based on a percentage of the price rather 
than a fixed fee amount).\100\ Accordingly, the $1 minimum continuing 
price threshold recognizes those distinctions and avoids applying the 
proposed Pilot's Test Group fixed dollar fee caps to securities below 
$1 for which a fixed dollar cap would be incompatible with the current 
existing percentage-based standards applicable to those 
securities.\101\
---------------------------------------------------------------------------

    \98\ See Section III.E.1 infra (discussing the obligations for 
primary listing exchanges to maintain Lists of Pilot Securities that 
will be updated as necessary prior to the beginning of trading on 
each day the U.S. equities markets are open for trading to 
communicate changes to Pilot Securities). Stocks in the Control 
Group that close below $1 would be removed from the Pilot. As 
discussed below, exchanges would be required to record on the Pilot 
Securities Change Lists the date that a stock closes below $1.
    \99\ While Rule 610(c) imposes a cap of $0.0030 for a protected 
quotation of $1.00 or more, the cap is 0.3% when the protected 
quotation is less than $1.00. See 17 CFR 242.610(c).
    \100\ See, e.g., New York Stock Exchange Price List, available 
at https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Price_List.pdf.
    \101\ For example, applying Test Group 2's $0.0015 cap to a 
security priced at $0.25, which currently would be subject to a fee 
cap of $0.00075 under Rule 610(c) (i.e., 0.3% of $0.25) would be 
inapposite.
---------------------------------------------------------------------------

    The Commission preliminarily believes that an initial minimum $2 
per share price threshold at the time of the initial stock selection 
captures substantially all NMS stocks while also providing a cushion so 
that substantially all of the securities selected for each Test Group 
will remain part of their respective Test Groups for the duration of 
the proposed Pilot and not be dropped on account of their share price 
closing below $1 during the Pilot, as it is uncommon for securities 
priced at $2 or more to fall below $1.\102\ This

[[Page 13018]]

initial threshold also will increase the likelihood that the securities 
in each Test Group remain the same throughout the entire proposed 
Pilot, which will provide consistency in the Test Groups and avoid any 
adverse impact caused by changes to the composition of the Test 
Groups.\103\
---------------------------------------------------------------------------

    \102\ Based on data computed from Center for Research on 
Securities Prices (CRSP), during the last five years (2012-2016), 
94.4% of publicly traded common stocks and ETPs had a share price 
above $2. Of those stocks, only 4.3% dropped below $1 at any point 
in that period. In addition, NYSE and Nasdaq can initiate delisting 
proceedings if a security trades below $1 for a certain period of 
time. See, e.g., NYSE Listed Company Manual Section 802.01C; Nasdaq 
Equity Rule 5450(a)(1). See also Cboe BYX Rule 14.7(e)(1) (continued 
listing requirement of a minimum bid price of $1 per share); NYSE 
Arca Rule 5.2(c) (maintenance requirement of a $5 closing bid price 
or $3 closing bid price under the alternate listing requirement).
    \103\ Similarly, the requirement that Pilot Securities have an 
unlimited duration or a duration beyond the end of the post-Pilot 
Period is intended to avoid selecting stocks that would expire and 
drop out during the Pilot, which also should provide consistency in 
the Test Groups and avoid adverse impacts caused by changes to the 
composition of the Test Groups.
---------------------------------------------------------------------------

    With respect to market capitalization, the EMSAC recommended 
limiting the pilot to large capitalization stocks with a minimum market 
capitalization of $3 billion in part to avoid overlap with the Tick 
Size Pilot, which commenced on October 3, 2016, and is scheduled to 
last for a two-year period until October 3, 2018.\104\ The Commission 
notes that the Tick Size Pilot may conclude before the proposed Pilot 
commences, but if not, the Commission believes that the strong support 
for a pilot in the near term, reflected in the comments summarized 
above, as well as the proposed Pilot's design, which, as discussed 
below, would protect the integrity of the data in both pilots, weighs 
in favor of proceeding expeditiously and not waiting for the Tick Size 
Pilot to first expire.\105\
---------------------------------------------------------------------------

    \104\ See EMSAC Pilot Recommendation, supra note 28, at 2. See 
also EMSAC Transcript, April 26, 2016, supra note 36, at 27:7-15 
(reflecting the Subcommittee's desire to run the Tick Size Pilot 
simultaneously with the Pilot without either program impacting the 
other). See also Investor Alert: Tick Size Pilot Program--What 
Investors Need to Know, available at https://www.sec.gov/oiea/investor-alerts-bulletins/ia_ticksize.html (summarizing the Tick 
Size Pilot).
    \105\ See, e.g., Healthy Markets Letter I, supra note 44, at 5 
(noting that ``market participants, experts, and policymakers have 
been clamoring for the Commission to adopt a study to address order 
routing incentives for years''); RBC Capital Markets Letter III, 
supra note 44, at 1 (``[T]he sooner that a pilot can be approved and 
commenced, the sooner the Commission will have the benefit of the 
pilot's data, and the sooner it can implement needed reforms.''); 
IEX Letter, supra note 44, at 4 (``The EMSAC recommendation was 
issued more than one year ago, and no one believes that concerns 
over maker-taker pricing have become less relevant since then. We 
believe that the time to proceed with the pilot is long past 
due.'').
---------------------------------------------------------------------------

    The Commission preliminarily believes that a more comprehensive 
pilot covering all NMS stocks, including those with market 
capitalizations below $3 billion, would produce a more meaningful 
dataset to facilitate broader analysis of the impact of transaction 
fees and rebates across the full spectrum of NMS stocks, including both 
large market capitalization companies with potentially substantial 
liquidity and trading activity as well as mid- and small capitalization 
companies with potentially less trading activity. A broader dataset 
will, in turn, permit the Commission and researchers to perform more 
in-depth analyses among different segments of the securities market, 
which may be more informative than a narrower pilot for evaluations of 
the various theories for how transaction fees and rebates may impact 
routing behavior, execution quality, and market quality.
    For example, some have suggested that transaction rebates are 
distortive and unnecessary for liquid large capitalization companies 
because, to the extent that those securities already trade at spreads 
no wider than the minimum trading increment, the rebate cannot serve to 
narrow the quoted spread further and the high fee that offsets the 
rebate undermines price transparency because a quote at the same 
displayed price on different equities exchanges (with different levels 
of fees) less closely reflects the actual net price to trade at any one 
exchange.\106\ The limitation or removal of rebates for liquid large 
capitalization stocks therefore may be less likely to lead to 
deterioration in market quality in those securities.\107\ On the other 
hand, some have argued that the beneficial aspects of rebates, 
including their potential to contribute to narrowing quoted spreads, 
may outweigh their potential for these distortions in mid- and small 
capitalization securities, which can face persistent challenges in 
attracting liquidity.\108\ Accordingly, transaction rebates may 
facilitate the provision of beneficial liquidity for mid- and small 
capitalization securities, and may outweigh any negative distortive 
impact on broker-dealer incentives, market complexity, or price 
transparency.\109\
---------------------------------------------------------------------------

    \106\ See, e.g., James Angel, Lawrence Harris & Chester Spatt, 
``Equity Trading in the 21st Century,'' Quarterly Journal of Finance 
1, (2011), available at https://doi.org/10.1142/S2010139211000067 
(noting that ``[t]he obfuscation makes it more difficult for traders 
to recognize the true costs of their trading.'') (``Angel, Harris, 
and Spatt''); Joe Ratterman, Chief Executive Officer, & Chris 
Concannon, President, BATS, ``Open Letter to U.S. Securities 
Industry Participants Re: Market Structure Reform Discussion,'' at 1 
(January 6, 2015), available at http://cdn.batstrading.com/resources/newsletters/OpenLetter010615.pdf (``BATS Open Letter'') 
(arguing that ``[a] substantial reduction in access fees, and their 
corresponding rebates, would help remove conflicts or a perception 
of conflicts with respect to those highly liquid securities that no 
longer require liquidity incentives.'').
    \107\ See, e.g., BlackRock Viewpoint, supra note 91, at 7 (``The 
value of liquidity and therefore the need for incentives and rebates 
is not the same across all stocks. Regulators should review whether 
highly liquid stocks require any rebates at all.'').
    \108\ See, e.g., BATS Open Letter, supra note 106, at 3 (``. . . 
BATS does not believe that highly liquid securities require as great 
a rebate as less liquid securities. . . . '').
    \109\ See id.
---------------------------------------------------------------------------

    To study these possible effects, the Commission believes it is 
important to gather data on the impact of fees and rebates on stocks of 
all market capitalizations. While it is possible that some observations 
from a pilot focused on large capitalization stocks also could be 
relevant to mid- and small capitalization stocks, it is likely that 
other observations could be inapposite, and without including smaller 
stocks in a pilot, the Commission and researchers would lack data to 
study the impact on them.
    Implementing without undue delay a broad pilot that includes stocks 
of all market capitalizations could potentially cause the Pilot to 
overlap with the Tick Size Pilot. Although such an overlap may be 
unlikely, the proposed Pilot has been designed so that, if necessary, 
it could proceed simultaneously with the Tick Size Pilot without 
distorting the effects of either pilot.\110\ Specifically, as discussed 
further below, in the event of an overlap each Test Group would be 
comprised of two subgroups, one of which contains securities included 
in the Tick Size Pilot, and one of which does not, enabling the 
Commission and researchers to identify and control for any possible 
effects of an overlap.\111\ The Commission therefore believes that this 
proposed Pilot design would protect the integrity of the data in both 
the proposed Pilot and the Tick Size Pilot, to the extent that the 
pilots overlap.\112\ Staging one transaction fee pilot for large 
capitalization stocks in

[[Page 13019]]

the near term (i.e., that does not overlap with the Tick Size Pilot's 
$3 billion market capitalization threshold) and conducting a separate, 
subsequent transaction fee pilot for mid- and small capitalization 
stocks following the conclusion of the Tick Size Pilot also would 
achieve that objective. However, the Commission preliminarily believes 
that it is preferable to proceed expeditiously with a broad transaction 
fee pilot because the data to be collected from the proposed Pilot, and 
the analyses that will follow, will help inform the Commission and the 
public on the potential impact of transaction fees and rebates across 
all segments of NMS stocks.
---------------------------------------------------------------------------

    \110\ See Section III.C infra for additional explanation 
regarding how the Pilot would control for the potential overlap with 
the Tick Size Pilot. Notably, if the two pilots overlap and the Tick 
Size Pilot ends before the proposed Pilot (if adopted) ends, the 
Transaction Fee Pilot's proposed Test Groups would not change. 
Alternatively, if the two pilots would not overlap at all because 
the Tick Size Pilot ends before the proposed Pilot (if adopted) 
commences, then the overlap design discussed below would not be 
necessary. See Section III.C (noting that each Test Group would 
remain constant for the duration of the proposed Pilot with only 
limited exceptions).
    \111\ The proposed overlap structure, which can be seen in Test 
Groups 1(a), 2(a), and 3(a) reflected in the table below titled 
``Proposed Pilot Design of the Transaction Fee Pilot for NMS 
Stocks,'' is specifically designed to enable comparison between 
subgroups within a particular Test Group, as well as across Test 
Groups, to identify any differences between those securities that 
overlap with the Tick Size Pilot and those that do not.
    \112\ In addition, conducting both pilots simultaneously would 
increase the amount of data collected while both pilots are active, 
which may increase the statistical power of tests of the marginal 
impact of transaction fees or rebates or of different tick sizes. 
Statistical power refers to the ability for statistical tests to 
identify differences across samples when those differences are 
indeed significant.
---------------------------------------------------------------------------

    Further, the Commission preliminarily does not believe that 
including smaller capitalization stocks in the proposed Pilot should 
disproportionately harm those issuers, even though it may result in the 
reduction or elimination of transaction-based rebate incentives \113\ 
that would otherwise be used to attract posted liquidity in those 
stocks on maker-taker exchanges, as discussed above.\114\ While the 
proposed Pilot would reduce or eliminate rebate incentives to transact 
in those securities on an exchange for certain Test Groups, the 
proposed Pilot would not impact the ability of an exchange to maintain 
a ``protected quote,'' which may offset the reduced rebate incentive 
and continue to serve as an incentive to attract liquidity 
providers.\115\ In addition, the proposed Pilot would reduce exchange 
transaction fees for certain Test Groups, as discussed below, thereby 
making it less expensive--and consequently more attractive--to transact 
in those securities on an exchange, which also may offset the reduced 
rebate incentive and attract liquidity providers. Accordingly, 
including in the proposed Pilot smaller capitalization companies that 
are part of the Tick Size Pilot will allow the Commission to collect 
data in the near term on the impact of transaction fees and rebates on 
NMS stocks, including smaller capitalization stocks, which may trade 
differently than large capitalization stocks and thus may be affected 
differently by changes to transaction fees and rebates.
---------------------------------------------------------------------------

    \113\ See supra notes 108-109 and accompanying text for an 
explanation of the beneficial aspects of rebates for mid- and small 
capitalization securities. See also Section V.C.2.f infra for a 
discussion of the potential impact of subjecting small-
capitalization securities to both the Tick Size Pilot and the 
proposed Pilot.
    \114\ See, e.g., EMSAC Pilot Recommendation, supra note 28, at 1 
(noting that there may not be ``any certain or predetermined 
outcomes from the pilot, and the net effect of many counterbalancing 
factors are not believed to be significantly beneficial or 
detrimental to any single group.'').
    \115\ The Commission has a variety of mechanisms to address 
issues that may arise under the Pilot. See 15 U.S.C. 78mm.
---------------------------------------------------------------------------

    The Commission requests comment on the securities to be included in 
the proposed Pilot. In particular, the Commission solicits comment on 
the following. To the extent possible, please provide specific data, 
analyses, or studies for support.
    5. Is the proposed sample size of securities for the proposed Pilot 
reasonable? If not, what other selection criteria should be used? What 
changes should the Commission consider to inclusion or exclusion from 
the sample set? Should the Commission include a narrower or broader 
universe of securities? In particular, should only common stocks and 
ETPs be included in the proposed Pilot and should other types of NMS 
stocks, like rights and warrants, be excluded from the Pilot? Why or 
why not? Is the proposed selection method for the Pilot reasonable?
    6. Is the inclusion of ETPs appropriate? Does the proposed Pilot 
design account for relevant distinctions between ETPs and other stocks? 
Should the proposed Pilot exclude ETPs that are not ETFs?
    7. If the Commission excludes ETPs from the proposed Pilot, what 
would be the effects on the quality and extent of data? How would this 
impact the study?
    8. Should other types of securities be included, such as options? 
Should certain securities be excluded? Why or why not?
    9. If the timing of the proposed Pilot appears likely to coincide 
with the Tick Size Pilot, would it be reasonable to proceed 
simultaneously with the proposed Pilot? Why or why not? To the extent 
that there is no overlap between the proposed Pilot and the Tick Size 
Pilot, the Commission would not retain the overlap design. Do 
commenters agree with this approach?
    10. Is the initial $2 per share threshold reasonable? Why or why 
not? Is there another level at which this threshold should be set?
    11. Is the $1 per share minimum continuing price threshold 
reasonable? Why or why not? Is there another level at which this 
threshold should be set?
    12. Should the Commission require a minimum market capitalization? 
If so, what should be the threshold? What would be the impacts of this 
revised market capitalization threshold?
    13. Should the Commission require a minimum trading volume for NMS 
stocks in the proposed Pilot?
    14. What are the likely effects of the proposed Pilot on issuers 
and capital formation? In particular, are different types of issuers 
likely to be affected in different ways by the proposed Pilot, and, if 
so, how?
    15. Should issuers be allowed to opt out of the proposed Pilot or 
would allowing issuers to opt out adversely affect the proposed Pilot? 
If so, how? What would be the impact on the extent and quality of the 
data? For example, could it reduce the representativeness of the 
results obtained from the Pilot, particularly if those issuers that opt 
out are predominantly one type of issuer (e.g., small or mid-
capitalization issuers)? If issuers were allowed to opt out, should 
only certain types of issuers be allowed to opt out, e.g., small-
capitalization stocks or stocks with low levels of liquidity? How 
should the Commission consider the benefits and costs on the overall 
Pilot? How should the costs to issuers and shareholders be measured?

C. Proposed Pilot Design

    Pursuant to proposed Rule 610T(b)(1), the Commission would 
designate by notice the initial List of Pilot Securities. That list 
would place each NMS stock that meets the initial criteria to be a 
Pilot Security into one of the three proposed Test Groups or into the 
Control Group. Each of the three Test Groups would be selected through 
stratified sampling by market capitalization, share price, and 
liquidity.\116\ The composition of each Test Group would remain 
constant for the duration of the proposed Pilot, except that the 
exchanges would update this information, as described below, to reflect 
changes to the composition of the groups caused by mergers, delistings, 
or removal from a Test Group due to the share price of a stock closing 
below $1.
---------------------------------------------------------------------------

    \116\ Stratified sampling refers to selecting stocks for each 
Test Group and the Control Group according to predefined criteria. 
As proposed, the predefined criteria would result in each Test Group 
and the Control Group containing a group of stocks that, as a group, 
reflect a similar distribution of market capitalization, share 
price, and liquidity. For example, when stratifying stocks on the 
basis of liquidity, each Test Group and the Control Group would have 
a similar distribution of high, moderate, and low liquidity 
securities.
---------------------------------------------------------------------------

    Each Test Group would contain 1,000 NMS stocks, with the remainder 
of eligible NMS stocks to be included in the Control Group. If the 
proposed Transaction Fee Pilot is adopted and commences before the end 
of the Tick Size Pilot, the selection of the common stocks for the 
Transaction Fee Pilot Test Groups would take into consideration the 
common stocks in the Tick Size Pilot.\117\ If the two pilots would not

[[Page 13020]]

overlap at all because the Tick Size Pilot ends before the proposed 
Pilot (if adopted) commences, then the overlap design of dividing each 
group into two subgroups would not be necessary and each Test Group 
would simply contain 1,000 NMS stocks without subgroups.
---------------------------------------------------------------------------

    \117\ Specifically, if the two pilots would overlap, then each 
of the proposed Transaction Fee Pilot's three Test Groups would be 
divided into two subgroups--one that overlaps with the Tick Size 
Pilot and one that does not overlap. The subgroups that overlap with 
the Tick Size Pilot would each contain 270 NMS stocks (45 stocks 
would be selected from each of the three Tick Size Pilot test groups 
(45 stocks x 3 Tick Size Pilot groups = 135 total), with the 
remaining 135 stocks coming from the Tick Size Pilot's control 
group, for a total of 270 common stocks). The subgroups that do not 
overlap with the Tick Size Pilot would each contain 730 NMS stocks: 
150 large-capitalization common stocks, 100 small- and mid-
capitalization stocks that do not overlap with the Tick Size Pilot, 
260 ETPs, and 220 other NMS stocks. For purposes of the proposed 
Pilot, large-capitalization common stocks would be common stocks 
with market capitalizations above $3 billion and conversely, small- 
and mid-capitalization common stocks would be those with market 
capitalizations of $3 billion or less. See Section III.B supra for 
discussion regarding including securities with market 
capitalizations above, as well as below, $3 billion in the proposed 
Pilot. See also proposed Rule 610T(b)(2)(ii)(D) (containing fields 
for certain types of NMS stocks that would be included in the 
proposed Pilot). The Commission would select stocks from the pool of 
securities eligible for the Tick Size Pilot in the same manner as it 
selects the stocks that would not overlap with the Tick Size Pilot.
---------------------------------------------------------------------------

    The Commission preliminarily believes that this design would be 
representative of the size of the overall population of NMS stocks and 
would provide sufficient statistical power to identify differences 
among the Test Groups with respect to common stocks and ETPs.\118\ This 
selection methodology for the Pilot Securities is intended to help 
ensure that the proposed Transaction Fee Pilot Test Groups would be 
similar in composition to each other and to the Control Group, as well 
as to the composition of the Tick Size Pilot test groups. This proposed 
design would reduce the likelihood that the proposed Transaction Fee 
Pilot would cause data issues for the study of the Tick Size Pilot and 
vice versa.\119\
---------------------------------------------------------------------------

    \118\ See supra note 112 (defining ``statistical power''). The 
Commission preliminarily believes that any reduction in the number 
of NMS stocks in any particular group could provide less statistical 
power and thereby affect the conclusions of the Pilot.
    \119\ See Section V.C.1.a.i.A infra. The proposed design ensures 
that similar proportions of stocks impacted by the Tick Size Pilot 
would be included in each Test Group of the Transaction Fee Pilot, 
such that any Tick Size Pilot effects would be uniform across the 
proposed Pilot. Researchers would therefore be able to control for 
those effects and minimize any data distortion.
---------------------------------------------------------------------------

    While the EMSAC limited its recommendation by proposing test groups 
modeled on the current regulatory structure reflected in Rule 610(c), 
the Commission instead has preliminarily determined to more broadly 
study the impact of all transaction fees on order routing behavior, 
execution quality, and market quality.\120\ Including all equities 
exchanges in the proposed Pilot, even those with taker-maker fee 
models, would ensure that the Pilot will collect data on all equities 
markets that are registered national securities exchanges, whose fees 
are all subject to the requirements of the Exchange Act and the rule 
filing requirements thereunder, thus treating equally all similarly 
situated entities.
---------------------------------------------------------------------------

    \120\ The Commission notes that one of the goals of Rule 610(c) 
was to support the integrity of the price protection requirement 
established by Rule 611 of Regulation NMS. See NMS Adopting Release, 
supra note 1, at 37503 (``Finally and most importantly, the fee 
limitation of Rule 610 is necessary to support the integrity of the 
price protection requirement established by the adopted Order 
Protection Rule. In the absence of a fee limitation, some `outlier' 
trading centers might take advantage of the requirement to protect 
displayed quotations by charging exorbitant fees to those required 
to access the outlier's quotations. Rule 610's fee limitation 
precludes the initiation of this business practice, which would 
compromise the fairness and efficiency of the NMS.'').
---------------------------------------------------------------------------

    In addition, as is the case currently under Rule 610(c), the 
proposed Pilot would permit equities exchanges to charge varied 
transaction fees for Pilot Securities within each Test Group, so long 
as such fees comply with the conditions (including the applicable cap) 
set for that group. The Commission believes that this would allow 
equities exchanges to continue to compete for order flow by adjusting 
their access fees within the bounds of the proposed Pilot.
    The Commission is proposing to apply the following pricing 
restrictions to Test Groups 1, 2, and 3, and the Control Group would 
remain subject to the current access fee cap in Rule 610(c):

[[Page 13021]]

[GRAPHIC] [TIFF OMITTED] TP26MR18.001

1. Test Group 1
    For Pilot Securities in Test Group 1, equities exchanges could 
neither impose, nor permit to be imposed, any fee or fees for the 
display of, or execution against, the displayed best bid or offer of 
such market in NMS stocks that exceeds or accumulates to more than 
$0.0015 per share. The cap in Test Group 1 would apply to transaction 
fees assessed on the remover (taker) of liquidity as well as 
transaction fees assessed on the provider (maker) of liquidity.\121\
---------------------------------------------------------------------------

    \121\ In other words, the fee cap in Test Group 1 would apply 
the cap to the take fee charged to the taker on a maker-taker 
exchange and also would apply the cap to the make fee charged to the 
maker on a taker-maker exchange.
---------------------------------------------------------------------------

    The EMSAC recommended three test groups, with fee caps of $0.0020, 
$0.0010, and $0.0002, respectively. The Commission also is proposing 
three test groups, two with fee caps of $0.0015 and $0.0005, and one 
that prohibits rebates and Linked Pricing. The Commission preliminarily 
believes that it is appropriate to test an intermediate reduction in 
the fee cap. However, because the proposed Pilot includes a no-rebate 
bucket, the Commission preliminary believes it is preferable to test a 
cap, set at half of the current $0.0030 cap, rather than two 
intermediate caps as EMSAC recommended. This approach will allow the 
proposed Pilot to test more pronounced changes to the status quo 
without increasing the total number of Test Groups. Accordingly, as 
discussed below, in addition to the $0.0015 test group, the proposed 
Pilot also includes a test group of $0.0005 (as proposed Test Group 2) 
as well as a no-rebate bucket (which EMSAC did not recommend).\122\ The 
Commission preliminarily believes that having a total of three Test 
Groups would allow the proposed Pilot to test several different 
scenarios while avoiding overcomplicating the Pilot and would represent 
a pilot design with which the exchanges are familiar because it aligns

[[Page 13022]]

with the Tick Size Pilot's three test groups.\123\
---------------------------------------------------------------------------

    \122\ See infra Section III.C.2 (discussing proposed Test Group 
2) and Section III.C.3 (discussing proposed Test Group 3).
    \123\ Maintaining three test groups for the proposed Pilot would 
allow it to align closely with the Tick Size Pilot's three test 
groups, with which the exchanges are familiar. In addition, the 
proposed Test Groups have been designed to account for overlap 
between the two pilots and control for the potential that such 
overlap could possibly affect the results of the Pilot. See supra 
Section III.B.
---------------------------------------------------------------------------

    Finally, the EMSAC's proposed first group would have applied its 
cap only to fees assessed for removing liquidity, which is consistent 
with the application of Rule 610(c)'s fee cap.\124\ As discussed above, 
the Commission instead is proposing to apply Test Group 1's cap to fees 
assessed for removing or posting liquidity. In other words, as 
discussed above, the proposed cap in Test Group 1 would apply to maker-
taker pricing as well as taker-maker pricing, which some comments 
submitted in response to the EMSAC's recommendation supported. The 
Commission preliminarily believes that applying the cap in Test Group 1 
to any fees assessed--including to fees for providing liquidity in a 
taker-maker pricing model--would help achieve the purpose of the 
proposed Pilot by applying the test conditions broadly to all equities 
exchange transaction fees and not just fees for accessing a protected 
quotation.
---------------------------------------------------------------------------

    \124\ See supra note 76 and accompanying text (noting that the 
Rule 610(c) access fee cap only caps fees for removing a protected 
quotation).
---------------------------------------------------------------------------

2. Test Group 2
    For Pilot Securities in Test Group 2, equities exchanges could 
neither impose, nor permit to be imposed, any fee or fees for the 
display of, or execution against, the displayed best bid or offer of 
such market that exceed or accumulate to more than $0.0005 per share. 
The cap in Test Group 2 would apply to transaction fees assessed on the 
remover (taker) of liquidity as well as transaction fees assessed on 
the provider (maker) of liquidity.\125\
---------------------------------------------------------------------------

    \125\ In other words, the fee cap in Test Group 2 would apply 
the cap to the take fee charged to the taker on a maker-taker 
equities exchange and also would apply the cap to the make fee 
charged to the maker on a taker-maker equities exchange.
---------------------------------------------------------------------------

    The level of the Commission's proposed cap for Test Group 2 is 
intended to introduce a materially lower cap than Test Group 1 to 
further reduce the potential distortion created by current levels of 
rebates, while continuing to permit, for the preponderance of exchange 
transaction volume, the ability of an exchange to maintain its net 
profit on a transaction.\126\ Specifically, Test Group 2 would prohibit 
exchanges from charging more than $0.0005 on one side of a transaction, 
which means an exchange would only have that amount (or less) to fund 
the rebate it pays to the other side of the transaction, unless it uses 
other sources of revenue to subsidize the rebate. Therefore, the 
Commission expects that Test Group 2's $0.0005 cap would significantly 
reduce, if not eliminate, the likelihood that an exchange would choose 
to offer rebates at their current levels for Pilot Securities in this 
group, while nevertheless retaining the ability of exchanges to compete 
by offering rebates if they so choose.\127\ Accordingly, Test Group 2 
is designed to test the impact of materially lower rebates and fees, 
where the potentially distortive effects of rebates, and the fees used 
to fund those rebates, is greatly reduced and thereby gather data on 
the impact of that reduction on order routing decisions, execution 
quality, and market quality.
---------------------------------------------------------------------------

    \126\ For example, if an exchange's base fee to take liquidity 
is $0.0030 and its base rebate to provide liquidity is $0.0020, the 
exchange would earn $0.0010 (net capture rate). The proposed cap for 
Test Group 2 would allow such an exchange to maintain its current 
net capture rate on such transaction if it charged both sides 
$0.0005, though charging both sides of a transaction for Test Group 
2 securities would result in a change to the exchange's fee model to 
a ``traditional'' pricing structure for those securities. As of 
December 2017, Nasdaq's base take fee was $0.0030 and its base 
rebate was $0.0020; NYSE's base take fee was $0.0030 and its base 
rebate was $0.0014; NYSE Arca's base take fee was $0.0030 and its 
base rebate was $0.0020; and CboeBZX's base take fee was $0.0030 and 
its base rebate was $0.0020. See, respectively, http://nasdaqtrader.com/Trader.aspx?id=PriceListTrading2 (Nasdaq), https://www.nyse.com/markets/nyse/trading-info/fees (NYSE), https://www.nyse.com/publicdocs/nyse/markets/nyse-arca/NYSE_Arca_Marketplace_Fees.pdf (NYSE Arca), and https://markets.cboe.com/us/equities/membership/fee_schedule/bzx/ (CboeBZX).
    \127\ For example, a maker-taker equities exchange might choose 
to offer a $0.0004 rebate and charge a fee of $0.0005 for stocks in 
Test Group 2. In this way, exchanges could continue to compete with 
one another by offering rebates. Compared to current levels of 
rebates, which may approach the level of the current $0.0030 cap, a 
rebate of $0.0004, by comparison, would be materially lower.
---------------------------------------------------------------------------

3. Test Group 3
    For Pilot Securities in Test Group 3, equities exchanges generally 
would be prohibited from offering rebates, either for removing or 
posting liquidity, and, as discussed further below, from offering a 
discount or incentive on transaction fee pricing applicable to removing 
(providing) liquidity that is linked to providing (removing) liquidity. 
In addition, for the reason discussed below, Test Group 3 would be 
unique in that the prohibition on rebates would apply not only to 
displayed top-of-book \128\ liquidity, but also would apply to depth-
of-book \129\ and undisplayed liquidity.\130\ In contrast, Test Groups 
1 and 2, like the Rule 610(c) fee cap, only cap fees for the execution 
of an order against a ``protected quotation,'' which is defined as an 
exchange's displayed top-of-book quote.\131\ While rebates would be 
prohibited in Test Group 3, transaction fees for securities in Test 
Group 3 would remain subject to the current $0.0030 access fee cap in 
Rule 610(c) for accessing a protected quotation.\132\
---------------------------------------------------------------------------

    \128\ ``Top-of-book'' means the aggregated best bid and best 
offer resting on an exchange; in other words, aggregate interest 
that represents the highest bid (to buy) and the lowest offer (to 
sell). See 17 CFR 242.600(b)(7) (defining ``best bid'' and ``best 
offer'').
    \129\ ``Depth-of-book'' refers to all resting bids and offers 
other than the best bid and best offer; in other words, all orders 
to buy at all price levels less aggressive than the highest priced 
bid (to buy) or all offers to sell at all price levels less 
aggressive than the lowest priced offer (to sell). See 17 CFR 
242.600(b)(8) (defining ``bid'' and ``offer'').
    \130\ ``Undisplayed'' refers to resting orders that are 
``hidden'' and not displayed publicly in the consolidated market 
data. See 17 CFR 242.600(b)(13) (defining ``consolidated display'' 
and (b)(60) (defining ``published bid and published offer''). See 
also infra notes 136-139 and accompanying text.
    \131\ See 17 CFR 242.600(b)(58) (defining ``protected 
quotation'').
    \132\ In other words, Test Group 3 would prohibit rebates for 
both posting and taking liquidity, but would remain subject to Rule 
610(c), which caps fees for taking liquidity. Test Group 3 would not 
cap fees for posting liquidity.
---------------------------------------------------------------------------

    While the EMSAC considered recommending a zero-rebate bucket, its 
recommendation ultimately did not contain such a component.\133\ 
Several commenters argued, however, that a pilot should either ban 
rebates altogether or include a ``no-rebate'' test bucket.\134\ In 
light of the current debate surrounding transaction fees and the 
particular attention paid to the potential conflict of interest 
presented by the payment of transaction-based rebates, the Commission 
believes that the proposed Pilot would be substantially more 
informative with a no-rebate bucket than a pilot without one, because 
the no-rebate bucket would allow the proposed Pilot to gather data to 
test the effects of an outright prohibition on transaction-based 
rebates. Specifically, if rebates create a conflict of interest for 
broker-dealers when they decide where to route an order to post or take 
liquidity, and if those conflicts have an effect on order routing 
behavior, execution quality, or market quality, then only a complete 
prohibition on rebates will allow the Commission to study directly 
these conflicts and their effects by observing what would happen in the 
absence of rebates. While Test Group 2's low cap should reduce the

[[Page 13023]]

likelihood that a market will offer a material rebate because the cap 
would limit the market's ability to offset the rebate by charging a 
slightly higher fee to the other side of the transaction, the 
possibility exists that rebates would nevertheless continue to be 
offered in Test Group 2. The Commission preliminarily believes that to 
gather data to study potential conflicts of interest presented by the 
payment of rebates and the effects they may have on order routing 
behavior, execution quality, and market quality, it is necessary for 
the proposed Pilot to establish a test group that entirely prohibits 
the payment of transaction-based rebates--which some believe drive 
distortions of those items.\135\ At the same time, Test Group 3 would 
not further restrict the ability of equities exchanges to charge for 
transaction services. By prohibiting all rebates, but not lowering the 
existing Rule 610(c) fee cap for Pilot Securities in Test Group 3, 
equities exchanges would no longer need to charge transaction fees at 
levels priced to offset the rebates they pay, while at the same time 
they would retain the ability to charge transaction fees as high as the 
current $0.0030 cap. Accordingly, Test Group 3 is intended to test, 
within the current regulatory structure, natural equilibrium pricing 
for transaction fees in an environment where all rebates are prohibited 
and exchanges do not need to charge offsetting transaction fees on the 
contra-side to subsidize those rebates.
---------------------------------------------------------------------------

    \133\ See EMSAC Pilot Recommendation, supra note 28, at 4. The 
EMSAC acknowledged that ``[c]apping inducements is not an existing 
component of our market structure.'' Id.
    \134\ See supra note 48.
    \135\ See, e.g., supra notes 21 (discussing the potential 
distortions caused by the conflicts of interest faced by broker-
dealers in light of conflicting economic incentives to earn rebates, 
which typically are not passed through by the broker-dealer to its 
customers, from the trading centers to which they direct orders for 
execution); 23 (discussing potential distortions of unnecessary 
market complexity through the proliferation of exchange order types 
and new exchanges, the incentive to trade off-exchange to avoid high 
fees, and the indirect ability to quote in sub-penny increments on a 
net basis); and 106 (discussing potential distortions caused by the 
high fees that offset rebates, which can undermine price 
transparency because a quote at the same displayed price on 
different exchanges (with different fees) does not reflect the 
actual net price to trade on any one trading center).
---------------------------------------------------------------------------

    As proposed, Test Group 3 would prohibit payment of transaction-
based rebates broadly for both posting and removing liquidity. In this 
respect, the Commission notes that Rule 610(c)'s access fee caps do not 
currently apply to non-displayed liquidity and depth-of-book quotes, 
and exchange fee schedules typically do not impose differing fees based 
on those parameters.\136\ The EMSAC noted a theoretical possibility 
that lower access fee caps could create an incentive for SROs to begin 
charging more to access non-displayed interest or depth-of-book quotes. 
However, such differing fees would lead to uncertainty for market 
participants that remove liquidity as they would not be able to control 
with absolute certainty whether they interact with such interest.\137\ 
The Commission preliminarily believes that the prospect of market 
participant objections to the uncertainty regarding what they would 
expect to pay to remove liquidity would make this outcome highly 
unlikely.
---------------------------------------------------------------------------

    \136\ Three equities exchanges do impose differing fees for 
certain orders based on whether the order is displayed or non-
displayed, including: (1) IEX, which incentivizes displayed 
liquidity by charging a lower transaction fee of $0.0003 for posting 
or taking displayed interest and imposes a higher fee of $0.0009 per 
share to post or take non-displayed liquidity; (2) NYSE American, 
which incentivizes posting of displayed liquidity and imposes a 
standard fee of $0.0002 per share to remove liquidity or post non-
displayed liquidity, though it does offer rebates to eDMMs; and (3) 
Cboe EDGA, which encourages non-displayed liquidity by not charging 
transaction fees for posting non-displayed liquidity and charging a 
low fee to take non-displayed interest, but imposes its standard fee 
on posting or removing displayed liquidity. See Investors Exchange 
Fee Schedule, available at https://iextrading.com/trading/fees/; 
NYSE American Fee Schedule, available at https://www.nyse.com/publicdocs/nyse/markets/nyse-american/NYSE_America_Equities_Price_List.pdf; and Cboe EDGA Exchange Fee 
Schedule, available at https://markets.cboe.com/us/equities/membership/fee_schedule/edga/. While these exchanges impose 
differing fees depending on the displayed nature of interest, none 
pay rebates uniquely for non-displayed orders or depth-of-book 
interest, and therefore would not be impacted by the application of 
Test Group 3's prohibition on the payment of rebates to all 
interest, including non-displayed liquidity and depth-of-book 
quotes.
    \137\ For example, a liquidity taker's order could interact with 
displayed or non-displayed liquidity (or both). If fees differed 
between them, market participants would face uncertainty when making 
routing decisions over what transaction fees they would incur.
---------------------------------------------------------------------------

    However, in Test Group 3, the possibility of an exchange continuing 
to offer rebates for non-displayed and depth-of-book quotes, while 
eliminating them on displayed interest, could have the potential to 
distort the Pilot results to the extent that stocks in Test Group 3 
remained subject to the potential conflicts of interest associated with 
rebates on non-displayed and depth-of-book quotes.\138\ Accordingly, to 
avoid any potential distortion from a narrowly-tailored ``no rebate'' 
bucket that was subject to exceptions and permitted rebates to continue 
to be offered on certain interest, the Commission preliminarily 
believes it is necessary to outright prohibit payment of any and all 
rebates in Test Group 3, including non-displayed liquidity and depth-
of-book interest. Doing so will permit the Commission to gather data on 
a ``no rebate'' environment, thereby allowing the Commission to observe 
directly the impact of rebates on order routing behavior, execution 
quality, and market quality by observing an environment where 
transaction-based rebates are not offered and comparing that to the 
control group where rebates continue to be offered. In turn, this data 
may inform the Commission about the extent to which rebates offered by 
equities markets are compatible with broker-dealers executing their 
customers' orders in the best market.\139\
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    \138\ For example, a market participant seeking to take 
liquidity may have an incentive to route to a taker-maker market 
that offered rebates for executing against non-displayed interest if 
the market participant expected to trade both with the full amount 
of displayed interest and also with non-displayed interest (and thus 
collect a rebate from interacting with the latter). Alternatively, a 
liquidity provider could have an incentive to route to a maker-taker 
market that offered rebates on non-displayed interest if the 
participant was able to use certain order types to ensure that its 
order remained non-displayed and executed only as ``poster'' to earn 
a rebate. For example, the provider could use a post-only order 
instruction to ensure that it never takes liquidity (and thus gets 
assessed a fee) and combine that with an instruction to prevent the 
order from becoming displayed. In either of these two examples, the 
market could continue to offer an incentive to earn a rebate on, or 
by interacting with, non-displayed liquidity, which could distort 
the results of the proposed Pilot.
    \139\ See 15 U.S.C. 78k-1(a)(1)(C)(iv).
---------------------------------------------------------------------------

    Finally, in addition to prohibiting rebates, Test Group 3 also 
would prohibit exchanges from offering a discount or incentive on 
transaction fee pricing applicable to removing (providing) liquidity on 
the exchange that is linked to providing (removing) liquidity on the 
exchange (``Linked Pricing''). For example, for Pilot Securities in 
Test Group 3, an exchange would be prohibited from adopting any 
discounts on transaction fees to remove (i.e., ``take'') liquidity 
where that discount is determined based on the broker-dealer's posted 
(i.e., ``make'') volume on the exchange, which would result in the 
broker-dealer paying a lower take fee in return for providing a certain 
level of liquidity on the exchange. However, as discussed further 
below, exchanges would not be prohibited from adopting new rules to 
provide non-rebate Linked Pricing to their registered market makers if 
the non-rebate discount or incentive is in consideration for meeting 
market quality metrics specified in an exchange rule.
    Prohibiting Linked Pricing for Test Group 3 is designed to support 
the objectives of that Test Group. Specifically, in Test Group 3, the 
Commission is seeking to obtain information about what would happen in 
the absence of the incentive created by offering rebates and the 
potential conflicts of interest they can present, including what would 
happen to fee

[[Page 13024]]

levels if they no longer subsidize those rebates. For example, if 
``taker'' transaction fees no longer are used to fund ``maker'' 
rebates, an exchange's taker fee would no longer be subject to that 
potential distortion and could be set at an equilibrium level in 
response to competition, which could put downward pressure on ``taker'' 
transaction fees. Accordingly, Test Group 3 is designed to gather data 
on the impact of creating an environment where fee levels are not 
potentially distorted by rebates and rebates do not influence routing.
    In support of creating such an environment for Test Group 3, 
exchanges also would be prohibited from introducing new Linked Pricing 
models that could possibly perpetuate similar potential distortions 
that maker-taker and taker-maker pricing models may impose on 
transaction fees. For example, if an exchange adopts Linked Pricing for 
Test Group 3 securities, it might offer a discounted transaction fee to 
remove liquidity only to those market participants that post a certain 
volume on the exchange. In effect, offering Linked Pricing to market 
participants in Test Group 3 without first requiring them to meet 
market quality metrics designed to benefit the overall market could 
continue to potentially distort transaction fee pricing if the fees are 
set at a level above their natural equilibrium, within the current 
regulatory structure, in order to subsidize the Linked Pricing 
incentive, and also could perpetuate the potential conflicts of 
interest associated with rebates and order routing.
    If, instead of paying rebates, exchanges seek to provide a discount 
or incentive on transaction fee pricing applicable to removing 
(providing) liquidity that is linked to providing (removing) liquidity, 
then equilibrium pricing may not be achieved to the extent that 
transaction fees are linked in this way. In turn, perpetuating this 
potential distortion could cloud the Pilot data for Test Group 3 if the 
Linked Pricing incentive interferes with the proposed Pilot's ability 
to isolate and analyze the impacts--on both the maker rebate (fee) and 
the taker fee (rebate)--of eliminating rebates in Test Group 3. 
Accordingly, the Commission preliminarily believes that prohibiting 
exchanges from offering not only rebates but also Linked Pricing in 
Test Group 3 is appropriate to maintain the integrity of Test Group 3 
and would facilitate analysis of securities in Test Group 3 consistent 
with its objective to test the impact of eliminating rebates and the 
potential distortions that rebates may cause.
    While rebates and Linked Pricing would be prohibited broadly for 
Test Group 3, the Commission proposes to permit an exchange to adopt 
new rules to provide non-rebate Linked Pricing to its registered market 
makers during the proposed Pilot in consideration for meeting market 
quality metrics.\140\ Exchanges have an interest in offering incentives 
to attract broker-dealers to become registered market makers on the 
exchange and commit to meet market making standards specified in 
exchange rules so that the exchange can, in turn, use the liquidity 
provided by its registered market makers to attract buyers and sellers 
to the exchange. The Commission preliminarily believes that permitting 
exchanges to adopt new rules to offer Linked Pricing to market makers 
for Test Group 3 securities preserves the ability of an exchange to 
attract market makers through non-rebate incentives and thereby helps 
maintain the baseline framework for registered market makers against 
which the effects of the proposed Pilot would be assessed.
---------------------------------------------------------------------------

    \140\ To adopt Linked Pricing for Pilot Securities in Test Group 
3 during the proposed Pilot, an exchange would need to propose new 
market making standards in a proposed rule change filing submitted 
pursuant to Section 19(b)(2) of the Exchange Act, and also would 
need to propose the fee incentive it would provide for meeting those 
standards. For example, an exchange may establish a specified 
minimum quote size combined with a requirement to be at the national 
best bid and offer for a designated percentage of the day. In return 
for meeting those continuous quoting requirements, the exchange 
might offer its registered market makers a fee discount to remove 
liquidity.
---------------------------------------------------------------------------

4. Control Group
    NMS stocks selected as Pilot Securities that are not placed in one 
of the three proposed Test Groups would be placed in the Control Group, 
which would be approximately the same size as each of the other three 
Test Groups combined and have a similar composition.\141\ Transaction 
fees for Pilot Securities in the Control Group would remain subject to 
the current Rule 610(c) access fee cap. Consistent with Rule 610(c), 
the Control Group would only cap fees for taking (removing) a protected 
quotation; it would not apply to fees for posting liquidity or 
otherwise cap or prohibit rebates. The Commission preliminarily 
believes that having a control group is vital to test the effects of 
lower transaction fees in the proposed Test Groups and that a control 
group with the current access fee cap would provide an appropriate 
baseline for analyzing the effect of the proposed Pilot.
---------------------------------------------------------------------------

    \141\ NMS stocks (including ETPs) placed in the Control Group 
must meet the same selection criteria as those NMS stocks placed in 
Test Groups 1, 2, and 3 (e.g., the NMS stock must have a share price 
of at least $2 at the time of selection, must maintain a share price 
of at least $1 per share to remain in the proposed Pilot, and must 
have an unlimited duration or a duration beyond the end of the post-
Pilot Period).
---------------------------------------------------------------------------

    In sum, the Commission preliminarily believes that the proposed 
size and composition of each of the three Test Groups is appropriate to 
ensure representativeness of the samples as well as sufficient 
statistical power across the Control and three Test Groups and 
therefore will produce a robust sample size for analysis that would 
allow the Commission and the public to reliably examine, compare, and 
assess the effects of differing transaction fees and rebates to inform 
future regulatory initiatives in this area. Further, the Commission 
preliminarily believes that the proposed Pilot design is appropriately 
tailored to account for potential overlap with the Tick Size Pilot.
    The Commission requests comment on the design of the proposed 
Pilot. In particular, the Commission solicits comment on the following. 
To the extent possible, please provide specific data, analyses, or 
studies for support.
    16. Is the proposed Pilot reasonably designed to evaluate the 
effect of transaction fees on order routing behavior, execution 
quality, and market quality? Why or why not? Should the Commission 
implement an alternative design, and if so, what should it be? What 
would be the impacts of the alternative design?
    17. Are the $0.0015 and $0.0005 fee cap levels reasonable? Should 
the Commission use different caps, for example $0.0002 or $0.0009 for 
Test Group 2? Should the Commission use the caps suggested by EMSAC 
(i.e., $0.0020, $0.0010, and $0.0002)?
    18. Rather than cap fees for Test Groups 1 and 2, should the pilot 
instead focus those Test Groups on rebate restrictions? If so, what 
restrictions and caps should the Commission impose?
    19. Are the proposed restrictions in Test Group 3 on rebates and 
Linked Pricing reasonable? Why or why not? Is the proposed language in 
Rule 610T(a) clear? For example, is the phrase ``impose, or permit to 
be imposed'' sufficiently clear? If not, what alternative language 
should the Commission use?
    20. If volume or liquidity changed for the Pilot Securities in Test 
Group 3, how, if at all, would such changes impact institutional 
traders? What volume or liquidity would be impactful? What would be the 
impact? For example, if fewer liquidity providers post orders in Test 
Group 3 Pilot Securities because there is no rebate for

[[Page 13025]]

them to earn, would institutional traders be more likely to obtain 
queue priority? Why or why not?
    21. If the Pilot data reveals an impact on quoted prices in Test 
Group 3 where, in the absence of rebates, spreads widen for a certain 
segment of stocks and ETPs (e.g., those that are moderately liquid), 
but not others (e.g., those that are highly liquid or those that are 
highly illiquid), how should the Commission evaluate that impact?
    22. Is maintaining the current fee cap of $0.0030 reasonable for 
Test Group 3, or should the Commission not subject Test Group 3 to the 
current fee cap in Rule 610(c)? Why or why not? Should the Commission 
cap fees for Test Group 3 using a different amount?
    23. For securities in Test Group 3, where rebates would not be 
permitted, will competition and market forces produce a market 
equilibrium that constrains exchange access fees to levels at or below 
today's current pricing? What do commenters consider to be a reasonable 
level for exchange transaction fees? If equilibrium transaction fee 
pricing is achieved, would such forces obviate the need for a fee cap 
at all? Or would a cap on exchange access fees continue to be necessary 
to constrain exchange pricing as long as Rule 611 of Regulation NMS 
imposes order protection requirements applicable to exchanges with 
protected quotations?
    24. Should one or more of the Test Groups eliminate protected 
quotation status, and thus the order protection requirements of 
Regulation NMS, for certain securities? Would doing so provide helpful 
insights into order routing? Why or why not?
    25. If analysis of the proposed Pilot data were to suggest that 
rebates offered by maker-taker exchanges do not affect quoted spreads 
or contribute to market quality or execution quality for the most 
actively traded NMS stocks, do commenters believe that the minimum 
trading increment for those most actively traded stocks should be 
reduced, for example, to a half-penny? Why?
    26. Would there be a sufficient number of stocks and ETPs in each 
Test Group? Why or why not? Or would fewer stocks and ETPs in each Test 
Group be capable of providing statistically significant data? If so, 
how many stocks and ETPs should be included in each Test Group? How 
would the quality and extent of the data be affected?
    27. Should the proposed Pilot overlap with the Tick Size Pilot? If 
so, does the proposed Pilot design adequately account for potential 
overlap with the Tick Size Pilot? Why or why not? What are the 
potential impacts of such overlap for equities exchanges, issuers, and 
other market participants? How could the Commission better design the 
proposed Pilot to deal with any overlap between the two pilots?
    28. Should Test Group 3's prohibition on rebates and Linked Pricing 
apply to depth-of-book and undisplayed liquidity? Why or why not? 
Should the fee caps in the other Test Groups also apply to depth-of-
book and undisplayed liquidity? Why or why not?
    29. Should the proposed Pilot include a ``trade-at'' provision that 
would restrict price matching of protected quotations? Why or why not? 
How would a ``trade-at'' component affect the data generated by the 
proposed Pilot? Should the Commission consider an alternative 
methodology to evaluate ``trade at''?
    30. Is the proposed Pilot design subject to any particular 
limitations with respect to achieving the objectives of the Pilot? Of 
what kind? How could the proposed Pilot design be improved to prevent 
such limitations?
    31. Should an equities exchange be able to offer rebates in Test 
Group 1 or 2 in excess of the fees it charges to the contra-side of an 
execution? For example, should the proposed Pilot prohibit equities 
exchanges from offering rebates in excess of $0.0015 in Test Group 1 or 
$0.0005 in Test Group 2? Why or why not?
    32. Would increasing transparency for customers into broker-dealer 
business models and/or trading practices (including, for example, 
transparency regarding broker-dealer revenue streams, order routing 
practices, or other matters) be a more effective way of addressing 
potential broker-dealer conflicts of interest arising from access fees 
and rebates?

D. Duration

    The Commission is proposing a two-year term for the proposed Pilot, 
with an automatic sunset at the end of the first year unless, prior to 
that time, the Commission publishes a notice determining that the Pilot 
shall continue for up to another year. In addition, as discussed below, 
the Commission is proposing a six-month pre-Pilot Period as well as a 
six-month post-Pilot Period. The Commission preliminarily believes this 
approach will give the Commission flexibility and help ensure its 
ability to gather sufficient data to reliably analyze the Pilot's 
impact on order routing behavior, execution quality, and market 
quality.\142\ The Commission believes that providers and takers of 
liquidity need time to gain experience with the different Test Groups, 
and the proposed Pilot needs to be long enough to make it economically 
worthwhile for market participants to adapt their behavior.\143\ The 
proposed Pilot should continue to collect data over a sufficiently long 
period of time that is capable of providing a sample that would have 
adequate statistical power. The Commission would need to observe 
developments during the proposed Pilot to determine whether to sunset 
it.
---------------------------------------------------------------------------

    \142\ See EMSAC Pilot Recommendation, supra note 28, at 2. The 
EMSAC recommended an initial three-month phase-in period involving 
10 stocks, after which each Test Group would be expanded to include 
the remaining securities in each group. See id. at 2. While a phase-
in period would allow markets and market participants to implement 
the required fee changes in a staged manner and provide an 
opportunity to address unforeseen implementation issues, the 
Commission believes that markets and market participants are 
accustomed to dealing with transaction fee changes and therefore 
should be readily capable of accommodating the terms of the proposed 
Pilot with the advance notice provided by the Commission's 
rulemaking process. Further, though exchanges would be required to 
collect and report certain data, as described below, the proposed 
Pilot would not require equities exchanges to make any changes to 
any of their trading systems, and therefore the Commission 
preliminarily believes a phased implementation schedule would not be 
necessary to test changes to outward facing systems.
    \143\ See, e.g., EMSAC Transcript, July 8, 2016, available at 
https://www.sec.gov/spotlight/emsac/emsac-070816-transcript.txt 
(comments of Joe Mecane noting that ``[a]fter further discussion, we 
thought two years was the right time frame, because the behavioral 
changes that we think that will result from the pilot program will 
take . . . some time to filter through the marketplace.'').
---------------------------------------------------------------------------

    The EMSAC recommended a two-year duration for a pilot, and the 
Commission's rule incorporates the possibility of a two-year pilot. The 
Commission believes that a two-year duration, with automatic possible 
sunset at the end of the first year is preferable because it would 
provide flexibility as the data from the Pilot develops. To suspend the 
automatic sunset, under proposed Rule 610T(c), the Commission would 
publish, no later than thirty days prior to the sunset date, a notice 
on its website and in the Federal Register. The Commission could 
suspend the sunset, for example, if it believed that additional time 
would help ensure that market developments are fully reflected in the 
data with sufficient statistical power for analysis. The Commission 
also, for example, could suspend the sunset if the Commission believed 
that a potentially disruptive event experienced during the first one-
year period counsels in favor of conducting the proposed Pilot for its 
full two-year term. Alternatively, the Commission could leave the 
sunset in

[[Page 13026]]

place by not publishing a notice if the one-year period was sufficient 
to fully reflect market developments and the data collected provides 
adequate statistical power to analyze those developments.
    While the Commission considered proposing a shorter period, such as 
that recommended by Nasdaq,\144\ a shorter duration for the Pilot than 
the proposal (i.e., less than one year) may allow short-term or 
seasonal events to unduly impact the Pilot data. For example, if the 
proposed Pilot were only six months long, the Pilot may or may not 
produce a sufficiently broad set of data capable of permitting analysis 
into potential conflicts of interest associated with transaction-based 
fees and rebates and the effects that changes to those fees and rebates 
have on order routing behavior, execution quality, and market quality.
---------------------------------------------------------------------------

    \144\ See Nasdaq Letter, supra note 44, at 3.
---------------------------------------------------------------------------

    Further, as noted above, Commission is proposing a six-month pre-
Pilot Period as well as a six-month post-Pilot Period. The pre-Pilot 
Period is intended to gather current data to help establish a baseline 
against which to assess the effects of the proposed Pilot. The post-
Pilot Period is intended to help assess any post-Pilot effects 
following the conclusion of the proposed Pilot. For both the pre- and 
post-Pilot Periods, the Commission is proposing to require the equities 
exchanges to publicly post on their websites the same data they would 
be required to publicly post for the proposed Pilot.
    Finally, as noted above, Nasdaq, NYSE, and Cboe have recommended 
that the Commission, instead of proceeding with a proposal for a 
transaction fee pilot, first take final action on two of the 
Commission's proposed rulemakings (disclosure of order handling 
information and regulation of NMS stock Alternative Trading Systems) 
and issue additional guidance on broker-dealers' duty of best 
execution.\145\ IEX criticized those recommendations as delaying 
tactics motivated by ``commercial protectionism'' from exchanges whose 
business models are ``completely reliant on the payment of rebates.'' 
\146\ The Commission believes that proceeding with a pilot in the near 
term would be appropriate as it would complement the Commission's other 
market structure initiatives and would gather data to inform the 
Commission and the public on the impact of equities transaction fees 
and whether additional regulatory action is needed or appropriate.
---------------------------------------------------------------------------

    \145\ See Joint Exchange Letter, supra note 44, at 2-4.
    \146\ See IEX Letter, supra note 44, at 2-3.
---------------------------------------------------------------------------

    The Commission requests comment on the proposed duration for the 
proposed Pilot, including the pre- and post-Pilot Periods. In 
particular, the Commission solicits comment on the following. To the 
extent possible, please provide specific data, analyses, or studies for 
support.
    33. Is the proposed duration long enough for the proposed Pilot to 
generate data to analyze the impact of transaction fees? If not, what 
time period should be selected? Is a different time period preferable?
    34. Is the provision for an automatic sunset at the end of the 
first year unless, prior to that time, the Commission publishes a 
notice determining that the Pilot shall continue for up to another 
year, reasonable? What factors or conditions would support continuing 
the proposed Pilot beyond one year?
    35. The EMSAC recommended an initial three-month phase-in period 
involving a limited number of stocks, after which each test group would 
be expanded to include the remaining securities in each group. As 
proposed, the Pilot would not include a phase-in period. Would such a 
period be useful? Why or why not?
    36. Are the proposed pre-Pilot and post-Pilot terms sufficient? 
Should the Commission select different lengths, or gather different 
data during those periods? Specifically, instead of a 6 month pre- and 
post-Pilot Period, should the Commission adopt a 3, 4, or 5 month pre-
Pilot and post-Pilot Period? Which, if any, of those is the shortest 
period that would provide sufficient statistical power for analysis, 
particularly with respect to ETPs? If the Commission requires at least 
6 months of pre-Pilot Period data, to what extent could the exchanges 
access and use historical data to populate the required pre-Pilot data 
described in Section E below? For example, could exchanges access 3 
months of historical data such that the pre-Pilot Period could be 
structured as a 3 month pre-Pilot Period combined with 3 months of 
historical data immediately preceding that period, for a total of 6 
months of cumulative pre-Pilot data? How much time would be necessary 
for the exchanges to compile 6 months of historical data?
    37. Do commenters believe that the Commission should, before taking 
action on the proposed Pilot, first take final action on the 
Commission's proposed rulemakings concerning disclosure of order 
handling information and regulation of NMS stock Alternative Trading 
Systems, and/or issue new guidance on broker-dealers' duty of best 
execution, or do commenters agree that proceeding with the proposed 
Pilot in the near term would complement the Commission's other market 
structure initiatives?

E. Data

    The Commission preliminarily believes that the following data 
should be collected and made publicly available as described below in 
order to facilitate the Commission's ability to assess the impact of 
the proposed Pilot and, as discussed below, promote transparency about 
the Pilot Securities as well as basic information about equities 
exchange fees and changes to those fees during the Pilot.\147\
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    \147\ The data and information that is to be made publicly 
available would be records of the equities exchanges and 
accordingly, would be subject to the recordkeeping requirements of 
Rule 17a-1 under the Exchange Act. See 17 CFR 240.17a-1.
---------------------------------------------------------------------------

1. Pilot Securities Exchange Lists and Pilot Securities Change Lists
    As discussed above, proposed Rule 610T(b)(1) would require the 
Commission to publish on its website a notice containing the initial 
List of Pilot Securities,\148\ which would identify the securities in 
the proposed Pilot and assign each of them to a designated Test Group 
(or the Control Group). While proposed Rule 610T does not impose a 
deadline by which this notice must be published, the Commission 
preliminarily expects that it would publish this notice approximately 
one month prior to the start of the Pilot Period.
---------------------------------------------------------------------------

    \148\ Proposed Rule 610T(b)(1)(ii) would define ``Pilot 
Securities'' for purposes of Rule 610T as the NMS stocks designated 
by the Commission on the initial List of Pilot Securities pursuant 
to paragraph (b)(1)(i) of Rule 610T and any successors to such NMS 
stocks. At the time of selection by the Commission, an NMS stock 
would be included in the Pilot only if it has an unlimited duration 
or a duration beyond the end of the post-Pilot Period and a minimum 
initial share price of at least $2. If the share price of a Pilot 
Security in one of the Test Groups closes below $1 at the end of a 
trading day, it would be removed from the Test Group and would no 
longer be subject to the pricing restrictions set forth in (a)(1)-
(3) of proposed Rule 610T.
---------------------------------------------------------------------------

    To account for corporate changes during the proposed Pilot that 
affect the Pilot Securities, such as name changes, mergers, or 
dissolutions, proposed paragraph (b) of Rule 610T provides a process to 
update and publicly disseminate information about changes to the List 
of Pilot Securities. As discussed and defined further below, the 
Commission is proposing to require each equities primary listing 
exchange \149\ to publicly post on its

[[Page 13027]]

website downloadable files containing a list of its primary listed 
securities included in the proposed Pilot as well as an updated 
cumulative list of all changes to any Pilot Security for which it 
serves as the primary listing market.\150\ An exchange would have to 
include this information on its website as downloadable files that are 
freely and persistently available and easily accessible by the general 
public.\151\ In addition, the information must be presented in a manner 
that facilitates access by machines without encumbrance by user name, 
password, or other access constraints \152\ and the files and 
information therein could not be subject to any usage restrictions, 
such as restrictions on access, retrieval, distribution, and reuse. 
Requiring the exchanges to make this information freely and publicly 
available with completely unencumbered access would facilitate the 
ability of any person to use the information to conduct and make public 
research and analyses consistent with the purposes of this Pilot.
---------------------------------------------------------------------------

    \149\ Proposed Rule 610T(b)(1)(iii) would define ``primary 
listing exchange'' for purposes of Rule 610T as a national 
securities exchange on which an NMS stock is listed. If an NMS stock 
is listed on more than one national securities exchange, proposed 
Rule 610T(b)(1)(iii) provides that the national securities exchange 
upon which the NMS stock has been listed the longest shall be the 
primary listing exchange.
    \150\ The Commission notes that the primary listing exchanges 
maintain public web pages containing similar lists with respect to 
the Tick Size Pilot. The lists for NYSE and NYSE American listed 
stocks are available on the NYSE website, available at https://www.nyse.com/tick-pilot. The lists for Nasdaq listed stocks are 
available on the Nasdaq website, available at https://www.nasdaqtrader.com/Trader.aspx?id=TickPilot.
    \151\ ``Persistently available'' means that through the end of 
the required five-year post-Pilot retention period, all data from 
the Pilot would need to be continually available on each exchange's 
website. ``Accessible'' means that the Pilot data posted by each 
exchange must be able to be indexed by third party query 
applications and easily found on each exchange's website.
    \152\ Common access constraints may include: ``CAPTCHA'' (i.e., 
``Completely Automated Public Turing Test to Tell Computer and 
Humans Apart'') constraints, which commonly provide a challenge-
response test to determine whether or not the user is human and 
block access to the information by machines; user name and password 
access requirements; user registration requirements; and limitations 
on downloads.
---------------------------------------------------------------------------

    The Commission believes that it is important to maintain an updated 
list of Pilot Securities so that market participants can know with 
certainty throughout the duration of the proposed Pilot the Test Group 
and/or Control Group assignments for all Pilot Securities, thereby 
avoiding any confusion over how the proposed Pilot affects the stocks 
in which market participants trade. Further, it is important to 
maintain detailed information on historical changes to Pilot Securities 
and their associated Test Groups and/or Control Group in order to 
ensure that market participants, researchers, and the Commission have 
ready access to definitive information on the Pilot Securities, which 
will assist the Commission and researchers in analyzing pilot data and 
assessing and accounting for changes to any Pilot Securities during the 
duration of the Pilot, including the post-Pilot Period. The Commission 
believes that the primary listing exchanges, as defined in proposed 
Rule 610T(b)(1)(iii), are in the best position to provide this 
information because they oversee their listed issuers and have rules in 
place that require listed issuers to report corporate change 
information to them.\153\ Accordingly, the primary listing exchanges 
are made aware of changes relevant to the proposed Pilot for the 
securities listed on their markets, and therefore are in the best 
position to disseminate this information by making it publicly 
available on their websites.
---------------------------------------------------------------------------

    \153\ See NYSE Listed Company Manual Rule 204.18 (Name Change) 
(requiring listed issuers to provide notice to NYSE of intended name 
changes 20 days in advance of the date set for mailing the 
shareholders' proxy materials dealing with the matter); Nasdaq 
Listing Rule 5250(e)(3)(A) (Record Keeping Change) (requiring listed 
issuers to provide notice to Nasdaq of name changes no later than 10 
days after the change); NYSE Arca Listed Company Manual Rule 5.3-
E(i)(1)(i)(D) (Financial Reports and Related Notices) (requiring 
listed issuers to notify the Exchange of changes in company name); 
Cboe BZX Exchange, Inc. Rule 14.6(e)(3)(A) (Record Keeping Change) 
(requiring listed issuers to provide notice to the Exchange of name 
changes no later than 10 days after the change); NYSE American 
Company Guide Sec. 930 (Change of Name) (requiring listed issuers to 
provide advance notice to the Exchange of intended name changes); 
IEX Rule 14.207(e)(3)(A) (Record Keeping Change) (requiring listed 
issuers to provide notice to the Exchange of name changes no later 
than 10 days after the change).
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a. Pilot Securities Exchange Lists
    As discussed further below, prior to the beginning of trading on 
the first day of the Pilot Period, proposed Rule 610T(b)(2)(i) would 
require each national securities exchange that is a primary listing 
exchange for equities to publicly post on its website downloadable 
files containing a list, in pipe-delimited ASCII format,\154\ of all 
securities included in the proposed Pilot for which the equities 
exchange serves as the primary listing exchange (the ``Pilot Securities 
Exchange List''). Proposed Rule 610T(b)(2)(ii) specifies the required 
fields for the Pilot Securities Exchange Lists, which are: Ticker 
symbol, security name, primary listing exchange, security type (common 
stock, ETP, preferred stock, warrant, closed-end fund, structured 
product, ADR, or other), Test Group (1, 2, 3 or Control Group), as well 
as the date the entry was last updated. The Commission preliminarily 
believes that this list would contain the essential identifying 
information necessary to inform market participants and the public 
about the securities included in the proposed Pilot, and the security 
type field would permit the Commission and researchers to easily 
identify subsets of NMS stocks so they can be analyzed separately.
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    \154\ The Commission understands that the equities exchanges and 
market participants have experience utilizing this common file 
format and will be able to create and make use of lists of Pilot 
Securities in pipe-delimited ASCII format (also referred to as a 
``text'' file) without difficulty. In particular, the exchanges use 
this format in the Tick Size Pilot. See Tick Size Pilot Data 
Collection Securities Files, available at http://www.finra.org/industry/oats/tick-size-pilot-data-collection-securities-files 
(noting that ``[t]he Pilot Securities files are pipe-delimited .txt 
files.'').
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    Each primary listing exchange would be responsible for keeping 
current its Pilot Securities Exchange List to reflect any changes. 
Specifically, proposed Rule 610T(b)(2)(i) would require the primary 
listing exchanges to maintain and update their Pilot Security Exchange 
List, as necessary, prior to the beginning of trading on each business 
day that the U.S. equities markets are open for trading (also referred 
to herein as a ``trading day''). If a change occurs that alters any of 
the fields required by Rule 610T(b)(2)(ii), such as ticker symbol, 
security name, or Test Group, the primary listing exchange for that 
Pilot Security must update its Pilot Securities Exchange List prior to 
the beginning of trading on the first trading day for which such change 
is effective. The primary listing exchanges would be required to 
continue to update the Pilot Securities Exchange Lists, as necessary, 
through to the conclusion of the post-Pilot Period.
b. Pilot Securities Change Lists
    In addition, proposed Rule 610T(b)(3)(i) would require each 
equities primary listing exchange to maintain and publicly post on its 
website downloadable files containing a list, in pipe-delimited ASCII 
format, of each separate change applicable to any Pilot Securities for 
which that primary listing exchange serves or, during the course of the 
Pilot, has served as the primary listing exchange (the ``Pilot 
Securities Change List''). Proposed Rule 610T(b)(3)(ii) specifies the 
required fields for the Pilot Securities Change List, which, in 
addition to the fields required for the Pilot Securities Exchange List, 
are: New ticker symbol (if applicable); new security name (if 
applicable); deleted date (if applicable); date the security closed 
below $1 (if applicable); effective date of the change; and reason for 
change. The list would be updated by the primary listing exchange

[[Page 13028]]

to include all changes since the inception of the Pilot, for the Pilot 
Securities listed on the exchange. Examples of changes that would 
appear on this list include name changes, ticker symbol changes, 
mergers, delistings, or removal from a Test Group due to the share 
price of a stock closing below $1. Each primary listing exchange would 
be required to update and post its Pilot Securities Change List prior 
to the beginning of trading on each trading day the U.S. equities 
markets are open for trading and keep it current through the end of the 
post-Pilot Period. The Pilot Securities Change List is designed to 
serve as a cumulative list that provides ready access to all changes to 
Pilot Securities listed on a particular equities exchange that have 
occurred subsequent to a primary listing exchange posting its initial 
Pilot Securities Exchange List on its website.
    The Commission believes that market participants and the public 
would benefit from having access to accurate and up-to-date information 
on the Pilot Securities and their classification in a particular Test 
Group or Control Group during the Pilot. As it is possible that changes 
to some of the Pilot Securities may occur over the course of the 
proposed Pilot, information about those changes could be useful to 
broker-dealers and other market participants when making routing and 
execution decisions. Accordingly, the Commission believes it is 
important for there to be ready access to relevant updates that impact 
the Pilot Securities Exchange Lists. Because the primary listing 
exchanges currently track corporate actions that affect their listed 
issuers, the Commission believes they are best positioned to 
disseminate information about those changes as they apply to the 
securities listed on their markets by making it publicly available on 
their respective websites.
    Further, having access to an updated, cumulative list reflecting 
all changes to the Pilot Securities will assist the Commission and 
researchers in analyzing the Pilot data. In particular, ready public 
access to the record of changes to Pilot Securities and any changes to 
the applicable Test Groups (or Control Group) that will be reflected in 
the Pilot Securities Change Lists would provide transparency to the 
public that the Commission and researchers could use when assessing 
Pilot data, and also could be useful to market participants, including 
broker-dealers that route customer orders, to assess and review changes 
to the lists of Pilot Securities over time.
    The primary listing exchanges would be required, pursuant to 
Proposed Rule 610T(b), to keep the lists publicly posted on their 
websites beginning with the Pilot Period through the post-Pilot Period, 
as defined in Proposed Rule 610T(c), and for five years after the end 
of the post-Pilot Period.\155\ The lists must be easily accessible and 
freely and persistently available in downloadable form and shall not be 
subject to any restrictions, including, but not limited to, access or 
usage restrictions.\156\ The Commission preliminarily believes that 
continued public availability of this information (particularly the 
Pilot Securities Change Lists) during the Pilot and for several years 
thereafter would be useful for market participants and the public, 
including academic researchers, because it would permit changes to the 
Pilot Securities to be easily tracked for comparison and analysis of 
the impact of those changes. Accordingly, the Commission expects that 
researchers would be interested in tracking changes to Pilot Securities 
over the course of the proposed Pilot, and that there likely would be 
continued interest in the Pilot Securities Exchange Lists and Pilot 
Securities Change Lists for some time following the conclusion of the 
proposed Pilot as researchers analyze the Pilot data and conduct their 
own independent assessments. Accordingly, the Commission believes that 
the public would benefit from the primary listing exchanges maintaining 
the lists they prepare pursuant to Proposed Rule 610T(b) on their 
public websites for a period of not less than five years following the 
conclusion of the post-Pilot Period because it would provide for ready 
access by the public to perform analyses which are likely to occur for 
several years following the conclusion of the proposed Pilot.
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    \155\ While both the Pilot Securities Exchange Lists and the 
Pilot Securities Change Lists would be required to be publicly 
posted for five years after the end of the post-Pilot Period, the 
primary listing exchanges would not be required to continue to 
update such lists following the conclusion of the post-Pilot Period.
    \156\ See proposed Rule 610T(b)(4).
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    The Commission requests comment on the initial List of Pilot 
Securities, the Pilot Securities Exchange List, and the Pilot 
Securities Change List, including the contents thereof and method of 
publication of that information. In particular, the Commission solicits 
comment on the following. To the extent possible, please provide 
specific data, analyses, or studies for support.
    38. Should the Commission determine the initial Pilot Securities 
and specify the Test Group (or Control Group) assignments at a 
specified minimum period of time prior to the start of the Pilot 
Period? Is one month sufficient, or should the notice be published 
closer to the start of the Pilot, such as two weeks prior? For 
comparison, the Commission selected securities for the Regulation SHO 
Pilot approximately ten months before the start of the Regulation SHO 
Pilot and the SROs assigned stocks to test groups one month before the 
start of the Tick Size Pilot. Does the experience with either of those 
pilots provide any insight into when the Commission should determine 
the initial Pilot Securities for the proposed Pilot? Or is it necessary 
for the Commission to select the Pilot Securities and assign them to 
groups prior to the pre-Pilot Period? Please explain. What, if any, 
operational or implementation complexities did market participants 
experience in relation to the timing of the assignment of securities in 
the previous pilots?
    39. Do the procedures specified in Proposed Rule 610T(b) offer an 
appropriate framework for maintaining the list of securities for the 
proposed Transaction Fee Pilot? If not, what other arrangement should 
the Commission implement? If yes, do any adjustments need to be made to 
accommodate the proposed Pilot?
    40. Is a pipe-delimited ASCII format the appropriate file format 
for maintaining the Pilot Securities Exchange Lists and Pilot 
Securities Change Lists? If not, what other format is more appropriate? 
Why is such alternate format preferred over a pipe-delimited ASCII 
format?
    41. How long should the rule require that exchanges maintain 
historical versions of the lists on their public websites for public 
availability? Is five years appropriate, or should they be maintained 
on public websites for more or less time?
    42. Should the Commission require, in order to make the data more 
accessible and usable from the exchanges' websites, more automated 
access to the data? For example, should the Commission require an 
exchange to make the data publicly available on its website via RSS 
Feeds \157\ and/or APIs? \158\ If so, which would be more preferable 
and why? What would be the benefits? What costs would be associated 
with such functionality?
---------------------------------------------------------------------------

    \157\ RSS Feeds (Really Simple Syndication) are a type of web 
feed which allows users to access updates to online content in a 
standardized, computer-readable format.
    \158\ API (Application Programming Interface) is a set of 
clearly defined methods of communication between various software 
components which can make it easier to develop a computer program by 
providing all the building blocks, which are then put together by 
programmers.
---------------------------------------------------------------------------

    43. Are the requirements for posting the required information on a 
public

[[Page 13029]]

website, including the prohibition on access and usage restrictions, 
appropriate to ensure that the public and the Commission will have 
unfettered access to and be able to use effectively, without 
encumbrance, the information? Should the Commission impose any other 
requirements for posting the information? How would usage restrictions 
impact the ability to analyze the data?
2. Exchange Transaction Fee Summary
    To facilitate analysis of the Pilot data, including the effect that 
transaction-based fees and rebates have on order routing behavior, 
execution quality, and market quality, the Commission preliminarily 
believes that it is necessary for the exchanges to post publicly 
standardized select data on transaction fees and rebates, including 
changes to fees and rebates for NMS stocks in each Test Group and the 
Control Group, as well as average and median realized fees measured 
monthly.\159\ While the proposed Pilot would cap access fees 
differently in Test Groups 1 and 2, exchanges would have the freedom to 
set fees at any level below those caps. The Exchange Transaction Fee 
Summary should facilitate comparison of each exchange's basic fee 
structure across all equities exchanges and help identify, in summary 
fashion, changes to those fees.
---------------------------------------------------------------------------

    \159\ Some fee changes would not be affected by the proposed 
Pilot. For example, fixed membership fees, regulatory fees, and 
connectivity fees that are not assessed by transaction would not 
fall within the scope of the proposed Pilot.
---------------------------------------------------------------------------

    Because changes to transaction fees and rebates currently are 
described using Form 19b-4 in individual proposed rule change filings 
that can be fairly complex, the Commission believes that compiling a 
dataset of fees and fee changes from Form 19b-4 fee filings alone for 
use in studying the proposed Pilot would be cumbersome and labor 
intensive for researchers and may discourage research. Further, the 
Commission recognizes that exchanges may use unique terminology to 
describe their fees, which could make comparison of fees across 
exchanges difficult for a researcher, so the proposal provides for 
standardized terms to ease comparison across exchanges. The Commission 
is proposing that exchanges publicly post on their websites in a 
downloadable file information on their fees (including rebates) and fee 
changes during the proposed Pilot (including for the pre-Pilot and 
post-Pilot Periods) using an eXtensible Markup Language (XML) schema to 
be published on the Commission's website.\160\ Similar to the Pilot 
Securities lists, discussed above, exchanges would be required to 
publicly post downloadable files containing the Exchange Transaction 
Fee Summary, which would require exchanges to post that information on 
a website that is freely and persistently available and easily 
accessible by the general public. Further, exchanges would be required 
to present the information in a manner that facilitates access by 
machines without encumbrance, and the files and information therein 
could not be subject to any usage restrictions such as restrictions on 
access, retrieval, distribution, and reuse.
---------------------------------------------------------------------------

    \160\ See proposed Rule 610T(e). The Commission's schema is a 
set of custom XML tags and XML restrictions designed by the 
Commission to reflect the proposed disclosures in Rule 610T(e). This 
requirement does not impact a national securities exchange's 
obligation pursuant to Section 19(b) of the Exchange Act and Rule 
19b-4 thereunder concerning filing a notice of proposed rule change 
to effectuate a change in transaction fees and updating the schedule 
of fees posted on the exchange's website to reflect such changes. 
See supra note 10 (discussing the procedural and substantive 
requirements applicable to Form 19b-4 fee filings).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the unencumbered 
availability of this data using the proposed XML schema would enhance 
data quality and facilitate analysis on the correlation between changes 
in transaction fees and changes in order routing behavior, execution 
quality, and market quality.\161\ There are other alternatives to the 
Commission proposed XML schema such as CSV and JSON formats. The CSV 
format provides the most compact file size among the alternatives; 
however, it also is the least flexible as it cannot convey the same 
complexity as XML or JSON or directly incorporate validation rules 
thereby potentially resulting in lower data quality. The JSON format 
provides a file size similar to XML and can convey complex data 
structures; however, XML is more widely supported by software packages 
and applications that are likely to be used by researchers and the 
public. Therefore, the use of JSON would likely impact reuse and 
analysis of the data provided by the proposed Pilot.
---------------------------------------------------------------------------

    \161\ See supra Section V.E.4 (discussing the proposed XML 
format and the limits of using ASCII format for the Exchange 
Transaction Fee Summary).
---------------------------------------------------------------------------

    Accordingly, for the duration of the proposed Pilot, including the 
pre- and post-Pilot Periods, proposed Rule 610T(e) would require each 
national securities exchange that trades NMS stocks to compile and post 
publicly a dataset using an XML schema to be published on the 
Commission's website that contains specified information on its fees 
and fee changes that affect each Test Group and the Control Group.\162\ 
Proposed Rule 610T(e) would require the equities exchanges to post on 
their websites an initial Exchange Transaction Fee Summary before the 
start of trading on the first day of the pre-Pilot Period and would 
require the information to be updated through the close of trading on 
the last day of the post-Pilot Period. During the Pilot, including the 
pre- and post-Pilot Periods, proposed Rule 610T(e) would require the 
equities exchanges to update the Exchange Transaction Fee Summary on a 
monthly basis within 10 business days of the first day of each calendar 
month to reflect data collected for the prior month.\163\
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    \162\ Because the Pilot Securities would be subject to a 
continuing minimum share price of $1, the proposed dataset would 
only contain information on fees applicable to transactions in 
securities with a per share price $1 or more.
    \163\ Using the month of December 2018 as an example, on or 
before January 16, 2019, an exchange would be required to post the 
required information based on data it collected during the previous 
month of December.
---------------------------------------------------------------------------

    Proposed Rule 610T(e) specifies the information to be provided in 
the Exchange Transaction Fee Summary. Specifically, the proposed 
summary of information relating to fees and fee changes would identify 
the self-regulatory organization by name (``SRO Name'') so that the 
Commission and researchers would be able to link each exchange to its 
reported fees.
    Further, the proposed summary would identify the applicable Pilot 
Test Group (i.e., 1, 2, 3, or Control), and it would identify the 
``Base'' take fee (rebate), the ``Base'' make rebate (fee), the ``Top 
Tier'' take fee (rebate), and the ``Top Tier'' make rebate (fee), as 
applicable.\164\ For purposes of the Exchange Transaction Fee 
Summaries, ``Base'' fee/rebate refers to the standard amount assessed 
or rebate offered before any applicable discounts, tiers, caps, or 
other incentives are applied. Further, ``Top Tier'' fee/rebate refers 
to the fee assessed or rebate offered after all applicable discounts, 
tiers, caps, or other incentives are applied. The Commission 
preliminarily believes that the Base and Top Tier information would be 
useful to the Commission and researchers as an approximation of the fee 
and rebate information that broker-dealers incorporate into their 
routing decisions, which will be useful in interpreting the Pilot data. 
For example, the information can be used to help identify and track 
changes in fees and rebates and the timing of those changes, which can 
be compared to changes in

[[Page 13030]]

order routing behavior, execution quality, and market quality.
---------------------------------------------------------------------------

    \164\ See proposed Rule 610T(e).
---------------------------------------------------------------------------

    In addition, proposed Rule 610T(e) would require exchanges to 
calculate the ``average'' and ``median'' per share fees and rebates, 
which the exchange would compute as the monthly realized average or 
median per-share fee paid or rebate received by participants on the 
exchange during the prior calendar month.\165\ The summary would 
require average and median per share fees and rebates to be reported 
separately for each participant category (discussed below), Test Group, 
displayed/non-displayed, and top/depth of book. The Commission believes 
the inclusion of average and median figures is helpful as the Base and 
Top Tier figures are general values and not all broker-dealers would 
pay or receive those amounts. While Base and Top Tier would be useful 
to facilitate comparison across exchanges, the addition of average and 
median figures will provide additional insight into the typical fees 
paid or rebates received by broker-dealers at each exchange. In turn, 
this information would be useful to the Commission and researchers 
analyzing how fees and rebates affect order routing decisions. While 
the average realized fee or rebate paid/earned by market participants 
on an exchange can be skewed by extremely large or small values, the 
median figures would not be affected by such values because median 
figures reflect the midpoint of values with an equal probability of 
falling above or below that amount. The Commission preliminarily 
believes that both the average and median realized fee/rebate figures 
would be helpful to the Commission and researchers in analyzing Pilot 
data and the Commission and researchers could incorporate both figures 
into their analyses, in addition to the Base and Top Tier data, 
discussed above. For example, a researcher could examine average 
realized per share fees and rebates when exploring order routing 
decisions with respect to particular exchanges across broker-dealers. 
Likewise, a researcher could consider median realized per share fees 
and rebates when examining the routing decisions of an individual 
broker-dealer faced with a choice of multiple competing exchanges each 
with different fees and rebates.
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    \165\ Using the month of December 2018 as an example, on or 
before January 16, 2019, an exchange would be required to post, 
among other data, the Base and Top Tier fees and rebates in effect 
on December 1, any changes to the Base or Top Tier fees and rebates 
during the month of December, and the average and median per-share 
fees paid or rebates received by participants on the exchange for 
the month of December.
---------------------------------------------------------------------------

    Further, the proposed summary of information would require equities 
exchanges to report ``record type'' and ``participant type.'' 
Specifically, ``record type'' would be an indicator variable to enable 
the Commission and researchers to quickly identify whether the fee 
being reported is an average/median figure, or whether it is the Base 
or Top Tier fee. Knowing whether a particular fee or rebate is either 
the Base/Top Tier or average/median would help the Commission and 
researchers avoid confusion and provide important clarity in the 
dataset to facilitate use of the information. The ``participant type'' 
also would be an indicator variable and would require exchanges to 
separately report fees applicable to registered market makers or other 
market participants. To the extent that an exchange maintains different 
fees and rebates (e.g., different Base or Top Tier fees or rebates) for 
market makers compared to other market participants, this indicator 
variable would allow the Commission and researchers to separately 
analyze market makers from other participants, which could be valuable 
when considering the effects of fees and rebates on execution quality 
and market quality as they impact the incentives on market makers to 
provide liquidity on specific exchanges. In addition, proposed Rule 
610T(e) would require the equities exchanges to identify whether the 
fees and rebates reported in the summary apply to displayed or non-
displayed liquidity or both displayed and non-displayed liquidity and 
whether they apply to the top or depth of book or to both top and depth 
of book.\166\ These indicator variables will help the Commission and 
researchers identify whether the fees/rebates reported in the dataset 
differ between displayed and non-displayed orders or between top and 
depth of book. If an exchange does differentiate between those 
conditions in the assessment of fees or provision or rebates, then it 
would so indicate. Inclusion of this information in the summary of 
information will allow the Commission and researchers to observe 
differences at exchanges in fees/rebates to provide or remove 
liquidity, which could be used to evaluate order routing, execution 
quality, and market quality.
---------------------------------------------------------------------------

    \166\ See proposed Rule 610T(e)(5) and (6).
---------------------------------------------------------------------------

    Finally, proposed Rule 610T(e)(7) and (8) would require the 
equities exchanges to identify the effective date for each fee (rebate) 
reported and, when applicable, the end date after which the fee 
(rebate) was no longer in effect.\167\ In addition, equities exchanges 
would report a separate indicator variable to identify when they change 
fees other than on the first trading day of a calendar month.\168\ 
Specifically, this variable would distinguish whether the average and 
median values reported in the dataset represent the pre-change average/
median or post-change average/median. For example, if an exchange 
changes its fees on the 15th of a month, then the average and median 
fees reported before the 15th would be marked to distinguish them from 
the average and median fees reported on and after the 15th of the 
month. This indicator variable would be necessary to allow the 
Commission and researchers to line up the time of reported fee 
information with observed order routing and execution and market 
quality information in the Pilot data.
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    \167\ See proposed Rule 610T(e).
    \168\ See proposed Rule 610T(e)(10).
---------------------------------------------------------------------------

    As proposed, each equities exchange would be required to post 
publicly on its website an initial Exchange Transaction Fee Summary 
containing the information prescribed in Rule 610T(e) using an XML 
schema to be published on the Commission's website prior to the start 
of trading on the first day of the pre-Pilot Period. Pursuant to 
proposed Rule 610T(e), each equities exchange thereafter would be 
required to publicly post an updated dataset within 10 business days of 
the first day of each calendar month and would continue to do so until 
the end of the post-Pilot Period.
    The Commission recognizes that including only the Base fee 
(rebate), Top Tier fee (rebate), average fee (rebate), and median fee 
(rebate) ignores significant variation in exchange fee schedules. 
However, including more granular information on specific individual 
fees and rebates would complicate the data, could be difficult to 
standardize across exchanges, and could potentially make the Pilot more 
expensive than proposed. Further, the Commission preliminarily believes 
that the proposed data fields provide sufficient information to assess 
the range of fees and the variation across exchanges in fees and 
facilitate analysis of the Pilot data, which otherwise would be 
challenging to summarize independently and accurately in light of the 
considerable complexity of exchange fee schedules noted above. 
Reporting the fee information separately for registered market makers, 
as a group, and other market participants, as a group, will allow the 
Commission to separate out the class of market makers to see how 
changes to fees and rebates

[[Page 13031]]

impact the fulfillment of their responsibility to provide liquidity. 
The Commission believes each exchange should summarize this information 
because each exchange is best able to understand its own fees and 
unique fee terminology.
    The Commission requests comment on the proposed Exchange 
Transaction Fee Summary proposed in connection with the proposed Pilot. 
In particular, the Commission solicits comment on the following. To the 
extent possible, please provide specific data, analyses, or studies for 
support.
    44. Is the proposed Exchange Transaction Fee Summary useful to 
permit comparisons to be made across exchanges? If not, what type of 
information should be captured?
    45. Is having an Exchange Transaction Fee Summary that uses the 
same XML schema useful when examining the Pilot data? Should the 
proposed Pilot use an alternative schema? If so, how should the schema 
change and what would be the impacts of such changes?
    46. Are the data elements included in the Commission's proposed 
schema reasonable? Should any changes be made and what would be the 
impacts of such changes?
    47. What information in the Exchange Transaction Fee Summary is 
most useful? What additional information in the Exchange Transaction 
Fee Summary would be helpful? Is any information in the proposed 
Exchange Transaction Fee Summary not useful and, if so, should it be 
removed? Please explain. If so, should alternative information be 
selected instead?
    48. Are both ``average'' and ``median'' fees useful metrics, or 
should other measures be selected and what would be the impacts of 
those alternatives?
    49. The proposal would require separate reporting for registered 
market makers, as a group, and other market participants, as a group. 
Should further groups be identified? Would customers or professionals 
be appropriate groups on which to collect fee data?
    50. Are monthly updates to the Exchange Transaction Fee Summary 
appropriate, or should the Commission require the exchanges to post 
this information more or less frequently and why?
    51. Should the Commission require exchanges to report in the 
Exchange Transaction Fee Summary additional information on proposed 
rule change filings that change transaction fees reported in the 
Exchange Transaction Fee Summary? If so, what information should be 
reported? Would the file number of the exchange's proposed rule change 
be sufficient, or should links be captured that reference the filing?
    52. Should the Commission require the exchanges to specially 
identify any filing submitted to the Commission that establishes or 
changes a fee, rebate, or other charge imposed by the Exchange? What 
form should this identification take? Should the title of the filing 
require a special identifier? Should the exchanges be required to post 
a consolidated list of such filings on a publicly available website?
    53. Should the Commission require submission of the Exchange 
Transaction Fee Summaries through EDGAR instead of requiring exchanges 
to post that information on each individual equities exchange's 
website? If so, how would this affect the exchange filers and how would 
it affect users of the Exchange Transaction Fee Summaries?
3. Order Routing Data
    To provide public data to facilitate an examination of the impact 
of the proposed Pilot on order routing behavior, execution quality, and 
market quality, the Commission proposes in Rule 610T(d) to require 
throughout the duration of the Pilot, as well as during the pre-Pilot 
Period and the post-Pilot Period, that each national securities 
exchange that trades NMS stocks prepare a downloadable file containing 
sets of order routing data in accordance with the specifications 
proposed in Rule 610T(d), for the prior month.\169\ The data would be 
in pipe-delimited ASCII format, and be publicly posted on each 
exchange's website no later than the last day of the following month. 
As proposed for the lists of Pilot Securities and the Exchange 
Transaction Fee Summary, exchanges would be required to publicly post 
downloadable files containing this order routing information. Exchanges 
would be required to post this information on a website that is freely 
and persistently available and easily accessible by the general public. 
In addition, exchanges would be required to present this information in 
a manner that facilitates access by machines without encumbrance by 
user name, password, or access constraints and the files and 
information therein could not be subject to any usage restrictions, 
such as restrictions on retrieval, distribution, and reuse. Requiring 
the exchanges to post and maintain this order routing information with 
free and completely unencumbered access would facilitate research and 
analyses consistent with the purposes of this Pilot.
---------------------------------------------------------------------------

    \169\ For example, by September 30th, an exchange would be 
required to post the required information containing order routing 
data for August.
---------------------------------------------------------------------------

    For the pre-Pilot Period, order routing datasets would include each 
NMS stock. For the Pilot Period and post-Pilot Period, order routing 
datasets would include each Pilot Security. As discussed below, the 
order routing data must contain aggregated and anonymized broker-dealer 
order routing information.\170\ Also as discussed below, the required 
datasets would contain order routing information for liquidity-
providing orders and liquidity-taking orders that is aggregated by day, 
by security, by exchange, and by broker-dealer on an anonymous 
basis.\171\ If the equities exchanges are reporting to the Consolidated 
Audit Trail (``CAT'') at the time the proposed Pilot commences, they 
would be able to compile the required order routing data by utilizing 
the data they collect pursuant to the national market system plan 
(``CAT NMS Plan'').\172\
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    \170\ See supra note 154 describing the reasons for requiring 
data to be provided in pipe-delimited ASCII format. Aggregated order 
routing data would consist of the cumulative (total) number of 
orders or shares of orders received, cancelled, executed, or routed 
to another trading center by order type and order size, accumulated 
by day, by security, by anonymized broker-dealer, and by exchange, 
as detailed in proposed Rule 610T(d).
    \171\ See proposed Rule 610T(d).
    \172\ See Securities Exchange Act Release No. 79318 (November 
15, 2016), 81 FR 84696 (November 23, 2016) (Joint Industry Plan; 
Order Approving the National Market System Plan Governing the 
Consolidated Audit Trail) and CAT NMS Plan Sections 6.3-6.4.
---------------------------------------------------------------------------

    As described in paragraph (d) to proposed Rule 610T, the Commission 
is proposing that each equities exchange would be required to post 
publicly two datasets on their websites in pipe-delimited ASCII format. 
One dataset would include daily volume statistics of liquidity-
providing orders by security and by anonymized broker-dealer, 
separating held and not-held orders. The second dataset would include 
daily volume statistics of liquidity-taking orders by security and by 
anonymized broker-dealer, separating held and not-held orders. The 
specific fields for each dataset as set forth in paragraph (d) to 
proposed Rule 610T are: Code identifying the equities exchange; eight-
digit code identifying the date of the calendar day of trading; ticker 
symbol; unique, anonymized broker-dealer identification code; order 
type code; order size codes; number of orders received; cumulative 
number of shares of orders received; cumulative number of shares of 
orders cancelled prior to execution; cumulative number of shares of 
orders executed at receiving market center; and cumulative number of 
shares of orders routed to another

[[Page 13032]]

execution venue. In addition, the liquidity-providing orders dataset 
also would require a field specifying the cumulative number of shares 
executed within certain specified time periods after order receipt by 
the exchange.
    The Commission preliminarily believes that the publicly-available 
order routing data should provide researchers and the Commission with 
data necessary to serve the Commission's regulatory purposes in 
studying the potential conflicts of interest associated with 
transaction-based fees and rebates and the effects that changes to 
those fees and rebates have on order routing behavior, execution 
quality, and market quality. In particular, the order routing data 
would contain information about the exchanges to which broker-dealers 
route orders, which will permit a closer examination of how broker-
dealers may change their order routing behavior in response to changes 
in fees and rebates at each exchange. Because broker-dealers may 
respond differently to differing levels of fees and rebates and the 
inherent conflicts of interest fees and rebates present when making 
routing decisions, the Commission preliminarily believes that data at 
the broker-dealer level would facilitate statistical analysis of those 
differences and the conflicts of interest associated with them. The 
order routing data also would provide valuable information on order 
type, order size, time to execution, and information on order 
execution, cancellation, and reroutes, all of which should facilitate 
analysis into routing behavior in response to differing levels of fees 
and rebates. In addition, this same information would also facilitate 
an analysis of the effects that changes to transaction-based fees and 
rebates may have on execution and market quality by permitting a close 
examination of matters such as liquidity concentration and competition 
for order flow among equities exchanges in different fee and rebate 
environments.
    Further, proposed Rule 610T(d) would require during the course of 
the Pilot, as well as during the pre-Pilot Period and the post-Pilot 
Period, each national securities exchange that trades NMS stocks to 
publicly post on its website downloadable files in pipe-delimited ASCII 
format no later than the last day of each month, sets of order routing 
data in accordance with the specifications in proposed Rule 610T(d), 
for the prior month. The Commission is proposing to require the 
equities exchanges to collect and make available pre-Pilot and post-
Pilot data, which would provide necessary benchmark information against 
which the Commission could assess the impact of the Pilot, and the 
impact of the Pilot on potential conflicts of interest associated with 
transaction-based fees and rebates and the effects that changes to 
those fees and rebates have on order routing behavior, execution 
quality, and market quality.
    In preparing the datasets, the equities exchanges would be required 
to anonymize information relating to the identity of individual broker-
dealers before making the order routing datasets publicly available. In 
order to track and aggregate the activity of particular broker-dealers 
across multiple exchanges, the Commission preliminarily believes it is 
important for each equities exchange to utilize the same anonymized 
code to identify a broker-dealer.
    Using a single code to identify each unique broker-dealer will 
allow the Commission and researchers to easily combine the separate 
exchange data files and sort them by unique broker-dealers, therein 
allowing the Commission and researchers to identify aggregate activity 
at the broker-dealer level across all equities exchanges. In turn, the 
ability to combine and sort all exchange data by anonymized codes 
representing individual broker-dealers would be useful for capturing 
and analyzing individual broker-dealer order routing decisions.
    In order to facilitate the anonymization of the identities of 
broker-dealers, representatives of the Commission would provide to the 
equities exchanges, on a confidential basis, a Broker-Dealer 
Anonymization Key. The Broker-Dealer Anonymization Key would provide 
the anonymization code for every broker-dealer whose order routing data 
would be included in the order routing datasets. The Commission 
preliminarily believes that it would be most efficient to create the 
Broker-Dealer Anonymization Key by assigning a unique, anonymized 
identification code to each central registration depository identifier 
(``CRD''), which are identifiers of registered broker-dealers known and 
regularly used by both the Commission and the equities exchanges.\173\ 
To protect the identities of broker-dealers, the Broker-Dealer 
Anonymization Key would only be accessible to representatives of the 
Commission and the equities exchanges.
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    \173\ CRD numbers are captured in the Commission's EDGAR system.
---------------------------------------------------------------------------

    Because proposed Rule 610T would state that the identities of 
broker-dealers contained in the Order Routing Datasets, and the Broker-
Dealer Anonymization Key, are regulatory information, exchanges would 
not be permitted to access or use that information for any commercial 
or non-regulatory purpose. The Commission considers the identities of 
broker-dealers in the proposed Order Routing Data, as well as the 
Broker-Dealer Anonymization Key, to be regulatory information produced 
for the specific and exclusive purpose of conducting the Pilot, which 
ultimately will inform the Commission's (as well as exchanges' and the 
public's) regulatory consideration of the impact of transaction fees on 
equities market structure. The Commission believes it would be 
inconsistent with an exchange's rules to use the Broker-Dealer 
Anonymization Key and the Order Routing Data to benefit its business 
operations.\174\ Accordingly, Rule 610T would expressly prohibit 
exchanges from accessing or using the Pilot's order routing data for 
commercial or non-regulatory purposes for reasons including, but not 
limited to, setting transaction fees, marketing, business development, 
and customer outreach.\175\
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    \174\ Section 19(g)(1) of the Act requires, in part, that every 
self-regulatory organization comply with its own rules. See 15 
U.S.C. 78s(g)(1). Corporate governance documents for equities 
exchange holding companies contain rules that restrict the use of 
information related to an equities exchange's self-regulatory 
function and do not permit use or disclosure of such information for 
commercial purposes. See By-laws of Nasdaq, Inc., Article XII, 
Section 12.1(b), available at http://nasdaq.cchwallstreet.com/NASDAQTools/PlatformViewer.asp?selectednode=chp_1_1_3_6&manual=%2Fnasdaq%2Fmain%2Fnasdaq-corporg%2F; Eighth Amended Bylaws of Intercontinental 
Exchange Inc., Article VIII, Section 8.1, available at http://ir.theice.com/governance/governance-and-charter-documents; Cboe 
Global Markets, Inc. and Subsidiaries Code of Business Conduct and 
Ethics, available at http://ir.cboe.com/~/media/Files/C/CBOE-IR-V2/
corporate-governance/code-of-business-conduct-and-ethics-27-oct-
2017-adopted.pdf; Bylaws of IEX Group, Inc., Article VII, Section 
35, available at https://iextrading.com/docs/governance/IEXG%20Bylaws.pdf; Bylaws of CHX Holdings, Inc., Article III, 
Section 2, available at http://www.chx.com/chx-holdings/bylaws/.
    \175\ For example, proposed Rule 610T would prohibit an 
exchange's non-regulatory personnel from having access to the 
Broker-Dealer Anonymization Key or using that information to 
decipher the order routing data posted by competing exchanges to 
learn the identities of those exchanges' biggest customers and then 
solicit those customers for itself.
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    The Commission believes that the public availability of the order 
routing datasets would be useful to allow market participants, 
researchers, and others to conduct independent analyses of the proposed 
Pilot and its impacts. To the extent these analyses reveal useful 
information about the potential conflicts of interest associated with 
transaction-based fees and rebates and the effects that changes to 
those fees and rebates have on order routing behavior,

[[Page 13033]]

execution quality, and market quality, the Commission believes it would 
use the resulting analyses for its own regulatory purposes to further 
inform itself and the public on whether further regulatory action in 
this area is appropriate.
    The Commission requests comment on the order routing-related data 
to be included in the proposed Pilot. In particular, the Commission 
solicits comment on the following. To the extent possible, please 
provide specific data, analyses, or studies for support.
    54. What data are necessary to facilitate analysis of the potential 
conflicts of interest associated with transaction-based fees and 
rebates and the effects that changes to those fees and rebates have on 
order routing behavior, execution quality, and market quality? Are 
there any specific measures that commenters believe would facilitate 
that analysis? For example, do commenters agree with the Joint Exchange 
Letter's recommendation to study the impact on broker-dealers and their 
customers of savings realized from lowered exchange transaction fees? 
\176\ If so, what data would facilitate that analysis?
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    \176\ See Joint Exchange Letter, supra note 44, at 4.
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    55. If the CAT repository was operational, as specified in the CAT 
NMS Plan, would the Commission have sufficient data to evaluate order 
routing behavior without this Pilot? Does the lack of the CAT affect 
the costs necessary for this proposed Pilot, and if so how?
    56. Should the Commission require the order routing datasets to 
separate out held and not-held orders? Why or why not? Are there 
certain shared characteristics regarding the handling of not-held 
orders, such as a greater likelihood to be directed to particular 
exchanges, that would be beneficial to assess? Please explain.
    57. Should the Commission also require exchanges to separately 
report non-anonymized datasets to the Commission? If so, what 
additional data would be useful?
    58. Will anonymizing the proposed data sufficiently protect 
confidential information? Are any further safeguards necessary? Why or 
why not? Are there other groupings that would be preferable, like 
aggregation units? If not, what benefits or limitations would there be 
in analyzing the data if the entirety of a broker-dealer's order 
routing activity is aggregated?
    59. Should the Commission use CRD numbers to create the Broker-
Dealer Anonymization Key? If not, why not? Are there other accessible 
identifying markers that the Commission should use to create the 
Broker-Dealer Anonymization Key?
    60. Would the equities exchanges be able to work with 
representatives of the Commission to validate the Broker-Dealer 
Anonymization Key? What additional information, if any, would be 
helpful for constructing the Broker-Dealer Anonymization Key?
    61. Should the Commission require the data to be aggregated at a 
broader level, such as by groups of similar market participants? Why or 
why not? Is there a need to aggregate the activity of any market 
participants to protect their identity? For example, should the 
identity of large market participants be aggregated? What unique risks 
are posed for market participants whose trading constitutes a material 
portion of overall volume? Why would anonymization of a particular 
broker-dealer not be sufficient for purposes of concealing the broker-
dealer's identity? What impact would aggregating order routing data at 
a broader level have on the ability for the Commission and researchers 
to assess the impact of the proposed Pilot on order routing behavior, 
execution quality, and market quality?
    62. Should the Commission collect pre-Pilot and post-Pilot data? 
For how long of a period should it collect such data? Is six months 
sufficient for each period? Should it collect such data for a shorter 
period, like three or four months, or a longer period? Should the 
lengths of the pre-Pilot and post-Pilot Periods be equal, or could the 
Commission instead collect pre-Pilot data for three months and post-
Pilot data for six months and still have adequate statistical power to 
evaluate the results of the Pilot?
    63. Should the Commission require the equities exchanges to both 
report the datasets to the Commission and make them publicly available 
on their websites? Is it sufficient to require the equities exchanges 
to make the datasets publicly available on their websites? To what 
extent would that reduce the burdens associated with complying with 
this provision?

F. Implementation Period

    The Commission proposes to notify the public through a notice of 
the start and end dates of the pre-Pilot, Pilot, and post-Pilot 
Periods, including any suspension of the one-year sunset of the Pilot 
Period.\177\ The start date of the pre-Pilot Period would be one month 
from the date the Commission issues the notice, and the end date of the 
pre-Pilot Period would be six months from the pre-Pilot Period's start 
date. Accordingly, the Pilot, which is to start at the conclusion of 
the pre-Pilot Period, would begin seven months from the date the 
Commission issues the notice. The post-Pilot Period would start at the 
conclusion of the Pilot and would end six months from the post-Pilot 
Period's start date.
---------------------------------------------------------------------------

    \177\ See proposed Rule 610T(c). The notice would be posted on 
the Commission's website.
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    The Commission recognizes that the proposed Pilot will require the 
equities exchanges to make certain changes to their fees to conform to 
the proposed terms of the Pilot and will require market participants to 
adjust their order routing systems in response to those changes. 
However, because equities exchanges frequently adjust their transaction 
fees and rebates with little, if any, advance notice to the public 
through immediately effective Form 19b-4 fee filings, the Commission 
preliminarily believes that broker-dealers currently are well situated 
to promptly accommodate any changes required to implement and comply 
with the proposed Pilot.\178\ Such adjustments may be more time-
consuming than usual for broker-dealers and other market participants 
insofar as additional programming may be needed to account for the 
different fee and rebate levels across three Test Groups and one 
Control Group of proposed Pilot.\179\ Nevertheless, the Commission 
preliminarily believes that broker-dealers and other market 
participants will have time and notice before the onset of the proposed 
Pilot, including the proposed six-month pre-Pilot Period, to begin to 
make updates to their trading strategies and execution algorithms, 
including planning for the prohibition on rebates and Linked Pricing in 
Test Group 3 and the fact that different stocks will be subject to 
different fee caps during the proposed Pilot. Thereafter, when the 
initial List of Pilot Securities is released and the exchanges submit 
their fee filings, broker-dealers could input those data points into 
their trading systems in the same manner they do today when exchanges 
change their fees.
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    \178\ SROs are required to file with the Commission copies of 
any proposed rule or any proposed rule change. 15 U.S.C. 78s(b)(1). 
Any proposed rule change establishing or changing a due, fee, or 
other charge imposed by the self-regulatory organization takes 
effect upon filing with the Commission. 15 U.S.C. 78s(b)(3)(A)(ii).
    \179\ See Section V.C.2.b. infra for a discussion of the costs 
that broker-dealers and other market participants may face in 
complying with the Pilot.
---------------------------------------------------------------------------

    In addition, for the duration of the proposed Pilot and during the 
pre- and post-Pilot Periods, each equities exchange would be required, 
pursuant

[[Page 13034]]

to proposed Rule 610T(d), to post publicly on its website specified 
datasets of order routing data aggregated by date, ticker symbol, 
national securities exchange, and broker-dealer. Separately, the 
equities exchanges also would be required to make changes to 
accommodate the requirements of proposed Rule 610T(b) concerning 
publication of information about the Pilot Securities and proposed Rule 
610T(e) concerning reports of data on their fees and fee changes.
    To provide time for the equities exchanges to make these changes, 
the Commission proposes that the start date of the pre-Pilot Period 
would be one month from the date it issues the notice pursuant to 
proposed Rule 610T(c). Accordingly, the start date of the Pilot Period, 
which would begin at the conclusion of the pre-Pilot Period, would be 
no earlier than seven months from the date of the Commission's notice 
issued pursuant to proposed Rule 610T(c). The Commission preliminarily 
believes that this process should provide sufficient advance notice to 
the equities exchanges to allow them time to put in place mechanisms to 
comply with the proposed requirements of Rule 610T and sufficient 
advance notice to broker-dealers and other market participants to allow 
them time to put in place any necessary changes to their order routing 
programming.\180\
---------------------------------------------------------------------------

    \180\ See id.
---------------------------------------------------------------------------

    The Commission requests comment on the proposed implementation 
period for the proposed Pilot. Specifically, the Commission solicits 
comment on the following. To the extent possible, please provide 
specific data, analyses, or studies for support.
    64. Is a one month period following the Commission's notice prior 
to the start of the pre-Pilot Period sufficient time to allow the 
equities exchanges to prepare for the pre-Pilot Period requirements? 
Why or why not?
    65. Is a minimum seven month period following the Commission's 
notice sufficient time to allow affected entities to establish and test 
mechanisms to comply with the proposed requirements? Why or why not? 
Should there be an alternate implementation period, such as twelve 
months? If so, what would be preferable and why?
    66. What technological or systems changes are necessary to 
effectuate the proposed Pilot? How would any such changes differ from 
changes required to accommodate routine changes in exchange fee 
schedules?

IV. Paperwork Reduction Act

    Certain provisions of the proposed rule contain ``collection of 
information requirements'' within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\181\ The Commission is submitting 
these collections of information to the Office of Management and Budget 
(``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 
1320.11.\182\ An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless the agency 
displays a currently valid control number.\183\ The title of the new 
collection of information is ``Transaction Fee Pilot Data.''
---------------------------------------------------------------------------

    \181\ 44 U.S.C. 3501 et seq.
    \182\ 44 U.S.C. 3507; 5 CFR 1320.11.
    \183\ 5 CFR 1320.11(l).
---------------------------------------------------------------------------

A. Summary of Collection of Information

1. Pilot Securities Exchange Lists and Pilot Securities Change Lists
    As discussed above, the Commission would publish by notice the 
initial List of Pilot Securities, which would identify the securities 
in the proposed Pilot and assign each of them to a designated Test 
Group (or the Control Group).
    Prior to the start of trading on the first day of the Pilot Period, 
proposed Rule 610T(b)(2)(i) would require each national securities 
equities exchange that is a primary listing exchange for NMS stocks to 
publicly post on its website a Pilot Securities Exchange List, in pipe-
delimited ASCII format, of all Pilot Securities for which it serves as 
the primary listing exchange. Proposed Rule 610T(b)(2)(i) also would 
require each primary listing exchange to maintain and update this list 
as necessary prior to the beginning of each trading day. In addition, 
proposed Rule 610T(b)(3)(i) would require that prior to the beginning 
of trading each trading day, a primary listing exchange would be 
required to publicly post on its website a Pilot Securities Change 
List, in pipe-delimited ASCII format, that cumulatively lists each 
separate change to Pilot Securities for which it serves or has served 
as the primary listing exchange. A proposed set of specifications for 
both lists is set forth in paragraph (b) of the proposed Rule.
    The two lists are intended to make available information about 
updates to the List of Pilot Securities as well as detailed information 
on changes to Pilot Securities and their associated Test Groups. 
Proposed Rule 610T(b) would require both the Pilot Securities Exchange 
List and the Pilot Securities Change List to be made publicly available 
on equities exchange websites and remain posted for the duration of the 
proposed Pilot, including the post-Pilot Period, as well as for five 
years thereafter. Because the primary listing exchanges oversee their 
listed issuers and have rules in place that require listed issuers to 
report corporate change information to them, the primary listing 
exchanges are in the best position to make this information publicly 
available.
    Further, the Commission believes that market participants and the 
public would benefit from having access to accurate and up-to-date 
information on the Pilot Securities and their respective test groups 
during the proposed Pilot. In addition, access to cumulative detailed 
information about changes to the Pilot Securities will assist the 
Commission in analyzing order routing data and will provide information 
to the public that researchers could use when assessing Pilot data.
2. Exchange Transaction Fee Summary
    As discussed above, the Commission preliminarily believes that it 
is necessary for the exchanges to post publicly standardized and 
simplified data on the equities exchanges' transaction fees and 
rebates, and the effective date for any change thereto, individually 
for each Test Group and the Control Group.\184\ This information is 
intended to facilitate analysis of the Pilot's order routing data, 
including the effect that transaction-based fees and rebates have on 
order routing behavior, execution quality, and market quality.
---------------------------------------------------------------------------

    \184\ Some fee changes would not impact or relate to the 
proposed Pilot. For example, fixed membership fees, regulatory fees, 
and connectivity fees that are not assessed by transaction would not 
fall within the scope of the proposed Pilot.
---------------------------------------------------------------------------

    In particular, while the proposed Pilot would cap access fees 
differently in Test Groups 1 and 2, exchanges would have the freedom to 
set fees at any level below those caps. Changes to equities exchange 
transaction fees and rebates currently are described in individual 
proposed rule change filings, so compiling a summary of information 
relating to fees and fee changes from Form 19b-4 fee filings for use in 
studying the proposed Pilot would be cumbersome and labor intensive for 
researchers and could discourage research and analysis of the Pilot 
data. Further, because equities exchanges may use unique terminology to 
describe their fees, the Commission preliminarily believes the equities 
exchanges are in the best position to provide this information and 
ensure that information

[[Page 13035]]

relating to their fees and rebates and changes thereto is correctly 
reflected using a common XML schema to facilitate comparison. In 
addition, only equities exchanges have access to information necessary 
to compute monthly realized average and median transaction fees, which 
would be required fields.
    Proposed Rule 610T(e) specifies the proposed fields to be required, 
including information on Base fees and rebates, Top Tier fees and 
rebates, and monthly realized average and median fees paid or rebates 
given, each reported separately for registered market makers and other 
participants.\185\ In addition, proposed Rule 610T(e) would require 
equities exchanges to identify the effective date for each fee (rebate) 
change reported and, when applicable, the end date after which the fee 
(rebate) was no longer in effect. It also would require equities 
exchanges to specify fees and rebates that apply to each Pilot Test 
Group (or the Control Group), and to what type of participant (market 
maker or other market participant) they apply. Further, equities 
exchanges would be required to indicate whether any of the reported 
fees or rebates are applied differently depending on whether the 
interest is non-displayed or ranked in the depth-of-book. Finally, as 
proposed in Rule 610T(e), the equities exchanges would prepare this 
information and make it publicly available on their websites.
---------------------------------------------------------------------------

    \185\ Including only the Base fee (rebate), average fee 
(rebate), median fee (rebate), and the Top Tier fee (rebate) ignores 
significant variation in exchange fee schedules. However, additional 
information would complicate the data and could be difficult to 
standardize across exchanges. Further, the Commission preliminarily 
believes that the proposed data fields provide sufficient 
information to assess the range of fees and the variation across 
exchanges in fees.
---------------------------------------------------------------------------

    This Exchange Transaction Fee Summary would be intended to 
facilitate comparison of exchanges' basic fee structures and help 
identify, in summary fashion, changes to those fees (rebates).
    Rule 610T(e) would require each national securities exchange that 
trades NMS stocks to publicly post this information before the 
beginning of trading on the first day of the pre-Pilot Period, and 
update it on a monthly basis thereafter through the close of trading on 
the last day of the post-Pilot Period.
3. Order Routing Data
    Proposed Rule 610T(d) would require each national securities 
exchange that trades NMS stocks to prepare, in pipe-delimited ASCII 
format, and publicly post on its website, no later than the last day of 
each month, specified order routing data containing aggregated and 
anonymized broker-dealer order routing information for the prior month 
in accordance with the specifications set forth in proposed Rule 
610T(d). Such data would be collected throughout the duration of the 
proposed Pilot, as well as during the pre-Pilot Period and the post-
Pilot Period. For the pre-Pilot Period, order routing datasets would 
include each NMS stock. For the Pilot Period and post-Pilot Period, 
order routing datasets would include each Pilot Security. As noted 
above, if the equities exchanges are reporting to the CAT at the time 
the proposed Pilot commences, the Commission preliminarily believes 
that they would be able to compile the required order routing data by 
using the data reported to the central repository. Publicly posting the 
datasets would provide the Commission, market participants, academic 
scholars, and the public with order routing data necessary to serve the 
Commission's regulatory purposes in studying the potential conflicts of 
interest associated with transaction-based fees and rebates and the 
effects that changes to those fees and rebates have on order routing 
behavior, execution quality, and market quality. In particular, the 
proposed order routing datasets would contain aggregated order routing 
data on liquidity-providing and liquidity-taking orders by security, by 
day, by exchange, and by anonymized broker-dealer, separating held and 
not-held orders, which should facilitate analysis into order routing 
behavior in response to differing levels of fees and rebates under the 
proposed Pilot. Further, in order to construct a dataset that both 
provides benchmark statistics for the pre-Pilot Period and also 
captures data to show changes after the end of the proposed Pilot, 
equities exchanges would provide the required data for dates starting 
six months prior to the Pilot Period through six months after the end 
of the Pilot Period. As proposed, the exchanges would publicly post the 
order routing datasets on their websites in pipe-delimited ASCII 
format, which would provide ready access to the data to facilitate 
analyses of the impact of the proposed Pilot.

B. Proposed Use of Information

    The data collected during the proposed Pilot would allow the 
Commission, market participants, academic scholars, and the public to 
study the potential conflicts of interest associated with transaction-
based fees and rebates and the effects that changes to those fees and 
rebates have on order routing behavior, execution quality, and market 
quality. In turn, this information should facilitate a data-driven 
evaluation of future policy choices.
    By publishing and maintaining a Pilot Securities Exchange List and 
a Pilot Securities Change List, each primary listing exchange would 
help ensure that the Commission, market participants, academic 
scholars, and the public have up-to-date information on corporate 
changes to listed issuers that impact the list of Pilot Securities, as 
well as changes to the composition of any of the proposed test groups. 
For example, if a stock undergoes a name change, ticker symbol change, 
corporate merger, or goes out of business, the primary listing 
exchanges would help disseminate information necessary to keep current 
the Pilot Securities Exchange List and the Test Groups into which the 
Pilot Securities are placed by the proposed Pilot.
    The proposed Exchange Transaction Fee Summary containing 
information on fees and fee changes that affect each Test Group and the 
Control Group should help facilitate more efficient analysis of the 
effect that transaction-based fees and rebates, and changes to 
transaction-based fees and rebates, have on order routing behavior, 
execution quality, and market quality by facilitating comparison across 
equities exchanges of each exchange's basic fee structure and 
identifying, in summary fashion, changes to those fees. The Commission 
preliminarily believes that the public availability of this data would 
facilitate this analysis of order routing data by the Commission, as 
well as by market participants, academic scholars, and the public.
    The proposed collection of order routing data would provide to the 
Commission and others necessary information on broker-dealer order 
routing behavior in response to changes in fees and rebates at each 
exchange, as well as information on order type, order size, time to 
execution, and information on order execution, cancellation, and 
reroutes, all of which should facilitate analysis of routing behavior 
in response to differing levels of fees and rebates and the impact of 
fee changes on execution quality and market quality. In addition, the 
collection of data for a pre-Pilot Period would provide an important 
benchmark against which to evaluate the order routing data collected 
during the proposed Pilot, and the collection of post-Pilot data would 
allow analysis of changes to order routing behavior when the proposed 
Pilot ends. Together, the information on changes and updates to the 
universe of Pilot Securities, the Exchange Transaction Fee Summary, and 
the order routing datasets is intended to

[[Page 13036]]

allow the Commission and others ready access to information to assess 
whether and in what ways changes to fees and rebates affect market 
participant behavior and impact the conflicts of interest faced by 
market participants. In addition to analysis by the Commission, market 
participants, academic scholars, and the public would be able to use 
this data for their own studies.

C. Respondents

    The respondents to this collection of information would be the 
equities exchanges, which are registered national securities exchanges 
that trade NMS stocks. Specifically, Rule 610T(b), which covers the 
Pilot Securities Exchange Lists and Pilot Securities Change Lists, 
would apply to the five primary listing exchanges for NMS stocks. Rule 
610T(d), which requires datasets on order routing, would apply to all 
thirteen equities exchanges that are currently registered with the 
Commission. Rule 610T(e), which requires datasets on fees (rebates) and 
fee (rebate) changes, would apply to all thirteen equities exchanges 
currently registered with the Commission.

D. Total Initial and Annual Reporting and Recordkeeping Burdens

1. Pilot Securities Exchange Lists and Pilot Securities Change Lists
    After the Commission designates the initial List of Pilot 
Securities and prior to the start of trading on the first day of the 
Pilot Period, proposed Rule 610T(b)(2) would require each primary 
listing exchange to compile in pipe-delimited ASCII format, publicly 
post on its website, and update as necessary, a list of the Pilot 
Securities for which the equities exchange serves as the primary 
listing exchange (i.e., the ``Pilot Securities Exchange List''), as 
well as a list of certain changes to any Pilot Security for which it 
serves or has served as the primary listing market (i.e., the ``Pilot 
Securities Change List''). Specifically, upon publication of the 
initial List of Pilot Securities by the Commission, the primary listing 
exchanges would be required to determine which Pilot Securities are 
listed on their market and compile and publicly post downloadable files 
containing a list of those securities, including all data fields 
specified in proposed Rule 610T(b)(2)(i) on their websites in pipe-
delimited ASCII format. The Commission preliminarily estimates that 
each primary listing exchange would incur, on average, a one-time 
burden of approximately 8 burden hours per primary listing exchange to 
compile and publicly post their initial Pilot Securities Exchange 
List.\186\ Accordingly, the Commission preliminarily believes that the 
aggregate one-time burden associated with the initial Pilot Securities 
Exchange Lists would be 40 burden hours.\187\
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    \186\ The Commission bases this estimate on a full-time 
Compliance Manager and Programmer Analyst each spending 
approximately 4 hours, for a combined total of approximately 8 
hours, to compile and publicly post to an exchange's website a 
downloadable file containing the initial Pilot Securities Exchange 
List.
    \187\ 8 burden hours per primary listing exchange x 5 primary 
listing exchanges = 40 burden hours.
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    After posting its initial Pilot Securities Exchange List, each 
equities exchange would be required to keep current that list to 
reflect any changes, and to prepare and publicly post on its website 
until the end of the post-Pilot Period the Pilot Securities Change List 
prior to the beginning of trading each trading day. The Commission 
preliminarily believes that each primary listing exchange has existing 
systems to monitor the names of listed companies and process any 
changes due to mergers, name changes, or other corporate actions, or 
transfer of a security that closed below $1 per share from a Test Group 
to the Control Group.\188\ Moreover, the Commission preliminarily 
believes these systems are currently being used to maintain the lists 
of pilot securities for the Tick Size Pilot, which, as noted above, 
employs a similar test-group structure and applies to many of the same 
securities, so the primary listing exchanges already have a process in 
place to update lists of pilot securities.\189\ However, each primary 
listing exchange would have to adapt these systems as necessary for the 
proposed Transaction Fee Pilot, notably the fact that the proposed 
Transaction Fee Pilot would apply to a larger number of securities than 
does the Tick Size Pilot. Accordingly, the Commission preliminarily 
estimates that each primary listing market would incur a one-time 
burden of approximately 12 burden hours of internal legal, compliance, 
and information technology operations to develop appropriate systems to 
track and compile changes relevant to Pilot Securities listed on their 
market for an aggregate one-time burden of approximately 60 burden 
hours.\190\ The Commission preliminarily estimates that, once the 
primary listing exchanges have established these systems, on average, 
each primary listing exchange would incur 126 burden hours annually to 
compile any changes related to Pilot Securities, such as name changes 
or mergers, and to publicly post the updated Pilot Securities Exchange 
Lists and Pilot Securities Change Lists on their websites prior to the 
start of each trading day.\191\ Accordingly, the Commission 
preliminarily estimates an average, aggregate annual burden of 630 
burden hours to update and publicly post the lists of Pilot 
Securities.\192\
---------------------------------------------------------------------------

    \188\ See supra note 153 and accompanying text.
    \189\ See supra note 150 and accompanying text.
    \190\ The Commission derived the total estimated burdens from 
the following estimates: (Attorney at 4 hours) + (Compliance Manager 
at 4 hours) + (Programmer Analyst at 4 hours) = 12 burden hours. 12 
burden hours per primary listing exchange x 5 primary listing 
exchanges = 60 burden hours.
    \191\ The Commission bases this estimate on a full-time 
Compliance Manager and Programmer Analyst together spending 
approximately 30 minutes per trading day updating and posting the 
required lists (approximately 252 trading days x 30 minutes per 
trading day = 7,560 minutes (126 hours)).
    \192\ 126 burden hours per primary listing exchange x 5 primary 
listing exchanges = 630 burden hours.
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2. Exchange Transaction Fee Summary
    Proposed Rule 610T(e) would require each national securities 
exchange that trades NMS stocks to maintain and publicly post on their 
websites downloadable files, using an XML schema to be published on the 
Commission's website, data concerning changes in transaction fees 
(rebates), and the effective date for each fee (rebate) change, for 
securities subject to the proposed Pilot. The Exchange Transaction Fee 
Summary would be required to be posted on the equities exchanges' 
websites before the start of trading on the first day of the pre-Pilot 
Period through the close of trading on the last day of the post-Pilot 
Period. Proposed Rule 610T(e) would require equities exchanges to 
update this summary of information within ten business days following 
the beginning of each calendar month. Proposed Rule 610T(e) specifies 
the proposed fields to be required, including, among other things, 
information on Base fees and rebates, average and median per share fees 
paid or rebates given, and Top Tier fees and rebates, each reported 
separately for registered market makers and other participants. In 
addition, proposed Rule 610T(e) would require equities exchanges to 
specify whether the fees (rebates) reported in the summary apply to 
displayed or non-displayed orders or between top and depth of book. 
Finally, the proposed rule would require equities exchanges to identify 
the effective date for each fee (rebate) change reported, including, 
when applicable, an indicator to flag instances where an equities 
exchange has changed fees other than on the first trading day of a 
calendar month and the end date after which the fee (rebate) was no 
longer in effect. It also would require exchanges to specify fees that 
apply to

[[Page 13037]]

each Pilot Test Group (or the Control Group), and to what type of 
interest the fees apply.\193\
---------------------------------------------------------------------------

    \193\ In addition, the Commission anticipates that each equities 
exchange would submit one Form 19b-4 fee filing to implement the 
proposed Pilot and one Form 19b-4 fee filing at the conclusion of 
the proposed Pilot to remove the required pricing restrictions. Each 
equities exchange might also choose to submit additional Form 19b-4 
fee filings during the proposed Pilot. While such filings may impose 
certain costs on the equities exchanges, those burdens are already 
accounted for in the comprehensive Paperwork Reduction Act 
Information Collection submission for Form 19b-4. See OMB Control 
No. 3235-0045 (August 19, 2016), 81 FR 57946 (August 24, 2016) 
(Request to OMB for Extension of Rule 19b-4 and Form 19b-4 PRA). The 
Commission does not expect the baseline number of Form 19b-4 fee 
filings to increase as a result of the proposed Pilot, nor does it 
believe that the incremental costs outlined in Section V.C.2.a 
exceed those costs used to arrive at the average costs and/or 
burdens reflected in the Form 19b-4 PRA submission.
---------------------------------------------------------------------------

    The Commission is proposing to require that each equities exchange 
publicly post on its websites the Exchange Transaction Fee Summary each 
month, using an XML schema published on the Commission's website. The 
Commission preliminarily believes that all the data necessary to 
complete the summary are currently maintained by the equities 
exchanges. However, the equities exchanges would be required to compute 
the monthly realized average and median per share fees and rebates, 
using fee and volume information that the equities exchanges maintain. 
The Commission preliminarily estimates that each equities exchange 
would incur a one-time burden of approximately 80 burden hours of 
internal legal, compliance, information technology, and business 
operations to develop appropriate systems for tracking fee changes, 
computing the monthly averages, and formatting the data and posting it 
on its website in accordance with the proposed rule.\194\ Therefore, 
the Commission preliminarily estimates that the average one-time 
initial aggregate burden for all equities exchanges necessary for the 
development and implementation of the systems needed to capture the 
transaction fee information and post it on their websites in the 
specified format in compliance with proposed Rule 610T(e) would be 
1,040 hours.\195\
---------------------------------------------------------------------------

    \194\ The Commission preliminarily estimates that an equities 
exchange would assign responsibilities for review and potential 
modification of its systems and technology to an Attorney, a 
Compliance Manager, a Programmer Analyst and a Senior Business 
Analyst. The Commission estimates the burden of reviewing and 
potentially modifying its systems and technology to be as follows: 
(Attorney at 20 hours) + (Compliance Manager at 20 hours) + 
(Programmer Analyst at 20 hours) + (Business Analyst at 20 hours) = 
80 burden hours per equities exchange. See Securities Exchange Act 
Release No. 76624 (Dec. 11, 2015), 80 FR 79757, 79771 fn. 93 (Dec. 
23, 2015) (SBS Taxonomy Proposing Release) (estimating the types of 
employees that would retain responsibility for modifying technology 
systems).
    \195\ 80 burden hours per equities exchange x 13 equities 
exchanges = 1,040 burden hours.
---------------------------------------------------------------------------

    Once an equities exchange has established the appropriate systems 
required for compiling, formatting, and publicly posting the Exchange 
Transaction Fee Summary in the specified format, the Commission 
preliminarily believes that it would be necessary for each equities 
exchange to monitor its systems to ensure its technology is up to date 
and reporting the required data in accordance with proposed Rule 
610T(e). The Commission preliminarily estimates that, on average, an 
equities exchange would incur an ongoing burden of approximately 40 
burden hours per year to monitor and, if necessary, update its systems 
used for compiling, formatting and publicly posting the Exchange 
Transaction Fee Summaries in accordance with the proposed Rule.\196\ 
Therefore, the Commission preliminarily estimates that the average 
aggregate, ongoing, annual burden for all equities exchanges to monitor 
their systems would be 520 hours.\197\
---------------------------------------------------------------------------

    \196\ Total estimated burdens which reflect the Commission's 
preliminary view that annual ongoing burdens would be approximately 
half the burdens of initially ensuring it has the appropriate 
systems to capture the required information in the required format: 
(Attorney at 10 hours) + (Compliance Manager at 10 hours) + 
(Programmer Analyst at 10 hours) + (Senior Business Analyst at 10 
hours) = 40 burden hours.
    \197\ 40 burden hours per equities exchange x 13 equities 
exchanges = 520 burden hours.
---------------------------------------------------------------------------

    Under the proposed rule, the equities exchanges would be required 
to format, calculate certain figures and post their initial Exchange 
Transaction Fee Summary at the outset of the pre-Pilot Period. As this 
would be the first time an equities exchange would be required to 
produce and post on their website such a summary, the Commission 
preliminarily estimates that it would require approximately 4 burden 
hours for each equities exchange to complete the initial Exchange 
Transaction Fee Summary and perform the necessary calculations.\198\ In 
addition, each equities exchange would be required to make its summary 
publicly available on its website using an XML schema to be published 
on the Commission's website. As discussed below, the Commission 
preliminarily believes that the equities exchanges have experience 
applying the XML format to market data.\199\ However, the Commission 
preliminarily believes that initially each equities exchange would 
incur a burden specific to the initial Exchange Transaction Fee Summary 
to ensure that it has properly implemented the XML schema. Therefore, 
the Commission preliminarily estimates that each equities exchange 
would incur a burden of 2 burden hours related to post the initial 
Exchange Transaction Fee Summary publicly on its website using the XML 
schema to be published on the Commission's website.\200\ Accordingly, 
the Commission preliminarily estimates that equities exchanges would 
incur, in aggregate, an initial burden of 52 hours to complete their 
initial Exchange Transaction Fee Summary \201\ and an initial burden of 
26 hours to post that dataset publicly on their websites using an XML 
schema to be published on the Commission's website, for a total 
aggregate, initial burden of 78 burden hours.\202\
---------------------------------------------------------------------------

    \198\ The Commission derived the total estimated burden from the 
following estimates: (Compliance Manager at 2 hours) + (Senior 
Business Analyst at 2 hours) = 4 burden hours per equities exchange.
    \199\ See infra notes 364-366 and accompanying text.
    \200\ The Commission derived the total estimated burden from the 
following estimates, which reflect the Commission's preliminary 
belief that the equities exchanges have experience posting 
information in an XML format on publicly-available websites: 
(Compliance Manager at 1 hour) + (Programmer Analyst at 1 hour) = 2 
burden hours per equities exchange.
    \201\ 4 burden hours per equities exchange x 13 equities 
exchanges = 52 burden hours.
    \202\ 2 burden hours per equities exchange x 13 equities 
exchanges = 26 burden hours.
---------------------------------------------------------------------------

    In addition, each equities exchange would be required to update the 
Exchange Transaction Fee Summary on a monthly basis to account for 
changes from the prior month, if any, and to report monthly realized 
average median fee and rebate information. The Commission preliminarily 
believes that such updates would require fewer burden hours, as the 
equities exchanges would have experience calculating necessary data and 
formatting the reports as required by the proposed Rule. Accordingly, 
the Commission preliminarily estimates that it would require 
approximately 2 burden hours each month, or 24 burden hours on an 
annualized basis, for each equities exchange to update.\203\ This 
estimate contemplates the impact of publicly posting the summary using 
the XML schema to be published on the Commission's website. 
Accordingly, the Commission preliminarily estimates that equities 
exchanges would incur, an aggregate, annual burden of 312 burden hours 
to publicly post on their websites

[[Page 13038]]

the Exchange Transaction Fee Summaries.\204\
---------------------------------------------------------------------------

    \203\ The Commission derived the total estimated burden from the 
following estimates: (Compliance Manager at 1 hour) + (Programmer 
Analyst at 1 hour) = 2 burden hours per equities exchange per month. 
2 burden hours per equities exchange per month x 12 months per year 
= 24 burden hours per equities exchange per year.
    \204\ 2 burden hours per equities exchange x 13 equities 
exchanges x 12 monthly updates = 312 burden hours per year.
---------------------------------------------------------------------------

3. Order Routing Data
    Proposed Rule 610T(d) would require each national securities 
exchange that trades NMS stocks to prepare, in pipe-delimited ASCII 
format, and publicly post on its website, no later than the last day of 
each month, specified data containing aggregated and anonymized broker-
dealer order routing information for the prior month in accordance with 
the specifications set forth in proposed Rule 610T(d). Such data would 
be collected throughout the duration of the Pilot, as well as during 
the six-month pre-Pilot Period and the six-month post-Pilot Period. For 
the pre-Pilot Period, order routing datasets would include each NMS 
stock. For the Pilot Period and post-Pilot Period, order routing 
datasets would include each Pilot Security. In preparing the order 
routing datasets, the equities exchanges would be required to anonymize 
information relating to the identity of individual broker-dealers 
before making the datasets publicly available. This anonymization would 
be achieved through the use of an anonymization key developed by the 
Commission, using CRDs.\205\
---------------------------------------------------------------------------

    \205\ See supra Section III.E.3.
---------------------------------------------------------------------------

    The Commission preliminarily estimates that, on average, there 
would be no paperwork burden to the equities exchanges to capture the 
required order routing data, as the Commission expects that the 
equities exchanges would collect the required data to create the order 
routing datasets through existing systems and technology already in 
place for the collection and reporting of data pursuant to the CAT NMS 
Plan. Furthermore, the Commission notes that the equities exchanges 
currently generate similar monthly datasets pursuant to Rule 605 of 
Regulation NMS.\206\ Accordingly, the Commission preliminarily believes 
that the equities exchanges would be able to leverage existing systems 
and technology utilized for Rule 605 reporting purposes to create the 
proposed monthly order routing datasets. The Commission preliminarily 
believes, however, that the equities exchanges would incur an initial 
one-time burden of 80 burden hours per equities exchange to ensure that 
its systems and technology are able to accommodate the proposed 
requirements to aggregate, anonymize, and publicly post the order 
routing information.\207\ Accordingly, the Commission preliminarily 
estimates that the aggregate one-time initial burden for ensuring its 
systems and technology are able to aggregate, anonymize, and post the 
required order routing data in compliance with proposed Rule 610T(d) 
would be 1,040 burden hours.\208\
---------------------------------------------------------------------------

    \206\ See 17 CFR 242.605.
    \207\ The Commission preliminarily estimates that an equities 
exchange will assign responsibilities for review and potential 
modification of its systems and technology to an Attorney, a 
Compliance Manager, a Programmer Analyst and a Senior Business 
Analyst. The Commission estimates the burden of reviewing and 
potentially modifying its systems and technology to be as follows: 
(Attorney at 20 hours) + (Compliance Manager at 20 hours) + 
(Programmer Analyst at 20 hours) + (Senior Business Analyst at 20 
hours) = 80 burden hours per equities exchange. See supra note 194.
    \208\ 80 burden hours per equities exchange x 13 equities 
exchanges = 1,040 burden hours.
---------------------------------------------------------------------------

    Once an equities exchange has determined that it maintains the 
appropriate systems and technology required for aggregation, 
anonymization, and posting of the required information, the Commission 
preliminarily believes that it would be necessary for each equities 
exchange to undertake ongoing efforts to ensure that their systems and 
technology are up to date so that the equities exchange may remain in 
compliance with the proposed Rule. These efforts could include 
personnel time to monitor the posting of the required data and the 
maintenance of the systems necessary to post the required data. The 
Commission preliminarily estimates that, on average, it would take an 
equities exchange approximately 40 burden hours per year to ensure that 
the systems and technology are up to date so as to facilitate 
compliance with the proposed Rule.\209\ Therefore, the Commission 
preliminarily estimates that the aggregate annual burden to maintain 
the systems necessary to aggregate, anonymize, and post the required 
order routing information to be approximately 520 burden hours per 
year.\210\
---------------------------------------------------------------------------

    \209\ The Commission derived the total estimated burdens from 
the following estimates, which reflect the Commission's preliminary 
view that annual ongoing burdens would be approximately half the 
burdens of initially ensuring it has the appropriate systems to 
capture the required information in the required format: (Attorney 
at 10 hours) + (Compliance Analyst at 10 hours) + (Programmer 
Analyst at 10 hours) + (Business Analyst at 10 hours) = 40 burden 
hours per equities exchange.
    \210\ 40 burden hours per equities exchange x 13 equities 
exchanges = 520 burden hours.
---------------------------------------------------------------------------

    In addition, each equities exchange would incur an ongoing burden 
associated with creating and formatting the order routing datasets to 
be publicly posted each month. The equities exchanges have experience 
with creating similar datasets in accordance with their obligations 
under Rule 605 of Regulation NMS. The Commission preliminarily believes 
that each equities exchange would incur burdens similar to those 
associated with preparing Rule 605 reports.\211\ Accordingly, the 
Commission preliminarily believes that each equities exchange would 
incur a burden of six burden hours per month, or 72 burden hours per 
year, to prepare and publicly post on its website the order routing 
datasets.\212\ Therefore, the aggregate, annual burden to publicly post 
on their websites order routing datasets in accordance with proposed 
Rule 610T(d) would be approximately 936 burden hours.\213\
---------------------------------------------------------------------------

    \211\ See FR Doc. 2016-08552, 81 FR 22143 (April 14, 2016) 
(``Request to OMB for Extension of Rule 605 of Regulation NMS'').
    \212\ Compliance Manager at 3 hours + Programmer Analyst at 3 
hours = 6 burden hours per month, per equities exchange. 6 burden 
hours per month x 12 months = 72 burden hours per year, per equities 
exchange.
    \213\ 72 burden hours per year x 13 equities exchanges = 936 
burden hours.
---------------------------------------------------------------------------

E. Collection of Information Is Mandatory

    Each collection of information discussed above would be a mandatory 
collection of information.

F. Confidentiality of Responses to Collection of Information

    The Pilot Securities Exchange List, Pilot Securities Change List, 
Order Routing Datasets, and the Exchange Transaction Fee Summary would 
not be confidential. Rather, each would be publicly posted by the 
exchanges. With respect to the Order Routing Datasets, the equities 
exchanges would anonymize the data they collect under Proposed Rule 
610T(d) before publicly posting it on their respective websites.

G. Retention Period for Recordkeeping Requirements

    National securities exchanges would be required to retain records 
and information pursuant to Rule 17a-1 under the Exchange Act.\214\
---------------------------------------------------------------------------

    \214\ 17 CFR 240.17a-1. See also supra note 147.
---------------------------------------------------------------------------

H. Request for Comments

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comments to:
    67. Evaluate whether the proposed collections of information are 
necessary for the proper performance of the functions of the agency, 
including whether the information shall have practical utility;
    68. Evaluate the accuracy of our estimates of the burden of the 
proposed collection of information;
    69. Determine whether there are ways to enhance the quality, 
utility, and

[[Page 13039]]

clarity of the information to be collected; and
    70. Evaluate whether there are ways to 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 submitting comments on the collection of information 
requirements should direct them to the Office of Management and Budget, 
Attention: Desk Officer for the Securities and Exchange Commission, 
Office of Information and Regulatory Affairs, Washington, DC 20503, and 
should also send a copy of their comments to Secretary, Securities and 
Exchange Commission, 100 F Street NE, Washington, DC 20549-1090, with 
reference to File Number S7-05-18. Requests for materials submitted to 
OMB by the Commission with regard to this collection of information 
should be in writing, with reference to File Number S7-05-18 and be 
submitted to the Securities and Exchange Commission, Office of FOIA/PA 
Services, 100 F Street NE, Washington, DC 20549-2736. As OMB is 
required to make a decision concerning the collection of information 
between 30 and 60 days after publication, a comment to OMB is best 
assured of having its full effect if OMB receives it within 30 days of 
publication.

V. Economic Analysis

    As explained above, the proposed Transaction Fee Pilot is designed 
to produce information on the effect of transaction-based fees on order 
routing decisions by broker-dealers, as well as execution and market 
quality.\215\ In recent years, a number of academics and market 
participants have expressed concern that the structure of transaction-
based fee pricing may lead to potential conflicts of interest between 
broker-dealers and their customers when brokers-dealers route customer 
orders to trading centers offering large rebates so that the broker-
dealer can capture the rebates, even when these venues do not offer 
high execution quality.\216\ However, as discussed in more detail 
below, the Commission cannot determine from existing empirical evidence 
the impact, if any, of transaction-based fees on order routing 
decisions by broker-dealers. Specifically, determining whether a causal 
relationship between exchanges' choice of transaction-based fees and 
broker-dealers' routing decisions is complicated because transaction-
based fees and order routing decisions could be jointly determined and 
order routing decisions could influence fees just as fees could 
influence order routing decisions. Currently available data do not 
permit researchers to isolate these factors and thus identify the 
existence or direction of such a causal relationship, which in turn 
impedes researchers' ability to determine the extent to which conflicts 
may exist.\217\ Moreover, the identification of potential causal 
relations between fees and order routing decisions becomes increasingly 
complex as exchanges modify their fees.\218\
---------------------------------------------------------------------------

    \215\ Execution quality generally refers to how favorably 
customer orders are executed. Execution quality measures are similar 
to liquidity measures and tend to include transaction costs, the 
speed of execution, the probability that the trade will be executed, 
and the price impact of the trade. See NMS Adopting Release, supra 
note 1, at 37513-15, 37537-38. Market quality encompasses execution 
quality but also relates more generally to how well the markets 
function. Market quality measures include liquidity, price 
discovery, and volatility in prices. See, e.g., Henrik Bessembinder, 
``Trade Execution Costs and Market Quality after Decimalization,'' 
Journal of Financial and Quantitative Analysis 38, 747-777 (2003) 
available at https://doi.org/10.2307/4126742; Maureen O'Hara and Mao 
Ye, ``Is Market Fragmentation Harming Market Quality?'', Journal of 
Financial Economics 100, 459-474 (2011) available at https://www.sciencedirect.com/science/article/pii/S0304405X11000390.
    \216\ See, e.g., Angel, Harris and Spatt, supra note 106; 
Battalio Equity Market Study, supra note 22; Harris, supra note 23.
    \217\ As proposed, the Transaction Fee Pilot would require the 
exchanges to make data available to the Commission and the public. 
Raw data provided by the Transaction Fee Pilot are likely to be used 
by a subset of academic and regulatory researchers (hereafter 
``researchers'') to develop analyses and discussion about the 
effects of transaction-based fees and rebates on order routing 
decisions, which could provide valuable information to the public 
and to the Commission.
    \218\ Over the last five years, U.S. equities exchanges, on 
average, have made 34 revisions, or approximately 6.7 revisions per 
year, to their transaction-based fees and rebates. In contrast to 
these changes, which are at the discretion of the exchanges and 
subject to Commission review, the proposed Transaction Fee Pilot 
would impose a change to access fees and rebates outside of the 
exchanges' control. See Section V.B.2.b infra.
---------------------------------------------------------------------------

    Because of the existing lack of empirical evidence regarding these 
potential conflicts of interest, additional information would assist 
the Commission in making regulatory decisions about whether and how to 
address transaction-based fees and rebates. To remedy the insufficiency 
of existing empirical evidence, the Commission is proposing a 
Transaction Fee Pilot, which would provide the Commission and the 
public with data currently unavailable to study fees and rebates that 
exchanges assess to broker-dealers and observe the effects of potential 
conflicts of interest that could arise between broker-dealers and their 
customers in connection with these fees. Specifically, the Commission 
expects that these data are likely to shed light on the extent, if any, 
to which broker-dealers route orders in ways that benefit the broker-
dealer but may not be optimal for customers. The data obtained from the 
proposed Transaction Fee Pilot would inform any possible future 
regulatory action that addresses these potential conflicts of interest 
to the ultimate benefit of investors. In addition, the proposed 
Transaction Fee Pilot data would also provide information about other 
potential economic effects of reducing access fee caps or prohibiting 
rebates or Linked Pricing. For example, the proposed Transaction Fee 
Pilot could offer information on whether prohibiting rebates or Linked 
Pricing alters broker-dealer behavior in a manner that affects market 
quality. Specifically, the proposed Pilot may provide information on 
how rebates affect quoted spreads, particularly for small and mid-cap 
securities, as well as how changes to fees affect order flow among 
trading centers.\219\
---------------------------------------------------------------------------

    \219\ See Section V.C.1.a.ii infra, for further discussion of 
the benefits of studying other economic effects of transaction fees 
and rebates.
---------------------------------------------------------------------------

    The proposed Transaction Fee Pilot would permit the study of 
whether conflicts of interest exist by (1) providing an exogenous shock 
to transaction-based fees and rebates, and (2) enabling the collection 
of representative results of data across a broad range of 
securities.\220\ An exogenous shock is an unpredictable or unexpected 
event that is outside of the economy or the system (i.e., not under the 
control or influence of those being studied) but can induce endogenous 
(i.e., within the system) responses. In the context of this proposed 
rule, the exogenous shock would take the form of either a reduction of 
the maximum permissible access fees or a prohibition on rebates or 
Linked Pricing paid by all U.S. equities exchanges. This shock would 
allow the Commission and others to explore how exogenous changes to 
fees and rebates could lead to changes in the ways in which broker-
dealers route customer orders for a broad sample of NMS securities. 
Specifically, the reduction in fees or elimination of rebates or Linked 
Pricing, as required in specific test groups of the proposed Pilot, may 
reduce the magnitude of a potential conflict of interest between 
broker-dealers and their clients caused by transaction-based fees and 
rebates. A

[[Page 13040]]

reduction in this potential conflict of interest would, in turn, be 
reflected in measurable changes to broker-dealer order routing 
decisions.
---------------------------------------------------------------------------

    \220\ See Section V.B.1 infra, for discussion of existing 
studies related to these topics and their limitations. See also 
Section II.B supra, for details of the Nasdaq study, which examined 
a change in the access fees and rebates charged by Nasdaq for 14 
stocks over a four-month period.
---------------------------------------------------------------------------

    As discussed in Section III.C, the proposed Pilot would span a two-
year period, with an automatic sunset at the end of the first year 
unless, prior to that date, the Commission publishes a notice 
determining that the proposed Pilot shall continue for up to another 
year,\221\ and would apply to both maker-taker and taker-maker 
exchanges. All NMS stocks (including ETPs) that have prices of at least 
$2.00 at the time of selection would be included in the proposed Pilot 
and would be segmented into three test groups and one control group. 
Each test group would contain a mix of stocks and ETPs, stratified 
based on variables such as market capitalization, share price, and 
liquidity.\222\ Under the requirements of the proposed Pilot, the 
exchanges could not charge any access fee or, where applicable, provide 
rebates or Linked Pricing, in excess of the limitations indicated by 
the proposed Pilot. Stocks and ETPs in Test Groups 1 and 2 would be 
restricted to maximum fees of $0.0015 and $0.0005 (with no restrictions 
on rebates), respectively, while Test Group 3 would eliminate the 
exchanges' ability to provide rebates to liquidity providers on maker-
taker exchanges and liquidity takers on taker-maker exchanges for both 
displayed and non-displayed liquidity and would prohibit Linked 
Pricing. Both the Control Group and Test Group 3 would maintain the 
current access fee cap of $0.0030 required by Rule 610(c) of Regulation 
NMS. By construction, Test Group 3 is designed to observe the effect of 
the absence of rebates or Linked Pricing on conflicts of interest and 
the equilibrium fee level and how that fee level would affect order 
routing decisions, execution quality, and market quality. Further, 
exchanges would continue to be permitted to have varying fees within 
each test group, and would be permitted to change their fees at their 
discretion, subject to Commission review, during the proposed Pilot for 
securities within each test group, so long as they comply with the 
conditions of the applicable test group.
---------------------------------------------------------------------------

    \221\ See Section III.D infra.
    \222\ See supra note 116. The Commission would detail the 
specifications of the stratification by notice.
---------------------------------------------------------------------------

    In the absence of the proposed Pilot, the Commission preliminarily 
believes it is unlikely that exchanges would collectively undertake a 
similar pilot and voluntarily coordinate the exogenous shock to fees 
and rebates across a broad set of securities, broker-dealers, and 
exchanges that would be required to appropriately analyze the effects 
of changes to fees and rebates.\223\ By imposing the same modifications 
to fees and rebates on all U.S. equities exchanges, the proposed Pilot 
would allow the Commission and the public to obtain data that would 
permit them to examine how changes to fees and rebates affect order 
routing decisions of broker-dealers. Accordingly, the Commission 
believes that the proposed Pilot would enable the collection of 
valuable data for both the Commission and the public that would 
otherwise be unavailable.
---------------------------------------------------------------------------

    \223\ See Section V.B.1.b.i infra.
---------------------------------------------------------------------------

    The Commission is mindful of the costs imposed by, and the benefits 
obtained from, our rules. Whenever the Commission engages in rulemaking 
and is required to consider or determine whether an action is necessary 
or appropriate in the public interest, Section 3(f) of the Exchange Act 
requires the Commission to consider whether the action would promote 
efficiency, competition, and capital formation, in addition to the 
protection of investors.\224\ Further, when making rules under the 
Exchange Act, Section 23(a)(2) of the Exchange Act requires the 
Commission to consider the impact such rules would have on 
competition.\225\ Section 23(a)(2) of the Exchange Act also prohibits 
the Commission from adopting any rule that would impose a burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act.\226\ The Commission preliminarily believes that 
many of the likely impacts of this proposal on efficiency, competition, 
and capital formation would be temporary in nature and would affect 
markets only for the duration of the proposed Pilot. The following 
analysis considers in detail the economic effects that may result from 
the Transaction Fee Pilot proposed in this release.
---------------------------------------------------------------------------

    \224\ See 15 U.S.C. 77b(b) and 15 U.S.C. 78c(f).
    \225\ See 15 U.S.C. 78w(a)(2).
    \226\ Id.
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    Where possible, the Commission has quantified the likely economic 
effects of the proposed Transaction Fee Pilot; however, as explained 
further below, the Commission is unable to quantify all of the economic 
effects because it lacks the information necessary to provide 
reasonable estimates. In some cases, quantification depends heavily on 
factors outside of the control of the Commission, which make it 
difficult to predict how market participants would act under the 
conditions of the proposed Pilot. For example, because of the 
flexibility that market participants have with respect to the choice of 
trading center for execution of transactions and because those choices 
can be influenced by factors outside of the scope of this pilot, such 
as volume discounts, the Commission cannot quantify, ahead of the 
proposed Pilot, the economic impact of any changes in order routing 
decisions by broker-dealers that may result from the proposed Pilot. 
Nevertheless, as described more fully below, the Commission provides 
both a qualitative assessment of the potential effects and a quantified 
estimate of the potential aggregate initial and aggregate ongoing 
costs, where feasible. The Commission encourages commenters to provide 
data and information to help quantify the costs, benefits, and the 
potential impacts of the proposed rule on efficiency, competition, and 
capital formation.

A. Background on Transaction-Based Fees and Potential Conflicts of 
Interest

    This section provides a review of transaction-based fee models, 
including a discussion of the history and mechanics of transaction-
based pricing. This section also presents an overview of the recent 
concerns about potential conflicts of interest between broker-dealers 
and their customers attributed to access fees and rebates assessed by 
exchanges.
1. Overview of Transaction-Based Fees
    Maker-taker pricing models originated on electronic communications 
networks (ECNs) in the late 1990s as ECNs attempted to attract order 
flow and draw liquidity from traditional exchanges by offering rebates 
to market participants that posted liquidity to their platforms.\227\ 
Shortly thereafter, exchanges followed suit and adopted maker-taker 
pricing models as market share migrated from traditional exchanges to 
ECNs. Today, nearly all U.S. equities exchanges have some form of 
transaction-based pricing models.\228\
---------------------------------------------------------------------------

    \227\ In 1997, Island ECN was the first electronic trading 
platform to offer rebates to attract limit orders to its platform.
    \228\ As of March 2018, EDGA and IEX do not operate as a maker-
taker or taker-maker market, although both charge flat fees. The 
remaining 11 exchanges are either maker-taker (nine) or taker-maker 
(two) exchanges. The baseline discusses these exchanges in more 
detail.
---------------------------------------------------------------------------

    Generally, transaction-based pricing models charge fees or remit 
rebates to members depending on whether their executed orders ``make'' 
or ``take'' liquidity from the market. An order that makes liquidity 
provides share volume (or depth) on a trading center at various 
execution prices, whereas an order that

[[Page 13041]]

takes liquidity removes the volume (or depth) resting on the trading 
center provided by the make orders. Orders that make, or provide, 
liquidity are non-marketable limit orders, which are limit orders that 
are submitted to an exchange or other trading center that cannot be 
filled immediately when they arrive because no market participant is 
willing to trade at the price of the order (i.e., the limit 
price).\229\ For example, if a customer places an order to sell 100 
shares of a security at $9.00 per share when the prevailing market bid 
price is $8.75, that customer is placing a non-marketable limit sell 
order that indicates her willingness to provide 100 shares of liquidity 
to the market at a price of $9.00. In contrast, orders that take, or 
remove, liquidity, are marketable orders. A marketable order, in turn, 
can be either a market order, which is an order to buy or sell a 
security to be executed immediately at current market prices,\230\ or a 
marketable limit order, which is either a limit buy order with a price 
at or above the lowest offer price in the market or a limit sell order 
with a price at or below the highest bid in the market. For example, if 
a customer places an order to sell 100 shares of a security at $8.50 
per share when the prevailing market bid price is $8.75 at a depth of 
more than 100 shares, that customer is placing a marketable limit sell 
order, and would take 100 shares of liquidity at a price of $8.75.
---------------------------------------------------------------------------

    \229\ A limit order is an order to buy or sell a security at a 
specified price or better. As the price of the non-marketable order 
gets further from the bid or offer price, the greater the likelihood 
that the non-marketable order must rest until better priced orders 
execute.
    \230\ As long as there are willing sellers and buyers, market 
orders are filled.
---------------------------------------------------------------------------

    In maker-taker models, an exchange charges an access fee to broker-
dealers that take liquidity using marketable orders and remits a rebate 
to broker-dealers that make liquidity by placing standing non-
marketable limit orders that subsequently interact with marketable 
orders. In a taker-maker market, the exchange charges an access fee to 
broker-dealers that provide liquidity by placing non-marketable limit 
orders and pays a rebate to market participants that take liquidity 
using marketable orders. In 2005, the Commission adopted Rule 610(c) of 
Regulation NMS,\231\ which limited the maximum access fee that could be 
charged by maker-taker exchanges to $0.0030 per share. The adoption of 
the fee limit was designed to ensure the fairness and accuracy of the 
displayed quotations by establishing an upper bound on the cost of 
accessing such quotations,\232\ while also precluding certain trading 
centers from raising their fees substantially to market participants 
required to access their quotations by the Order Protection Rule,\233\ 
and preventing certain trading centers from taking advantage of 
intermarket price protection by acting as toll booths between price 
levels.\234\
---------------------------------------------------------------------------

    \231\ See NMS Adopting Release, supra note 1.
    \232\ See id. at 37543-46.
    \233\ See NMS Adopting Release, supra note 1, at 37504-38. The 
Order Protection Rule is designed to ensure that investors receive a 
consistent price quotation for NMS stocks across all exchanges where 
a security is traded and that investors receive the best possible 
execution price for marketable orders.
    \234\ See id. at 37584. See also Harris, supra note 23 
(suggesting that large access fees were a response to some trading 
venues paying large rebates to market participants as a means of 
attracting order flow to those venues in the early days of maker-
taker exchanges).
---------------------------------------------------------------------------

2. Potential Conflicts of Interest
    Academics, market participants, regulators, and legislators 
recently have expressed concern about how transaction-based fees have 
affected order routing decisions by broker-dealers and the execution 
quality obtained by customers.\235\ This concern has centered on the 
potential for conflicts of interest between broker-dealers and their 
customers that may distort best execution practices.
---------------------------------------------------------------------------

    \235\ See Staff Maker-Taker Memo, supra note 99. See also Angel, 
Harris, and Spatt, supra note 106; Jeffrey Bacidore, Hernan Otero, 
and Alak Vasa, ``Does Smart Routing Matter?'', Working Paper, 
Investment Technology Group, Inc. (2010), available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1681449 (``Bacidore, 
Otero, and Vasa''); Battalio Equity Market Study, supra note 22; 
Harris, supra note 23. In addition to potential conflicts of 
interest, several of these studies have also indicated that 
transaction-based pricing models have led to reduced price 
transparency for investors and increased market fragmentation and 
complexity. These are discussed in greater detail in Section 
V.C.1.b, infra.
---------------------------------------------------------------------------

    Broker-dealers are required to use reasonable diligence to execute 
customer orders according to best execution standards, which require 
broker-dealers ``to execute customers' trades at the most favorable 
terms reasonably available under the circumstances . . .'' \236\ When 
seeking best execution for their orders, broker-dealers often consider 
opportunities to obtain prices better than those currently quoted. In 
order to comply with best execution standards, broker-dealers evaluate 
their aggregate customer orders and periodically assess which competing 
trading center offers the most favorable terms of execution.\237\ The 
quoted prices that are used by broker-dealers to meet their best 
execution standards do not reflect any access fees assessed or rebates 
offered by the exchanges.\238\
---------------------------------------------------------------------------

    \236\ See NMS Adopting Release, supra note 1, at 37537-38. See 
also supra note 215.
    \237\ See NMS Adopting Release, supra note 1, at 37537-38.
    \238\ See, e.g., Angel, Harris, and Spatt, supra note 106.
---------------------------------------------------------------------------

    Even while complying with best execution requirements, broker-
dealers may route non-marketable limit orders to trading centers that 
offer the best quoted prices but that also offer high rebates for those 
orders, which the broker-dealers may then retain, rather than pass 
through to customers.\239\ The availability of high rebates, however, 
may influence how broker-dealers route customer orders to the detriment 
of customers, even if orders are still routed to an exchange posting 
the best quoted prices.\240\ One study, for example, shows lower 
execution quality, in terms of reduced probability of execution or 
increased time to execution, for non-marketable limit orders on 
exchanges that pay high rebates.\241\ Thus, broker-dealers may route 
orders to exchanges that have the best quoted prices but are suboptimal 
for customers in other ways

[[Page 13042]]

because orders are either less likely or take longer to execute.
---------------------------------------------------------------------------

    \239\ The potential conflicts of interest are more likely when 
broker-dealers retain the rebates, because such broker-dealers have 
greater incentive to maximize those rebates potentially at the 
expense of customer execution quality. The Battalio Equity Market 
Study, for example, found that a sample of retail broker-dealers 
appear to route orders to venues that offer large rebates, thereby 
maximizing order flow payments. However, as noted in the Battalio 
Equity Market Study, routing orders to venues with large rebates did 
not result in superior execution quality for non-marketable limit 
orders. See Battalio Equity Market Study, supra note 22. See also 
David Cimon, ``Broker Routing Decisions in Limit Order Markets,'' 
Working paper, Bank of Canada, (2017) available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2789804. Cimon provides 
a theoretical model of conflicts of interest in broker-dealer 
markets, where broker-dealers route marketable orders to venues with 
low access fees to reduce the access fees paid by the broker-dealer, 
increasing the volume of uninformed orders and lowering the risk of 
adverse selection for non-marketable limit orders posted to that 
venue.
    \240\ The duty of best execution requires broker-dealers to 
execute customer trades at the most favorable terms reasonably 
available under the circumstances. See NMS Adopting Release, supra 
note 1, at 37537-38. The duty of best execution is not inconsistent 
with the automated routing of orders; however, broker-dealers must 
periodically assess the quality of competing markets to ensure that 
order flow is directed to markets providing the most beneficial 
terms for their customer orders.
    \241\ See, Battalio Equity Market Study, supra note 22, which 
finds some evidence that execution quality is related to the 
transaction-based fees. For instance, in their analysis of a single 
order-routing system, for a sample of matched limit orders placed on 
high fee and low fee venues, high fee venues have a fill rate of 
approximately 73%, while low fee venues have a fill rate of 
approximately 99% (Table V). Further, in a multiple regression 
analysis (Table VI), the study shows that the probability of filling 
an order is decreasing as the take fee increases, while the time to 
execution increases. The limitations of the Battalio Equity Market 
Study are discussed below in Section V.B.1.b, infra.
---------------------------------------------------------------------------

    Maker-taker exchanges with high rebates tend to have high access 
fees, which increase the cost to broker-dealers to execute marketable 
orders. These high access fees may lead broker-dealers to route 
marketable orders to exchanges with lower access fees, even though 
there may be a significant number of standing non-marketable limit 
orders on exchanges with higher access fees.\242\ As the broker-dealers 
route marketable orders to exchanges with lower access fees, execution 
quality for the non-marketable limit orders is likely to deteriorate 
because the non-marketable limit orders are likely to have lower 
probability of execution and longer times to execution for orders that 
do execute. High rebates may also limit the ability of an exchange to 
generate a liquidity externality because these high rebates could draw 
order flow to exchanges with low execution quality, despite the 
availability of higher execution quality on other trading centers.\243\ 
This behavior may fragment order flow. In contrast, if exchanges did 
not provide high rebates, broker-dealers may be more likely to route 
orders to exchanges that quote the best price and have the best overall 
execution quality,\244\ permitting order flow to consolidate on those 
venues.
---------------------------------------------------------------------------

    \242\ See, Angel, Harris, and Spatt, supra note 106.
    \243\ A liquidity externality occurs when a given trading center 
becomes the preferred trading destination for both marketable and 
non-marketable orders.
    \244\ See Battalio Equity Market Study, supra note 22, at 2232 
(``[O]ur results suggest that . . . routing decisions based 
primarily on rebates/fees are inconsistent with best execution. For 
limit order traders, there are significant opportunity costs [with 
respect to execution quality] with routing all nonmarketable limit 
orders to a single venue offering the highest liquidity rebates.'').
---------------------------------------------------------------------------

    In general, customer orders routed to exchanges that remit high 
rebates are also more likely to face adverse selection when 
executed.\245\ Adverse selection occurs when one party to a transaction 
has less information about the value of an asset than the other party 
to the transaction, resulting in the possibility that the less informed 
party only transacts when it is disadvantageous to do so. In the 
context of order execution, adverse selection is likely to occur 
because some fraction of market participants is likely to possess more 
precise information about the value of a security.\246\ Order flow from 
these ``informed traders'' is generally routed to exchanges. In order 
for the exchanges to draw sufficient liquidity to satisfy the orders 
placed by informed traders, they may offer high rebates to broker-
dealers to attract non-marketable limit orders, which are likely to be 
placed by uninformed traders, to satisfy the demands of informed 
traders' order flow.\247\ Under such circumstances, these non-
marketable limit orders face an adverse selection problem because they 
execute against marketable orders that likely were placed by informed 
traders.\248\ As adverse selection increases at high rebate/high fee 
exchanges, informed traders will always execute orders to the detriment 
of uninformed traders (retail customers), i.e., the orders will more 
likely be executed at disadvantageous prices for the uniformed traders 
relative to customer orders routed to low rebate/low fee exchanges, 
where the likelihood of facing an informed trader is less.\249\ In 
these situations, the broker-dealers thus face a potential conflict of 
interest when they receive high rebates from the exchanges seeking to 
attract liquidity while their customers bear costs of the 
disadvantageous prices resulting from the adverse selection.
---------------------------------------------------------------------------

    \245\ See, Angel, Harris, and Spatt, supra note 106. See also 
Peter Hoffman, ``Adverse Selection, Market Access and Inter-market 
Competition,'' Journal of Banking & Finance 65, 108-119 (2016), 
available at https://www.sciencedirect.com/science/article/pii/S0378426615002976; Sviatoslav Rosov, ``HFT, Price Improvement, 
Adverse Selection: An Expensive Way to Get Tighter Spreads?'', CFA 
Institute (2014) available at https://blogs.cfainstitute.org/marketintegrity/2014/12/18/hft-price-improvement-adverse-selection-an-expensive-way-to-get-tighter-spreads/ (``Rosov'').
    \246\ Some market participants may know more about the value of 
a security because some investors, such as some professional 
traders, could just be better at processing public information. See, 
e.g., Michael Brennan and Avanidhar Subrahmanyam, ``Market 
Microstructure and Asset Pricing: On the Compensation for 
Illiquidity in Stock Returns,'' Journal of Financial Economics 41, 
441-464 (1996), available at http://www.sciencedirect.com/science/article/pii/0304405X9500870K; David Easley and Maureen O'Hara, 
``Information and the Cost of Capital,'' Journal of Finance 59, 
1553-1583 (2004), available at http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2004.00672.x/pdf.
    \247\ Exchanges do not have sufficient liquidity from retail 
marketable orders because they are generally internalized or routed 
to wholesalers to avoid access fees. Several studies indicate that 
internalizers are unlikely to accept marketable orders from market 
participants that are likely to be informed. See Angel, Harris, and 
Spatt, supra note 216; Rosov, supra note 245.
    \248\ See, e.g., Dolgopolov, supra note 21. For example, if an 
investor had a non-marketable limit buy order at $10, when the 
current market price was $10.25, that standing limit order to buy at 
$10 is likely to only get executed when prices are declining.
    \249\ See Katya Malinova and Andreas Park, ``Subsidizing 
Liquidity; the Impact of Make/Take Fees on Market Quality,'' Journal 
of Finance 70, 509-536 (2015), available at http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2004.00672.x/pdf 
(examining the introduction of maker rebates on the Toronto Stock 
Exchange); Yiping Lin, Peter Swan, and Frederick H. deB. Harris, 
``Maker-Taker Fees, Liquidity Competition, and High Frequency 
Trading,'' Working Paper, University of New South Wales (2017) 
(examining the Nasdaq pilot, described above in Section II.B). In 
analyses of markets where exchanges conducted pilots altering the 
access fees and rebates paid on subsets of stocks, results indicate 
that markets with lower access fees (and rebates) had reduced 
adverse selection costs. Venues with lower access fees could draw 
increased order flow from both informed and uninformed traders. If 
the proportion of informed traders is unlikely to change due to fees 
and rebates changes, as overall order flow increases due to lower 
access fees, then the likeihood of transacting with an informed 
trader declines, thereby reducing the adverse selection costs to 
traders.
---------------------------------------------------------------------------

    Given the competitive nature of the broker-dealer industry,\250\ 
the Commission considered whether competition could alleviate potential 
conflicts of interest between investors and broker-dealers, as 
investors choose between broker-dealers that offer to place orders on 
their behalf. To the extent that investors are able to identify broker-
dealers that do not act on potential conflicts of interest, investors 
could discourage broker-dealers from acting on such conflicts of 
interest. The Commission preliminarily believes, however, that 
competition between broker-dealers may not resolve this issue because 
of a combination of three reasons: Asymmetric information, switching 
costs and a lack of collective action.
---------------------------------------------------------------------------

    \250\ See Section V.B.2.a infra.
---------------------------------------------------------------------------

    First, asymmetric information between broker-dealers and their 
customers limits the ability of customers to identify broker-dealers 
that do not act on potential conflicts of interest. For example, 
customers do not generally have access to information about broker-
dealers' individual sources of revenue.\251\ As discussed below in more 
detail, although disclosures required pursuant to Rule 606 provide 
information about material conflicts of interest related to payment for 
order flow, these disclosures do not provide information on the effect 
of transaction-based fees on order routing decisions. Moreover, while 
under Rule 606, a customer may request information about the venues to 
which her orders were routed in the prior six months, a customer cannot 
necessarily use this information to compare how these orders would have 
been treated by other broker-dealers. Further, these

[[Page 13043]]

disclosures do not provide customers with information about the payment 
and collection of transaction-based fees and rebates by broker-dealers.
---------------------------------------------------------------------------

    \251\ While consolidated revenues may be available from Form 10-
K filings for broker-dealers that are public reporting companies, 
broker-dealers do not report revenues attributable to specific 
sources, such as rebates from a particular exchange or payments for 
order flow from a particular venue. For instance, revenues derived 
from commissions and fees are often just reported in aggregate as 
``Commissions and Fees.'' Therefore, even though aggregate revenues 
for some broker-dealers are publicly available, customers do not 
have access to the information on individual sources of revenue that 
could reveal potential conflicts of interest.
---------------------------------------------------------------------------

    Second, even if investors had sufficient information to conclude 
they would be better served by a different broker-dealer, investors may 
face costs in switching broker-dealers.\252\ If these switching costs 
are high relative to the costs that investors anticipate may arise from 
potential conflicts of interest, investors may not switch broker-
dealers even if it appears that their broker-dealer may have acted on 
conflicts of interest.
---------------------------------------------------------------------------

    \252\ These switching costs may be monetary, but may also have a 
time and effort component.
---------------------------------------------------------------------------

    The presence of switching costs also may exacerbate a collective 
action problem among investors.\253\ While investors could provide 
incentives to broker-dealers to eliminate potential conflicts of 
interest by threatening to move accounts away from broker-dealers known 
to act on conflicts of interest, switching costs may undermine the 
credibility of such a threat. This is because, although each customer 
individually bears a cost to switch accounts, the benefits of a 
successful threat, while conditional on a sufficient number of 
customers agreeing to switch, are available to all customers whether 
they would switch or not. If the switching costs are high relative to 
the proportion of customer defections necessary to threaten a broker-
dealer, customers are unlikely to generate enough of a threat to alter 
broker-dealers' behavior.
---------------------------------------------------------------------------

    \253\ Collective action occurs when a number of individuals or 
entities work together to achieve a common objective, such as 
investors acting to reduce the potential conflicts of interest in 
order routing decisions by broker-dealers.
---------------------------------------------------------------------------

B. Baseline

    We compare the economic effects of the proposed rule, including 
benefits, costs, and effects on efficiency, competition, and capital 
formation, to a baseline that consists of the existing regulatory 
framework and market structure. As explained above, by temporarily 
altering the fee and rebate structure for certain NMS stocks (including 
ETPs), the proposed Pilot is designed to produce information on order 
routing behavior that would not otherwise be available. The baseline 
discusses the existing set of information, as well as the exchanges' 
current practices with respect to fees and rebates and the regulations 
governing those fees and rebates.
1. Current Information Baseline
    While the studies cited above discuss the potential issues for 
investors associated with transaction-based fee models,\254\ limited 
empirical evidence exists to date about the extent that potential 
conflicts of interest arise from maker-taker and taker-maker pricing 
models and how transaction-based fees affect the integrity and 
structure of the U.S. equity markets. Below, we discuss the existing 
information currently available to the Commission or the public that 
concerns the relationship between transaction-based fees and order 
routing decisions and describe the limitations of this information for 
use in policy discussions regarding transaction-based fees and 
potential conflicts of interest.
---------------------------------------------------------------------------

    \254\ See supra note 216.
---------------------------------------------------------------------------

a. Existing Information
    The existing empirical studies available regarding the relation 
between transaction-based fees, order routing decisions, and execution 
quality consists of two studies: One academic study and a study 
conducted by Nasdaq.\255\ According to the Battalio Equity Market 
Study, broker-dealers appear to trade execution quality of customer 
orders, as measured by the likelihood of and time to execution (and not 
price), for the rebates obtained by providing liquidity to maker-taker 
venues.\256\ By routing orders to exchanges that pay high rebates, 
broker-dealers may engage in rebate capture at the expense of client 
execution.\257\ Using data obtained from mandatory Rule 606 disclosures 
over a two-month window,\258\ the Battalio Equity Market Study also 
identified that four of the ten broker-dealers included in the analysis 
route limit orders exclusively to market makers or to exchanges that 
offered the largest liquidity rebates (and charging the highest access 
fees).\259\ A number of tests in the Battalio Equity Market Study also 
show that low-fee venues provide better execution quality for limit 
orders, as measured by the likelihood of an order fill, the speed of 
execution, and higher average realized spreads, relative to high-fee 
venues, suggesting that order routing decisions to high rebate venues 
are likely to be suboptimal from a customer's perspective, and may be 
indicative of potential conflicts of interest.
---------------------------------------------------------------------------

    \255\ Although a number of studies theoretically suggest that 
the transaction-based pricing structure coupled with discretion by 
broker-dealers over order routing decisions could lead to potential 
conflicts of interest with their customers, only the Battalio Equity 
Market Study provides empirical evidence on the effect of fees and 
rebates on order routing. Battalio Equity Market Study, supra note 
22. As discussed more thoroughly below in Section V.B.1.b, the 
Battalio Equity Market Study, while enlightening, has a number of 
limitations that inhibit the ability to draw causal inferences from 
it about potential conflicts of interest. See, e.g., Angel, Harris, 
and Spatt, supra notes 106 and 216; Dolgopolov, supra note 21; 
Harris, supra note 23.
    \256\ The Battalio Equity Market Study's abstract of the paper 
states: ``We identify retail brokers that seemingly route orders to 
maximize order flow payments by selling market orders and sending 
limit order to venues paying large liquidity rebates. . . . [W]e 
document a negative relation between limit order execution quality 
and rebate/fee level. This finding suggests that order routing 
designed to maximize liquidity rebates does not maximize limit order 
execution quality. . . .'' See Battalio Equity Market Study, supra 
note 22, at 2193.
    \257\ See Battalio Equity Market Study, supra note 22. See also 
Section V.A.2 supra, for an overview of the potential conflicts of 
interest that emerge.
    \258\ Rule 606 requires broker-dealers to provide quarterly 
reports that provide an overview of their routing practices. See 
Securities Exchange Act Release No. 51808 (November 27, 2000), 65 FR 
75414, (December 1, 2000) (``Disclosure or Order Execution and 
Routing Practices''). Rule 606 disclosures require broker-dealers to 
disclose material aspects of their relationships with certain 
trading venues, including a description of payment for order flow. 
The reports, however, do not require broker-dealers to disclose the 
amounts of payment for order flow, or the rebates received or access 
fees paid.
    \259\ See Battalio Equity Market Study, supra note 22. The 
Battalio Equity Market Study, however, does not specify whether the 
limit orders are marketable or non-marketable limit orders, as Rule 
606 disclosures do not segment these orders.
---------------------------------------------------------------------------

    Separately, and as discussed in Section II.B,\260\ Nasdaq 
independently conducted a study, whereby it lowered access fees and 
rebates for a sample of 14 stocks over a period of four months in 2015, 
providing an exogenous shock to the transaction-based pricing model on 
the exchange. The Nasdaq experiment lowered both the access fees 
charged and the liquidity rebates paid on the securities included in 
their study.\261\ Nasdaq's analysis indicated that Nasdaq's reduction 
in access fees and liquidity rebates reduced Nasdaq's market share and 
Nasdaq's incidence of providing the NBBO, suggesting that Nasdaq 
experienced a decline in some measures of market quality as a result of 
the changes to access fees and rebates.\262\ Further, Nasdaq found that

[[Page 13044]]

there was a shift in the composition of the top five liquidity 
providers for the securities that occurred as a result of the 
experiment.\263\
---------------------------------------------------------------------------

    \260\ See supra notes 31 and 32 and corresponding text.
    \261\ The Nasdaq study lowered access fees to $0.0005 and 
rebates to $0.0004 simultaneously for a set of 14 securities, half 
of which identified Nasdaq as the primary listing exchange, the 
other half which identified the NYSE as the primary listing 
exchange. The Nasdaq released two reports (see supra note 31) 
examining the changes to a number of metrics related to market 
quality.
    \262\ Although the 14 stocks experienced a decline in market 
share on Nasdaq and their incidence of time at the NBBO, there was 
no statistically significant change in the level of liquidity 
taking, variance ratio, realized spread, return autocorrelation, 
effective spread, relative effective spread, quoted spread, relative 
quoted spread, displayed dollar depth at the NBBO, or time between 
either quote updates or price changes in the NBBO. See Nasdaq May 
Report, supra note 31.
    \263\ The top five liquidity providers prior to the start of the 
pilot significantly reduced their liquidity provision from 44.5% of 
the liquidity provided pre-pilot to 28.7% in the pilot period. 
However, the top five liquidity providers from the pilot period had 
a significant increase in their liquidity provision from 29.7% pre-
pilot to 41.5% in the pilot period. See Nasdaq May Report, supra 
note 31.
---------------------------------------------------------------------------

    Two studies have examined exogenous shifts between maker-taker and 
payment for order flow pricing models on U.S. options exchanges.\264\ 
These studies found that the movement from a payment for order flow 
model to a maker-taker model led to a decrease in execution costs for 
option classes affected by the shift, improved quoted spreads, and 
altered broker-dealer order routing behavior to account for the 
fees.\265\ However, the change to a payment for order flow model from a 
maker-taker model yielded better execution quality, but a reduction in 
the number of orders and order volume.\266\
---------------------------------------------------------------------------

    \264\ See Amber Anand, Jian Hua, and Tim McCormick, ``Make-Take 
Structure and Market Quality: Evidence from the U.S. Options 
Markets,'' Management Science 62, 3217-3290 (2016), available at: 
https://pubsonline.informs.org/doi/abs/10.1287/mnsc.2015.2274 
(``Anand, Hua, and McCormick''); Robert Battalio, Todd Griffith, and 
Robert Van Ness, ``Make-Take Fees versus Order Flow Inducements: 
Evidence from the NASDAQ OMX PHLX Exchange,'' Working Paper, 
University of Notre Dame (2017), available at: http://www1.villanova.edu/content/dam/villanova/VSB/assets/marc/marc2017/SSRN-id2870000.pdf (``Battalio, Griffith, and Van Ness''). Anand, 
Hua, and McCormick explores the transition from a payment for order 
flow model to a maker-taker model on NYSE ARCA, while Battalio, 
Griffith, and Van Ness examines the shift on NASDAQ OMX PHLX 
(``PHLX'') from a maker-taker model to a payment for order flow 
model.
    \265\ See Anand, Hua, and McCormick, supra note 264.
    \266\ See Battalio, Griffith, and Van Ness, supra note 264.
---------------------------------------------------------------------------

    A number of existing data sources could be used independently or in 
combination to relate transaction-based fees to order routing and 
execution quality. For instance, in the Battalio Equity Market Study 
and the Nasdaq Study discussed above, researchers employed some 
combination of Rule 606 data, proprietary broker-dealer data, the Trade 
and Quote (TAQ) database,\267\ and proprietary exchange data. In 
addition, while not employed in previous studies, CAT data, Rule 605 
data, and exchanges' Form 19b-4 fee filings and fee schedules available 
from each exchange's website, could provide insights into the relation 
between transaction-based fees, order routing, and execution quality.
---------------------------------------------------------------------------

    \267\ The Battalio Equity Market Study, supra note 22, relies on 
Rule 606 disclosures to identify order routing for a small sample of 
broker-dealers, proprietary broker-dealer data from a single smart-
order routing system to capture limit order execution quality for 
this broker-dealer's orders, and the TAQ data to measure execution 
quality as a function of each venue's taker fee or rebate.
---------------------------------------------------------------------------

    Rule 606 requires broker-dealers to make publicly available 
quarterly reports that provide an overview of their routing practices 
for non-directed retail orders in NMS securities. As a further 
requirement of Rule 606, broker-dealers must disclose the identities of 
the ten venues to which the largest number of orders were routed for 
execution. Rule 606 disclosures additionally require broker-dealers to 
disclose material aspects of their relationships with trading venues to 
which they route orders, including a description of payment for order 
flow and any profit sharing relationships, which, like rebates, could 
lead to potential conflicts of interest for broker-dealers when routing 
orders.\268\ Researchers and other analysts interested in order routing 
data can download these forms quarterly directly from broker-dealer 
websites.
---------------------------------------------------------------------------

    \268\ Conflicts of interest for broker-dealers potentially could 
arise from a number of sources, including affiliations with trading 
venues, receipt of payment for order flow, receipt of payment from 
profit-sharing relationships, and rebates. Rule 606, however, 
requires only descriptions of any arrangements for payment for order 
flow, but does not require broker-dealers to provide information on 
the net amount of payment for order flow, payment received from 
profit-sharing relationships, or disclosure of access fees paid or 
rebates received. See Disclosure of Order Execution and Routing 
Practice, supra note 258, at 75425-28.
---------------------------------------------------------------------------

    Proprietary data from broker-dealers or exchanges could also 
provide information about order routing and execution quality. Broker-
dealer data include information on the orders received and routed by 
that broker-dealer, including where the broker-dealer routed orders, 
whether the orders execute, and the price, size, and time of execution. 
Exchange data include information on the order received by an exchange, 
including which members routed orders to the exchange, whether the 
orders execute, and the price, size, and time of execution. As these 
data include commercially sensitive information, they are not broadly 
available.
    Once the CAT Phase 1 becomes operational,\269\ the Commission and 
SROs will have information on all exchange routing and exchange 
executions for all NMS securities. In CAT Phase 1, exchanges would 
record and report order events on every order they receive for NMS 
securities. Order events include order receipt, order routes, order 
modifications, order cancelations, and order executions.
---------------------------------------------------------------------------

    \269\ See supra note 172.
---------------------------------------------------------------------------

    Rule 605 data provides information about execution quality by 
market center, including exchanges, ATSs, and broker-dealers that 
execute orders, by requiring standardized reports of statistical 
information regarding order execution, and was designed to improve the 
public disclosure of order execution practices by exchanges.\270\ These 
data are available monthly from market center websites or data vendors, 
and provide information on execution quality statistics such as 
transaction costs, execution speed, and fill rates reported separately 
for marketable and non-marketable orders.
---------------------------------------------------------------------------

    \270\ See Disclosure of Order Execution and Routing Practice, 
supra note 258, at 75417-25.
---------------------------------------------------------------------------

    Beyond Rule 605 data, researchers could also use the TAQ database 
as a means of measuring order execution quality. The TAQ database is 
publicly available (for a fee) from the NYSE and provides access to all 
trades and quotes for NMS securities, from which researchers and other 
analysts can estimate trade-based measures of execution quality.
    Finally, researchers and other analysts can manually create 
datasets of exchange fees and rebates from the information that 
exchanges provide on their websites and release in their Notice of 
Filing of Proposed Rule Changes, which would capture information 
contained in exchanges' Form 19b-4 fee filings. The Form 19b-4 fee 
filings record changes to the existing exchange fee schedules with the 
Commission. At any point that an exchange chooses to make a change to 
any aspect of its access fees and rebates, the exchange must provide 
notice to the Commission that it is filing a proposed rule change to 
amend its existing fee and rebate schedule. Exchanges may file their 
revisions to fees and rebates for immediate effectiveness upon 
submitting the Form 19b-4 fee filings with the Commission.
b. Limitations of Existing Information
    Existing studies and available data sources are limited in ways 
that are likely to reduce the strength of conclusions that relate to 
the impact of transaction-based fees and rebates on order routing 
decisions and the existence or magnitude of potential conflicts of 
interest between broker-dealers and their customers. The limitations of 
existing studies fall primarily into two categories: (1) The results of 
the studies may not be representative, and (2) the results of the

[[Page 13045]]

studies cannot make a causal connection needed to inform on potential 
conflicts of interest. This section discusses those limitations as well 
as separately discussing the limitations associated with existing 
sources of data mentioned above.
i. Representative Results
    The results of both the Battalio Equity Market Study and the Nasdaq 
study may not be representative of the potential impacts of broad 
changes in access fees or rebates. Drawing market-wide inferences from 
the limited samples in these studies could be problematic because the 
results are predicated on information obtained from a single broker-
dealer or trading venue. First, the Battalio Equity Market Study uses 
order level data from a single broker-dealer to determine the relation 
between maker-taker fees and limit order execution quality. Analysis 
based on observation of a single broker-dealer may not provide 
representative results because the relation between transaction-based 
fees and potential conflicts of interest may not be generalizable to 
other broker-dealers. For example, over 400 broker-dealers maintain 
membership with at least one U.S. equities exchange.\271\ If the single 
broker-dealer examined in the Battalio Equity Market Study has 
significantly different order routing behavior than the average broker-
dealer that routes orders to exchanges, the information obtained from 
examining the relation between transaction-based fees and order routing 
decisions of that broker-dealer would not be representative of the 
entire market and therefore would provide an incomplete representation 
of potential conflicts of interest.
---------------------------------------------------------------------------

    \271\ Estimates based on data from Form 1 of the X-17A-5 
filings. As of December 31, 2016, 3,972 broker-dealers that filed 
form X-17A-5. See Section V.B.2.a infra.
---------------------------------------------------------------------------

    The Battalio Equity Market Study also relies on a sample of Rule 
606 order routing decisions obtained directly from the reporting 
entities' websites from a limited sample of ten well-known national 
retail brokers from a single quarterly reporting cycle (October and 
November 2012). As discussed above, over 400 broker-dealers are members 
of at least one national securities exchange. The ten retail brokers 
analyzed in the Battalio Equity Market Study make up approximately 2.1% 
of the broker-dealers with exchange memberships, and less than 0.3% of 
broker-dealers overall. Although these are well-known retail brokers, 
due to the lack of representativeness of the sample (e.g., the majority 
of the broker-dealers represented in the Battalio Equity Market Study 
are online broker-dealers), these broker-dealers may be more (or less) 
likely than the average broker-dealer to route customer orders in ways 
that benefit themselves at the expense of their customers. The findings 
in the Battalio Equity Market Study, therefore, may not be 
representative of a broader sample of broker-dealers. Moreover, the 
Commission is unable to determine if the Battalio Equity Market Study's 
analyses of the Rule 606 disclosure data has statistical power because 
the authors did not provide any statistical analyses beyond the 
percentage of market or limit orders routed to a particular exchange.
    Similarly, the results of the Nasdaq study may not be 
representative of the broader market, as the Nasdaq study affected only 
a very small sample of common stocks and focused on order routing to a 
single exchange. As discussed in Section II.B, Nasdaq selected 14 
stocks to be part of the analysis, which represent only 0.3% of all NMS 
stocks. The sample is unlikely to be representative of the universe of 
NMS securities for two reasons: (1) The sample included a small number 
of stocks (and no ETPs),\272\ and (2) less than one-third of these 
stocks were small or mid-capitalization at the time of the analysis, 
although most had market capitalizations close to $3 billion 
immediately prior to the study.\273\ Further, the analysis only focused 
on the effects of changes to transaction-based fees for a single 
exchange: Nasdaq. As the other equities exchanges did not have similar 
changes to transaction-based fees and rebates, any inferences drawn 
from the Nasdaq study may not be valid under different circumstances in 
which all equities exchanges were subject to consistent revisions to 
transaction-based fees.
---------------------------------------------------------------------------

    \272\ Only common stocks were included in the Nasdaq study, 
while the proposed Pilot will include NMS stocks, which includes 
common stocks as well as ETPs.
    \273\ Market capitalizations are computed from CRSP shares 
outstanding and stock price, as of December 31, 2014.
---------------------------------------------------------------------------

    In the spirit of the Nasdaq study, exchanges could coordinate 
voluntarily to simultaneously implement a pilot similar to the Nasdaq 
pilot on all exchanges over a broader sample of stocks, to produce more 
representative results. The Commission preliminarily believes, however, 
that exchanges would not be likely to coordinate changes to access fees 
and rebates for the purpose of studying potential conflicts of interest 
between broker-dealers and their customers because of competitive 
incentives, such as inducements to draw order flow away from 
competitors.\274\
---------------------------------------------------------------------------

    \274\ With respect to the Nasdaq study, the purpose of revising 
access fees and rebates was to determine how these changes affected 
market share and Nasdaq's fraction of time at the NBBO.
---------------------------------------------------------------------------

    Researchers could conduct studies with data sources currently 
available that provide more representative results than those provided 
in existing studies. However, the Commission preliminarily believes 
that data limitations discussed in greater detail below could make such 
studies difficult. Moreover, the results of such studies would unlikely 
be able to establish a causal connection between transaction-based fees 
and order routing decisions by broker-dealers needed to inform policy 
decisions on potential conflicts of interest. The importance of causal 
inference is discussed in the next section.
ii. Causality
    In addition to limitations in how representative results may be, 
existing studies are also of limited use for policy decisions because 
they cannot test for causal relationships between transaction fees and 
order routing decisions. Because transaction-based fees and order 
routing decisions could be jointly determined, researchers cannot 
readily disentangle the direction of causality, and therefore cannot 
determine the extent that potential conflicts exist. The identification 
of causal relations between fees and order routing decisions becomes 
increasingly complex because exchanges have some discretion to modify 
their fees.\275\ In practice, researchers attempt to identify and 
measure causal relations in two ways: (1) Exogenous shocks, which have 
been discussed above, and (2) econometric techniques, such as an 
instrumental variables approach.\276\
---------------------------------------------------------------------------

    \275\ Over the last five years, the exchanges, on average, have 
made 34 revisions, or approximately 6.7 revisions per year, to their 
transaction-based fees and rebates. See Section V.B.2.b infra.
    \276\ The method of instrumental variables is used to estimate 
causal relationships when controlled experiments or exogenous shocks 
are not feasible. An ``instrument'' changes the explanatory variable 
but has no independent effect on the dependent variable, allowing a 
researcher to uncover the causal effect of the explanatory variables 
on the dependent variable of interest.
---------------------------------------------------------------------------

    Although the Nasdaq study implements an exogenous shock, which 
could have permitted causal inference regarding the relationships 
between transaction fees, order routing, and market quality, that study 
did not analyze the impact of potential conflicts of interest on order 
routing decisions. Further, even if the Nasdaq study had analyzed a 
causal relationship between transaction-based fee and rebates and 
potential conflicts of interest, the

[[Page 13046]]

limited representativeness of the Nasdaq sample, would limit the 
generality of the study.
    With respect to the transition between forms of pricing models that 
occurred on the option exchanges, discussed above, the key limitation 
is the comparison of maker-taker pricing models with payment for order 
flow pricing models. Studies that explore these regime shifts between 
maker-taker to payment for order flow models are not comparing 
situations in which one regime could theoretically have lower conflicts 
of interest than the other.\277\ Each of these types of models is 
likely to create potential conflicts of interest that could affect how 
broker-dealers route their customer orders,\278\ although evidence does 
not suggest that one form of pricing model is more or less prone to 
conflicts than another. Moreover, the change from one form of pricing 
model to another could introduce new conflicts of interest that did not 
previously exist. Therefore, the Commission preliminarily believes that 
exchange-driven transitions between maker-taker and payment for order 
flow pricing models are not likely to provide information about 
potential conflicts of interest driven by the maker-taker and taker-
maker models or to inform the Commission about future regulatory 
decisions regarding transaction-based fees.
---------------------------------------------------------------------------

    \277\ See supra note 264.
    \278\ See Robert Battalio, Andriy Shkilko, and Robert Van Ness, 
``To Pay or Be Paid? The Impact of Taker Fees and Order Flow 
Inducements on Trading Costs in U.S. Options Markets,'' Journal of 
Financial and Quantitative Analysis 51, 1637-1662 (2016), available 
at: https://www.cambridge.org/core/services/aop-cambridge-core/content/view/0782CE3E9679C29BB910A66192D27201/S0022109016000582a.pdf/div-class-title-to-pay-or-be-paid-the-impact-of-taker-fees-and-order-flow-inducements-on-trading-costs-in-u-s-options-markets-div.pdf.
---------------------------------------------------------------------------

    The Battalio Equity Market Study attempts to test for causal 
relationships between liquidity rebates and order routing decisions of 
broker-dealers using an instrumental variables approach. However, in 
the absence of an exogenous shock to access fee caps or rebates outside 
the control of exchanges, the authors are unable to definitively 
determine the causes of broker-dealers' order routing decisions through 
the use of econometric techniques. Consequently, the authors are unable 
to disentangle whether fees and rebates drive broker-dealer order 
routing decisions or order routing decisions determine fees and rebates 
chosen by exchanges.
    Although exchanges revise their fee schedules frequently, the 
Commission preliminarily does not believe that studying order routing 
and execution quality around these fee changes alone can establish 
causality because fee changes are at the discretion of exchanges and 
could be caused by changes to order routing behavior. In the absence of 
an event outside of the control of the exchanges (e.g., an exogenous 
shock to either fees or rebates), identifying the direction of 
causality between changes in fees and order routing behavior is nearly 
impossible. Thus, any discretionary actions by exchanges to revise 
their fee schedules independently of other exchanges is unlikely to 
yield information that would be valuable to the Commission for 
informing any future policy decisions about potential conflicts of 
interest between broker-dealers and their customers.
iii. Existing Data Sources
    As noted above, several data sources provide information on order 
routing and execution quality. While researchers theoretically could 
use these data sources to produce representative results regarding the 
relation between transaction-based fees, order routing, and execution 
quality, the Commission preliminarily believes that data limitations, 
would make these studies difficult to produce.
    As discussed previously, Rule 606 disclosures provide information 
on order routing. Rule 606 disclosures are currently the only data 
publicly available to researchers and others on order routing by 
broker-dealers; however, limitations in the Rule 606 data reduce the 
ability of researchers to use the data to produce representative 
results. The data are cumbersome to collect on a broad scale, as 
researchers would generally need to access each broker-dealer's web 
page to manually download the data. The Rule 606 data are also only 
available at a quarterly frequency, and broker dealers are not required 
to maintain historical data, which hampers the ability to efficiently 
produce research on multiple quarters of data, and could lead to short 
sample periods that may provide relatively limited power for 
statistical tests.\279\ Notably, there currently is no central 
repository of these data, so any collection of this information by 
researchers would be a lengthy and labor-intensive process. For 
example, a researcher that has not already downloaded a time series of 
Rule 606 reports would need to download one quarter at a time, waiting 
three months for each quarter's data to create a time series; 
assembling a single year's worth of data would require nine to twelve 
months. Such delays could significantly increase the opportunity costs 
of undertaking such studies and decrease the likelihood of new research 
on the relation between transaction-based fees and order routing 
decisions. Moreover, these limitations also could prevent other 
researchers and other analysts from verifying or replicating analyses 
if researchers did not concurrently collect the Rule 606 reports across 
the same periods of observation.
---------------------------------------------------------------------------

    \279\ See supra note 118.
---------------------------------------------------------------------------

    In addition, the quarterly frequency of the Rule 606 reports by 
broker-dealers is different from the frequency of changes in fee 
schedules by exchanges (e.g., as presented in Table 2, over a recent 
five-year measurement period, the average exchange updated its fees 
schedule approximately 6.7 times per year).\280\ Further, while the 
Rule 606 data provides order routing at the broker-dealer level, such 
information is not granular enough to thoroughly study potential 
conflicts of interest.
---------------------------------------------------------------------------

    \280\ Not every fee schedule revision pertains to access fees or 
rebates. To focus only on these revisions, each Form 19b-4 fee 
filing was evaluated to determine that revisions to fees or rebates 
were pertinent to this baseline.
---------------------------------------------------------------------------

    The value of Rule 606 disclosures for identifying possible 
conflicts of interest resulting from transaction-based fees would be 
limited for a number of additional reasons, even if the Commission were 
to require a historical time series of these disclosures for all 
broker-dealers.
    First, each broker-dealer discloses data for only its top ten order 
routing venues. Second, because broker-dealers disclose data at a 
quarterly frequency, a five-year sample of Rule 606 data for a single 
broker-dealer, would include only 20 observations, limiting statistical 
power. Third, although Rule 606 reports also provide some disclosure 
about potential broker-dealer conflicts of interest, they do not 
include any disclosure of access fees assessed or rebates offered by 
exchanges to the broker-dealers. Fourth, Rule 606 data do not 
distinguish between marketable and non-marketable limit orders. 
Finally, Rule 606 currently covers only retail orders. If institutional 
orders also are subject to potential conflicts of interest, studying 
Rule 606 data alone would not inform on such conflicts of interest.
    To produce representative results using proprietary broker-dealer 
or exchange data would require obtaining these data from a sufficient 
number of diverse broker-dealers and exchanges. However, proprietary 
data from broker-dealers or exchanges are generally not available to 
the public. While some researchers have obtained such data

[[Page 13047]]

from a single broker-dealer or exchange, and some broker-dealers and 
exchanges employ their own researchers, the Commission preliminarily 
believes that it would be difficult for researchers to obtain such data 
from a sufficient number of broker-dealers or exchanges in order to 
produce representative results.
    Regardless of whether researchers would obtain data from Rule 606 
disclosures or directly from exchanges, much of the data currently 
available is either unstructured or in a non-standardized format. For 
instance, many broker-dealers provide PDF files of Rule 606 
disclosures, while exchanges use bespoke terminology to classify their 
fees and rebates, which likely limits the value of these data for 
researchers examining the effect of fees and rebates on order routing 
decisions. This lack of standardization across platforms could make it 
difficult for researchers to aggregate data and construct 
representative samples for comparison and analyses.
    While Rule 605 and TAQ data are available to researchers and may 
provide information about execution quality, they too have a number of 
limitations. For example, Rule 605 data provides execution quality 
information for both marketable and non-marketable orders; however, the 
methodologies for estimating measures of the speed of execution of non-
marketable orders are outdated.\281\ For instance, Rule 605 measures 
realized spreads based on quotations five minutes after the time of 
order execution and recent research suggests using quotations that more 
closely follow a trade, because any temporary price impact of a trade 
goes away within seconds, not minutes, of the trade.\282\ Like Rule 606 
data, Rule 605 data also covers smaller retail-sized orders only, and 
the data are only available at the monthly frequency. Instead, 
researchers and the Commission could rely on TAQ data, a publicly 
available dataset provided by the NYSE to subscribers, in order to 
capture some measures of execution quality. However, the TAQ data has 
limited information on limit order execution quality that would be 
valuable to the Commission and others.
---------------------------------------------------------------------------

    \281\ See Concept Release, supra note 3.
    \282\ See, e.g., Jennifer Conrad and Sunil Wahal, ``The Term 
Structure of Liquidity Provision,'' Working Paper, University of 
North Carolina--Chapel Hill (2017), available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2837111.
---------------------------------------------------------------------------

    To incorporate transaction-based fee information into analyses, 
researchers would need to manually collect and compile the information 
from exchanges' websites and their Form 19b-4 fee filings, which notify 
the Commission of changes to those fee schedules. Although the current 
fee schedules are posted on exchange websites, in order to identify 
changes to those fees, researchers would need to search the 
Commission's website for such Form 19b-4 fee filings to identify when 
exchanges change their fees and to gather information about those fees, 
as exchanges do not file their fees on a routine basis, but rather only 
when making changes. Such information would be cumbersome to compile. 
Additionally, because of the complexity of exchange fee structures and 
the lack of standardization of these structures across exchanges, 
identifying comparable fees across exchanges is unwieldy. For example, 
identifying the base or top-tier fees across exchanges could be 
difficult for researchers. As shown in Table 2 below, the average 
exchange has 24 different access fee categories and 21 different rebate 
categories. Further, exchanges do not disclose per share average or 
median fees charged and rebates earned on any report or filing, so such 
information is unavailable to the public. To add to the impediments to 
fee data aggregation and comparison, Form 19b-4 fee filings are 
available only as PDF files downloadable from the Commission's website, 
thereby increasing the costs of aggregation across exchanges over time 
by researchers.
    Even if limitations to data availability and aggregation were 
overcome and researchers could construct a representative sample of fee 
and routing data, researchers would still face obstacles in 
understanding the relationship between transaction-based fees and 
rebates and routing decisions. Without an exogenous shock to fees and 
rebates to infer the causal relation between these transaction-based 
fees and order routing decisions, researchers would not be able to 
analyze whether the order routing decisions observed are driven by fees 
and rebates or vice versa.\283\
---------------------------------------------------------------------------

    \283\ See Section V.B.1.b.ii supra.
---------------------------------------------------------------------------

2. Current Market Environment
    This section provides an overview of the market for trading 
services, and of the exchanges and ATSs that could be affected as a 
result of revisions to the transaction-based fee structure required by 
the proposed Pilot. Where information is currently available to the 
Commission, a description of the current practices of exchanges along 
dimensions that are relevant to the proposed Pilot (e.g., summary 
information on their current fee schedule or the frequency of fee 
revisions) are included.
a. Market for Trading Services
    The market for trading services, which is served by exchanges, 
ATSs, and other liquidity providers (internalizers and others),\284\ 
relies on competition to supply investors with execution services at 
efficient prices. These trading venues, which compete to match traders 
with counterparties, provide a platform for price negotiation and 
dissemination of trading information. The market for trading services 
in NMS securities consists of 13 national equity market exchanges and 
34 ATSs. Other off-exchange venues include internalizers and 
wholesalers, which execute a substantial volume of retail order flow. 
The remainder of this section discusses the current competitive 
landscape for exchanges and ATSs relevant to our economic analysis of 
the proposed Pilot.
---------------------------------------------------------------------------

    \284\ See supra note 247.
---------------------------------------------------------------------------

    Since the adoption of Regulation NMS in 2005, the market for 
trading services has become more fragmented and competitive. As of July 
18, 2017, 13 national equity market exchanges operate in the U.S., as 
shown in Table 1. Of these exchanges, nine are maker-taker exchanges 
and two are taker-maker pricing exchanges; the EDGA and IEX operate as 
flat-fee exchanges.\285\ Since Regulation NMS was adopted in 2005, the 
market for trading services has become significantly more competitive 
as measured by the decline in market share of individual exchanges, 
discussed in more detail below. The number of U.S. equities exchanges 
has increased by over 60%, as the number of exchanges increased from 
eight exchanges in 2005 to 13 exchanges operating today, as shown in 
Table 1.\286\

[[Page 13048]]

Several studies have suggested that transaction-based fee pricing 
partially drove the increase in the number of U.S. equities exchanges 
since 2005.\287\
---------------------------------------------------------------------------

    \285\ IEX charges a flat fee of $0.0009 for trades against non-
displayed liquidity on both sides of the market, and charges $0.0003 
for trade execution against displayed liquidity. See https://iextrading.com/trading/fees. As of March 2018, EDGA is no longer 
operating as a taker-maker market, but is also operating as a flat-
fee venue. See http://markets.cboe.com/us/equities/.
    \286\ Although 13 U.S. equities exchanges currently operate as 
of March 2018, the majority of these exchanges are part of exchange 
families. For instance, NYSE, NYSE Arca, NYSE American, and NYSE 
National, are all part of the NYSE Group, which is wholly owned by 
the Intercontinental Exchange (ICE), while Nasdaq, Phlx, and BX, are 
owned by Nasdaq. BATS, BATS-Y, EDGA, and EDGX, which all operated as 
ATSs in 2005, are all subsidiaries of Cboe Global Market, Inc. 
Although many exchanges belong to exchange groups, the Commission 
preliminarily believes that each of these exchanges operates 
independently of the other exchanges owned by the same parent 
company. IEX became a registered exchange in 2016. Further, NSX 
(NYSE National) existed as an exchange in 2005, but halted 
operations in 2016. It was acquired by NYSE/ICE in January 2017, 
which indicated at the time of the acquisition that it will operate 
the exchange as NYSE National. See ``NYSE Finalizes Acquisition of 
National Stock Exchange,'' Press Release, Intercontinental Exchange 
(January 31, 2017), available at: http://ir.theice.com/press/press-releases/all-categories/2017/01-31-2017-232800326. Researchers can 
adequately control for exchanges that are subsidiaries of the same 
parent when conducting analyses of the effect of changes in 
transaction-based fees on order routes.
    \287\ See, e.g., Angel, Harris, and Spatt, supra notes 106 and 
216; Harris, supra note 23.
---------------------------------------------------------------------------

    Execution services are a lucrative business, which encourages new 
trading centers to enter the market in the hopes of capturing rents 
associated with order execution.\288\ As discussed above, liquidity 
externalities, where the more liquid venues attract more interest and 
therefore more liquidity, could result in a single venue (or very 
limited number of venues) being the preferred trading location for any 
given stock because all traders could optimally route orders to the 
venue with the highest liquidity for a given stock.\289\ If rebates 
offered by exchanges are large enough, they provide incentives for 
market participants to route orders to those venues, in order to 
capture the rebates. Rebates offered by exchanges, therefore, may 
``break'' the liquidity externality.
---------------------------------------------------------------------------

    \288\ See id.
    \289\ Liquidity externalities are discussed in more detail in 
Section V.A.2, supra.
    \290\ Shares are computed based on share volume. Market shares 
for the exchanges reported do not add up to 100%, since 
approximately 37% of share volume trades off-exchange on over-the-
counter venues.
    \291\ As of March 2018, EDGA is no longer operating as a taker-
maker exchange and is now operating as a flat-fee venue; however, it 
was operating as one as of July 2017 when the data for this table 
was obtained.
    \292\ In 2005, BX existed as the Boston Stock Exchange.
    \293\ As of July 2017, NYSE American is no longer a purely 
maker-taker market as only certain types of market participants 
(electronic Designated Market Makers) are eligible for rebates. See 
NYSE American Equities Price List, available at: https://www.nyse.com/publicdocs/nyse/markets/nyse-american/NYSE_America_Equities_Price_List.pdf.
    \294\ NYSE acquired NSX in January 2017, and the exchange is now 
known as NYSE National. Although not currently operational, the 
Commission has assumed for the purposes of this analysis that it 
will be operational during the Pilot.

                            Table 1--U.S. National Equities Exchanges as of July 2017
----------------------------------------------------------------------------------------------------------------
                                                                                     Exchange in   Market Share
                    Exchange                               Market fee type              2005?        \290\ (%)
----------------------------------------------------------------------------------------------------------------
Cboe BZX--https://markets.cboe.com.............  Maker-Taker.......................  ...........            5.95
Cboe BYX--https://markets.cboe.com.............  Taker-Maker.......................  ...........            4.80
Cboe EDGA \291\--https://markets.cboe.com......  Taker-Maker.......................  ...........            1.64
Cboe EDGX--https://markets.cboe.com............  Maker-Taker.......................  ...........            6.38
BX \292\--www.nasdaqtrader.com.................  Taker-Maker.......................     [check]             3.02
Phlx (PSX)--www.nasdaqtrader.com...............  Maker-Taker.......................     [check]             0.76
Nasdaq--www.nasdaqtrader.com...................  Maker-Taker.......................     [check]            14.51
NYSE Arca--https://www.nyse.com/markets........  Maker-Taker.......................     [check]             9.03
NYSE American \293\--https://www.nyse.com/       Maker-Taker.......................     [check]             0.34
 markets.
NYSE--https://www.nyse.com/markets.............  Maker-Taker.......................     [check]            13.90
NYSE National \294\--https://www.nyse.com/       Maker-Taker.......................     [check]   ..............
 markets.
CHX--www.chx.com...............................  Maker-Taker.......................     [check]             0.42
IEX--www.iextrading.com........................  ..................................  ...........            2.14
----------------------------------------------------------------------------------------------------------------

    Table 1 also highlights that market share of trading volume among 
exchanges is not very concentrated. Although NYSE and Nasdaq have the 
largest overall total volume market shares of approximately 14% each 
among the exchanges, as of July 2017, these two exchanges collectively 
account for less than 30% of the total market share of trading volume 
for NMS securities, indicating that the market for trading services has 
become decentralized, and has become more so over time. For instance, 
between 2004 and 2013, the market share of NYSE-listed stocks on the 
NYSE declined from approximately 80% to 20%, while market share on 
other exchanges and off-exchange trading centers has increased.\295\ 
This decentralization provides market participants with a choice among 
venues when they route orders, and may also encourage exchanges to 
attract order flow. For instance, transaction-based fees represent one 
means by which national securities exchanges may compete for order 
flow, and exchanges may adopt business models that focus on attracting 
order flow by offering large rebates or charging competitive fees. 
Exchanges may compete for order flow on other dimensions as well, by 
offering better execution quality and innovations in order types and 
other trading mechanisms.
---------------------------------------------------------------------------

    \295\ See Angel, Harris, and Spatt, supra note 216, Figures 2.17 
and 2.18. Although less evident than for NYSE-listed securities, the 
effect is similar for the Nasdaq market.
---------------------------------------------------------------------------

    In addition to competing with other U.S. equities exchanges, 
exchanges also compete for order flow from off-exchange trading 
centers, including ATSs, internalizers, and others. Broker-dealers may 
opt to route order flow off-exchange, as they may be able to avoid 
access fees paid to exchanges for doing so. Off-exchange trading makes 
up a substantial fraction of total volume, as approximately 37% of all 
transaction reports are routed using the NYSE and Nasdaq Trade 
Reporting Facilities as of July 2017.\296\ Of that off-exchange NMS 
share volume, approximately 13% was attributable to ATSs, of which 34 
traded NMS securities as of July 2017.\297\ The remaining 24% of off-
exchange share volume is routed to other off-exchange trading centers, 
such as internalizers.\298\ In aggregate, broker-dealers and other 
market participants have a large and varied set of options as to where 
they route orders, whether to exchanges or to

[[Page 13049]]

off-exchange trading centers. Moreover, empirical evidence suggests 
that traditional exchanges, such as NYSE and Nasdaq, are losing market 
share to off-exchange trading centers and newer exchanges,\299\ which 
may provide different incentives to broker-dealers in order to attract 
this order flow, including access fees and rebates. We discuss the 
current environment for transaction-based fees in the next section.
---------------------------------------------------------------------------

    \296\ Data on off-exchange market share are available from the 
BATS Global Market web page, available at http://markets.cboe.com/us/equities/market_share/
    \297\ The estimates of ATSs that trade NMS stocks and ATS trade 
volume share was developed using weekly summaries of trade volume 
collected from ATSs pursuant to FINRA Rule 4552. See also Securities 
Exchange Act Release No. 76474 (November 18, 2015), 80 FR 80998, 
81109 (December 28, 2015) (Regulation of NMS Stock Alternative 
Trading Systems). The estimates in this release were calculated in 
the same manner as in the cited release. See also ``OTC (ATS & Non-
ATS) Transparency,'' FINRA, available at: http://www.finra.org/Industry/Compliance/MarketTransparency/ATS/.
    \298\ Total market share is collected from the BATS Global 
Market web page, available at: http://markets.cboe.com/us/equities/market_share/. ATS weekly market share is collected from FINRA, 
available at: https://otctransparency.finra.org.
    \299\ See Angel, Harris, and Spatt, supra note 216.
---------------------------------------------------------------------------

    The proposed Pilot is also likely to affect competition among 
broker-dealers that route institutional and retail orders. These 
broker-dealers compete in a segment of the market for broker-dealer 
services. The market for broker-dealer services is highly competitive, 
with most business concentrated among a small set of large broker-
dealers and thousands of small broker-dealers competing in niche or 
regional segments of the market.\300\ Large broker-dealers typically 
enjoy economies of scale over small broker-dealers and compete with 
each other to service the smaller broker-dealers, who are both their 
competitors and their customers.\301\ As of December 31, 2016, 
approximately 4,000 broker-dealers filed Form X-17a-5. These firms 
varied in size, with median assets of approximately $725,000, average 
assets of nearly $1 billion, and total assets across all broker-dealers 
of approximately $3.9 trillion. The twenty largest broker-dealers held 
approximately 75% of the assets of broker-dealers overall, with total 
assets of $2.93 trillion, indicating the high degree of concentration 
in the industry. Of the 3,972 broker-dealers that filed Form X-17a-5, 
430 are members of U.S. equities exchanges. Broker-dealers that are 
members of equities exchanges had, on average, higher total assets than 
other broker-dealers, with median assets of $21 million, average assets 
of $8.6 billion, and total assets across all broker-dealers that are 
members of exchanges of $3.6 trillion.
---------------------------------------------------------------------------

    \300\ See Securities Exchange Act Release No. 63241 (November 3, 
2010), 75 FR 69791, 69822 (November 15, 2010) (``Risk Management 
Controls for Brokers or Dealers with Market Access'').
    \301\ See id.
---------------------------------------------------------------------------

b. Transaction-Based Fees and Rebates
    Exchanges are required to disclose their current fee schedules, 
which include transaction-based fees and rebates, connectivity fees, 
membership fees, among others.\302\ When exchanges update their fees, 
they are required to file Form 19b-4 with the Commission, which if 
filed pursuant to Section 19(b)(3)(A) makes fee changes effective upon 
filing.\303\ Although these fee schedules and Form 19b-4 fee filings 
contain information about fees beyond transaction-based fees and 
rebates, in this baseline, the discussion is limited to only 
transaction-based fees and rebates and any changes thereto.
---------------------------------------------------------------------------

    \302\ See 17 CFR 240.19b-4(m)(1), which requires each SRO to 
post and maintain a current and complete version of its rules, 
including those related to transaction-based fees and rebates, on 
its website.
    \303\ As discussed in Section V.B.1.b.iii supra, fee 
information, such as that included in exchange fee schedules or Form 
19b-4 fee filings, does not have standardization or formatting 
requirements.
---------------------------------------------------------------------------

    Table 2 reports the range of minimum and maximum access fees and 
rebates, as well as the number of categories for each (in parentheses 
below the fee ranges), by exchange, for the most recently available fee 
schedule.\304\ On average, U.S. exchanges have 24 access fee categories 
and 21 rebate categories associated with these fee schedules. For the 
maker-taker exchanges, access fees are capped at $0.0030, but are as 
little as zero in some fee categories for some exchanges; taker-maker 
exchanges, because they are not restricted in the amount they can 
charge to non-marketable limit orders, have fees that range as high as 
$0.0033. Seven exchanges have some categories of rebates that exceed 
the maximum access fees charged by exchanges.
---------------------------------------------------------------------------

    \304\ The access fee and rebate ranges in Table 2 are collected 
from recent fee schedules (as of July 18, 2017) available from each 
individual exchange's website (listed in Table 1). Table 2 provides 
the date from which these fee schedules were reported. The ranges in 
fees are the minimum and maximum fees and rebates reported by each 
exchange.
---------------------------------------------------------------------------

    Table 2 also provides the number of fee revisions for the exchanges 
as reported in their Form 19b-4 fee filings to the Commission in the 
last five years (July 16, 2012-July 18, 2017). Exchanges, on average, 
have changed their fee schedules 34 times in the last five years,\305\ 
indicating that the average exchange revises its transaction-based fee 
schedules about seven times per year (approximately every 7.4 weeks).
---------------------------------------------------------------------------

    \305\ The median number of revisions to fee and rebate schedules 
by exchanges is 38 over the five-year period.

                        Table 2--Summary of Transaction-Based Fee Schedules for U.S. National Equities Exchanges as of July 2017
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                           Number of     Date of last
               Exchange                  revisions  (5   fee schedule        Access fees  (# of categories)             Rebates  (# of categories)
                                            years)         available
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cboe BZX..............................              40       7/15/2017  $0.0000-$0.0030 (31)...................  $0.0010-$0.0032 (16)
Cboe BYX..............................              45       7/15/2017  $0.0000-$0.0033 (36)...................  $0.0010-$0.0025 (12)
Cboe EDGA.............................              47       7/15/2017  $0.0000-$0.0032 (48)...................  $0.0011-$0.0027 (10)
Cboe EDGX.............................              64       7/15/2017  $0.0000-$0.0030 (37)...................  $0.0011-$0.0034 (19)
BX....................................              31       7/13/2017  $0.0005-$0.0030 (10)...................  $0.0000-$0.0025 (8)
Phlx (PSX)............................              26       7/15/2017  $0.0026-$0.0030 (5)....................  $0.0023-$0.0031 (7)
Nasdaq................................              59       7/20/2017  $0.0030 (2)............................  $0.0000-$0.0034 (36)
NYSE Arca.............................              51        7/3/2017  $0.0006-$0.0030 (68)...................  $0.0002-$0.0033 (61)
NYSE American.........................               9       7/24/2017  $0.0003-$0.0030 (34)...................  $0.0000-$0.0045 (41)
NYSE..................................              38        7/1/2017  $0.0003-$0.0030 (14)...................  $0.0000-$0.0045 (40)
NYSE National \306\...................              19       9/20/2016  $0.0003-$0.0030 (2)....................  $0.0000 (1)
CHX...................................               8        5/3/2017  $0.0030 (1)............................  $0.0020 (1)
IEX...................................               1       8/19/2016  $0.0009................................  -$0.0009
--------------------------------------------------------------------------------------------------------------------------------------------------------

    For several of the exchange families, information about revenues 
and costs attributed to transaction-based fees and rebates is available 
in aggregate from Form 10-K filings. Using the statements of income 
from Form 10-K filings for 2016 capturing the net (of rebates) 
transactions-based revenues, the Nasdaq exchanges (Nasdaq, BX, and PSX)

[[Page 13050]]

earned $564 million.\307\ Based on the same measure the NYSE-affiliated 
exchanges (NYSE, NYSE Arca, NYSE American, and NYSE National) earned 
$223 million in transaction-based fees net of rebates,\308\ while the 
BATS Global Markets (now, Cboe BZX, Cboe BYX, Cboe EDGA, and Cboe 
EGDX), for the nine months ended September 30, 2016, earned $177 
million in transaction-based fees net of rebates.\309\ Neither CHX nor 
IEX or their affiliates are publicly traded, meaning that these 
exchanges do not file an annual Form 10-K with the Commission. As a 
result, public information regarding the revenues or profits associated 
with transaction-based fees does not exist for these exchanges.
---------------------------------------------------------------------------

    \306\ NYSE acquired NSX in January 2017, and the exchange is now 
known as NYSE National. As of March 2018, the exchange currently has 
not submitted new fee schedules nor has it reported any trading 
volume in recent months.
    \307\ See the Nasdaq 2016 Form 10-K filings, available at: 
https://www.sec.gov/Archives/edgar/data/1120193/000112019317000003/ndaq1231201610-k.htm. Net transaction-based revenues for equity 
securities were approximately 25% of total operating margin.
    \308\ See the Intercontinental Exchange 2016 Form 10-K filings, 
available at: http://otp.investis.com/clients/us/intercontinental_exchange_group2/SEC/sec-show.aspx?Type=html&FilingId=11827791&Cik=0001571949. For the 
Intercontinental Exchange, net transaction-based revenues were 
approximately 10% of operating income for 2016.
    \309\ See the Bats Global Markets Form 10-Q filings (September 
30, 2016), available at: http://www.snl.com/Cache/36600023.pdf. Cboe 
announced its intent to acquire BATS Global Markets in September 
2016, and the acquisition became effective on March 1, 2017. For the 
nine-month ending September 30, 2016, the net transaction-based 
revenues were 62% of BATS operating profits over the same time 
period.
---------------------------------------------------------------------------

    Information on the net transactions-based revenues for each 
individual exchange, as opposed to the amounts reported for exchange 
groups in Form 10-K filings, is not currently publicly available, 
making it difficult to analyze the fees and rebates for an individual 
exchange. To estimate the net transactions-based revenues for each 
individual exchange, Table 3 reports the maximum and median net 
transaction-based fees based on each exchange's most recently reported 
fee schedule and the share volume of each exchange for June 16, 2017 
through July 18, 2017.\310\ As evidenced by the significant differences 
between the sum of net of rebate revenues for entities reporting to the 
same exchange group obtained from Table 3 and the total net of rebate 
revenues for each exchange family reported on the Form 10-K or 10-Q 
filings, this approach does not yield reliable results, highlighting 
the limitations on the data currently available to researchers.
---------------------------------------------------------------------------

    \310\ The share volume is obtained from the Cboe website, 
available at http://markets.cboe.com/us/equities/market_share/. To 
compute the maximum profit attainable, staff took the difference 
between the highest possible access fee and the lowest possible 
rebate and multiplied it by the monthly share volume. For a midpoint 
profit, the median of the access fees less the median of the rebates 
is computed and multiplied it by share volume. In order to make the 
results comparable to those reported above from Form 10-K filings, 
the monthly profits are annualized by multiplying each monthly 
profit amount by 12.

Table 3--Estimates of Annualized Per-Exchange Net Transaction-Based Fee Revenues From Transaction-Based Fees and
                                          Monthly Exchange Share Volume
                                        [for June 16, 2017-July 18, 2017]
                                                  [in millions]
----------------------------------------------------------------------------------------------------------------
                                                    Annualized       Per share      Annualized       Per share
            Exchanges              Share  volume     midpoint         profit          maximum         profit
                                       \311\        difference       (median)       difference       (maximum)
----------------------------------------------------------------------------------------------------------------
Cboe BZX........................           8,677         ($62.5)       ($0.0006)          $208.2         $0.0020
Cboe BYX........................           7,003           (8.4)        (0.0001)           193.3          0.0023
Cboe EDGA.......................           2,388           (8.6)        (0.0003)            60.2          0.0021
Cboe EDGX.......................           9,310          (83.8)        (0.0008)           212.3          0.0019
BX..............................           4,411            24.5          0.0005           158.8          0.0030
Phlx (PSX)......................           1,115             1.3          0.0001             9.4          0.0007
Nasdaq..........................          21,171           330.3          0.0013           762.2          0.0030
NYSE Arca.......................          13,175             7.9          0.0001           442.7          0.0028
NYSE American...................             494           (3.6)        (0.0006)            17.8          0.0030
NYSE............................          20,277           (146)        (0.0006)             730          0.0030
NYSE National...................  ..............  ..............  ..............  ..............  ..............
CHX.............................             609             7.3          0.0010             7.3          0.0010
IEX.............................           3,117             N/A         $0.0000             N/A          0.0000
----------------------------------------------------------------------------------------------------------------

C. Analysis of Benefits and Costs of Proposed Transaction Fee Pilot
---------------------------------------------------------------------------

    \311\ Monthly share volume obtained from Cboe for June 16, 2017 
through July 18, 2017, available at http://markets.cboe.com/us/equities/market_share/.
---------------------------------------------------------------------------

1. Benefits of Proposed Transaction Fee Pilot
    The Commission expects that the benefits of the proposed 
Transaction Fee Pilot would fall into two categories: More informed 
policy decisions, including more information about potential conflicts 
of interest between broker-dealers and their customers (primary 
benefits) and more information on other issues important to the 
Commission (ancillary benefits), as well as other benefits that may 
accrue to market participants for the duration of the proposed Pilot. 
In this section we discuss each of the categories of benefits as well 
as potential limitations to those benefits.
a. Benefits of More Informed Policy Decisions
i. Benefits of Studying Potential Conflicts of Interest
    The Commission preliminarily believes that the proposed Transaction 
Fee Pilot would lead to a more thorough understanding of issues related 
to potential conflicts of interest arising from transaction-based 
pricing models, which would ultimately inform the Commission's policy 
decisions. This increased understanding would derive from design 
elements of the proposed Transaction Fee Pilot that address the 
limitations of currently available information described in the 
baseline: Lack of representative results, inability to identify 
causality, and insufficient publicly available data. The data obtained 
will improve the quality of research and analysis by the Commission and 
others, which will provide additional data about the effect of 
transaction-based fees on order routing decisions of broker-dealers in 
ways that reflect potential conflicts of interest with their clients. 
The Commission believes that these additional data, which would be 
unavailable in the absence of the proposed Pilot, would help the

[[Page 13051]]

Commission make more informed and effective future policy decisions to 
the ultimate benefit of investors.
    To obtain the additional data to understand the relationship 
between fees and rebates and order routing decisions, the proposed 
Transaction Fee Pilot would simultaneously create several different fee 
environments, each of which restricts transaction-based fees 
differently, and would make available data that allows researchers to 
compare order routing, execution quality, and market quality in these 
fee environments to the current fee environment. The study of these 
comparisons would inform the Commission and the public about any 
possible conflicts of interest that arise as a result of transaction-
based fees. The Commission preliminarily believes that the different 
fee environments created by the proposed Pilot, even though implemented 
temporarily and over representative subsamples NMS securities, would 
produce effects on order routing decisions by broker-dealers that are 
identical or similar to those that would arise under a similar 
permanent change to our regulatory environment. Therefore, the 
Commission preliminarily believes that the information obtained from 
the Pilot will help inform our consideration of any future proposals.
    As noted, three distinct features of the proposed Pilot's design 
would facilitate analyses of the relationship, if any, between fees and 
potential conflicts of interest. Specifically, the proposed Pilot is 
designed to provide (1) representative results; (2) sufficient 
information to determine causality; and (3) more direct access to data 
that is currently unavailable or requires lengthy and labor-intensive 
effort to compile and process. The following sections discuss in detail 
each of these aspects of the proposed Pilot and how they could improve 
upon the information currently available.

A. Representative Results

    In the context of the proposed Transaction Fee Pilot, 
representativeness of results means that the impact of the proposed 
Pilot's terms on a Test Group during the Pilot Period is likely to be 
consistent with the impact of the results on the Test Group if the 
Pilot's terms were permanent (as opposed to temporary). 
Representativeness is desirable for researchers and policy makers 
because it ensures that inferences drawn from the results of analysis 
of Pilot data are likely to be similar to those that would emerge if 
the terms were permanent. As discussed in the baseline, current 
analyses are limited in their ability to broadly inform policy choices 
by some combination of the following: Order routing data from a single 
broker-dealer, a small sample of securities, a single exchange, or a 
short sample period. By contrast, the Commission preliminarily believes 
that the proposed Pilot, as designed, would produce more representative 
results. Specifically, as discussed in detail below, the proposed Pilot 
would cover a large stratified sample of nearly all NMS stocks 
(including ETPs), both maker-taker and taker-maker exchanges, and 
access fee caps as well as a prohibition on rebates or Linked Pricing, 
and would have a two-year duration with an automatic sunset at the end 
of the first year unless the Commission determines, at its discretion, 
that the proposed Pilot shall continue for up to another year.\312\ The 
proposed Pilot also would capture and make available to the public for 
research and analysis, a comprehensive database of the order routing 
decisions of all broker-dealers that route orders to U.S. equities 
exchanges. As detailed in the baseline, it would be infeasible for 
researchers to compile current data sources across all broker-dealers.
---------------------------------------------------------------------------

    \312\ As designed, the proposed Pilot will only exclude NMS 
securities that have prices below $2.00 per share as of the date of 
pilot selection. As detailed above, the data would also be produced 
for a six-month pre-Pilot Period and a six-month post-Pilot Period.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the proposed Pilot would 
produce representative results, presenting a significant improvement on 
existing studies, because the proposed Pilot applies to a large 
stratified sample of NMS stocks (including ETPs) with prices of at 
least $2.00 per share at the date of the Pilot Securities selection, 
and with no restrictions on market capitalization. In particular, the 
Commission recognizes that any possible conflicts of interest related 
to transaction-based fees could vary across securities such that the 
results of a pilot focused only on large capitalization stocks may not 
provide information relevant to small capitalization stocks or 
ETPs.\313\ Including nearly all NMS securities allows the results to 
inform policy choices across any subset of these securities. The 
stratification of the stocks selected for each test group is designed 
to ensure that each test group and the control group have a similar 
composition, facilitating a comparison across groups, which further 
supports the representativeness of results. If, for instance, the test 
groups and control group had a different composition, researchers might 
not be able to distinguish whether differences across test groups and 
the control group stem from different fee environments or different 
sample composition, rendering the results less representative. In 
addition, the Commission preliminarily believes that the sample sizes 
in the test groups are sufficient to provide the statistical power 
necessary to identify differences across the samples.
---------------------------------------------------------------------------

    \313\ See, e.g., Battalio Equity Market Study, supra note 22.
---------------------------------------------------------------------------

    Representativeness of results of the Pilot would also be promoted 
by the choice of the Pilot Security selection date. The proposed rule 
would allow the Commission to select the Pilot Securities at any point 
in time up to Pilot start date. As noted in Section III.E.1, the 
Commission anticipates that it would assign and designate by notice 
each Pilot Security to one Test Group or the Control Group 
approximately one month prior to the start of the Pilot. By assigning 
securities close to the start of the Pilot, each Test Group and the 
Control Group are likely to be more comparable during the Pilot. 
Because stratification criteria (e.g., market capitalization and 
liquidity) vary naturally over time, the closer the assignments occurs 
to the proposed Pilot effective date, the more comparable the Test 
Groups would be during the proposed Pilot. Selection of securities 
close to the start of the proposed Pilot would also be more likely to 
include the intended universe of securities, by capturing securities 
that enter the market between the possible adoption of the rule and the 
start of the proposed Pilot, while avoiding securities that exit during 
this period. Further, to the extent that market participants would 
change their behavior in anticipation of the proposed Pilot, setting 
the selection period close to the proposed Pilot effective date could 
reduce the effect of such behavior on pre-Pilot data.
    The results of the proposed Pilot would be further representative 
because the proposed Pilot applies to all U.S. equities exchanges 
regardless of fee structure. Broker-dealers potentially face 
transaction-fee related conflicts of interest regardless of whether 
those fees are on maker-taker exchanges or taker-maker exchanges. 
Further, a pilot that addresses only a single fee structure would not 
produce results relevant for policy choices that also would apply to 
another fee structure.
    Applying the proposed Pilot to all exchanges also improves upon the 
existing analysis of the limited fee experiment conducted by Nasdaq, 
which only covered a single exchange, as explained in Section V.B.1. 
While the results from that study are suggestive

[[Page 13052]]

that broker-dealers routed customer orders to other exchanges that did 
not change their transaction-based fees, reasons other than potential 
conflicts of interest could have impacted the changes in order routing 
decisions. The Commission believes that the proposed Pilot would 
achieve representativeness by requiring transaction-fee changes for all 
U.S. equities exchanges, which would allow researchers to identify how 
these revisions affect order routing decisions across exchanges. 
Further, the proposed Pilot would require that changes to fees or 
rebates would be applied at the security level, which means that for 
any given security, the limitation on access fees or rebates would be 
ubiquitous across all exchanges.
    In addition, the proposed Pilot achieves representativeness by 
imposing access fee caps and a prohibition on rebates or Linked 
Pricing. The existing literature suggests that the potential conflicts 
of interest arising from access fees could induce behavior that would 
be different from the behavior induced from conflicts arising from 
rebates or Linked Pricing. Therefore, the inclusion of caps on both 
access fees and rebates or Linked Pricing allows for a more 
comprehensive analysis of any possible conflicts of interest than could 
be achieved by focusing solely on access fees or rebates. For example, 
Test Group 2 limits access fees to $0.0005, which could feasibly limit 
rebates paid on displayed liquidity, while Test Group 3 strictly 
prohibits rebates or Linked Pricing across the entire depth of book for 
displayed and non-displayed liquidity. On the surface, it appears that 
Test Groups 2 and 3 both could eliminate rebates paid to broker-
dealers; however, these categories are not equal in their ability to 
reduce rebates.\314\
---------------------------------------------------------------------------

    \314\ The Commission preliminarily believes that applying the 
top of book and depth of book restriction to Test Group 3, but not 
in Test Group 2, is not an area of significant difference between 
the two test groups. Section III.C.3, supra, provides discussion for 
why Test Groups 1 and 2 do not have requirements to access fees for 
non-displayed or depth-of-book liquidity.
---------------------------------------------------------------------------

    Test Group 3 would completely prohibit rebates or Linked Pricing, 
which could provide information on how exchanges compete for order flow 
when rebates are not an option for exchanges, and could provide insight 
into the equilibrium level of access fees in the absence of rebates or 
Linked Pricing.\315\ Prohibiting exchanges from offering rebates or 
Linked Pricing in Test Group 3 is necessary to maintain the economic 
integrity of Test Group 3 and to provide information about Test Group 3 
consistent with its objective to test the impact of eliminating rebates 
on the natural equilibrium level of fees, within the current regulatory 
structure, and the potential conflicts of interest that rebates may 
cause.\316\ Although Rule 610(c) of Regulation NMS caps the maximum 
access fee for exchanges at $0.0030, in the absence of rebates or 
Linked Pricing, competition among exchanges could drive the average 
access fee to an amount substantially below $0.0030.\317\ In other 
words, Test Group 3 would allow competition among exchanges, in the 
absence of rebates or Linked Pricing, to determine the level of access 
fees from which exchanges have no incentive to move away.
---------------------------------------------------------------------------

    \315\ Equilibrium refers to conditions of a system in which all 
competing influences are balanced. For instance, with respect to the 
Test Group 3, this could be the level of access fee charged by 
exchanges from which no exchange has any incentive to increase or 
decrease that fee. This would be the equilibrium access fee.
    \316\ If Linked Pricing were not prohibited, market participants 
could potentially circumvent the prohibition on rebates through 
Linked Pricing mechanisms. Therefore, including prohibitions on 
rebates or Linked Pricing could provide information to the 
Commission and the public about potential conflicts of interest 
associated with rebates or substitutes for rebates, such as Linked 
Pricing, as well as the equilibrium fee that emerges in the absence 
of rebates or Linked Pricing.
    \317\ In addition to removing rebates or Linked Pricing in Test 
Group 3, the Commission could also temporarily suspend limitations 
on access fee caps imposed by Rule 610(c) of Regulation NMS. 
However, implementing multiple changes within a single test group 
may prevent researchers and others from clearly determining the 
effect of the prohibition of rebates on order routing decisions of 
broker-dealers from the effect resulting from the removal of access 
fee caps.
---------------------------------------------------------------------------

    The Commission further preliminarily believes that the duration of 
the proposed Pilot would produce sufficiently representative results. 
If broker-dealers incorporate transaction fees and rebates into their 
order routing decisions, a two-year duration for the proposed Pilot, 
with an automatic sunset at the end of the first year, unless the 
Commission publishes a notice determining that the proposed Pilot shall 
continue for up to a second year, would likely make it economically 
worthwhile for broker-dealers to change their routing behavior during 
the Pilot by making it costly to avoid the proposed Pilot. 
Specifically, as discussed below, the Commission recognizes that 
broker-dealers would incur costs to incorporate new fee schedules that 
are consistent with the proposed Pilot's requirements into their order 
routing decisions. Broker-dealers could ignore the Pilot to avoid these 
costs. If enough broker-dealers ignore the Pilot, the Pilot might not 
produce results that provide the Commission and the public a sense of 
the likely impact of permanent changes to fee caps or rebates. However, 
to the extent that broker-dealers incorporate transaction-based fees 
and rebates into their order routing decisions, ignoring the proposed 
Pilot would also be costly for broker-dealers, and these costs increase 
with the duration of the Pilot. The Commission preliminarily believes 
that the proposed Pilot duration, even with a one-year sunset, is long 
enough to produce representative results because, as discussed below in 
Section V.C.2.b, broker-dealers that incorporate transaction-based fees 
and rebates into their routing decisions would find it economically 
worthwhile to adapt their behavior in response to the Pilot.
    Further, the provision for an automatic sunset facilitates 
representative results because it provides the Commission with 
flexibility as the data from the proposed Pilot develops. For example, 
the Commission could suspend the sunset if, for example, it believed 
that additional time would help ensure that market developments are 
fully reflected in the data with sufficient statistical power for 
analysis, recognizing that such market developments are uncertain. 
Therefore, the sunset provides flexibility to the Commission to observe 
developments during the proposed Pilot to determine whether to allow 
the sunset to occur.
    The Commission preliminarily believes that the inclusion of a broad 
sample of NMS securities, including small and mid-capitalization 
stocks, ensures representative results from the proposed Pilot. 
Although previous studies, as discussed above, suggest that any 
possible conflicts of interest are likely to be the greatest for small-
capitalization securities,\318\ the Commission believes that it is 
important to the design of the proposed Transaction Fee Pilot to 
include these small and mid-capitalization stocks (including ETPs).
---------------------------------------------------------------------------

    \318\ See Battalio Equity Market Study, supra note 22; Harris, 
supra note 23.
---------------------------------------------------------------------------

    As a result, small and mid-capitalization securities could be 
subject to both the Transaction Fee Pilot and the Tick Size Pilot for 
some period of time. However, the Commission preliminarily believes 
that any overlap between the pilots is unlikely. If the pilots do 
overlap, the proposed Pilot selection process facilitates the overlap 
with the Tick Size Pilot while maintaining representative results. In 
particular, the selection process for the proposed Pilot would result 
in similar proportions of stocks impacted by the proposed Transaction 
Fee Pilot in each

[[Page 13053]]

Tick Size Pilot test and control groups. Specifically, each of the 
proposed Transaction Fee Pilot's three test groups would be divided 
into two subgroups--one that overlaps with the Tick Size Pilot and one 
that does not overlap.\319\ Assuming each pilot test group affects the 
other pilot's test and control groups similarly, this design safeguards 
the results of each pilot by ensuring that Tick Size Pilot effects are 
uniform across the proposed Transaction Fee Pilot and vice versa, such 
that researchers are able to control for effects of the Tick Size Pilot 
on the proposed Transaction Fee Pilot and vice versa.
---------------------------------------------------------------------------

    \319\ Each test group would contain 270 common stocks that 
overlap with the Tick Size Pilot, with 45 stocks selected from each 
of the three Tick Size Pilot test groups (45 stocks x 3 Tick Size 
Pilot groups = 135 total) with the remaining 135 stocks coming from 
the Tick Size Pilot's control group. See supra note 117 and 
accompanying text.
---------------------------------------------------------------------------

B. Causality

    In addition to providing representative results, the Commission 
expects the proposed Transaction Fee Pilot to achieve the benefits 
identified above because it would, among other things, provide insight 
into the degree to which transaction-based fees result in potential 
conflicts of interest that alter broker-dealer routing decisions to the 
detriment of investors. Such causal information is necessary when 
considering policy choices aimed at reducing any possible distortions 
related to potential conflicts of interest. As detailed in the 
baseline, exogenous shocks are a means by which researchers may 
establish the existence of a causal relationship between changes to 
transaction-based fees and changes to order routing decisions of 
broker-dealers and infer whether these decisions are related to 
possible conflicts of interest.\320\ This proposed Pilot facilitates 
the establishment of causality through an exogenous shock that 
simultaneously creates several distinct fee environments, each of which 
restricts transaction-based fees or rebates differently, enabling 
synchronized comparisons to the current environment.
---------------------------------------------------------------------------

    \320\ As discussed in the baseline, establishing causality can 
be accomplished through either exogenous shocks or econometric 
methods, such as instrumental variable analysis. As noted above, the 
Battalio Equity Market Study, supra note 22, which employed an 
instrumental variables approach, was unable to definitely establish 
causal relations between transaction-based fees and rebates and 
order routing decisions.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the proposed Pilot is 
able to facilitate the examination of causality because the proposed 
Pilot would produce a single exogenous shock that differentially 
impacts either fees or rebates on both maker-taker and taker-maker 
exchanges. Although exchanges adjust their fee schedules frequently, 
which could affect the order routing decisions of broker-dealers, 
researchers have, to date, been unable to determine whether these 
discretionary changes to fees cause order routing decisions or whether 
order routing decisions cause the changes in fees. With the exception 
of the Nasdaq study, which lacks representative results, prior analyses 
lacked an exogenous shock to fees, thus any conclusions about causality 
that are drawn from these studies may not provide reliable information 
about possible conflicts of interest.\321\ Exogenous shocks, such as 
those in the proposed Transaction Fee Pilot provide researchers a clear 
means of analyzing the direction of causality.\322\
---------------------------------------------------------------------------

    \321\ Although the Nasdaq study provides an exogenous shock to 
both access fees and rebates simultaneously for a subset of 
securities, the value of the results are impeded by (1) the small 
sample size of the study and (2) the limit of the shock to a single 
exchange, as broker-dealers could just route order flow to a 
different exchange. See supra note 31.
    \322\ Other econometric techniques, such as instrumental 
variables methodology, are used only when an exogenous shock (or 
other controlled experiment) cannot be established.
---------------------------------------------------------------------------

    As discussed above, the proposed Pilot would produce a single 
exogenous shock that differentially affects multiple test groups. The 
simultaneity of the exogenous shocks across test groups also 
facilitates examination of causality. If some market-wide event were to 
result in deviations in order routing behavior during the proposed 
Transaction Fee Pilot, the event would likely affect stocks in each 
test group as well as the control group. Researchers can easily control 
for the impact of the market-wide event, because the impact of the 
market-wide event would likely affect test groups and the control group 
similarly, and therefore, would be unlikely to appear in the 
comparisons of the test groups to the control group. By contrast, if 
the exogenous shocks were not simultaneous, the market-wide event may 
impact only one test group, complicating the comparisons of that test 
group to the baseline period or to the other test groups.
    The design of the proposed Pilot further enhances researchers' 
ability to identify causal relationships. The Commission preliminarily 
believes that publishing daily updates to the List of Pilot Securities 
facilitates the identification of causal relations between transaction-
based fees and order routing decisions. By requiring daily updates to 
the List of Pilot Securities, the proposed Pilot would provide broker-
dealers with the information they need to track the exact securities in 
each test group in real-time and when securities exit the Pilot. This 
information may be crucial for broker-dealers that choose to adjust 
their routing behavior during the pilot. If broker-dealers are unable 
to track which securities are in which test groups, the Pilot results 
could provide misleading causal information.

C. Expansion of Publicly Available Data

    The Commission also expects the Transaction Fee Pilot to attain the 
benefits identified above because it would provide access to data that 
would either not be available to the public or that would require 
lengthy and labor-intensive collection. Having a representative source 
of data available to the public is critical for the production of 
research and analyses about the effect of transaction-based fees on 
broker-dealer order routing decisions. If more research and analyses 
become available, that research is more likely to provide increased 
depth and perspective on potential conflicts of interest to the 
Commission. Making the data available to the public also provides 
transparency and allows others to replicate, validate, and confirm the 
information that the Commission considers in connection with policy 
choices.
    The Commission preliminarily believes that the proposed data 
requirements improve upon existing data, as is discussed in more detail 
below; thus, any inferences drawn from existing data sources prior to 
the proposed pilot would likely have limited value in providing 
information about the effect of transaction-based fees on order routing 
decisions. The Pilot's characteristics would enable representative 
results and a means to examine the exogenous shocks to transaction-
based fees. The public availability of the Pilot data would facilitate 
study of whether the exogenous shocks to transaction-based fees affect 
order routing and are related to potential conflicts of interest 
between broker-dealers and their customers. The proposed Pilot would 
make information on order routing decisions available on a more 
granular level and would reduce the cumbersome nature of data 
collection associated with existing order routing data and fee data.
    The Transaction Fee Pilot would enable the public to gain access to 
order routing data not currently available to them and would provide 
access to fee data in a simplified and standardized form, which would 
improve the quality of the analyses produced as a result of the Pilot. 
Although order routing data

[[Page 13054]]

and fee schedules are publicly available through a combination of Rule 
606 disclosures and exchange websites, respectively, the Transaction 
Fee Pilot would resolve a number of limitations associated with using 
currently available data to study the effect of transaction-based fees 
on potential conflicts of interest. Further, the proposed Pilot would 
make available broker-dealer order routing data for all exchange-member 
broker-dealers for the Pilot duration, which substantially expands the 
data that would be available to researchers in the absence of the 
Pilot.
    The Transaction Fee Pilot would make available to the public new 
data on order routing decisions anonymized and aggregated by day, by 
security, by broker-dealer, and by exchange. This data would facilitate 
the analyses of aggregated daily order-routing decisions for a 
comprehensive sample of broker-dealers, which are likely to provide 
representative results of how changes in transaction fees and rebates 
affect these decisions. Even if the Commission were to require a 
historical time series of a complete set of broker-dealer Rule 606 
disclosures to be made publicly available, the limitations presented in 
Section V.B.1 would still exist, namely data frequency, which likely 
would limit any statistical power associated with analyses of the data, 
non-disclosure of potential conflicts of interest related to 
transaction-based fees, and the focus on retail orders.
    The order routing data obtained as a result of the proposed Pilot 
would instead provide superior information to that currently available. 
Data would be available for a representative sample of NMS securities, 
across all broker-dealers, and exchanges, at the daily frequency, which 
would provide sufficient data for analyses, while solving the issue of 
statistical power. Relative to the data that some studies acquire from 
broker-dealers and exchanges,\323\ the order routing data released 
during the Transaction Fee Pilot would also allow researchers to 
observe a time series of data across broker-dealers and exchanges. The 
reduction in the start-up costs of examining order routing data, where 
start-up costs could include hand-collection of data over long time 
series, would likely encourage more research that would utilize data 
from the Transaction Fee Pilot. Further, more granular order routing 
data (e.g., daily order routing statistics by anonymized broker-dealer) 
would facilitate more targeted analysis. Together, these effects would 
facilitate higher quality research on issues such as potential 
conflicts of interest, which would improve the quality of the 
information available to the Commission for policy decisions.
---------------------------------------------------------------------------

    \323\ See, e.g., Battalio Equity Market Study, supra note 22.
---------------------------------------------------------------------------

    An additional requirement of the proposed Pilot is that the 
exchanges would be required to provide a standardized dataset of fees, 
the Exchange Transaction Fee Summary. Although researchers could 
identify some of the effects of changes to transaction-based fees and 
rebates on order routing decisions directly from knowing which 
securities are in a given test group, these data could improve the 
quality of tests of the Pilot by allowing researchers to incorporate 
information on how exchanges vary cross-sectionally in their fee and 
rebate structures, even within the various test groups. In particular, 
this information would allow researchers to create proxies for which 
exchanges are likely to be more or less expensive for marketable or 
marketable limit orders. For instance, within Test Group 1, the maximum 
allowable access fee is $0.0015; however, each exchange may have 
different base and top-tier fees. Thus, only knowing that a security is 
in Test Group 1 would be incomplete information about how orders might 
be routed by broker-dealers to different exchanges, and the Exchange 
Transaction Fee Summary would provide that information. Moreover, the 
Exchange Transaction Fee Summary would provide researchers with 
historical (realized) average and median per share fees and rebates to 
provide an ex post analysis of how actual fees affected order routing 
decisions from the prior period, which is not available from any data 
source today. This information provides another avenue for researchers 
to identify exchanges that are more expensive or less expensive using 
actual past fees instead of a fee schedule that varies widely across 
participants.
    Exchanges would construct Exchange Transaction Fee Summaries 
according to an XML schema to be published on the Commission's website, 
and exchanges would update this information monthly.\324\ These data 
would be standardized and consistently formatted, which would ease the 
use of these data for researchers, as each exchange would have to 
report the base, top-tier, average, and median fees, as detailed above 
in Section III.E.2. Each month, exchanges would be required to report 
realized average and median per share fees, as well as any ``spot'' 
revisions to fees associated with Form 19b-4 fee filings to the 
Commission. These fee data would be publicly posted on each exchange's 
website.\325\
---------------------------------------------------------------------------

    \324\ The standardized fee data, as would be required by the 
proposed Pilot, is discussed in Section III.E.2, supra.
    \325\ Proposed Rule 610(T) requires each exchange to publicly 
post on its website downloadable files containing the Exchange 
Transaction Fee Summary and update them on a monthly basis. 
Similarly, each exchange would be required to publicly post on its 
website downloadable files containing daily aggregated and 
anonymized order routing statistics, updated monthly. Each exchange 
would also be required to provide daily on its website downloadable 
files containing the List of Pilot Securities and the Pilot 
Securities Change List.
---------------------------------------------------------------------------

    The Exchange Transaction Fee Summary released during the Pilot 
would: (1) Ease aggregation across exchanges, which affords researchers 
an opportunity to obtain representative results; (2) replicate across 
studies, which would provide validation of findings; and (3) reduce 
burdens associated with fee data collection, which could encourage more 
research on the impact of fees and rebates on routing behavior. Because 
each exchange would be required to provide its Exchange Transaction Fee 
Summary using the Commission's XML schema, data on fees and rebates 
would be produced in a structured and standardized format, allowing 
researchers to easily aggregate and compile the data across all of the 
U.S. equities exchanges. The format of the data would facilitate the 
ability of a researcher to obtain representativeness in her results, 
which could enhance current views on possible conflicts of interest 
related to transaction-based fees.
    Moreover, because all researchers would have access to the same set 
of data on transaction-based fees and rebates, they would be able to 
replicate, validate, and confirm the analyses of one another, which 
would be difficult to do with existing data sources. Unlike currently 
available fee data, downloadable files containing the Exchange 
Transaction Fee Summary would be publicly posted on each exchange's 
website and would provide researchers with consistent measures of 
various categories of fees and rebates, described in Section III.E.2, 
thereby reducing costs to researchers to collect and analyze the data 
provided. Thus, the Commission preliminarily believes that a 
standardized reporting of summary data on fees by the exchanges would 
facilitate analysis of the effect of transaction-based fees on order 
routing decisions by broker-dealers.
    The proposed rule would require that the Exchange Transaction Fee 
Summary be structured using an XML schema to be published on the 
Commission's

[[Page 13055]]

website. Data that are structured in a standard format can result in 
lower costs to analysts and higher quality data. An additional key 
benefit of structured data is increased usability. If, for instance, 
the Exchange Transaction Fee Summary were not standardized across the 
exchanges, researchers would have to manually rekey the data, a time-
consuming process which has the potential to introduce a variety of 
errors, such as inadvertently keying in the wrong data or interpreting 
the filings inconsistently, thereby reducing comparability. With the 
data in the reports structured in XML, researchers could immediately 
download the information directly into databases and use various 
software packages for viewing, manipulation, aggregation, comparison, 
and analysis. This would enhance their ability to conduct large-scale 
analysis and immediate comparison of the fee structures of exchanges. 
The Commission preliminarily believes that requiring these reports to 
be made available in an XML format would provide flexibility to 
researchers and would facilitate statistical and comparative analyses 
across exchanges, test groups, and date ranges.
    Moreover, as an open standard, XML is widely available to the 
public at no cost. As an open standard, XML is maintained by an 
industry consensus-based organization, rather than the Commission, and 
undergoes constant review. As updates to XML or industry practice 
develop, the Commission's XML schema may also have to be updated to 
reflect the updates in technology. In those cases, the supported 
version of the XML schema would be published on the Commission's 
website and the outdated version of the schema would be removed in 
order to maintain data quality and consistency with the XML standard.
    The Commission's proposed XML schema would also incorporate certain 
validations to help ensure data quality. Validations are restrictions 
placed on the formatting for each data element so that comparable data 
are presented comparably. Complete and appropriately formatted data 
enhances data users' abilities to normalize and aggregate the data for 
review and analysis. The validations incorporated into the schema would 
be effective for checking data completeness and appropriate formatting, 
and would help the exchanges ensure that the data they post adheres to 
the Commission's XML schema in completeness and formatting.\326\ 
Accordingly, the Exchange Transaction Fee Summary reports made 
available by exchanges in XML format pursuant to the proposed rule 
would have to be validated against the most recent XML schema published 
on the Commission's website.
---------------------------------------------------------------------------

    \326\ These validations, however, will not test for the 
underlying accuracy of the data.
---------------------------------------------------------------------------

ii. Benefits of Studying Other Economic Effects
    In addition to potential conflicts of interest, a number of studies 
have expressed other concerns related to transaction-based fees. For 
example, studies predict that transaction-based fee pricing has led to 
increased market fragmentation and complexity.\327\ As an ancillary 
benefit to the Transaction Fee Pilot, the Commission and the public 
possibly could obtain data to facilitate analyses and research relating 
to the effects of fees and rebates on market fragmentation and market 
complexity in addition to those designed to study the potential 
conflicts of interest. These analyses are likely to be informative to 
the Commission as it evaluates future policy decisions.
---------------------------------------------------------------------------

    \327\ See, e.g., Thierry Foucault, Ohad Kadan, and Eugene 
Kandel, ``Limit Order Book as a Market for Liquidity,'' Review of 
Financial Studies 18, 1171-1217 (2005), available at: https://academic.oup.com/rfs/article/18/4/1171/1595760 (``Foucault et al. 
(2005)''); Marios Panayides, Barbara Rindi, and Ingrid Werner, 
``Trading Fees and Intermarket Competition,'' Working Paper, 
University of Pittsburgh (2017) available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2910438 (``Panayides et 
al. (2017)''). Panayides et al. (2017) builds on the theoretical 
model of Foucault et al. (2005) and finds a decline in market 
quality and fraction of order flow to an exchange as its relative 
rebate declines or the take fee increases.
---------------------------------------------------------------------------

    Through the use of the order routing data from the Transaction Fee 
Pilot, researchers would be able to study order flow among different 
venues, which could provide insights into whether changes in 
transaction-based fees affect the current baseline of competition 
between exchanges and off-exchange trading centers, even in the absence 
of potential conflicts of interest. Existing literature suggests that 
transaction-based pricing has contributed to an increase in the number 
of venues competing for order flow over time.\328\ By offering rebates 
or Linked Pricing, start-up maker-taker and taker-maker trading centers 
have been able to attract order flow from exchanges such as NYSE and 
Nasdaq, thereby reducing liquidity externalities, or concentration of 
order flow to a preferred venue, and leading to increased fragmentation 
of the market for trading services. By altering the access fee and 
rebate structures for exchanges, researchers may be able to identify 
whether these changes lead to more (or less) concentration of liquidity 
and how they affect competition for order flow among exchanges, which 
could lead to less (or more) market fragmentation. The effect of 
transaction-based fees on market fragmentation could not be examined in 
the absence of the Pilot.
---------------------------------------------------------------------------

    \328\ As discussed in the baseline, the number of exchanges has 
increased since 2005, and market share has become less concentrated 
over the same time period. These exchanges are not fully 
independent; the majority of the U.S. equities exchanges belong to 
three exchange groups. The Commission preliminarily believes that 
any analyses of the effects of transaction-based fees on order 
routing decisions can appropriately control for exchange groups.
---------------------------------------------------------------------------

    By design, the Transaction Fee Pilot would alter access fees and 
rebates in some test groups, also providing researchers with 
information on how these revisions affect the quoted spreads (e.g., 
whether the spreads widen or narrow). The width of the quoted spread is 
considered to be an indicator of a stock's liquidity, with narrower 
spreads generally indicating more liquid securities. The proposed Pilot 
could provide information on whether fees and rebates affect the 
liquidity of securities, as measured by the quoted spreads, across 
different test groups. Existing studies suggest that quoted spreads 
appear to decline as liquidity rebates increase; \329\ thus, rebates 
appear to decrease the cost of trading (and narrow the NBBO), thereby 
potentially improving investor and market welfare.\330\ For some 
marketable orders, the net spread (the quoted spread plus the cost of 
access fees) is wider than the quoted spread, thereby potentially 
reducing transparency because quoted spreads (for at least some orders) 
are different from the net spread, yet most retail customers are 
unaware of the difference.\331\ Without transparency of the fees and 
rebates assessed to traders, the true costs of trading may be 
concealed, thereby creating a distortion between the quoted spread and 
the net cost of trading. Additional distortions between the quoted 
spread and the net costs for customers arise because orders are priced 
on different schedules in

[[Page 13056]]

different markets.\332\ Even if several trading centers match the NBBO, 
the magnitude of the access fees and liquidity rebates could 
significantly affect the net price paid by customers.\333\
---------------------------------------------------------------------------

    \329\ See Angel, Harris, and Spatt, supra notes 106 and 216; 
Brolley and Malinova, supra note 24; Harris, supra note 23; 
O'Donoghue, supra note 24.
    \330\ See Brolley and Malinova, supra note 24. Academic studies 
suggest that the majority of retail orders are executed off-exchange 
at prices based on the NBBO, thereby providing retail investors with 
better prices in the presence of rebates. If, however, large rebates 
provide incentives for broker-dealers to route retail orders to 
these exchanges instead of to off-exchange venues, retail customers 
may not be fully aware of the total cost associated with their 
orders. See e.g., Angel, Harris, and Spatt, supra notes 106 and 216.
    \331\ See Harris, supra note 23.
    \332\ See Angel, Harris, and Spatt, supra notes 106.
    \333\ See Battalio Equity Market Study, supra note 22.
---------------------------------------------------------------------------

iii. Potential Limitations on the Benefits
    The Commission recognizes that pilots are unpredictable and as such 
considered whether possible limitations associated with pilots 
generally, as well as certain issues presented by the design of this 
pilot in particular, would limit the benefits of the Transaction Fee 
Pilot. The Commission preliminarily believes that the limitations of 
pilots, some of which may affect the Transaction Fee Pilot as discussed 
below, should not impede its success. This section discusses, in 
greater detail below, issues associated with pilots in general and the 
potential concerns with resultant research and analyses, as well as 
overlap with the Tick Size Pilot.
    Pilots may face limitations related to the unpredictable nature of 
market conditions and confounding events. Even if a pilot lasted 
several years, not all of the market conditions of interest could be 
experienced. Depending on the requirements of pilots, such limitations 
might reduce the usefulness of the information obtained.\334\ The 
Commission preliminarily believes, however, that the value of the 
information obtained from the proposed Transaction Fee Pilot is not 
dependent upon having variation in market conditions over time, and 
that the duration of the proposed Pilot would provide sufficient 
information for future analyses.
---------------------------------------------------------------------------

    \334\ For instance, a pilot could be designed where the 
information obtained from the proposed Pilot would only be valuable 
if certain market conditions, such as high market volatility or a 
recessionary period occurred. If, however, markets experience low 
volatility or are in an expansionary period, the proposed Pilot may 
either not be sufficiently long enough to capture the events that it 
requires to be useful or would have to be extended to ensure that 
those market conditions could occur.
---------------------------------------------------------------------------

    In addition, pilots also face the limitation that market 
participants, knowing that a pilot is underway, may not act as they 
would in a permanent regime.\335\ In the context of this pilot, broker-
dealers could choose to retain their current order-routing decisions 
for the duration of the proposed Pilot, which could be costly to such 
broker-dealers.\336\ Broker-dealers, when deciding whether to adjust 
any order routing behavior that currently depends on fees and rebates, 
would likely trade off the costs of retaining strategies that are no 
longer profitable because of the restrictions imposed by the proposed 
Pilot against the costs of adjusting the algorithms for their smart 
order routing systems, as explained below Section V.C.2. The costs of 
``waiting out'' the pilot increase with the duration of the pilot, 
whereas the costs of adjusting the algorithms of the smart order 
routers do not. Alternatively, broker-dealers could substantially 
change their business model in order to avoid the Pilot.\337\ Either of 
these outcomes could lead to results that would not represent the 
effects of a permanent rule change. The Commission preliminarily 
believes that it is unlikely that broker-dealers would maintain 
existing order routing decisions or alter their business models to 
avoid the Pilot. In particular, the Commission preliminarily believes 
that the proposed Pilot duration is likely to make it economically 
worthwhile for broker-dealers to adjust their order routing behavior, 
as the total costs of changes to order routing systems are estimated to 
be on average approximately $42,900 per broker-dealer, if the Pilot 
were to automatically sunset at the end of the first year.\338\ 
Further, although the proposed Pilot could automatically sunset at the 
end of the first year, the Commission retains the flexibility to 
suspend the sunset to continue the proposed Pilot for up to an 
additional year, at its discretion, if the Commission believes that it 
needs additional data for any reason.
---------------------------------------------------------------------------

    \335\ For example, one study provided evidence suggesting that 
trading behavior may not have completely adjusted to the Regulation 
SHO pilot. See, Ekkehart Boehmer, Charles Jones, and Xiaoyun Zhang, 
``Unshackling Short Sellers: The Repeal of the Uptick Rule,'' 
Working Paper, Columbia University (2008), available at: https://www0.gsb.columbia.edu/faculty/cjones/UptickRepealDec11.pdf. Despite 
this effect, the study found evidence consistent with the evidence 
gathered from the Regulation SHO pilot. See Securities Exchange Act 
Release No. 50103 (July 28, 2004), 69 FR 48008 (August 6, 2004) 
(``Regulation SHO'').
    \336\ If broker-dealers have smart order routing systems that 
use algorithms that maximize rebate capture, as suggested in the 
Battalio Equity Market Study, supra note 22, then for at least some 
subset of securities, broker-dealers would not be able to pursue 
rebates from those exchanges, so it would be suboptimal for broker-
dealers to not reconsider their order routing choices. If broker-
dealers, however, already have order routing decisions that are 
optimal from a customer's perspective (i.e., based on execution 
quality) and are not driven by potential conflicts of interest 
(i.e., maximizing rebates), then for at least some broker-dealers, 
their order routing decisions may be unchanged, particularly if 
execution quality does not migrate between exchanges as a result of 
the implementation of the proposed Pilot.
    \337\ It could be costly for broker-dealers to completely alter 
their business models because they may not find it worthwhile to do 
so for a temporary pilot. Further, if a broker-dealer has 
discretionary control over a customer's account, the broker-dealer 
could alter their business model by overweighting stocks in the 
control group and underweighting stocks in Test Group 3, if the 
objective of the broker-dealer is to continue to capture rebates.
    \338\ The costs for broker-dealers to update their order routing 
systems are detailed in Section V.C.2.f. If the proposed Pilot were 
extended for up to an additional year, the total costs to broker-
dealers would be approximately $67,000 per broker-dealer.
---------------------------------------------------------------------------

    In order to facilitate analysis of data during the Pilot Period, 
the Commission believes that it is important to collect sufficient data 
during a pre-Pilot Period. The pre-Pilot data can then be compared with 
the data that would be produced during the Pilot Period, which would 
permit analysis of any changes to order routing behavior, execution 
quality, and market quality between the two for the Pilot Securities in 
each of the Test Groups. To make this comparison informative, the 
length of the pre-Pilot Period needs to be long enough to obtain 
sufficient statistical power to permit analysis of the stocks and ETP 
Pilot Securities. In turn, sufficient statistical power in tests that 
compare the pre-Pilot data to the Pilot data would allow the Commission 
and others to more easily use the information obtained from the Pilot 
to inform future regulatory consideration of exchange transaction fees 
and their impact on the markets.\339\ The Commission preliminarily 
believes that at least six months of pre-Pilot data may be required to 
obtain the necessary statistical power to permit analysis of the Pilot 
Securities during the Pilot, particularly ETPs.\340\ Without sufficient 
statistical power, researchers cannot use statistical techniques to 
distinguish between a pilot that has no effect and pilot data that do 
not provide enough power to detect an effect. In such situations, in 
order to have sufficient data to obtain statistical power, researchers 
would have to wait until the conclusion of the post-Pilot period to 
gather additional data, likely delaying the initial results of the 
proposed Pilot and the Commission's consideration thereof.
---------------------------------------------------------------------------

    \339\ See supra note 118.
    \340\ See supra note 430.
---------------------------------------------------------------------------

    Furthermore, a short pre-Pilot Period introduces additional risk 
that analysis of certain Pilot data may be uninformative. Even if 
researchers were to wait until the conclusion of the post-Pilot period 
to begin analysis, they may not be able to identify the effects of the 
Pilot because data obtained from the post-Pilot period could be 
confounded by information about the Pilot. For example, if exchanges 
alter their fee structures in the post-Pilot period as a result of the 
Pilot (rather than revert back to their fee models in effect prior

[[Page 13057]]

to the Pilot), data from the post-Pilot period likely would be unable 
to supplement or substitute for data obtained from a shorter pre-Pilot 
Period, underscoring the importance of a longer pre-Pilot Period. Thus, 
the value of any analyses obtained from the Pilot may be limited, 
thereby reducing the information obtained from such analyses for any 
potential regulatory recommendations.
    The Commission preliminarily does not believe that the benefits of 
the proposed Transaction Fee Pilot would be limited by the potential 
overlap with the Tick Size Pilot. For at least some portion of the 
proposed Transaction Fee Pilot's pre-period or Pilot Period, a sample 
of small and mid-capitalization stocks could simultaneously be subject 
to two pilots.\341\ Two potential issues associated with the overlap 
between the pilots could lead to incorrect inferences in any analyses 
of the data produced by the proposed Pilot.\342\ First, researchers 
would have to create additional control groups to account for the 
overlap with the Tick Size Pilot, which potentially increases the costs 
for researchers to study the proposed Transaction Fee Pilot. Second, 
the interaction between the test groups arising from the overlap may 
not be consistent across test groups.\343\ However, the Commission 
preliminarily believes that researchers could appropriately control for 
such interaction in their analyses of either pilot.
---------------------------------------------------------------------------

    \341\ Sections V.C.2.b and V.D.3, infra, discuss more thoroughly 
the implications for small and mid-capitalization issuers.
    \342\ In addition to these two issues, there may not be 
sufficient statistical power to jointly test the impact of being in 
test groups of both pilots. Given the limited number of securities 
that would, for example, be part of Test Group 1 of the Transaction 
Fee Pilot and Test Group 1 of the Tick Size Pilot (45 stocks), a 
substantial number of time series observations would likely be 
necessary to achieve statistical power. Depending on when the 
Transaction Fee Pilot becomes effective, there may only be limited 
overlap between the two pilots, if any. However, understanding the 
joint impact is not the reason for overlapping the pilots.
    \343\ The stratification approach that would be used to 
construct the test groups assumes that the impact of changes to fees 
and rebates would be the same across all Tick Size Pilot test 
groups, and that representativeness would be maintained. If the 
impacts are different, then a researcher might not be able to 
control for all of the interactions, potentially undermining the 
reliability of the results.
---------------------------------------------------------------------------

    The Commission recognizes that the data obtained from the 
Transaction Fee Pilot would not be straightforward to study. 
Specifically, the changes in fees or rebates imposed by the proposed 
Pilot may change transaction costs in a way that results in changes to 
order routing decisions by broker-dealers, even absent potential 
conflicts of interest. Studying how order routing changes during the 
proposed Pilot, without jointly studying why it changes, would not be 
sufficient to understand any possible conflicts of interest. 
Researchers can carefully select and apply sophisticated econometric 
techniques to distinguish the proportion of changes in order routing 
decisions resulting from execution quality considerations from those 
resulting from potential conflicts of interest. Nonetheless, this 
complication could reduce the number and/or quality of studies of the 
proposed Transaction Fee Pilot.
b. Other Benefits of the Proposed Transaction Fee Pilot
    Other benefits may emerge that would affect markets and market 
participants for the duration of the proposed Pilot, such as reduced 
conflicts of interest for some test groups or lower all-in costs of 
trading. As discussed in further detail below, the Commission 
preliminarily believes that other likely benefits of this proposal 
would be temporary in nature and affect markets and market participants 
only for the duration of the proposed Pilot.
    The potential conflicts of interest discussed above could be 
mitigated during the duration of the proposed Pilot for investors in at 
least some subset of securities. For instance, in Test Group 2 where 
access fees are lowered or Test Group 3 where rebates or Linked Pricing 
are prohibited, broker-dealers may alter their order routing behavior 
because the incentives to capture rebates or Linked Pricing are 
lessened or removed from this subset of securities. The Commission 
notes, as discussed in the baseline section, that it lacks sufficient 
evidence of these potential conflicts of interest to ascertain the harm 
to investors from the conflicts; instead, the proposal itself would be 
a mechanism for ascertaining the magnitude of any such benefits. 
Therefore, the Commission at this time is uncertain of the magnitude of 
these benefits.
    For at least some subsets of securities where rebates are likely to 
be reduced to de minimis levels or eliminated entirely for the duration 
of the proposed Pilot, broker-dealers could increase the routing of 
customer orders to off-exchange trading centers, such as ATSs. When 
broker-dealers can no longer capture rebates or Linked Pricing for some 
subsets of securities, they could change their order routing to off-
exchange trading centers, because this would allow these broker-dealers 
to avoid access fees for marketable orders. Off-exchange trading 
centers are required to match the prevailing NBBO, and the Commission 
understands that most ATSs do not charge access fees or pay rebates and 
could temporarily reduce the all-in costs of trading for orders routed 
off-exchange.\344\
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    \344\ In addition to the potentially lower all-in costs of 
trading for orders routed off-exchange, ATSs also reduce the 
likelihood of price impact associated with large trades, as those 
investors trading blocks of shares could potentially reduce the 
price impact of their trades by crossing orders off-exchange, which 
could reduce the likelihood that other market participants find out 
about the order ahead of the execution. See Jennifer Conrad, Kevin 
Johnson, and Sunil Wahal, ``Institutional Trading and Alternative 
Trading Systems,'' Journal of Financial Economics 70, 99-114, (2003) 
available at https://www.sciencedirect.com/science/article/pii/S0304405X03001430.
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    As an additional temporary benefit resulting from the proposed 
Pilot, lower access fees or eliminated rebates or Linked Pricing in 
some test groups could drive down the cost of routing orders to 
exchanges, which could draw order flow away from ATSs and back to 
exchanges, potentially resulting in an improvement in exchange 
execution quality. A reduction in access fees in proposed Transaction 
Fee Pilot test groups could induce broker-dealers to route more 
marketable orders to maker-taker exchanges. As marketable orders 
increase on maker-taker exchanges, under the assumption that broker-
dealers route orders in their customer's best interest, non-marketable 
orders could also be routed to the same exchanges, because the 
likelihood of execution and possibly the speed of execution improve for 
non-marketable orders with an increase in marketable orders. Thus, as a 
by-product of the proposed Pilot, exchanges temporarily may see 
improvements in their overall execution quality and may see an increase 
in routing of order flow by broker-dealers even in the absence of large 
rebates. This could benefit investors as they may temporarily obtain 
better execution quality or price improvement for some securities that 
they would not otherwise obtain in the absence of the proposed Pilot.
    The exogenous shock to fees and rebates also could temporarily 
affect the transparency of quoted spreads. Several studies suggest that 
access fees and rebates, while narrowing the quoted spread, increase 
the net cost of trading but in a way that is not transparent to 
investors.\345\ Reductions to access fees and rebates could increase 
the transparency of the all-in costs of trading for investors. Although 
the proposed Pilot is not designed to provide investors with full 
transparency of the net costs of trading, for at least

[[Page 13058]]

some test groups, where rebates are likely to be reduced to de minimis 
levels or prohibited outright, investors may obtain partial 
transparency on how rebates affect quoted spreads and possibly the all-
in costs of trading. This effect could be particularly important for 
small and mid-capitalization securities, where price transparency may 
be low and which are likely to experience an increase in spreads, and 
could subsequently reduce liquidity for these securities as a result of 
the exogenous shocks to fees and rebates. Therefore, for the duration 
of the proposed Pilot, an unintended benefit to investors in these 
securities is that prices may be more transparent as the all-in costs 
of trading are closer to the true economic net cost as reflected in the 
displayed quotes.
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    \345\ See Angel, Harris, and Spatt, supra notes 106 and 216.
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    The Commission preliminarily believes that another temporary 
benefit of the proposal would be that the proposed Transaction Fee 
Pilot could prevent some traders from indirectly quoting in sub-
pennies.\346\ Rebates have the practical effect of reducing the minimum 
tick size by the size of the rebate, and in effect allow trading 
centers to offer quotations superior to the existing quote. Several 
studies suggested that the use of fees and rebates to effectively 
undercut quotations by sub-pennies is particularly severe in taker-
maker markets.\347\ The proposed Transaction Fee Pilot would, in some 
test groups, reduce or eliminate rebates, which could stem this 
indirect reduction of tick sizes, and could provide the Commission and 
the public with information currently unavailable about the frequency 
of this issue.
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    \346\ Rule 612 of Regulation NMS prohibits traders from 
submitting sub-penny quotations on securities trading at prices over 
$1.00. The purpose of the sub-penny quotation prohibition was two-
fold: (1) To prevent high frequency traders from front-running 
standing non-marketable limit orders and (2) to reduce the 
complexity of trading systems. See NMS Adopting Release, supra note 
1, at 37550-57.
    \347\ See, e.g., Angel, Harris, and Spatt, supra note 216; 
Harris, supra note 23. One study noted that as a result of the Tick 
Size Pilot test group with the trade-at provision, taker-maker 
markets have seen a significant increase in market share, in part 
due to this quotation issue. See Carole Comerton-Forde, Vincent 
Gregoire, and Zhuo Zhong, ``Inverted Fee Venues and Market 
Quality,'' Working Paper, University of Melbourne (2017), available 
at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2939012.
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2. Costs of Proposed Transaction Fee Pilot
    This section describes the compliance costs associated with the 
proposed Transaction Fee Pilot, followed by the additional temporary 
costs that could affect issuers, investors, broker-dealers, exchanges, 
and other market participants resulting from the proposed Pilot.
a. Exchange Compliance Costs of the Proposed Transaction Fee Pilot
    The proposed Pilot would impose costs on exchanges to comply with 
the Pilot's requirements to collect, calculate, and publicly post data 
required by the Pilot on their websites, as well as to implement the 
required fee changes. An overview of the requirements of the proposed 
Pilot are presented in this section, and are discussed in more detail 
below. Specifically, exchanges that serve as the primary listing market 
would be required to publicly post on their websites downloadable files 
containing the Pilot Securities Exchange List, derived from the initial 
List of Pilot Securities published on the Commission's website by 
notice, as well as maintain and update the Pilot Securities Exchange 
List as necessary prior to the beginning of trading on each trading 
day. Separately, prior to the beginning of trading on each trading day 
and throughout the duration of the proposed Pilot, each primary listing 
exchange shall publicly post on its website a downloadable file 
containing a Pilot Securities Change List, which lists each separate 
change applicable to any Pilot Security (i.e., name changes, mergers, 
or other corporate events) for which the exchange serves or has served 
as the primary listing exchange.\348\
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    \348\ As discussed in Section III.E.1, supra, the Commission 
would publish by notice the initial List of Pilot Securities, which 
would identify the securities in the proposed Pilot and assign each 
of them to a designated test group (or the control group).
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    The proposed Pilot would also require that each exchange provide a 
monthly standardized Exchange Transaction Fee Summary, detailed in 
Section III.E.2, which includes information on the initial list of fees 
and rebates associated with each test group and the control group, as 
well as changes to those fees and rebates corresponding with Form 19b-4 
fee filings made to the Commission. In addition to the base and top-
tier fees and rebates required in the Exchange Transaction Fee Summary, 
exchanges would also be required to calculate and publicly post on 
their websites the realized monthly average and median per share fees 
and rebates as part of the Exchange Transaction Fee Summary.
    As discussed in more detail in Section III.E.3, equities exchanges 
would prepare and publicly post on their websites, order routing data, 
updated on a monthly basis, containing aggregated and anonymized 
broker-dealer order routing information. The required datasets, 
detailed in proposed Rule 610T(d), would contain order routing 
information for liquidity-providing orders and liquidity-taking orders 
aggregated by day, by security, by broker-dealer, and by exchange on an 
anonymous basis. The Commission expects that the equities exchanges 
would compile the required order routing data by utilizing the data 
they collect pursuant to the CAT.\349\ As discussed below, each 
exchange would need to aggregate at the daily level the order routing 
statistics detailed in proposed Rule 610T(d) and would need to 
anonymize that data at the broker-dealer level, using the anonymization 
key provided by representatives of the Commission at the outset of the 
proposed Pilot. These data, in pipe-delimited ASCII format, would be 
publicly posted to each exchange's website, no later than the last day 
of each month for the prior month.
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    \349\ See Section III.E.3 supra, which provides a more detailed 
discussion of the use of the CAT for the collection of order routing 
data.
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    Although the proposed rule requires that exchanges release order 
routing data at the anonymized broker-dealer level, market participants 
or researchers theoretically could reverse engineer proprietary trading 
strategies of other market participants, which could have implications 
for the profitability of those strategies going forward if they were 
revealed or mimicked by other participants. The Commission is sensitive 
to the potential proprietary nature of the order routing data but 
preliminarily believes that releasing the order routing data would not 
affect market participants because the likelihood of being able to 
reverse engineer broker-dealers' order-level strategies is low because 
the data would be aggregated by security and day and would anonymize 
the broker-dealers. The proposal requires the order routing data to be 
anonymized at the broker-dealer level to limit the degree to which it 
reveals proprietary information. The order routing data are also 
aggregated by day, and released with a delay, to limit revealing 
individual strategies in the event someone was able to reverse engineer 
broker-dealer identities. The Commission provides estimates of the 
costs associated with complying with the proposed Transaction Fee 
Pilot's reporting requirements, discussed in detail below.

[[Page 13059]]

b. Updating the Pilot Securities Exchange List and Pilot Securities 
Change List
    As described above, the exchanges would maintain and make public 
prior to the start of each trading day the Pilot Securities Exchange 
List of the securities included in each test or control group on its 
website, in accordance with Rule 610T(b), making relevant adjustments 
for ticker symbol changes and corporate actions (i.e., mergers or name 
changes). Further, each exchange would publicly post on its website the 
updated Pilot Securities Change List prior to the start of each trading 
day, which would list, separately, changes to applicable Pilot 
Securities. Additional details of what would be included in each list 
are provided in Section III.E.1.
    From time to time, exchanges update issuers' ticker symbols for 
various reasons, such as a merger or a corporate reorganization and 
notify their members when such changes become effective. Given that 
every exchange has practices in place to update its members about the 
listed securities and has also adjusted its normal processes to account 
for the Tick Size Pilot, the Commission preliminarily believes that the 
costs associated with providing required data for the proposed 
Transaction Fee Pilot would not place undue cost burdens upon the 
exchanges. The processes used by exchanges to update the list of pilot 
securities for the Tick Size Pilot could be used to also track the 
proposed Transaction Fee Pilot securities, as well as any changes to 
those securities as detailed above in Section III.E.1.
    Upon the initial publication of the List of Pilot Securities by 
notice by the Commission, the primary listing exchanges \350\ would 
need to determine which securities are listed on their market, compile, 
and publicly post on their websites downloadable files in pipe-
delimited ASCII format a list of those securities. The Commission 
preliminarily estimates that the costs associated with the initial 
compilation of the Pilot Securities Exchange List would cost $2,060 per 
exchange, or $10,300, in aggregate.\351\
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    \350\ The five primary listing exchanges are NYSE, Nasdaq, NYSE 
American, NYSE ARCA, and BATS.
    \351\ This estimate is based on the following: [(Compliance 
Manager (4 hours) x $298) + (Programmer Analyst (4 hours) x $232)] = 
$2,060 per exchange, or $2,060 x 5 primary listing exchanges = 
$10,300 in aggregate. The burden hours are obtained from Section 
IV.J.1, supra. The Commission estimates the wage rate associated 
with these burden hours based on salary information for the 
securities industry compiled by the Securities Industry and 
Financial Markets Association (SIFMA). The estimated wage figure for 
attorneys, for example, is based on published rates for attorneys, 
modified to account for a 1,800-hour work-year and multiplied by 
5.35 to account for bonuses, firm size, employee benefits, and 
overhead, yielding an effective hourly rate for 2013 of $380 for 
attorneys. See Securities Industry and Financial Markets 
Association, Management & Professional Earnings in the Securities 
Industry--2013, available at: https://www.sifma.org/resources/research/management-and-professional-earnings-in-the-securities-industry-2013/. These estimates are adjusted for inflation based on 
Bureau of Labor Statistics data on CPI-U between January 2013 
(230.280) and January 2017 (242.839). Therefore, the 2017 inflation-
adjusted effective hourly wage rates for attorneys are estimated at 
$401 ($380 x 242.839/230.280). The Commission discusses other costs 
of compliance with the proposed rule below.
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    The Commission understands that each primary listing exchange has 
existing systems to monitor and maintain the Pilot Securities Exchange 
List and the Pilot Securities Change List as a result of certain 
corporate actions.\352\ While these systems can be used to collect the 
data required to be made public for the Pilot Securities Exchange List 
and the Pilot Securities Change List, the Commission further 
understands that these systems would have to be adapted to conform to 
the requirements of the proposed Pilot. The Commission estimates that 
it would cost each primary listing exchange approximately $3,720 to 
develop appropriate systems for the proposed Transaction Fee Pilot, or 
$18,600 in aggregate across the five U.S. primary listing 
exchanges.\353\ Once these systems are established, the Commission 
estimates that it would cost each exchange $86,300 for the entire 
duration of the proposed Pilot, including up to the one-month pre-Pilot 
Period, a two-year Pilot duration, and the six-month post-Pilot Period, 
or $431,500 across the five primarily listing exchanges,\354\ to 
publicly post on each exchange's website the Pilot Securities Exchange 
List and Pilot Securities Change List prior to the start of each 
trading day in pipe-delimited ASCII format. If the Commission 
determined that the proposed Pilot shall be automatically sunset at the 
end of the first year, the Commission estimates that the costs to each 
exchange would be $52,900 for the one-month pre-Pilot Period, a one-
year Pilot duration, and the six-month post-Pilot Period, or $264,500 
across the five primarily listing exchanges.\355\
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    \352\ See supra note 150. As discussed above, primary listing 
exchanges have experience in producing and maintaining similar lists 
on their websites with respect to the Tick Size Pilot, which should 
be adaptable to meet the requirements of the proposed Transaction 
Fee Pilot.
    \353\ This estimate is based on the following: [(Attorney (4 
hours) x $401) + (Compliance Manager (4 hours) x $298) + (Programmer 
Analyst (4 hours) x $232)] [ap] $3,720 per exchange, or $3,720 x 5 
exchanges [ap] $18,600 in aggregate. The burden hours are obtained 
from Section IV.J.1, supra.
    \354\ If the proposed Pilot were to automatically sunset at the 
end of the first year, the total number of days that the exchanges 
would need to provide the Pilot Securities Exchange List and the 
Pilot Securities Change Lists would be up to 651 business days (up 
to 21 business days for the one-month pre-Pilot Period, 504 business 
days for the two-year Pilot horizon (252 business days per year x 2 
years), and 126 business days for the six-month post-Pilot Period). 
The total number of days in the pre-Pilot Period would be no more 
than 21 trading days, but could be as short as zero days depending 
on when the exchanges begin to publish the Lists. The cost estimate 
for providing these lists for the entire period is based on the 
following: [(Compliance Manager (0.25 hour x 651 trading days) x 
$298) + (Programmer Analyst (0.25 hour x 651 trading days) x $232)] 
[ap] $86,300, or $86,300 x 5 exchanges [ap] $431,500, in aggregate. 
The burden hours are obtained from Section IV.J.1, supra.
    \355\ If the proposed Pilot were to automatically sunset at the 
end of the first year, the total number of days that the exchanges 
would need to provide the Pilot Securities Exchange List and the 
Pilot Securities Change Lists would be up to 399 business days (up 
to 21 business days for the one-month pre-Pilot Period, 252 business 
days for the one-year Pilot horizon, and 126 business days for the 
six-month post-Pilot Period). The total number of days in the pre-
Pilot Period would be no more than 21 trading days, but could be as 
short as zero days depending on when the exchanges begin to publish 
the Lists. The cost estimate for providing these Lists for the 
entire period is based on the following: [(Compliance Manager (0.25 
hour x 399 trading days) x $298) + (Programmer Analyst (0.25 hour x 
399 trading days) x $232)] [ap] $52,900, or $52,900 x 5 exchanges 
[ap] $264,500, in aggregate. The burden hours are obtained from 
Section IV.J.1, supra.
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c. Producing the Exchange Transaction Fee Summary in XML Format
    In addition to the Pilot Securities Exchange List provided by the 
primarily listing exchanges, all U.S. equities exchanges would also 
need to publicly post on their websites the Exchange Transaction Fee 
Summary, downloadable files containing the initial set of fees at the 
outset of the proposed Transaction Fee Pilot as well as monthly updates 
to include both changes to fees and rebates reported in Form 19b-4 fee 
filings and realized average and median per share fees and rebates, as 
discussed in Section III.E.2. The Exchange Transaction Fee Summary 
would need to be updated promptly in response to any changes to its 
dataset following the beginning of each calendar month from the pre-
Pilot Period through the post-Pilot Period. The exchanges would be 
required to provide information on any transaction-based fee changes, 
according to Rule 610T(e), that they make during the proposed Pilot, 
including the effective dates of fee revisions. The proposed rule also 
requires that each exchange calculates the realized monthly average and 
median per share fees and rebates, as discussed in more detail in 
Section III.E.2.
    A requirement at the outset of the proposed Pilot is that exchanges 
would need to report their base and top-tier

[[Page 13060]]

fees and rebates, which the Commission estimates would cost each 
exchange $1,130, or $14,700, in aggregate across the 13 U.S. equities 
exchanges.\356\ The reported base and top-tier fees and rebates would 
be mandatory elements of the Exchange Transaction Fee Summary. 
Concurrent with the submission of the Form 19b-4 fee filings to the 
Commission at the outset of the proposed Transaction Fee Pilot, the 
exchanges would also be required to publicly post on their websites 
downloadable files containing the initial Exchange Transaction Fee 
Summary, using an XML schema to be published on the Commission's 
website. The Commission estimates that it would cost exchanges $530 
each to post this summary dataset to their websites, or $6,900 in 
aggregate across the 13 U.S. equities exchanges, using an XML schema to 
be published on the Commission's website.\357\
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    \356\ The estimate is based on the following: [(Compliance 
Manager (2 hours) x $298) + (Senior Business Analyst (2 hours) x 
$265)] [ap] $1,130, or $1,130 x 13 equities exchanges [ap] $14,700 
in aggregate. The burden hours are obtained from Section IV.J.1, 
supra.
    \357\ This estimate is based on the following: [(Compliance 
Manager (1 hours) x $298) + (Programmer Analyst (1 hours) x $232)] = 
$530 per exchange, or $530 x 13 U.S. equities exchanges [ap] $6,900 
in aggregate. The burden hours are obtained from Section IV.J.1, 
supra.
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    The proposed rule would also require that exchanges compute the 
monthly average and median realized per share fees and rebates, as 
detailed in Section III.E.2. These data would provide the Commission 
and the public aggregated data on the actual per share levels of fees 
and rebates assessed in the prior month, which the Commission believes 
is critical for estimating the effects of fees and rebates on order 
routing decisions. The Commission preliminarily believes that the costs 
associated with computing these summary data on fees and rebates are 
likely to be larger than the costs associated with updating the 
Exchange Transaction Fee Summary, discussed in detail below, and would 
likely require new systems by the exchanges to track the average and 
median fees.
    The Commission estimates that each exchange would have a one-time 
cost of $24,000, or $312,000 in aggregate across the 13 U.S. equities 
exchanges, associated with the development and implementation of 
systems tracking realized monthly average and median per share fees 
pursuant to the proposed rule.\358\ The Commission further anticipates 
that it would cost an additional $12,000 annually, or $156,000, in 
aggregate, per year, to ensure that the system technology is up to date 
and remains in compliance with the proposed rule.\359\
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    \358\ This estimate is based on the following, which reflects 
the Commission's experience with and burden estimates for SRO 
systems changes: [(Attorney (20 hours) x $401) + (Compliance Manager 
(20 hours) x $298) + (Programmer Analyst (20 hours) x $232) + 
(Senior Business Analyst (20 hours) x $265] [ap] $24,000 per 
exchange, or $24,000 x 13 exchanges [ap] $312,000 in aggregate. The 
burden hours are obtained from Section IV.J.1, supra.
    \359\ This estimate is based on the following, which reflects 
the Commission's experience with and burden estimates for SRO 
systems changes: [(Attorney (10 hours) x $401) + (Compliance Manager 
(10 hours) x $298) + (Programmer Analyst (10 hours) x $232) + 
(Senior Business Analyst (10 hours) x $265] [ap] $12,000 per 
exchange, or $12,000 x 13 exchanges [ap] $156,000 in aggregate. The 
burden hours are obtained from Section IV.J.1, supra.
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    Moreover, as discussed above, exchanges would be required to 
produce monthly updates to the Exchange Transaction Fee Summary to 
capture realized average and median per share fees as well as any 
revisions to fee schedules made by the exchanges, which would be 
reflected in changes to base or top-tier fees and rebates, detailed in 
Section III.E.2. The Commission estimates that each month it would cost 
each exchange $530 to update the dataset of summary fees to reflect the 
updates to historical realized average and median per share fees and 
changes to the base and top-tier fees. This would require each exchange 
to make a total of 36 updates to the Exchange Transaction Fee Summary 
from the pre-Pilot Period through the post-Pilot Period, if the 
Commission determined that the proposed Pilot should continue for up to 
a second year and not automatically sunset at the end of the first 
year.\360\ Each exchange would have total costs of updates to the 
Exchange Transaction Fee Summary of approximately $19,100 per exchange, 
or $248,300 among the 13 exchanges over the pilot duration, including 
pre- and post-periods.\361\ If the proposed Pilot were to automatically 
sunset at the end of the first year, without the Commission determining 
that an extension for up to an additional year was needed, this would 
decrease the total number of updates to the Exchange Transaction Fee 
Summary to 24.\362\ Under an automatic sunset at the end of the first 
year, each exchange would have total costs of updates to the Exchange 
Transaction Fee Summary of approximately $12,700 per exchange, or 
$165,100 among the 13 exchanges over the pilot duration, including pre- 
and post-periods.\363\ As detailed above, the Commission preliminarily 
estimates that the costs associated with the monthly updates to the 
Exchange Transaction Fee Summary would be a small fraction of the costs 
associated with the initial allocation of fees required at the outset 
of the proposed Pilot.
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    \360\ This estimate of updates to the Exchange Transaction Fee 
Summary is the aggregation of updates from the pre-Pilot Period (6), 
the two-year pilot period if the Commission determines that an 
extension of up to an additional year was needed (24), and the post-
pilot period (6), for a total number of 36 updates.
    \361\ This estimate is based on the following: [(Compliance 
Manager (1 hours) x $298) + (Programmer Analyst (1 hours) x $232)] = 
$530 per exchange, or $530 x 36 fee changes per exchange [ap] 
$19,100. The 36 fee changes for the exchange encompass six updates 
during the six-month pre-Pilot Period, 24 updates during the two-
year Pilot Period, assuming that the Commission determines that the 
additional year is required, and six updates during the six-month 
post-Pilot Period. In aggregate, updates to the Exchange Transaction 
Fee Summary are estimated to cost $19,100 x 13 U.S. equities 
exchanges [ap] $248,300. The burden hours are obtained from Section 
IV.J.1, supra.
    \362\ This estimate of updates to the Exchange Transaction Fee 
Summary is the aggregation of updates from the pre-Pilot Period (6), 
the one-year pilot period with an automatic sunset at the end of the 
first year (12), and the post-pilot period (6), for a total number 
of 24 updates.
    \363\ This estimate is based on the following: [(Compliance 
Manager (1 hours) x $298) + (Programmer Analyst (1 hours) x $232)] = 
$530 per exchange, or $530 x 24 fee changes per exchange [ap] 
$12,700. The 24 fee changes for the exchange encompass six updates 
during the six-month pre-Pilot Period, 12 updates during the one-
year Pilot Period, assuming that the Commission determines that the 
additional year is not required and the Pilot is automatically 
sunset at the end of the first year, and six updates during the six-
month post-Pilot Period. In aggregate, updates to the Exchange 
Transaction Fee Summary are estimated to cost $12,700 x 13 U.S. 
equities exchanges [ap] $165,100. The burden hours are obtained from 
Section IV.J.1, supra.
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    As discussed in Section III, the proposal would require that the 
Exchange Transaction Fee Summary be published on the exchanges' 
websites using an XML schema to be published on the Commission's 
website. The Commission understands that there are varying costs 
associated with varying degrees of structuring. The Commission 
preliminarily believes that most of the exchanges already have 
experience applying the XML format to market data. For example, the 
exchanges and market participants regularly use the FIX protocol \364\ 
and FpML \365\ to exchange information on highly structured financial 
instruments and related market data.\366\
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    \364\ The Financial Information eXchange (FIX) protocol is an 
electronic communications protocol that provides a non-proprietary, 
free and open XML standard for international real-time exchange of 
information related to the securities transactions and markets. See 
https://www.fixtrading.org/.
    \365\ FpML (Financial products Markup Language) is an open 
source XML standard for electronic dealing and processing of OTC 
derivatives. It establishes the industry protocol for sharing 
information on, and dealing in, financial derivatives and structured 
products. See http://www.fpml.org/ org/.
    \366\ Most of the exchanges have at least some portion of their 
data available through XML formats. For instance, the NYSE Group of 
exchanges provides daily closing prices, among other data, in XML, 
Excel, and pipe-delimited ASCII, while the Nasdaq exchanges (Nasdaq, 
BX, and PHLX) and Cboe exchanges (Cboe BZX, Cboe BYX, Cboe EDGA, and 
Cboe EDGX), provide daily share volume data, among other data, in 
XML. Information on the use of XML by exchanges is available at 
www.nyse.com, www.nasdaqomx.com, www.cboe.com, for the NYSE, Nasdaq, 
and Cboe exchange groups, respectively, and was obtained from a 
staff review of information on publicly available exchange websites. 
The Commission was unable to obtain information from CHX or IEX on 
their use of XML from information available on their publicly 
available websites.

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[[Page 13061]]

    The Commission anticipates that implementation of the proposed 
Pilot's XML schema would draw upon exchange resources and experiences 
previously used to implement other supply chain information standards, 
like those discussed above, that were developed by industry consensus-
based organizations. Costs generally associated with the implementation 
may include those for: Identifying the data required by the proposed 
Pilot within the exchange source systems; mapping the relevant fields 
in the exchanges' data source systems to the Commission's proposed XML 
schema; implementing, testing and executing the validation rules; and 
developing the website posting processes as required by the proposed 
rule. The initial costs to exchanges of complying with the Commission's 
proposed XML schema in order to publicly post the Exchange Transaction 
Fee Summary in this format would be $500 per exchange, or $6,500 in 
aggregate across the 13 exchanges.\367\ For all updates to the Exchange 
Transaction Fee Summary, the Commission estimates that any burden 
associated with making those available using the XML schema is included 
in the costs of the updates discussed above.
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    \367\ This estimate is based on the following, which reflects 
the Commission's experience with and burden estimates for systems 
changes to map to an XML schema: [(Programmer Analyst (1 hours) x 
$232) + (Senior Business Analyst (1 hours) x $265] [ap] $500 per 
exchange, or $500 x 13 exchanges [ap] $6,500 in aggregate. See 
Securities Exchange Act Release No. 78309 (July 13, 2016), 81 FR 
49431, 49475 (July 27, 2016) (``Disclosure of Order Handling 
Information''). The estimate is lower than that for proposed Rule 
606 disclosures because the costs for those disclosures encompassed 
many additional requirements beyond the mapping to an XML schema.
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d. Producing the Order Routing Data
    The proposed rule also would require as part of the proposed 
Transaction Fee Pilot that exchanges would prepare, in pipe-delimited 
ASCII format, and publicly post on their websites, order routing data, 
updated monthly, containing aggregated and anonymized broker-dealer 
order routing information. As discussed in proposed Rule 610T(d) and in 
Section III.E.3, the datasets would contain separate order routing data 
for liquidity-providing and liquidity-taking orders aggregated by day, 
by security, by anonymized broker-dealer, and by exchange, each month.
    The Commission preliminarily believes that as long as the CAT Phase 
1 data are available at the implementation of the proposed Transaction 
Fee Pilot, the exchanges would be able to use that data to construct 
the order routing data required by the proposed rule. In particular, 
the CAT Data will include records for every order received by an 
exchange that indicate the member routing the order to the exchange and 
details regarding the type of security. The CAT Data will also include 
other information necessary to create the order routing data such as 
order type information, special handling instructions, and execution 
information. In the event that the CAT Phase 1 data were not available, 
the exchanges would have to use existing systems to collect the 
required order routing data.\368\ Regardless of which system exchanges 
use for the order routing data, the Commission anticipates they would 
incur costs in producing the downloadable files containing aggregated 
and anonymized monthly order routing data to be posted publicly on the 
exchanges' websites. The proposal would require that the exchanges 
adhere to using the common broker-dealer anonymization key provided by 
a representative of the Commission in order to track and analyze the 
activity of a given broker-dealer across multiple exchanges. As 
discussed in Section III.E.3, the Commission would construct a broker-
dealer anonymization code, which would be an anonymized code common to 
a broker-dealer across all exchanges using CRD information.
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    \368\ The Commission acknowledged the use of CAT for future 
pilots in its Approval Order of the CAT NMS Plan. See note 172 
supra. The Commission is aware that much of the data produced by the 
CAT are highly sensitive and if not properly anonymized and 
aggregated could reveal personally identifiable information (PII) at 
the investor level or proprietary trading strategies at the broker-
dealer level. Accordingly, the exchanges would only make public as 
part of the Transaction Fee Pilot order routing data that are 
aggregated on a daily basis and anonymized of broker-dealers to 
minimize the potential for revelation or reverse engineering of 
proprietary order routing decisions.
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    The exchanges would also be required to make public the aggregated, 
anonymized order routing data described in Section III.E.3. The 
proposal requires that the exchanges would make public each month a 
dataset of aggregated, anonymized data on order routing statistics, 
detailed in proposed Rule 610T(d), by day, by issuer, and by broker-
dealer. The Commission estimates that each exchange would have a one-
time cost of $24,000, or $312,000 in aggregate across the 13 exchanges, 
associated with the development and implementation of systems needed to 
aggregate and anonymize the order routing information, as well as store 
the data, in the pipe-delimited ASCII format specified by the proposed 
rule and as detailed in proposed Rule 610T(d).\369\ The Commission 
anticipates that it would cost each exchange an additional $12,000 per 
year, or $156,000 in aggregate per year, to ensure that the system and 
storage technology is up to date and remains in compliance with the 
proposed rule.\370\
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    \369\ This estimate is based on the following, which reflects 
the Commission's experience with and burden estimates for SRO 
systems changes: [(Attorney (20 hours) x $401) + (Compliance Manager 
(20 hours) x $298) + (Programmer Analyst (20 hours) x $232) + 
(Senior Business Analyst (20 hours) x $265] [ap] $24,000 per 
exchange, or $24,000 x 13 exchanges [ap] $312,000 in aggregate. The 
burden hours are obtained from Section IV.J.1, supra.
    \370\ This estimate is based on the following, which reflects 
the Commission's experience with and burden estimates for SRO 
systems changes: [(Attorney (10 hours) x $401) + (Compliance Manager 
(10 hours) x $298) + (Programmer Analyst (10 hours) x $232) + 
(Senior Business Analyst (10 hours) x $265] [ap] $12,000 per 
exchange, or $11,960 x 13 exchanges [ap] $156,000 in aggregate. The 
burden hours are obtained from Section IV.J.1, supra.
---------------------------------------------------------------------------

    The proposed rule would require that exchanges produce monthly 
updates of the order routing data, and make them publicly available on 
their websites in pipe-delimited ASCII format by the end of the month, 
as detailed in Section III.E.3 and proposed Rule 610T(d). The 
Commission estimates that the publication and updates of the order 
routing dataset would cost $1,600 each month. This would require each 
exchange to make a total of 24 updates to the order routing data from 
the pre-Pilot Period through the post-Pilot Period, if the proposed 
Pilot were to automatically sunset at the end of the first year. Each 
exchange would have recurring costs of updates to the order routing 
data of approximately $57,600 per exchange, or $748,800 among the 13 
exchanges over the entire duration of the Pilot, and the pre-Pilot and 
post-Pilot periods.\371\ If the Commission were

[[Page 13062]]

to allow the proposed Pilot to automatically sunset at the end of the 
first year, this would decrease the total number of monthly updates to 
the order routing data by 12 to 24.\372\ Under the automatic sunset, 
each exchange would have recurring costs of updates to the order 
routing data of approximately $38,400 per exchange, or $499,200 among 
the 13 exchanges over a one-year Pilot, and the pre-Pilot and post-
Pilot periods.\373\
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    \371\ This estimate is based on the following: [(Compliance 
Manager (3 hours) x $298) + (Programmer Analyst (3 hours) x $232)] 
[ap] $1,600 per exchange, or $1,600 x 36 fee changes per exchange 
[ap] $57,600. The burden hours are obtained from Section IV.J.1, 
supra. The 36 updates to the order routing data for each exchange 
encompass six updates during the six-month pre-Pilot Period, 24 
updates during the two-year Pilot Period, assuming that the 
Commission determines at the end of the first year that it shall 
continue the proposed Pilot for up to an additional year, and six 
updates during the six-month post-pilot period. In aggregate, 
updates to the order routing data are estimated to cost $57,600 x 13 
U.S. equities exchanges [ap] $748,800.
    \372\ This estimate of updates to the order routing data is the 
aggregation of updates from the pre-Pilot Period (6), the one-year 
Pilot Period assuming that the Commission allows the Pilot to 
automatically sunset at the end of the first year (12), and the 
post-Pilot Period (6), for a total number of 24 updates.
    \373\ This estimate is based on the following: [(Compliance 
Manager (3 hours) x $298) + (Programmer Analyst (3 hours) x $232)] 
[ap] $1,600 per exchange, or $1,600 x 24 fee changes per exchange 
[ap] $38,400. The burden hours are obtained from Section IV.J.1, 
supra. The 24 updates to the order routing data for each exchange 
encompass six updates during the six-month pre-Pilot Period, 12 
updates during the first year of the Pilot Period, assuming that the 
Commission determines at the end of the first year that it shall 
automatically sunset the proposed Pilot, and six updates during the 
six-month post-pilot period. In aggregate, updates to the order 
routing data are estimated to cost $38,400 x 13 U.S. equities 
exchanges [ap] $499,200.
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e. Fee-Related Costs to Exchanges
    At the outset of the proposed Pilot, each equities exchange would 
need to provide to the Commission a comprehensive Form 19b-4 fee filing 
reflecting all of the applicable fees and rebates relevant to each of 
the three Pilot Test Groups, as well as the Control Group--to reflect 
the temporary changes to transaction-based fees and rebates as a result 
of the proposed Pilot. The Commission anticipates considerable costs 
associated with and time devoted by each exchange to optimally assign 
fees and rebates across Test Groups, within the parameters allowed by 
the proposed Pilot, including any incentives, tiers, caps, and 
discounts available. The Commission estimates that it would cost 
$48,400 per-exchange for the initial Form 19b-4 fee filing or $629,200 
in aggregate.\374\ The Commission further anticipates that exchanges 
would bear similar costs upon the completion of the proposed Pilot to 
prepare Form 19b-4 fee filings for the Commission.
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    \374\ The estimate is based on the following: [(Attorney (40 
hours) x $401) + (Compliance Attorney (40 hours) x $352) + 
(Assistant General Counsel (25 hours) x $449) + (Director of 
Compliance (15 hours) x $470)] [ap] $48,400, or $48,400 x 13 
equities exchanges [ap] $629,200 in aggregate. See OMB Control No. 
3235-0045 (August 19, 2016), 81 FR 57946 (August 24, 2016) 
(``Request to OMB for Extension of Rule 19b-4 and Form 19b-4 
Filings'').
---------------------------------------------------------------------------

    In addition to the initial production of the Form 19b-4 fee filing 
at the outset of the proposed Pilot, exchanges may also choose to make 
periodic updates to their fee and rebate schedules, and provide Form 
19b-4 fee filings to notify the Commission and the public of those 
updates. As noted in the baseline, the average exchange makes 
approximately seven changes to its fee schedules per year. While 
recognizing the possibility that as a result of the proposed Pilot, 
exchanges may revise their fee schedules more or less often during the 
proposed Pilot, the Commission has no basis to expect an increase in 
the number of Form 19b-4 fee filings other than at the beginning or end 
of the proposed Pilot and has no basis to expect a decrease.
    The Commission also recognizes that as an outcome of the proposed 
Pilot, the complexity of the Form 19b-4 fee filings could increase, 
thereby increasing the overall costs for exchanges to revise their fee 
and rebate schedules.\375\ As discussed above, the proposed Pilot would 
require exchanges to design multiple new fee structures for each of the 
test groups, which would then translate into additional information in 
each Form 19b-4 fee filing submitted during the proposed Pilot. These 
costs are likely to increase because the exchanges could take 
considerably more time to design and describe fee structures in each 
filing than they do designing fee structures today. As discussed above 
in the baseline, the average fee schedules of exchanges are complex, 
with many different categories of fees or rebates assessed to NMS 
stocks (including ETPs). Assuming the frequency remains constant, then 
the proposed Pilot could increase the incremental costs incurred by 
exchanges to file the expected Form 19b-4 fee filings during the 
proposed Pilot.\376\ The additional costs would only be relevant for 
Form 19b-4 fee filings that occur during the proposed Pilot Period, and 
would not apply to Form 19b-4 fee filings in the pre-Pilot or post-
Pilot Periods, as the Commission does not believe that there will be 
any incremental costs associated with increased complexity of these 
filings during these periods. The Commission estimates that each 
exchange would bear an incremental cost of $10,600 per Form 19b-4 fee 
filing to account for the increased complexity associated with the 
requirements of the proposed Pilot, or $1,930,000 for the anticipated 
182 Form 19b-4 fee filings for fee and rebate revisions across the 13 
U.S. equities exchanges during the two-year pilot duration.\377\ If the 
proposed Pilot were to automatically sunset at the end of the first 
year, the Commission estimates that exchanges would bear costs of 
approximately $965,000 for the anticipated 91 Form 19b-4 filings for 
fee and rebate revisions across the 13 U.S. equities exchanges during 
the first year of the Pilot duration.
---------------------------------------------------------------------------

    \375\ The Commission preliminarily believes that the inclusion 
of Linked Pricing prohibitions for Test Group 3 should not increase 
the complexity of Form 19b-4 filings for exchanges because many 
exchanges already report non-cash incentives, such as tiered pricing 
or volume discounts, as part of their standard filings. Further, the 
Commission does not believe that exchanges currently use Linked 
Pricing mechanisms and instead most rely on rebates.
    \376\ Maintaining the current average frequency of 7 19b-4 
filings per year would mean that the average exchange would file a 
total of 14 19b-4 filings during the two-year pilot (7 filings x 2 
year duration). If the Commission were to allow the proposed Pilot 
to automatically sunset at the end of the first year, then the total 
number of 19b-4 filings could decrease by 7 filings. Annually, 
across all 13 exchanges, the Commission preliminarily estimates that 
there will be 91 19b-4 filings (7 filings x 13 exchanges). If the 
Commission determines that the proposed Pilot shall continue for a 
second year, in aggregate, the 13 exchanges could file a total of 
182 19b-4 filings (91 x two-year Pilot duration).
    \377\ The estimate is based on the following: [(Attorney (8 
hours) x $401) + (Compliance Attorney (8 hours) x $352) + (Assistant 
General Counsel (6 hours) x $449) + (Director of Compliance (4 
hours) x $470)] [ap] $10,600, or $10,600 x 182 fee changes in 
aggregate across 13 exchanges over the two-year pilot duration [ap] 
$1,930,000 in aggregate, assuming that the Commission determines 
that the proposed Pilot shall continue for up to an additional year. 
If the proposed Pilot were to automatically sunset after the first 
year, the Commission preliminarily believes that the costs 
associated with 91 19b-4 filings (13 exchanges x 7 filings) would be 
approximately $965,000 ($10,600 x 91 filings). See Request to OMB 
for Extension of Rule 19b-4 and Form 19b-4 Filings, supra note 374.
---------------------------------------------------------------------------

f. Other Costs Associated With the Proposed Transaction Fee Pilot
    As discussed in further detail below, the Commission preliminarily 
believes that many of the other likely costs of this proposal would be 
temporary in nature and affect markets only for the duration of the 
proposed Pilot. For instance, more complicated fee structures could 
also increase an exchange's processing costs of tracking and 
calculating monthly invoices for its members during the proposed Pilot; 
however, the Commission does not have any information on the costs to 
exchanges for tracking and calculating monthly member invoices and 
therefore cannot provide estimates of quantified costs. The following 
section includes discussion of implementation costs for broker-dealers, 
the temporary effect on

[[Page 13063]]

brokerage commissions, the effects to exchanges of liquidity 
externalities and complexity, and costs associated with the overlap 
with the Tick Size Pilot.
    In addition to the compliance costs for exchanges associated with 
the implementation of the proposed Pilot, exchanges also may experience 
a change to their revenues associated with transaction-based fees and 
rebates. As discussed in the baseline, the exchange groups NYSE Group, 
Nasdaq, and BATS Global Markets, had net transaction-fee revenue of 
$223 million, $564 million, and $177 million, respectively, in 2016 as 
obtained from their Form 10-K or Form 10-Q filings. As discussed in 
more detail below, the margin between fees and rebates ranges from 
$0.0001 to $0.0005.\378\ If the margin were $0.0005, exchanges could 
have no reduction in their overall net revenues (fees less rebates). 
If, instead, the margin is less than $0.0005, then exchanges could 
experience a decline in revenues attributable to securities in Test 
Group 2, if they continue to provide a nominal rebate to broker-dealers 
as an inducement to route orders to that exchange. Moreover, because 
Test Group 3 would prohibit rebates or Linked Pricing without changing 
the fee cap, exchanges would have incentives to charge higher fees than 
a competitive equilibrium would suggest, subsidizing any shortfall in 
revenues arising from Test Group 2. Competitive pressures arising from 
other market participants, including ATSs, could affect the success of 
any attempted revenue subsidization by exchanges through increased 
fees.
---------------------------------------------------------------------------

    \378\ See Section V.D.2 infra.
---------------------------------------------------------------------------

    As noted above, the Commission preliminarily estimates that the 
only test group that could result in reduced revenues for exchanges is 
Test Group 2. Below, the Commission estimates a possible range of 
effects to the monthly revenues in aggregate across exchanges depending 
on the magnitude of the rebate that they could pay. Given that fees and 
rebates are interconnected, the Commission preliminarily assumes that 
as fees are reduced as a requirement of the proposed Pilot, exchanges 
will similarly reduce rebates paid; therefore, the Commission 
preliminarily believes that exchanges are unlikely to pay rebates in 
excess of the maximum fee permitted in a given test group. The maximum 
per share revenue for Test Group 2 would then be $0.0005, with a 
minimum of $0.0000, depending on whether the exchange paid no rebate or 
a rebate of $0.0005, respectively, which would leave the exchange net 
revenue neutral before operating costs under the second scenario. 
Assuming that the share volume in Test Group 2 would be one-sixth of 
the total share volume across all securities,\379\ using data from 
Table 3 in the baseline, Test Group 2 would have share volume of 
approximately 15.3 billion each month.\380\ Under the scenario where 
exchanges paid no rebates in Test Group 2, the Commission preliminarily 
anticipates no change in revenue, assuming that the margin between fee 
revenue and rebate cost of $0.0005.\381\ If, instead, exchanges paid 
rebates of $0.0005, where the net capture would be zero for Test Group 
2, this would lead to a monthly aggregate shortfall in revenues across 
all exchanges of $7,650,000.\382\ At the exchange level, Nasdaq, which 
has the largest monthly volume percentage (23%), would have a monthly 
shortfall of $1,760,000.\383\ If exchanges are likely to have similar 
share volume each month, then the annual average shortfall across all 
exchanges would be $91.8 million. Compared to the margin between fee 
revenue and the cost of rebates for the publicly traded exchanges, 
detailed in the baseline, the annual revenue shortfall would be 
approximately 9.5%.\384\ If the net capture on exchanges is less than 
$0.0005, on average, then exchanges could either maintain their current 
margin between fees and rebates (e.g., if the net capture is $0.0003, 
then exchanges could reduce rebates to $0.0002) or could increase the 
margin by reducing rebates even further (e.g., reduce rebates to 
$0.0001, and increase net capture to $0.0004).
---------------------------------------------------------------------------

    \379\ As designed, the proposed Pilot would allocate an equal 
number of securities to the three test groups and the control group 
(i.e., the test groups combined would have 50% of the NMS securities 
and the control group would have 50%). Each test group would have 
one-third of the combined test group allocation, thereby, in total 
leaving each test group with one-sixth of the securities included in 
the proposed Pilot. Assuming that the allocation of share volume 
would be similar due to the stratification of the sample discussed 
above, each test group would have one-sixth of total share volume 
each month.
    \380\ Table 3 in the baseline shows aggregate exchange share 
volume for July 2017 was 91.7 billion shares, of which one-sixth 
would be 15.3 billion shares. Further, the Commission preliminarily 
estimates that these volume figures would be similar across all 
months, assuming no seasonality in share volume.
    \381\ In addition, an exchange could have no change in net 
margin if its current margin is between $0.0005 and $0.0010 and the 
exchange charged for both taking and making liquidity. However, the 
effect of charging both sides on net revenues is unknown because 
charging both sides could change the nature of the exchange's order 
flow.
    \382\ If Test Group 2 has monthly share volume of 15.3 billion 
shares, then the revenue shortfall is estimated to be 15.3 billion x 
$0.0005 [ap] $7,650,000.
    \383\ As shown in Table 3, Nasdaq's July 2017 shares are 21.2 
billion. Nasdaq's overall share is 21.2/91.7 [ap] 23%. The 
Commission estimates the monthly revenue shortfall for Nasdaq to be 
0.23 x $7,650,000 [ap] $1,760,000.
    \384\ In aggregate, the NYSE Group, Nasdaq, and BATS Global 
Markets earned a margin between fee revenues and costs of rebates of 
approximately $960 million in 2016. If the revenue shortfall was $92 
million, then the percentage shortfall would be $92 million/$960 
million [ap] 9.5%. However, this is likely to be too high since BATS 
Global Markets only reported financial statements for the first nine 
months of 2016. In the nine-months ending September 2016, BATS 
earned a margin between fee revenues and costs of rebates of 
approximately $177 million. Assuming that BATS earned revenues at a 
constant rate throughout the year, then the 12-month margin would 
have been $236 million ($177 million/9 months = $x million/12 
months, x = $236 million). In that case, the aggregate margin would 
have increased from $960 million to $1.023 billion, which would have 
reduced the percentage shortfall from approximately 9.5% to 9.0% 
($92 million/$1.023 billion).
---------------------------------------------------------------------------

    Although the costs of compliance with the proposed Pilot primarily 
affect the exchanges, broker-dealers and other market participants are 
also likely to have implementation costs as a result of the proposed 
Pilot, if they decide to alter their behavior in response to the Pilot. 
For instance, many broker-dealers have smart-order routing systems that 
use algorithms to route orders based on certain criteria, such as fill 
rates, time to execution, or highest rebates.\385\ In response to the 
proposed Pilot, market participants that use smart-order routers could 
have a one-time cost at the onset (and the conclusion) of the Pilot to 
adjust their algorithms to reflect the shocks to transaction-based 
fees. In the absence of smart-order routers, market participants could 
still need to adjust the execution determinations to take advantage of 
the changes implemented during the proposed Pilot. The Commission 
preliminarily believes that the costs associated with updating the 
execution algorithms by broker-dealers are likely to be more costly 
than the periodic adjustments that broker-dealers may make to 
incorporate changes to fee schedules implemented by exchanges because 
they are likely to require more complex programming that segments 
stocks into different fee regimes, rather than just altering codes or 
inputs.
---------------------------------------------------------------------------

    \385\ See Bacidore, Otero, and Vasa, supra note 235, which found 
that smart-order routers designed to maximize rebates delivered 
worse execution quality to their clients.
---------------------------------------------------------------------------

    The Commission preliminarily believes that broker-dealers that are 
members of exchanges already have in place order routing systems, 
whether smart order routers or algorithmic trading programs that route 
orders to exchanges for which they are members. Therefore, the 
Commission does not expect that broker-dealers would need to bear 
start-up costs associated with implementing new order routing systems 
as a result of the proposed Pilot,

[[Page 13064]]

and would only need to make modifications to the existing code to 
capture changes in fees and rebates associated with each test group of 
securities. The Commission estimates that the costs to broker-dealers 
that are members of exchanges to make the initial adjustment to their 
order routing systems at the outset of the proposed Pilot would be 
$8,700 per broker-dealer, or $3,741,000 in aggregate across the 430 
broker-dealers that are currently members of equities exchanges.\386\ 
The Commission further estimates that broker-dealers would bear a 
similar cost to alter their order routing systems at the conclusion of 
the proposed Pilot.
---------------------------------------------------------------------------

    \386\ This estimate is based on the following, which reflects 
the Commission's experiences with and burden estimates for broker-
dealer systems changes: [(Attorney (5 hours) x $401) + (Compliance 
Manager (10 hours) x $298) + (Programmer Analyst (10 hours) x $232) 
+ (Senior Business Analyst (5 hours) x $265)] [ap] $8,700 per 
broker-dealer that is a member of at least one exchange. As of 
December 31, 2016, 430 unique broker-dealers were members of 
exchanges (Form X-17a-5). The aggregate costs of updating order 
routing systems to reflect the proposed Transaction Fee Pilot 
requirements would cost $8,700 x 430 [ap] $3,741,000.
---------------------------------------------------------------------------

    As a result of the proposed Pilot, the Commission expects that 
broker-dealers would make adjustments to their order routing systems 
associated with changes to fees or rebates submitted by exchanges 
through Form 19b-4 fee filings to the Commission. As discussed in the 
baseline, exchanges, on average, make changes to fees or rebates 
approximately seven times per year; therefore, broker-dealers are 
likely to have experience in adjusting the order routing systems to 
reflect these routine changes to fees and rebates. Although broker-
dealers have experience with revisions to exchange fee and rebate 
schedules, due to the added complexity of having to adjust and update 
multiple modules within their order routing systems, broker-dealers are 
likely to face higher costs per adjustment as a result of the proposed 
Pilot. The Commission preliminarily believes that the per-adjustment 
costs associated with these changes are likely to be a small fraction 
of the costs associated with the initial costs of updating the routing 
systems to reflect the required fee and rebate revisions at the outset 
of the proposed Pilot. The Commission estimates that the additional 
costs to broker-dealers that are members of exchanges to make periodic 
adjustments to their order routing systems to reflect changes in fees 
and rebates would be $265 per adjustment, or $114,000 in aggregate 
across the 430 broker-dealers that are members of U.S. equities 
exchanges.\387\ As shown above, the Commission preliminarily expects 
that exchanges, if submitting changes to fees and rebates at the same 
rate as they have in the last five years, would submit 182 total 
revisions to fees and rebates over the pilot duration, if the Pilot 
were to automatically sunset at the end of the first year. Therefore, 
the aggregate costs of updating order routing systems would be $48,200 
per broker-dealer, or $20,726,000 in total across all broker-
dealers.\388\ If the Pilot were to automatically sunset at the end of 
the first year, the aggregate costs of updating order routing systems 
would be $24,100 per broker-dealer, or $10,363,000 in total across all 
broker-dealers. The Commission notes, however, that these estimates may 
be overstated, as not all broker-dealers are members of all exchanges, 
which would reduce the total number of changes to the order-routing 
systems that they would implement. Therefore, the Commission 
preliminarily believes that the costs to broker-dealers of adjusting 
their order routing systems as a results of the proposed Pilot are 
nominal, and each broker-dealer would spend on average approximately 
$67,000 to update their systems over the entire proposed Pilot 
Period.\389\ If the Commission determined that the proposed Pilot shall 
automatically sunset at the end of the first year, then the costs 
associated with these updates would be approximately $42,900 per 
broker-dealer. Moreover, as noted above, this estimate assumes that 
broker-dealers are members of all 13 U.S. equities exchanges, whereas 
many are members of only a subset of exchanges, which would further 
reduce the costs of updating their order routing systems.
---------------------------------------------------------------------------

    \387\ This estimate is based on the following, which reflects 
the Commission's experiences with and burden estimates for broker-
dealer systems changes: [(Compliance Manager (0.5 hours) x $298) + 
(Programmer Analyst (0.5 hours) x $232)] = $265 per broker-dealer 
that is a member of at least one exchange. The aggregate costs 
updating order routing systems to reflect the periodic fee and 
rebate revisions would cost $265 x 430 [ap] $114,000.
    \388\ If 182 total fee and rebate changes were to occur over the 
duration of the proposed Pilot (13 equities exchanges x 7 revisions 
per year x 2 years = 182), each broker-dealer would bear costs of 
updating its order routing systems of $265 x 182 [ap] $48,200, or 
$20,726,000 ($48,200 x 430) in aggregate across all broker-dealers 
over the first year of the proposed Pilot. The Commission estimates 
that costs would be approximately $10,363,000 ($265 x 13 exchanges x 
7 updates x 430 broker-dealers) if the Commission determined that 
proposed Pilot automatically sunset at the end of the first year.
    \389\ These costs reflect the costs of approximately $9,000 at 
the outset of the proposed Pilot to update the order routing system 
to reflect the changes to the fee structure for securities in the 
test groups, approximately $49,000 to reflect the incremental costs 
of the estimated 182 revisions to fee schedules during the proposed 
Pilot ($530 per revisions x 7 revisions per year x 2 years x 13 
exchanges), and $9,000 at the conclusion of the proposed Pilot to 
unwind changes to the order routing systems, for a total of $67,000 
per broker-dealer. If the proposed Pilot were to automatically 
sunset at the end of one year, then these costs would be 
approximately $42,900 ($530 x 7 revisions x 13 exchanges) per 
broker-dealer. See supra note 338 and the accompanying text.
---------------------------------------------------------------------------

    Exchanges and broker-dealers could also bear an increased cost of 
complexity associated with the exogenous shocks to the fees and rebates 
as required by the various test groups. As of July 2017, exchanges have 
24 fee categories and 21 rebate categories, on average. If exchanges 
maintain the same level of complexity in their fee schedules during the 
proposed Pilot, up to a four-fold increase in the number of fee and 
rebate categories could occur, which would increase complexity for the 
exchanges, and would also increase complexity for broker-dealers who 
incorporate fees into their order routing decisions. Although the 
proposal would require exchanges to report a fee dataset as well as any 
changes to those fees, the exchanges may not simplify their actual fee 
schedules. For the duration of the proposed Pilot, however, the 
exchanges could resort to simplified fee schedules relative to the 
current baseline to reduce the costs of complying with the proposed 
Pilot.
    Beyond the implementation and compliance costs for exchanges and 
broker-dealers associated with the proposed Transaction Fee Pilot, a 
number of temporary costs could be borne by investors as a result of 
the Pilot. The changes to the transaction-based fee structure could 
lead to temporary, suboptimal outcomes for market participants, such as 
short-lived increases in brokerage commissions. It has been shown in 
several studies that brokerage commissions today are at historically 
low levels.\390\ Brokerage clients seeking simplicity in their overall 
cost structure may have a preference for low commissions and increased 
services provided by broker-dealers, and in turn, may allow broker-
dealers to capture rebates (and bear the costs of access fees), either 
through explicit contracts or implicit agreements.\391\ As a result, 
the proposed Pilot could lead to higher overall commissions as rebates 
obtained by broker-dealers fall, thereby temporarily reducing the 
overall welfare of retail brokerage clients as a result of increased 
commissions.\392\
---------------------------------------------------------------------------

    \390\ See Angel, Harris, and Spatt, supra notes 106 and 216.
    \391\ See supra note 37. See also O'Donoghue, supra note 24.
    \392\ The Commission acknowledges differing effects on brokerage 
commissions could occur as a result of the proposed Pilot depending 
on whether the client is a retail customer versus an institutional 
customer. For instance, some brokerage accounts charge per-
transaction commissions to retail clients (e.g., Fidelity charges 
$4.95 per trade, www.fidelity.com, while TD Ameritrade charges $6.95 
per trade, www.tdameritrade.com). Institutional commissions, on the 
other hand, are highly negotiated and may be based on something 
other than a per trade or per share basis, such as a flat fee for 
use of a broker's order routing algorithm; however, data on the 
structure or magnitude of institutional commissions is not publicly 
available.

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[[Page 13065]]

    For instance, the elimination of rebates or Linked Pricing in Test 
Group 3 could result in a transfer from broker-dealers to exchanges. 
Assuming, as discussed above,\393\ the margin between fees and rebates 
is $0.0002 per share, with access fees of $0.0030 per share and rebates 
of $0.0028 per share, Test Group 3 could result in a transfer of 
$0.0028 from broker-dealers to the exchanges, particularly because 
exchanges would be prohibited from offering Linked Pricing mechanisms 
that could act as substitutes for cash rebates.\394\ Following this 
example, and using the same estimation procedure to calculate costs to 
exchanges attributable to the reduction in fees in Test Group 2, the 
estimates of the potential increased revenue to exchanges are as 
follows. Assuming that the share volume in Test Group 3 would be one-
sixth of the total share volume across all securities,\395\ using data 
from Table 3 in the baseline, Test Group 3 would have share volume of 
approximately 15.3 billion each month.\396\ If the margin between fee 
revenue and rebate cost is $0.0002, as discussed above, then under the 
assumption that exchanges reduce fees to $0.0002 in Test Group 3, the 
Commission preliminarily anticipates no change in revenue for 
exchanges, and no transfer from broker-dealers. If, instead, exchanges 
charged fees of $0.0030 while prohibited from paying rebates or Linked 
Pricing in Test Group 3, the Commission preliminarily estimates a 
monthly aggregate increase in revenues across all exchanges of 
$42,840,000.\397\ If exchanges are likely to have similar share volume 
each month, then the estimated annual average increase in revenues 
across all exchanges would be $514.1 million.
---------------------------------------------------------------------------

    \393\ See supra note 28.
    \394\ Although the Commission preliminarily believes that 
competition among exchanges would drive access fees down for Test 
Group 3 as a result of the elimination of rebates, exchanges could 
charge access fees as high as the current cap of $0.0030.
    \395\ As designed, the Pilot would allocate an equal number of 
securities to the three test groups and the control group (i.e., the 
test groups combined would have 50% of the NMS securities and the 
control group would have 50%). Each test group would have one-third 
of the combined test group allocation, thereby, in total leaving 
each test group with one-sixth of the securities included in the 
pilot. Assuming that the allocation of share volume would be similar 
due to the stratification of the sample discussed above, each test 
group would have one-sixth of total share volume each month.
    \396\ Table 3 in the baseline shows aggregate exchange share 
volume for July 2017 was 91.7 billion shares, of which one-sixth 
would be 15.3 billion shares. Further, the Commission preliminarily 
estimates that these volume figures would be similar across all 
months, assuming no seasonality in share volume.
    \397\ If Test Group 3 has monthly share volume of 15.3 billion 
shares, and the margin would increase by $0.0028 ($0.0030 - 
$0.0002), the revenue increase per month is estimated to be 15.3 
billion x $0.0028 [ap] $42,840,000.
---------------------------------------------------------------------------

This transfer of rebates from the broker-dealers to exchanges could 
feasibly increase exchange revenue by approximately 53.6%.\398\ 
Moreover, these costs could likely fall to investors in the form of 
higher commissions or fees charged to cover the decrease in broker-
dealer revenue due to losses in rebates for securities in Test Group 3.
---------------------------------------------------------------------------

    \398\ In aggregate, the NYSE Group, Nasdaq, and BATS Global 
Markets earned a margin between fee revenues and costs of rebates of 
approximately $960 million in 2016. If the estimated margin 
increased by $514.1 million, then the percentage increase in this 
margin would be $514.1 million/$960 million [ap] 53.6%. However, 
this is likely to be too high since BATS Global Markets only 
reported financial statements for the first nine months of 2016. In 
the nine-months ending September 2016, BATS earned a margin between 
fee revenues and costs of rebates of approximately $177 million. 
Assuming that BATS earned revenues at a constant rate throughout the 
year, then the 12-month margin would have been $236 million ($177 
million/9 months = $x million/12 months, x = $236 million). In that 
case, the aggregate margin would have increased from $960 million to 
$1.023 billion, which would have reduced the percentage increase 
from approximately 53.6% to 50.3% ($514.1 million/$1.023 billion).
---------------------------------------------------------------------------

    The Commission further acknowledges that if brokerage commissions 
were to increase as a result of the proposed Pilot, broker-dealers 
could continue to charge higher commissions even after the conclusion 
of the proposed Pilot. However, due to competition among broker-
dealers, including the proliferation of low-cost online broker-dealers, 
the Commission preliminarily believes that broker-dealers would be 
unlikely to significantly increase brokerage commissions as a result of 
the proposed Pilot.\399\
---------------------------------------------------------------------------

    \399\ See Section V.B.2.a supra, which discusses the competitive 
environment for broker-dealer services.
---------------------------------------------------------------------------

    As a result of the proposed Pilot, effective bid-ask spreads could 
temporarily widen for securities in certain test groups due to the 
elimination or reduction of rebates. According to one study, 
transaction-based rebates could serve to artificially lower the NBBO, 
which could lower the trading costs to investors.\400\ This reasoning 
suggests that wider effective bid-ask spreads could temporarily 
increase transactions costs for internalized order flow or orders 
routed to ATSs that execute based on the NBBO, which would 
predominantly impact retail investors, as well as for orders executing 
on exchanges. However, any potential degradation of the effective bid-
ask spread due to lower or reduced rebates could be mitigated by lower 
access fees.
---------------------------------------------------------------------------

    \400\ See Angel, Harris, and Spatt, supra note 106.
---------------------------------------------------------------------------

    The reduction or elimination of rebates could also particularly 
affect smaller exchanges due to the liquidity externality. As liquidity 
tends to consolidate for reasons discussed in Section V.A.2, the 
restrictions on rebates as a result of the proposed Pilot could harm 
smaller exchanges that perhaps compete by paying large rebates rather 
than by producing better prices or execution quality. In the short run, 
this could lead to lost revenue for these exchanges, and potentially 
could have longer-term effects if smaller exchanges consolidate or exit 
as a result of the proposed Pilot. As discussed above, using available 
data, the Commission estimates that aggregate revenue shortfalls for 
exchanges are likely to range between zero and $92 million 
annually.\401\
---------------------------------------------------------------------------

    \401\ See Section V.C.2.a supra, for the estimates of revenue 
shortfalls that could occur as a result of the proposed Pilot.
---------------------------------------------------------------------------

    Markets may also temporarily become even more complex as a result 
of the proposed Pilot. Exchanges could promote additional order types 
and may even initiate new types of markets as a result of the proposed 
Pilot, which would only serve to further fragment markets and add to 
their complexity, the costs of which could be borne by investors. The 
Commission preliminarily believes, however, that a new exchange 
registered in response to the Pilot would be unlikely to become 
operational before the conclusion of the proposed Pilot.
    Simultaneously subjecting a subset of NMS securities to both the 
Tick Size Pilot and the proposed Transaction Fee Pilot could increase 
potential costs to issuers, particularly for small-capitalization 
issuers, to the extent that any overlap between the pilots could occur. 
Small issuers that could be subject to both pilots are most likely to 
face adverse liquidity environments, and therefore, are most likely to 
have ramifications to their liquidity, such as larger spreads, as a 
result of the simultaneity of the pilots. Longer term, if the temporary 
impacts on liquidity acutely affect some firms, it could affect capital 
formation for these securities and could lead to the potential exit of 
these issuers from the capital markets, through acquisition or 
delisting, as these

[[Page 13066]]

small issuers are least likely to be able to ride out negative 
liquidity shocks. Instead, the proposed Pilot could lead some issuers 
to delay entering the capital markets for the duration of the proposed 
Pilot.\402\
---------------------------------------------------------------------------

    \402\ If rebates are associated with increased liquidity, 
particularly for small issuers, then prohibitions on rebates or 
Linked Pricing could adversely affect those firms. However, the 
Commission preliminarily believes that exempting registered market 
makers from the prohibition on non-rebate incentives could lessen 
the impact to liquidity for small issuers.
---------------------------------------------------------------------------

    Separately, the implementation costs to exchanges associated with 
running two pilots on subsets of the same securities could have 
significant costs related to the complexity of multiple pilots, to the 
extent that the pilots could overlap. Although the exchanges already 
have operational experience with implementing the Tick Size Pilot, the 
costs of implementation provided above could be underestimated because 
of the complexity of tracking the same issuers within multiple pilots. 
For instance, the Commission preliminarily estimates that it will cost 
$3,720 per exchange to construct its initial Pilot Securities Exchange 
List, and $33,400 annually to update this list daily. Because exchanges 
may have to identify securities that are in both the Transaction Fee 
Pilot and the Tick Size Pilot for some period of time, the costs of 
producing the Pilot Securities Exchange List could exceed these 
values.\403\ The Commission, therefore, preliminarily believes that any 
excess costs are likely to be proportional to the duration of the 
overlap between the Tick Size Pilot and the proposed Transaction Fee 
Pilot.\404\
---------------------------------------------------------------------------

    \403\ See supra note 353.
    \404\ If such overlap occurred, and was limited to the pre-Pilot 
data collection period for the proposed Transaction Fee Pilot, the 
additional costs related to implementation, complexity, and 
uncertainty could be minimal because the two pilots would not 
operate simultaneously. As discussed in Section V.C.1.a.i.A, supra, 
the Commission preliminarily believes that any overlap could be 
minimal. See also supra note 342 for a discussion of the potential 
statistical power of testing the joint effects of the two pilots 
simultaneously. The Commission is cognizant that a longer overlap 
could be costly to market participants.
---------------------------------------------------------------------------

D. Impact on Efficiency, Competition, and Capital Formation

    Exchange Act Section 3(f) requires the Commission when engaging in 
rulemaking to consider or determine whether an action is necessary or 
appropriate in the public interest, and to consider, in addition to the 
protection of investors, whether the action will promote efficiency, 
competition, and capital formation.\405\ As discussed in further detail 
below, the Commission preliminarily believes that any of the direct 
effects of this proposal on efficiency, competition and capital 
formation would likely be temporary in nature and affect markets only 
for the duration of the proposed Pilot. The Commission preliminarily 
believes that the information obtained as a result of the proposed 
Transaction Fee Pilot could improve regulatory efficiency, because 
analyses of this data are likely to provide a more representative view 
of the effect of transaction-based fees on order routing decisions than 
would be available to the Commission in the absence of the proposed 
Pilot. Further, the proposed Pilot may have a number of temporary 
effects on price efficiency, the competitive dynamics between exchanges 
and off-exchange trading venues in the market for trading services, and 
on capital formation, particularly for small issuers.
---------------------------------------------------------------------------

    \405\ See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    As discussed above, a primary benefit of the proposed Pilot is that 
it would produce data that will be relevant for the Commission's 
consideration of the economic effects of transaction-based fees. The 
data obtained from the proposed Transaction Fee Pilot would provide 
information not currently available to the Commission about the role of 
transaction-based fees in the market for trading services and how that 
affects competition between exchanges and with off-exchange trading 
centers.
1. Efficiency
    The proposed Transaction Fee Pilot would provide the Commission 
with an opportunity to empirically examine the effects of an exogenous 
shock to transaction fees and rebates order routing behavior, execution 
quality and market quality. Insofar as the data produced by the 
proposed Pilot permits the Commission and the public to evaluate and 
comment upon the potential impacts of alternative policy options, the 
proposal may promote regulatory efficiency. In the absence of the 
proposed Pilot, the Commission would have to rely on currently-
available data to inform future policy decisions related to 
transaction-based fees and data limitations may impair the efficiency 
of policy decisions based on this information.
    The temporary efficiency impacts the Commission expects during the 
proposed Pilot depend on how the proposed Pilot fee and rebate 
restrictions proposed for the three test groups balance the interests 
of different groups of market participants. For example, if during the 
Pilot, the lower fee caps and no-rebate restriction induced by the 
proposed Pilot cause broker-dealers to be more likely to route customer 
orders to trading centers with better pricing, higher speed of 
execution, or higher probability of execution, rather than to trading 
centers with the largest rebates, the proposed Pilot may temporarily 
improve the efficiency of capital allocation by lowering execution 
costs. Efficiency of capital allocation could be reduced if, as a 
response to the loss in revenue from rebates, broker-dealers increase 
commissions or fees charged to customers. Higher commissions or fees 
could reduce customers' willingness to trade or could lead to a lower 
injection of capital into the markets by investors because a larger 
fraction of each investable dollar would go to compensate broker-
dealers for the lost revenue. However, because rebates are generally 
accompanied by higher access fees, the overall costs to broker-dealers 
to route orders to exchanges could decline for some test groups, which 
could lead to a decrease in commissions or fees and temporarily 
increase the efficiency of capital allocation.
    For the duration of the proposed Transaction Fee Pilot, lower 
access fees could improve liquidity of stocks and ETPs in some test 
groups, by reducing the costs to execute marketable orders. As 
marketable orders become less costly, these orders are likely to be 
routed to exchanges with lower access fees, improving execution quality 
and possibly creating a liquidity externality, whereby lower access fee 
venues will become the preferred trading center for marketable and non-
marketable orders.\406\ An increase in liquidity could improve 
informational efficiency by allowing securities prices to adjust more 
quickly to changes in fundamentals.
---------------------------------------------------------------------------

    \406\ As discussed in detail above, improvements in execution 
quality could present as better prices for execution, higher 
probability of execution, and faster time to execution. See supra 
note 215.
---------------------------------------------------------------------------

    As a result of the proposed Pilot, price efficiency might also 
improve; quoted spreads also may more closely reflect the net cost of 
trading and could temporarily increase price transparency for 
securities in certain test groups. Currently, broker-dealers do not 
relay information about amounts of fees paid or rebates received on 
trades to their customers, thereby limiting the transparency of the 
total costs incurred to execute a trade. The proposed Pilot would not 
mandate disclosure by the exchanges or the broker-dealers of order-
level transaction-based fees; and therefore, will not resolve the 
limitations to transparency of the total fees paid and rebates received 
by broker-dealers discussed above. As fees decline or rebates are 
removed in some

[[Page 13067]]

test groups, however, the deviation in the net cost of trading from the 
quoted spread could shrink, thereby at least partially improving price 
transparency for the duration of the proposed Pilot, and temporarily 
improving pricing efficiency and price discovery. Therefore, as an 
additional benefit of the proposed Pilot, the Commission could also 
examine the temporary effect of revisions to access fees and rebates on 
quoted spreads, to better inform future policy recommendations of the 
effects of transaction-based fees on price efficiency.\407\
---------------------------------------------------------------------------

    \407\ See Section V.C.2.b supra.
---------------------------------------------------------------------------

    Other aspects of the proposed Pilot temporarily may impair 
efficiency. The proposed Pilot is intended to reduce (and in some cases 
eliminate) rebates or Linked Pricing for a substantial portion of NMS 
stocks (including ETPs); however, the loss of rebates or Linked Pricing 
in Test Group 3 could have a differential effect between large and 
small capitalization securities.\408\ If exchanges use rebates as a 
mechanism to provide broker-dealers with incentives to post non-
marketable orders to exchanges, in the absence of rebates, broker-
dealers instead may have incentives to post these orders to off-
exchange trading centers, such as ATSs. This may lead to a temporary 
widening of the NBBO, which could lead to a temporary reduction of 
liquidity that could be particularly severe for small or mid-cap 
securities. Thus, the overall informational efficiency of prices, as a 
result of widening spreads, could temporarily decline with the 
implementation of the proposed Pilot.
---------------------------------------------------------------------------

    \408\ See supra note 402.
---------------------------------------------------------------------------

    Furthermore, even if broker-dealers do not use ATSs and 
internalization more intensively, the proposed Pilot may temporarily 
impair the efficiency of transactions in certain Test Groups, through 
the impact of Pilot-induced fee and rebate changes on the NBBO. As 
discussed earlier, one potentially distortive effect of transaction-
based fees on maker-taker trading centers is that they provide 
incentives for market participants to post more aggressive limit orders 
(e.g., limit orders close to the current market price) because they 
anticipate receiving rebates if their orders are executed. To the 
extent that reductions in rebates result in a wider bid-ask spread in 
certain stocks and ETPs during the proposed Pilot Period, this may 
increase transaction costs for internalized order flow or orders routed 
to ATSs that execute based on the NBBO and for orders executing on 
exchanges.\409\ For example, if an ATS offers to execute buy orders at 
the average of the national best offer and midpoint, rather than at the 
wider quoted spread, the ATS would execute these orders at higher 
prices than those available on exchanges. Notably, the impact of less 
aggressive limit orders is less likely to affect marketable orders on 
maker-taker trading centers, because lower taker fees could mitigate 
the impact of a wider quoted spread on total transaction costs for 
liquidity takers.
---------------------------------------------------------------------------

    \409\ See Angel, Harris, and Spatt, supra note 106.
---------------------------------------------------------------------------

    Finally, the Commission acknowledges that the fee caps and 
prohibition on rebates or Linked Pricing imposed on the test groups 
during the proposed Pilot further constrain the exchanges' abilities to 
strategically choose fee and rebate schedules and for some NMS stocks 
may restrict the fees and rebates further beyond the current levels, 
which could be efficient from the exchanges' perspective, incorporating 
their beliefs about the trade-off between revenues and costs associated 
with these transaction-based fees. The proposal could temporarily 
result in more or less efficient fee and rebate schedules because the 
exchanges might not be able to optimize their pricing structure for 
some test groups of securities. While the Commission does not currently 
have information to determine the current level of efficiency of fees 
and rebates, the information that the Commission and the public receive 
from the proposed Pilot could enable the analysis of market impacts 
stemming from changes to fees, potentially permitting the Commission to 
assess alternative requirements for transaction-based fees that may be 
more efficient.
2. Competition
    While the Commission preliminarily believes that most of the 
impacts of the proposed Pilot on the market for trading services would 
be limited to the duration of the proposed Pilot, some effects may last 
beyond the end of the proposed Pilot. Certain exchanges could be harmed 
if a reduction in rebates results in consolidation of orders at other 
exchanges. This could occur if the proposed Pilot attenuates the 
potentially distortive impact of transaction-based fees and causes 
broker-dealers to route orders to trading centers they perceive as more 
liquid. To the extent that increased order flow in a security directed 
to a particular venue encourages broker-dealers to route more orders 
for that security to the venue, a liquidity externality may develop, 
making the venue the preferred routing destination for all orders. 
Although these effects would likely last only for the duration of the 
proposed Pilot, depending on the extent of the liquidity externalities, 
smaller exchanges could experience long-lasting competitive effects. 
The proposed Transaction Fee Pilot could also temporarily discourage 
entry of new exchanges that might otherwise emerge to take advantage of 
the maker-taker and taker-maker pricing models.\410\ Under such 
circumstances, while the consolidation of liquidity may benefit market 
participants, it may also make it difficult for trading centers with 
low volumes in particular securities to compete with trading centers 
that represent liquidity centers in these securities. This could lead 
to consolidation or exit by small exchanges as a result of the proposed 
Pilot, although the Commission preliminarily believes that either of 
those events is unlikely because the anticipated revenue shortfall, as 
discussed above, would be for a limited duration and would not be 
significant enough to cause this result.
---------------------------------------------------------------------------

    \410\ Academic studies suggest a number of new exchanges emerged 
specifically to take advantage of maker-taker and taker-maker 
pricing models. See, e.g., Angel, Harris, and Spatt, supra note 106.
---------------------------------------------------------------------------

    The proposed Transaction Fee Pilot may also temporarily alter 
competition among exchanges that use transaction-based fee pricing 
models. Exchanges that pay fees and remit rebates frequently revise 
their fee schedules in order to remain competitive and to attract order 
flow. The impact of the proposal on competition depends on the extent 
to which the fee caps and prohibition on rebates or Linked Pricing 
restrict exchanges' transaction-based fee strategies. On one hand, the 
proposed Pilot, while changing either access fees or rebates on certain 
subsets of securities, could leave the margins that exchanges obtain 
from transaction-based pricing models unchanged and could preserve the 
current state of competition among exchanges in the market for those 
securities. Several earlier studies suggest that the average difference 
between the access fees and rebates is approximately $0.0005; however, 
the EMSAC NMS Subcommittee observed that the current typical margin per 
share is $0.0002,\411\ and a recent report from 2017 suggests that the 
spread between fees and rebates is approximately $0.0001.\412\ For 
instance, for stocks in

[[Page 13068]]

Test Group 1, which limits access fees to no greater than $0.0015, it 
may be possible for exchanges to modify fee structures in a way that 
leaves margins unchanged and does not impact competition between 
exchanges. However, this may not be true for all test groups, and some 
exchanges may be unable to maintain current average margins per share 
for stocks in Test Group 2.\413\ These exchanges may choose to compete 
less intensively for order flow in this test group, instead focusing on 
stocks and ETPs in other test groups. Some of the shortfall in the 
competition for order flow for this subset of securities could be 
filled by off-exchange trading centers. Alternatively, exchanges may 
revise pricing strategies for stocks in other groups, choosing to 
implicitly subsidize rebates for stocks in some test groups using fees 
from stocks in other test groups. This may increase competition for 
order flow in some test groups while reducing it in others. In the 
presence of tighter restrictions on transaction-based fees during the 
proposed Pilot Period, exchanges could compete in other ways to attract 
trading volume (e.g., discounts on connectivity fees or increased 
volume discounts), although the Commission believes that for some test 
groups the ability to offer meaningful volume discounts would be 
limited.\414\
---------------------------------------------------------------------------

    \411\ See supra note 28.
    \412\ See, e.g., Laura Cardella, Jia Hao, and Ivalina Kalcheva, 
``Make and Take Fees in the U.S. Equity Market,'' Working Paper, 
University of Arizona (2015), available at: https://www.rhsmith.umd.edu/files/Documents/Centers/CFP/research/cardella_hao_kalcheva.pdf (``Cardella, et al. study''); Harris, 
supra note 23. Each of these papers indicates the difference between 
fees and rebates is approximately $0.0005 per share; the Cardella et 
al. study, however, uses data from 2008 to 2010. A recent discussion 
indicates that the difference between fees and rebates is $0.0001. 
See, e.g., ``How to Align Broker and Customer Interests to Make 
Exchanges More Competitive,'' Trillium Management, LLC (June 28, 
2017), available at: https://www.trlm.com/align-broker-customer-interests-make-exchanges-competitive/.
    \413\ As discussed in Section III.C.2, if the margin between 
fees and rebates exceeds $0.0005, exchanges theoretically could 
assess fees to both the make and take sides of the market; however, 
the Commission preliminarily believes that exchanges are unlikely to 
do so.
    \414\ For NMS stocks included in Test Group 3, order flow 
incentives would be substantially reduced, particularly any new 
inducements that provide a discount or incentive on one side of the 
market that is linked to activity on the opposite side of the 
market.
---------------------------------------------------------------------------

    The proposed Transaction Fee Pilot may not only affect competition 
between exchanges, but also could affect broker-dealers' decisions to 
route orders to off-exchange trading centers for the duration of the 
proposed Pilot, affecting how exchanges compete with other execution 
venues in the market for trading services. Lower rebates during the 
proposed Pilot Period may prompt broker-dealers to internalize a higher 
proportion of order flow or route a higher proportion of order flow to 
wholesalers and ATSs. This could alter the current competitive dynamics 
among trading centers in favor of non-exchange trading centers. Lower 
access fees, on the other hand, could attract marketable order flow 
from the ATSs and back to the exchanges, which could tilt the 
competitive equilibrium in favor of the national securities exchanges.
    The proposed Pilot could also temporarily affect the competition 
for order flow for ATSs and could subsequently alter their market 
share. As discussed in the baseline, the market share of trading volume 
on ATSs is approximately 13%. If the prohibition of rebates or Linked 
Pricing in Test Group 3 leads to increased order flow migrating to off-
exchange trading centers, this may increase the fraction of transaction 
volume to ATSs or other off-exchange venues traditionally captured by 
exchanges. The reduction in access fees in some of the test groups, 
however, could lead to exchanges attracting more order flow away from 
ATSs and other off-exchange trading centers. Similarly, if the 
equilibrium access fee in Test Group 3 is below $0.0030 in the absence 
of rebates, exchanges may be able to draw order flow from off-exchange 
trading centers.
    The Commission recognizes that the potential temporary competitive 
impacts stemming from the proposed Pilot would generally depend on the 
exposure of each trading center to each test group and the control 
group of NMS stocks, because the constraints on fees and rebates apply 
differently to each group. For instance, if a high portion of an 
exchange's volume was derived from stocks in Test Group 2, it may be at 
a particular competitive disadvantage relative to an exchange that 
served markets across all groups, because a substantial reduction in 
the fee cap applicable to Test Group 2 would apply to a higher 
proportion of its trading volume. However, the Commission preliminarily 
believes that, given its aim of producing representative groups of 
stocks and ETPs for the purposes of the proposed Pilot, trading centers 
are not likely to be substantially more exposed to NMS stocks in any 
one group.
3. Capital Formation
    The Commission preliminarily does not expect the proposed Pilot to 
have a substantial permanent impact on capital formation because the 
proposed Pilot is limited in duration, though many of the 
implementation costs associated with the proposed Pilot would require 
exchanges to expend resources related to maintaining the List of Pilot 
Securities and any changes to that lists, as well as the maintenance of 
the Exchange Transaction Fee Summary and the order routing data, they 
may have otherwise invested elsewhere or distributed to 
shareholders.\415\
---------------------------------------------------------------------------

    \415\ The costs associated with implementation and compliance 
with the proposed Transaction Fee Pilot are discussed in more detail 
above (Section V.C.2.a, supra).
---------------------------------------------------------------------------

    As discussed above,\416\ the Commission recognizes that the overall 
temporary impact of the proposed Transaction Fee Pilot on liquidity and 
total transaction costs could be positive or negative. As a result, the 
impact of the proposed Pilot on capital formation is uncertain. On one 
hand, the proposed Pilot could temporarily reduce total transaction 
costs for many market participants by consolidating liquidity and 
improving execution quality. To the extent that such cost reductions 
are realized, they may, for instance, permit market participants to 
more efficiently deploy financial resources by reducing the cost of 
hedging financial risks. As a result, the proposed Pilot may marginally 
and temporarily promote capital formation. Improvements in both 
liquidity and price efficiency could make capital markets more 
attractive, at least for the duration of the proposed Pilot. The 
temporary reduction in rebates to certain test groups as a result of 
the implementation of the proposed Pilot could widen quoted spreads, 
thereby potentially leading to worse execution prices and subsequently 
reducing liquidity for the duration of the proposed Pilot.\417\ This 
would have similar indirect impacts on capital formation but in the 
opposite direction, by increasing the cost of hedging financial risks.
---------------------------------------------------------------------------

    \416\ Section V.C.1.a.ii, supra, provides a discussion of price 
transparency, which could improve liquidity and total transaction 
costs, while the liquidity externality is discussed in Section 
V.A.2, supra.
    \417\ See, George Chacko, Jakub Jurek, and Erik Stafford, ``The 
Price of Immediacy,'' Journal of Finance 63, 1253-1290 (2008), 
available at: http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2008.01357.x/full (``Chacko et al.''). According to Chacko et 
al., liquidity has three important dimensions: Price, quantity, and 
immediacy. A market for a security is considered ``liquid'' if an 
investor can quickly execute a significant quantity at a price at or 
near fundamental value.
---------------------------------------------------------------------------

    The proposed Pilot may also affect capital formation through its 
impact on discretionary accounts. A number of broker-dealers have 
discretionary agreements with their clients, wherein the broker can 
transact in the client's account without the client's consent. For the 
duration of the proposed Transaction Fee Pilot, some broker-dealers may 
alter the composition of their clients' portfolios to trade and hold 
greater proportions of the accounts in high-rebate NMS stocks 
(including ETPs) in the Control Group and Test Group 1. Such revisions 
to portfolio

[[Page 13069]]

composition as a result of the proposed Pilot are not necessarily 
efficient from an investor's perspective and could have a detrimental 
impact on capital formation insofar as they increase the riskiness of 
client portfolios or decrease client portfolios' expected returns.\418\ 
This behavior would temporarily distort the market for high-rebate 
stocks and ETPs, creating a higher demand for these securities and 
potentially leading to an inefficient allocation of capital based on 
signals that are unrelated to firm fundamentals.
---------------------------------------------------------------------------

    \418\ Allocative efficiency in the context of investment choice 
is optimized when there are no restrictions on the set of investment 
opportunities available to an investor. See, e.g., Niels Christian 
Nielsen, ``The Investment Decision of the Firm under Uncertainty and 
the Allocative Efficiency of Capital Markets,'' Journal of Finance 
31, 587-602 (1976), available at: https://www.jstor.org/stable/2326628. If the proposed Pilot potentially leads some broker-dealers 
to alter the investment opportunity set to avoid securities that do 
not pay rebates, then allocative efficiency for those investors 
would likely be impaired since the opportunity set is restricted.
---------------------------------------------------------------------------

    As discussed above, the proposed Pilot could lead to a temporary 
reduction of liquidity that could be particularly severe for small or 
mid-capitalization securities.\419\ In addition to reducing the 
informational efficiency of prices, if the effects of the proposed 
Pilot are severe enough, longer term, it could affect capital formation 
for these securities. If the temporary impacts on liquidity acutely 
impact some firms, it could lead to either the potential exit of these 
issuers from the capital markets, through acquisition or delisting, as 
these small issuers are those least likely to ride out negative 
liquidity shocks. Further, the proposed Pilot could lead to a delay by 
some issuers to enter the capital markets during the proposed Pilot's 
duration.
---------------------------------------------------------------------------

    \419\ See supra note 402.
---------------------------------------------------------------------------

E. Alternatives

    Below, the Commission discusses a number of alternatives to the 
proposed Transaction Fee Pilot. As explained above, the proposed Pilot 
is designed to collect data on how changes to fees and rebates affect 
order routing behavior and execution, which could inform the Commission 
and the public as to any possible conflicts of interest between broker-
dealers and their customers. The Commission considers four sets of 
alternatives: (1) Expansion of the proposed Pilot to include ATSs; (2) 
inclusion of a trade-at provision; (3) prohibition of overlap with the 
Tick Size Pilot; and (4) adjustments to the basic pilot structure 
(e.g., the inclusion of a zero access fee test group). Where 
appropriate, suggestions attributable to the EMSAC recommendation have 
been identified within the scope of the alternatives presented 
below.\420\
---------------------------------------------------------------------------

    \420\ See supra note 37.
---------------------------------------------------------------------------

1. Expand Proposed Transaction Fee Pilot To Include ATSs
    As proposed, the Transaction Fee Pilot would not require ATSs to 
comply with the requirements on the limits to access fees or rebates 
imposed by the Pilot. One alternative would be the inclusion of ATSs in 
the proposed Transaction Fee Pilot proposal. Including ATSs in the 
proposed Transaction Fee Pilot would increase availability of data for 
an important segment of trading activity in the NMS securities, would 
cover a larger portion of the order routing inducements,\421\ and could 
enhance the information regarding possible conflicts of interest 
available to the Commission. ATSs capture a large fraction of 
transaction volume for NMS stocks (approximately 13% as of July 2017), 
indicating that they are important competitors to exchanges and other 
off-exchange trading centers.\422\ Some studies have noted that 
transaction-based fees and rebates have likely caused some order flow 
to migrate from exchanges to off-exchange trading centers, such as 
ATSs, in order to avoid high access fees levied by some exchanges.\423\
---------------------------------------------------------------------------

    \421\ See supra note 268.
    \422\ See supra note 298.
    \423\ See Angel, Harris, and Spatt, supra note 216.
---------------------------------------------------------------------------

    An alternative that includes ATSs would be broader than the 
proposed Pilot and would also include more inducements, besides fees 
and rebates, that broker-dealers might receive for routing orders to 
particular trading centers, including ATSs.\424\ The Commission has 
limited information about how ATS fee structures might induce broker-
dealers to route orders to ATSs thereby creating potential conflicts of 
interest between broker-dealers and their clients. If it included 
trading centers beyond exchanges, the proposed Pilot would provide 
information to the Commission and the public about a more complete set 
of order routing decisions by broker-dealers because it would increase 
the representativeness of the results obtained, and may provide a 
deeper understanding of how exogenous shocks to fees and rebates affect 
order routing decisions. Further, because transaction-based fees and 
rebates are one possible method that exchanges and ATSs use as 
inducements for order flow, a pilot that was inclusive of these other 
inducements would further expand our understanding of what drives order 
routing decisions and might raise possible conflicts of interest.
---------------------------------------------------------------------------

    \424\ As discussed above, the proposed rule only prohibits new 
inducements that provide a discount or incentive on one side of the 
market that is linked to activity on the opposite side of the market 
for Test Group 3.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the inclusion of ATSs 
and other inducements for order flow into the proposed Transaction Fee 
Pilot is likely to substantially increase the costs relative to the 
current proposal and may not be practical. Because broker-dealers that 
operate ATSs could bundle fees for ATS usage with other broker-dealer 
fees, the proposal might not practically be able to impose an access 
fee cap or prohibition on rebates on ATS fees. Further, the Commission 
currently does not require that ATSs provide periodic public 
disclosures on their fees, as it does with national securities 
exchanges, and these fees do not need to be filed with or approved by 
the Commission. Unlike exchanges, which must report their fees 
schedules publicly on their websites, and must file Form 19b-4 with the 
Commission to effect any changes to those fee schedules, ATSs currently 
have no reporting requirements for their fees. The costs to ATSs of 
participating in the Pilot would be higher relative to the costs to the 
exchanges in two ways: (1) The Pilot would require ATSs to report 
information that is currently not required by regulation for the 
purpose of the proposed Pilot, and (2) the Pilot would impose 
significant start-up costs on the ATSs to set up systems to report 
these fees. Thus, including ATSs in an alternative version of the 
proposed Pilot would likely increase both the costs and the complexity 
of the proposed Pilot because it would likely require a shift in the 
disclosure regime for these trading centers.
    Even in the absence of including ATSs in the proposed Pilot, the 
Commission would be able to obtain information on the proportion of 
trades going to ATSs from several sources. First, several transaction 
datasets, including trade reporting facility (TRF) data and TAQ data, 
provide information on off-exchange trades, including ATS trades. 
Further, FINRA produces periodic (weekly) data on the total shares of 
NMS securities executed by individual ATSs.\425\ Thus, the Commission 
would obtain information from the proposed Pilot to identify whether 
exogenous shocks to

[[Page 13070]]

transaction-based fees on exchanges have an effect on order routing 
decisions, including whether broker-dealers alter their routing of 
order to ATSs during the proposed Pilot. The inclusion of ATSs into the 
requirements of the proposed Pilot, however, would likely significantly 
add to the proposed Pilot's complexity and cost a significant amount of 
money to implement.
---------------------------------------------------------------------------

    \425\ Combining the FINRA volume data executed by ATSs for a 
given security, with other data, such as TAQ, which would provide 
total share volume for a given security, a researcher would be able 
to estimate the fraction of ATS trading as a percentage of total 
trading in NMS securities over the same time period.
---------------------------------------------------------------------------

2. Trade-At Test Group
    The proposed Transaction Fee Pilot could include a ``trade-at'' 
provision in conjunction with the changes to the fees and rebates 
currently proposed in the Pilot.\426\ The trade-at provision would 
require that orders be routed to a market with the best displayed price 
or are executed at a materially improved price. A trade-at provision 
could increase incentives to display prices, as off-exchange trading 
centers would no longer be able to match the best price offered 
elsewhere, but instead would have to provide significant price 
improvement or start displaying their quotes at the NBBO. Including the 
trade-at provision as a component of the proposed Transaction Fee Pilot 
could potentially increase the level of displayed liquidity across all 
venues, because off-exchange trading centers, such as ATSs, would have 
increased incentives to display prices, and could have effects on the 
order routing decisions of broker-dealers. Orders routed to exchanges 
that are not posting the best prices could be indicative of potential 
conflicts of interest between broker-dealers and their customers. 
Including a trade-at subgroup could provide supplemental information to 
the Commission about how a combination of trade-at provisions coupled 
with revisions to transaction-based fees affect broker-dealer order 
routing decisions.
---------------------------------------------------------------------------

    \426\ Because a ``trade-at'' provision is already a requirement 
of the Tick Size Pilot, to the extent that there is overlap between 
the two pilots and sufficient statistical power, the Commission may 
be able to obtain valuable information from that pilot without the 
need to include a trade-at provision in the proposed Transaction Fee 
Pilot.
---------------------------------------------------------------------------

    From an implementation perspective, including a trade-at provision 
would result in a pilot that is more complex than the proposed Pilot. 
As proposed, the Pilot has three test groups for different exogenous 
shocks to fees or rebates; adding a trade-at provision would double the 
number of test groups, thereby increasing the costs of implementation 
for exchanges. Such an addition would also likely increase the 
difficulty of analyses. The Tick Size Pilot includes a trade-at group 
because exchanges were concerned that, in the current market 
environment, a larger tick size could induce order flow to go off-
exchange.\427\ However, unlike the Tick Size Pilot, the Commission 
preliminarily believes that as a result of the proposed Transaction Fee 
Pilot, marketable order flow would be less likely to flow to off-
exchange trading centers, because as access fees for some test groups 
would decline, order flow could be drawn back to exchanges. The 
Commission, therefore, preliminary believes that the inclusion of the 
trade-at provision would not likely provide much additional information 
to address the potential conflicts of interest between broker-dealers 
and their customers beyond that afforded by the proposal.
---------------------------------------------------------------------------

    \427\ See Tick Size Pilot Approval Order, supra note 5, at 
27538-42.
---------------------------------------------------------------------------

3. No Overlap With Tick Size Pilot
    As proposed, the Transaction Fee Pilot could overlap with the Tick 
Size Pilot for some portion of the proposed Pilot duration, although 
the length of that overlap is uncertain, and the Commission 
preliminarily believes that any anticipated overlap would be minimal 
and would depend on when the proposed Transaction Fee Pilot would 
become effective, if adopted. Alternatively, the Commission could 
consider two separate alternatives that both address the elimination of 
the overlap of the proposed Transaction Fee Pilot with the Tick Size 
Pilot: (1) Limiting the sample to securities with market 
capitalizations of at least $3 billion or (2) delaying the 
implementation of the Pilot until the Tick Size Pilot is concluded.
    The first potential alternative is similar to that recommended by 
EMSAC, whereby the pilot would include only securities with market 
capitalizations in excess of $3 billion, in order to avoid the 
simultaneity of the Tick Size Pilot and the proposed Transaction Fee 
Pilot for a subset of securities. The advantage to this approach is 
that the proposed Transaction Fee Pilot could start without 
consideration for the Tick Size Pilot duration, and could reduce 
implementation and complexity burdens for exchanges and broker-dealers 
because no subset of securities would be subject to the two pilots 
simultaneously. However, this approach of only examining the effects of 
changes on transaction-based fees for securities with market 
capitalizations of at least $3 billion would significantly reduce the 
overall sample representativeness desired by the proposed Pilot, which 
would limit the usefulness of any data obtained from such a pilot. The 
Commission preliminarily believes that removing these smaller issuers, 
for which the potential conflicts of interest could likely be the 
largest,\428\ from the proposed Transaction Fee Pilot would limit the 
value of the information received, and would be less useful to the 
Commission for informing future policy recommendations related to these 
conflicts, as discussed in more detail in Section V.C.1.a.i.A.
---------------------------------------------------------------------------

    \428\ See Battalio Equity Market Study, supra note 22; Harris, 
supra note 23. The negative relationship between access fees and 
execution quality (realized spreads) increases for low-priced 
securities, suggesting that low-priced or small capitalization 
stocks are more likely to have potential conflicts of interest 
related to transaction-based fees than large capitalization stocks.
---------------------------------------------------------------------------

    Alternatively, the Commission could delay full implementation of 
the proposed Transaction Fee Pilot until six months after the Tick Size 
pilot concludes, to the extent that such overlap between the pilots 
exists. By implementing each pilot sequentially, the Commission would 
obtain distinct information generated by each pilot, and would reduce 
the potential costs incurred by exchanges and broker-dealers in 
implementing simultaneous pilots, as well as the temporary other costs 
borne by small issuers and other market participants, discussed in 
detail in Section V.C.2.b. On the other hand, running sequential pilots 
could delay the benefits of the information the Commission anticipates 
realizing from the pilot.
    The Commission preliminarily believes that the alternative to delay 
implementing the proposed Transaction Fee Pilot to avoid any overlap 
(to the extent that such an overlap would otherwise occur) with the 
Tick Size Pilot would provide minimal cost savings relative to the 
proposal. As discussed in Section V.C.2.b, the Commission anticipates 
that the costs associated with overlapping the proposed Transaction Fee 
Pilot with the Tick Size Pilot could be small. Further, as discussed 
above, the Commission preliminarily believes the Pilot's design would 
prevent any overlap, to the extent that overlap between the proposed 
Transaction Fee Pilot and the Tick Size Pilot occurs, from compromising 
the Pilot results.
4. Adjustments to the Proposed Transaction Fee Pilot Structure
    The alternatives described above provide significant revisions to 
the approach or the representativeness of the proposed Transaction Fee 
Pilot. This section discusses a number of alternatives that detail 
other

[[Page 13071]]

adjustments to the basic structure of the Pilot as proposed. These 
include an alternative time frame for the Pilot duration or the pre- 
and post-Pilot Periods, a zero access fee test group, alternative 
access fee caps, and the inclusion of non-displayed liquidity or depth-
of-book provisions in Test Groups 1 and 2.
    As currently proposed, the Transaction Fee Pilot would be 
implemented for two years with an automatic sunset at the end of the 
first year, unless the Commission publishes a notice determining that 
the proposed Pilot shall continue for up to another year. 
Alternatively, the Commission could recommend an earlier or later Pilot 
sunset or a longer or shorter Pilot duration. An earlier Pilot sunset 
would shorten the anticipated proposed Pilot duration, reducing the 
time period during which potential negative temporary effects resulting 
from the proposed Pilot could occur. However, if the anticipated 
duration of the proposed Pilot were sufficiently short, some broker-
dealers could either choose to not alter their current order routing 
behavior and wait out the length of the Pilot, which would limit the 
usefulness of the information obtained by the Pilot.\429\ A shorter 
anticipated duration also could reduce the usefulness of the 
information and the benefits provided by the proposed Pilot, if it 
reduced the statistical power of any analyses, because it would make it 
more difficult for researchers to detect whether an effect actually 
exists.\430\
---------------------------------------------------------------------------

    \429\ See Section V.C.1.a.iii, which discusses the potential 
limitations associated with pilots, including a discussion that some 
market participants could choose to not alter their behavior if the 
proposed Pilot had a short duration.
    \430\ The Commission staff estimates that it would require a 
minimum Pilot duration of six months to achieve sufficient 
statistical power to detect whether an effect is actually present; 
therefore, any Pilot duration shorter than six months would have 
limited benefits for detecting the effect of transaction-based fees 
and rebates on order routing decisions, execution quality, and 
market quality.
---------------------------------------------------------------------------

    Conversely, as the anticipated Pilot duration increases so too 
would the costs for exchanges, as this would extend the duration of the 
changes to their revenue models and the costs of compliance with the 
proposed Pilot requirements. However, increasing the duration beyond 
two years is unlikely to provide any significant increases in the 
benefits identified above. As discussed in Section V.C.1.a.i, the 
Commission preliminarily believes that the proposed Pilot duration, 
even with a one-year sunset would make it economically worthwhile for 
broker-dealers to alter their order-routing decisions, because it would 
likely be costly for broker-dealers to sit out the full duration of the 
proposed Pilot or retain pre-Pilot order routing decisions for its 
duration. Further, a longer Pilot duration would increase the costs 
associated with a longer time period in which temporary negative 
externalities arising from the proposed Pilot would exist. These 
externalities could have longer-term implications on efficiency, 
competition, and capital formation, and could reduce overall levels of 
investor protection.
    The Commission could alternatively propose a pilot with a fixed 
two-year duration. A two-year pilot without the possibility of an 
automatic sunset at the end of the first year would have the same 
maximum costs as a pilot with a sunset, but would not have the 
potential to reduce costs in the event that the sunset occurs. The 
alternative would also not provide the Commission with the flexibility 
to efficiently end the proposed Pilot early once the Pilot produced 
sufficient data to obtain representative results. On the other hand, 
broker-dealers could perceive higher expected costs of not adapting to 
the Pilot under the alternative because they could expect the sunset to 
reduce the anticipated duration of the Pilot. However, the Commission 
preliminarily believes that broker-dealers that base their order 
routing decisions on transaction-based fees and rebates will incur 
sufficient costs from not enacting changes to their order routing 
decisions in response to the Pilot with an expected one-year sunset 
such that they are not likely to sit out the Pilot Period; therefore, a 
mandatory two-year pilot would not likely provide any additional 
behavioral change that would not already be obtainable from the 
proposed Pilot.
    As currently proposed, the Pilot requires a six-month pre-Pilot 
Period and a six-month post-Pilot Period, which would allow the 
Commission and the public to compare order routing decisions in the 
same stocks both with and without the proposed Pilot restrictions as 
well as across stocks in different test groups. Alternatively, the 
Commission could propose shorter pre-Pilot and post-Pilot Periods. 
Shorter pre- and post-Pilot Periods would reduce costs to exchanges of 
having to provide the Exchange Transaction Fee Summary and order 
routing data. These reduced costs come at the trade-off of shorter 
horizons for data collection that could lead to reduced statistical 
power and reduce the ability of the proposed Pilot to produce 
representative results.\431\
---------------------------------------------------------------------------

    \431\ The Commission staff estimates the pilot would need to 
produce approximately six months of data to detect changes unique to 
ETPs, and between 60 and 69 days of data to detect changes unique to 
small and large NMS stocks, respectively. The methodology employed 
provided power tests on the distributions of average daily dollar 
volume data for ETPs and small and large capitalization NMS common 
stocks obtained from the CRSP U.S. Stock Database. The power tests 
determined the number of days of data that would be required to 
detect a 10% change in the daily volume of various subgroups of 
securities.
---------------------------------------------------------------------------

    If the proposed Pilot included a zero access fee test group, this 
would effectively serve to temporarily remove a source of revenue for 
exchanges entirely from a subset of securities. This approach could 
produce additional information, such as how order routing behavior and 
execution quality changes in the absence of transaction-based fees (and 
likely rebates), that could be useful to the Commission to facilitate 
future policy decisions regarding the transaction-based pricing 
structures of exchanges. However, any new revenue model created during 
the proposed Pilot could provide additional incentives for broker-
dealers to route order flow from customers in a manner that could make 
possible conflicts of interest more or less pervasive, complicating 
analysis of the pilot. If a zero access fee test group were included, 
exchanges would be unable to charge access fees to market participants 
that take liquidity from maker-taker markets or make liquidity on 
taker-maker exchanges. The inclusion of a zero access fee test group 
would thus completely eliminate the transaction-based fee model for a 
subset of securities, which could force exchanges to create entirely 
new revenue models for securities in this test group. Although 
inclusion of a zero access fee test group could potentially provide 
expanded information to the Commission and the public about possible 
conflicts of interest, the Commission notes that these would come at 
the cost of lost revenue to exchanges for eliminating transaction-based 
fees entirely or costs associated with the creation of new revenue 
models only for the duration of the Pilot.
    The Pilot, as currently proposed, would have three test groups: (1) 
One that caps access fees at $0.0015; (2) one that caps access fees at 
$0.0005; and (3) one that prohibits rebates or Linked Pricing for 
displayed and non-displayed liquidity and along the entire depth of the 
limit order book. Alternatively, the Commission could have proposed 
other test groups with different caps on access fees. For example, the 
Commission could have proposed only caps to access fees, similar to 
those in the EMSAC

[[Page 13072]]

recommendation,\432\ or could have increased the number of test groups. 
Only studying exogenous shocks to access fees would have limited the 
amount and type of information available to the Commission, given that 
the theoretical literature suggests that potential conflicts of 
interest are linked to rebates more than to access fees. Any 
alternative would likely replace the zero rebate test group with 
another access fee cap group. Thus, without a test group that 
specifically focuses on the removal of rebates and the corresponding 
impact on conflicts of interest, the Commission and the public would 
have a set of information of lower value than it would otherwise. An 
alternative to increase the number of test groups could produce more 
gradation in the caps to access fees, this alternative would likely 
increase the complexity of the proposed Pilot, and would increase the 
implementations costs to account for the additional test groups. These 
costs would be borne with little incremental benefit to the quality of 
information produced from these additional test groups, because these 
additional groups would only provide minor variations in access fees 
from those already proposed.
---------------------------------------------------------------------------

    \432\ The maximum access fee caps under the EMSAC recommendation 
would be $0.0020 (Test Group 1), $0.0010 (Test Group 2), and $0.0002 
(Test Group 3).
---------------------------------------------------------------------------

    As the Pilot is currently proposed, only Test Group 3, which 
eliminates rebates or Linked Pricing, would restrict fees or rebates or 
Linked Pricing in non-displayed liquidity and depth-of-book. As 
discussed in Section III.C.3, under the proposed Pilot, perverse 
incentives to move liquidity away from the displayed liquidity or the 
top-of-book could be created if rebates are not eliminated along the 
entire book and for displayed and non-displayed liquidity. As an 
alternative to the current Pilot proposal, the Transaction Fee Pilot 
could also revise access fees in Test Groups 1 and 2 to cover both non-
displayed liquidity and the depth-of-book. Unlike the problem 
associated with moving away from displayed liquidity that could emerge 
if rebates or Linked Pricing were not removed from the entire depth of 
the limit order book, the Commission does not believe that under the 
proposed Pilot incentives would emerge for exchanges to charge more to 
access non-displayed interest or depth-of-book quotes. Such differing 
fees across displayed and non-displayed liquidity as well as the depth 
of the limit order book would lead to increased uncertainty for market 
participants that take liquidity, as they would not be able to control 
whether their executions are with displayed or non-displayed liquidity. 
If the fees differed between displayed and non-displayed liquidity, 
broker-dealers would face cost uncertainty when making routing 
decisions over what access fees they would incur. From the exchanges' 
perspective, having differing fees for posting or interacting with 
displayed and non-displayed liquidity would be burdensome to track and 
more costly to administer and, to the extent the uncertainty it creates 
dissuades market participants from routing to their market, could 
ultimately cause them to lose order flow. Accordingly, the Commission 
preliminarily believes that it is unnecessary to mandate transaction-
based fee caps for the non-displayed liquidity.
    Under the current proposal, Test Group 3 would prohibit rebates or 
Linked Pricing on NMS stocks (including ETPs). Alternatively, the 
Commission could instead prohibit only rebates, without any extension 
to other similar inducements that an exchange might use to attract 
order flow. The Commission, however, believes that an alternative that 
excludes like inducements from Test Group 3 would provide opportunities 
for exchanges to work around the rebate prohibition, which would likely 
reduce the effectiveness of the information received about NMS stocks 
(including ETPs) in Test Group 3.
    The Commission alternatively could propose a limitation on Linked 
Pricing across all Test Groups, not just Test Group 3. Given that Test 
Groups 1 and 2 would undergo a reduction in fees due to the lower caps 
in each of those groups, which likely would lead to a corresponding 
reduction in rebates, exchanges may choose to alter other like 
incentives, which would allow them to supplement the incentive they 
provide for activity in securities in Test Groups 1 and 2, and could 
distort the information obtained from the Pilot. However, from the 
exchanges' perspective, enhancing like inducements would further erode 
margins related to transaction activity. Therefore, the Commission 
preliminarily believes that it is unnecessary to prohibit like 
inducements for Test Groups 1 and 2.
    As currently proposed, the Transaction Fee Pilot does not require 
the exchanges to produce much additional information on order execution 
quality statistics. As an alternative, the Commission could require 
that the exchanges produce daily Rule 605 data similar to that required 
in Appendix B.1 of the Tick Size Pilot Plan. Providing daily order 
execution quality statistics are important for the Tick Size Pilot, 
because order size is influenced by tick size, and is an important 
determinant of execution quality. As a result, trade-based measures of 
the effect of the Tick Size Pilot might not yield the same results as 
order-based measures of the Tick Size Pilot, such as that in data 
required in Appendix B.1 of the Tick Size Pilot Plan. However, the 
proposed Transaction Fee Pilot might not alter order sizes nearly as 
dramatically as in the Tick Size Pilot, or might not alter them at all. 
Therefore, the Commission preliminarily does not expect that results of 
the proposed Transaction Fee Pilot using trade-based execution quality 
measures to differ from results using order-based execution quality 
measures. Even though exchanges have systems in place to capture some 
elements of daily data as required by the Tick Size Pilot, including 
this data could be costly for the exchanges to provide with limited 
benefit for the proposed Transaction Fee Pilot. As currently proposed, 
the Transaction Fee Pilot would provide daily information on shares 
submitted, executed, and cancelled to an exchange, and would provide 
some limit order execution quality information, such as time to 
execution and likelihood of execution, that are not currently available 
from other existing data sources.\433\
---------------------------------------------------------------------------

    \433\ For example, existing studies often incorporate execution 
quality statistics estimated from TAQ data. See, e.g., Battalio 
Equity Market Study, supra note 22.
---------------------------------------------------------------------------

    As the Pilot is currently proposed, downloadable files containing 
the Exchange Transaction Fee Summary would need to be publicly posted 
on each exchange's website using an XML schema to be published on the 
Commission's website. Alternatively, similar to the List of Pilot 
Securities, the Exchange Transaction Fee Summary could be reported in 
pipe-delimited ASCII format. However, the pipe-delimited ASCII format 
does not support validations. As discussed earlier, validations help 
ensure that comparable data are formatted consistently and reported 
completely. Validations also help the exchanges to test whether the 
data are complete and formatted correctly before posting the data. 
Because the pipe-delimited ASCII format does not support validations, 
exchanges have to manually review data completeness and correct 
formatting. In the case that an exchange was to post incorrectly 
formatted or incomplete data, the exchange would have to incur the 
burden of reviewing the data again to identify the problem and 
reposting

[[Page 13073]]

the data. Validations help ensure that any inconsistencies in data 
completeness or formatting can be automatically tested for and 
identified before posting. And because some fields in the data may be 
manually entered (i.e., the Exchange Transaction Fee Summary), having 
validations would help ensure the quality of this data. Requiring a 
format that incorporates validations would also best enhance data 
users' abilities to normalize, aggregate, compare, and analyze the 
Exchange Transaction Fee Summary data because the data is assured to be 
complete and consistently formatted. Therefore, the Commission does not 
believe that the Exchange Transaction Fee Summary should be reported in 
pipe-delimited ASCII format as that would limit both the data's 
accessibility and ease of use.

F. Request for Comment

    The Commission seeks commenters' views and suggestions on all 
aspects of its economic analysis of the proposed rule. In particular, 
the Commission asks commenters to consider the following questions:
    71. Is the proposed Pilot, in the form of a temporary Commission 
rule, necessary to achieve the objectives of this Pilot? Are there 
other approaches that would achieve these objectives? Has the 
Commission appropriately evaluated the benefits and costs of conducting 
successive (or potentially simultaneous) pilots?
    72. Is there existing data that could yield the same information, 
with respect to sample representativeness and causality, on the 
relation between transaction-based fees and rebates on order routing 
behavior, execution quality and market quality that could be obtained 
by the Commission in place of the proposed Transaction Fee Pilot? 
Please explain in detail.
    73. Is there additional data that the Commission should gather from 
the proposed Pilot? Please be specific as to what this data would be 
and how it could inform the Commission about possible conflicts of 
interest related to access fees and rebates.
    74. Do you believe the Commission's assessment of the baseline for 
economic analysis is reasonable? Why or why not? Please explain in 
detail.
    75. Do you believe that the proposing release accurately describes 
the baseline and how those current practices could change under the 
proposed Pilot? Why or why not? Please explain in detail.
    76. Do you believe that the Commission has accurately described how 
market participants would be affected by the proposed Transaction Fee 
Pilot? Why or why not? Please explain in detail.
    77. Do you believe that the Commission has accurately described the 
benefits of the information that would be received from the proposed 
Transaction Fee Pilot? Why or why not? Please explain in detail.
    78. Is the Commission's analysis of the costs and benefits of the 
proposed Transaction Fee Pilot accurate and complete? Why or why not? 
Please explain in detail.
    79. Do you believe that there are costs or benefits that would 
accrue to investors likely as a result of the proposed Pilot? If so, 
please explain in detail.
    80. Do you believe that there are additional costs that may arise 
from the proposed Transaction Fee Pilot? If so, do you believe there 
are methods by which the Commission could reduce the costs imposed by 
the proposed Pilot while still achieving its goals? Please explain in 
detail.
    81. Do you believe that the order routing data could facilitate the 
reverse engineering of proprietary order routing strategies despite the 
daily aggregation and anonymization of the data at the broker-dealer 
level? Why or why not? If so, do you believe that there are 
alternative, safer methods of providing the order routing data that 
would still allow the Pilot to achieve its goals? Please explain in 
detail.
    82. Do you believe that there are additional benefits or costs that 
could be quantified or otherwise monetized? Why or why not? If so, 
please identify the categories, and if possible, provide specific 
estimates or data.
    a. Given that the Tick Size Pilot requires exchanges to compile a 
daily list of pilot securities and to identify changes to those pilot 
securities due to name changes, mergers, and other corporate events, 
are the costs estimated for compliance with reporting of the daily 
pilot list for the proposed Transaction Fee Pilot reasonable?
    b. Given that exchanges submit Form 19b-4 fee filings to the 
Commission regularly, are the costs estimated for Form 19b-4 fee 
filings associated with the commencement of the proposed Pilot or for 
periodic revisions to transaction-based fees and rebates reasonable?
    c. As exchanges frequently update their transaction-based fees and 
rebates, can market participants provide estimates of the costs 
associated with updating order routing systems as a result of fee 
changes?
    83. Are there any effects on efficiency, competition, and capital 
formation that are not identified or are misidentified in the above 
analysis? Please be specific and provide data and analysis to support 
your views.
    84. Do you believe that the Commission has accurately described how 
the competitive landscape for the market for trading services for NMS 
securities would be temporarily affected by the proposed Transaction 
Fee Pilot? Why or why not? Please explain in detail. Does the release 
discuss all relevant forms of competition and whether the proposal 
could alter them? If not, which additional forms of competition could 
the proposed Pilot impact and how? Please explain in detail.
    85. Are there alternative approaches to reporting fee data in XML 
format that would facilitate ease of use? What are the likely costs of 
compliance of the proposed requirements? Please explain in detail.
    86. Would any alternative approaches outlined above better achieve 
the objectives articulated by the Commission? Which approach and why? 
What would be the costs and benefits of these approaches? Please 
explain in detail.
    87. Would the inclusion of ATSs in the proposed Transaction Fee 
Pilot better achieve the objectives articulated by the Commission? What 
would be the costs and benefits of including these venues? Please 
explain in detail.
    88. What should be the appropriate length of the pre-Pilot Period 
and post-Pilot Period in terms of achieving sufficient statistical 
power?
    89. What other economic effects are likely to be associated with 
the proposed Transaction Fee Pilot?

VI. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (``SBREFA''),\434\ the Commission requests comment on the 
potential effect of the proposed rule on the United States economy on 
an annual basis. The Commission also requests comment on any potential 
increases in costs or prices for consumers or individual industries, 
and any potential effect on competition, investment, or innovation. 
Commenters are requested to provide empirical data and other factual 
support for their views to the extent possible.
---------------------------------------------------------------------------

    \434\ 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).
---------------------------------------------------------------------------

VII. Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (``RFA'') \435\ requires Federal 
agencies, in

[[Page 13074]]

promulgating rules, to consider the impact of those rules on small 
entities. Section 603(a) \436\ of the Administrative Procedure 
Act,\437\ 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.'' \438\ Section 605(b) of the RFA states that this 
requirement shall not apply ``to any proposed or final rule if the head 
of the agency certifies that the rule will not, if promulgated, have a 
significant economic impact on a substantial number of small entities 
'' \439\
---------------------------------------------------------------------------

    \435\ 5 U.S.C. 601 et seq.
    \436\ 5 U.S.C. 603(a).
    \437\ 5 U.S.C. 551 et seq.
    \438\ The Commission has adopted definitions for the term 
``small entity'' for purposes of Commission rulemaking in accordance 
with the RFA. Those definitions, as relevant to this proposed 
rulemaking, are set forth in 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).
    \439\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    The proposed rule would apply to national securities exchanges 
registered with the Commission under Section 6 of the Exchange 
Act.\440\ With regard to a national securities exchange, the 
Commission's definition of a small entity is an exchange that has been 
exempt from the reporting requirements of Rule 601 of Regulation NMS, 
and is not affiliated with any person (other than a natural person) 
that is not a small business or small organization.\441\ None of the 
national securities exchanges registered under Section 6 of the 
Exchange Act that would be subject to the proposed Pilot are ``small 
entities'' for purposes of the RFA. In particular, none of the equities 
exchanges are exempt from Rule 601 of Regulation NMS.
---------------------------------------------------------------------------

    \440\ See supra Sections IV (Paperwork Reduction Act) and V 
(Economic Analysis) (discussing, among other things, the current 
market environment and compliance obligations for national 
securities exchanges).
    \441\ See 17 CFR 240.0-10(e).
---------------------------------------------------------------------------

    As discussed above, the proposed rule will not apply to any ``small 
entities.'' Therefore, for the purposes of the RFA, the Commission 
certifies that the proposed rule would not have a significant economic 
impact on a substantial number of small entities.
    The Commission requests comment regarding this certification. In 
particular, the Commission solicits comment on the following:
    90. Do commenters agree with the Commission's certification? If 
not, please describe the nature of any impact on small entities and 
provide empirical data to illustrate the extent of the impact.

VIII. Statutory Authority and Text of the Proposed Rule

    Pursuant to the Exchange Act, and particularly Sections 3(b), 5, 6, 
11A, 15, 17, and 23(a) thereof, 15 U.S.C. 78c, 78e, 78f, 78k-1, 78o, 
78q, and 78w(a), the Commission proposes to amend Title 17 of the Code 
of Federal Regulations in the manner set forth below.

List of Subjects

17 CFR Part 200

    Administrative practice and procedure, Authority delegations 
(Government agencies), Organization and functions (Government 
agencies).

17 CFR Part 242

    Brokers, Reporting and recordkeeping requirements, Securities.

    For the reasons set out in the preamble, the Commission is 
proposing to amend Title 17, Chapter II of the Code of Federal 
Regulations as follows:

PART 200--ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND 
REQUESTS

0
1. The authority citation for part 200 continues to read in part as 
follows:

    Authority:  15 U.S.C. 77c, 77o, 77s, 77z-3, 77sss, 78d, 78d-1, 
78d-2, 78o-4, 78w, 78ll(d), 78mm, 80a-37, 80b-11, 7202, and 7211 et 
seq., unless otherwise noted.

0
2. Amend Section 200.30-3 by adding paragraph (a)(84) to read as 
follows:

Sec.  200.30-3   Delegation of Authority to Director of Division of 
Trading and Markets.

* * * * *
    (a) * * *
    (84) To issue notices pursuant to Rule 610T(b)(1)(i) and (c) (17 
CFR 242.610T(b)(1)(i) and (c)).
* * * * *

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

0
3. The authority citation for part 242 continues to read as follows:

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

0
4. Add Section 242.610T to read as follows:

Sec.  242. 610T   Equity transaction fee pilot.

    (a) Pilot Pricing Restrictions. Notwithstanding Rule 610(c), on a 
pilot basis for the period specified in paragraph (c) of this section, 
in connection with a transaction in an NMS stock, a national securities 
exchange may not:
    (1) For Test Group 1, impose, or permit to be imposed, any fee or 
fees for the display of, or execution against, the displayed best bid 
or offer of such market that exceed or accumulate to more than $0.0015 
per share;
    (2) For Test Group 2, impose, or permit to be imposed, any fee or 
fees for the display of, or execution against, the displayed best bid 
or offer of such market that exceed or accumulate to more than $0.0005 
per share;
    (3) For Test Group 3, provide to any person, or permit to be 
provided to any person, a rebate or other remuneration in connection 
with an execution, or offer, or permit to be offered, any linked 
pricing that provides a discount or incentive on transaction fees 
applicable to removing (providing) liquidity that is linked to 
providing (removing) liquidity, except to the extent the exchange has a 
rule to provide non-rebate linked pricing to its registered market 
makers in consideration for meeting market quality metrics; and
    (4) For the Control Group, impose, or permit to be imposed, any fee 
or fees in contravention of the limits specified in 17 CFR 242.610(c).
    (b) Pilot Securities.
    (1) Initial List of Pilot Securities.
    (i) The Commission shall designate by notice the initial List of 
Pilot Securities, and shall assign each Pilot Security to one Test 
Group or the Control Group.
    (ii) For purposes of Rule 610T, ``Pilot Securities'' means the NMS 
stocks designated by the Commission on the initial List of Pilot 
Securities pursuant to paragraph (b)(1)(i) and any successors to such 
NMS stocks. At the time of selection by the Commission, an NMS stock 
must have a minimum initial share price of at least $2 to be included 
in the Pilot and must have an unlimited duration or a duration beyond 
the end of the post-Pilot Period. If the share price of a Pilot 
Security in one of the Test Groups or the Control Group closes below $1 
at the end of a trading day, it shall be removed from the Test Group or 
the Control Group and will no longer be subject to the pricing 
restrictions set forth in (a)(1)-(3) of this section.
    (iii) For purposes of Rule 610T, ``primary listing exchange'' means 
the national securities exchange on which the NMS stock is listed. If 
an NMS stock is listed on more than one national securities exchange, 
the national securities exchange upon which the NMS stock has been 
listed the longest shall be the primary listing exchange.
    (2) Pilot Securities Exchange Lists.
    (i) After the Commission selects the initial List of Pilot 
Securities and prior

[[Page 13075]]

to the beginning of trading on the first day of the Pilot Period each 
primary listing exchange shall publicly post on its website 
downloadable files containing a list, in pipe-delimited ASCII format, 
of the Pilot Securities for which the exchange serves as the primary 
listing exchange. Each primary listing exchange shall maintain and 
update this list as necessary prior to the beginning of trading on each 
business day that the U.S. equities markets are open for trading 
through the end of the post-Pilot Period.
    (ii) The Pilot Securities Exchange Lists shall contain the 
following fields:
    (A) Ticker Symbol;
    (B) Security Name;
    (C) Primary Listing Exchange;
    (D) Security Type:
    (1) Common Stock;
    (2) ETP;
    (3) Preferred Stock;
    (4) Warrant;
    (5) Closed-End Fund;
    (6) Structured Product;
    (7) ADR;
    (8) Other;
    (E) Test Group:
    (1) Control Group;
    (2) Test Group 1;
    (3) Test Group 2;
    (4) Test Group 3;
    (F) Date the Entry Was Last Updated.
    (3) Pilot Securities Change Lists.
    (i) Prior to the beginning of trading on each trading day the U.S. 
equities markets are open for trading throughout the duration of the 
Pilot, including the post-Pilot Period, each primary listing exchange 
shall publicly post on its website downloadable files containing a 
Pilot Securities Change List, in pipe-delimited ASCII format, that 
lists each separate change applicable to any Pilot Securities for which 
it serves or has served as the primary listing exchange. The Pilot 
Securities Change List will provide a cumulative list of all changes to 
the Pilot Securities that the primary listing exchange has made to the 
Pilot Securities Exchange List published pursuant to (b)(2).
    (ii) In addition to the fields required for the Pilot Securities 
Exchange List, the Pilot Securities Change Lists shall contain the 
following fields:
    (A) New Ticker Symbol (if applicable);
    (B) New Security Name (if applicable);
    (C) Deleted Date (if applicable);
    (D) Date Security Closed Below $1 (if applicable);
    (E) Effective Date of Change; and
    (F) Reason for the Change.
    (4) Posting Requirement. All information publicly posted in 
downloadable files pursuant to 610T(b)(2) and (3) shall be and remain 
freely and persistently available and easily accessible by the general 
public on the primary listing exchange's website for a period of not 
less than five years from the conclusion of the post-Pilot Period. In 
addition, the information shall be presented in a manner that 
facilitates access by machines without encumbrance, and shall not be 
subject to any restrictions, including restrictions on access, 
retrieval, distribution and reuse.
    (c) Pilot Duration.
    (1) The Pilot shall include a six-month ``pre-Pilot Period;''
    (2) A two-year ``Pilot Period'' with an automatic sunset at the end 
of the first year unless, no later than thirty days prior to that time, 
the Commission publishes a notice that the Pilot shall continue for up 
to another year; and
    (3) A six-month ``post-Pilot Period.''
    (4) The Commission shall designate by notice the commencement and 
termination dates of the pre-Pilot Period, Pilot Period, and post-Pilot 
Period, including any suspension of the one-year sunset of the Pilot 
Period.
    (d) Order Routing Datasets. Throughout the duration of the Pilot, 
including the pre-Pilot Period and post-Pilot Period, each national 
securities exchange that trades NMS stocks shall publicly post on its 
website downloadable files, in pipe-delimited ASCII format, no later 
than the last day of each month, containing sets of order routing data, 
for the prior month, in accordance with the specifications below. For 
the pre-Pilot Period, order routing datasets shall include each NMS 
stock. For the Pilot Period and post-Pilot Period, order routing 
datasets shall include each Pilot Security. All information publicly 
posted pursuant to this paragraph (d) shall be and remain freely and 
persistently available and easily accessible by the general public on 
the national securities exchange's website for a period of not less 
than five years from the conclusion of the post-Pilot Period. In 
addition, the information shall be presented in a manner that 
facilitates access by machines without encumbrance, and shall not be 
subject to any restrictions, including restrictions on access, 
retrieval, distribution, and reuse. Each national securities exchange 
shall treat the identities of broker-dealers contained in the Order 
Routing Datasets, including the broker-dealer anonymization key, as 
regulatory information and shall not access or use that information for 
any commercial or non-regulatory purpose.
    (1) Dataset of daily volume statistics include the following 
specifications of liquidity-providing orders by security and separating 
held and not-held orders in pipe-delimited ASCII format with field 
names as the first record and a consistent naming convention that 
indicates the exchange and date of the file:
    (i) Code identifying the submitting exchange.
    (ii) Eight-digit code identifying the date of the calendar day of 
trading in the format ``yyyymmdd.''
    (iii) Symbol assigned to an NMS stock (including ETPs) under the 
national market system plan to which the consolidated best bid and 
offer for such a security are disseminated.
    (iv) Unique, anonymized broker-dealer identification code.
    (v) Order type code
    (A) Inside-the-quote orders;
    (B) At-the-quote limit orders; and
    (C) Near-the-quote limit orders.
    (vi) Order size codes
    (A) <100 share bucket;
    (B) 100-499 share bucket;
    (C) 500-1,999 share bucket;
    (D) 2,000-4,999 share bucket;
    (E) 5,000-9,999 share bucket; and
    (F) > 10,000 share bucket.
    (vii) Number of orders received.
    (viii) Cumulative number of shares of orders received.
    (ix) Cumulative number of shares of orders cancelled prior to 
execution.
    (x) Cumulative number of shares of orders executed at receiving 
market center.
    (xi) Cumulative number of shares of orders routed to another 
execution venue.
    (xii) Cumulative number of shares of orders executed within
    (A) 0 to <100 microseconds of order receipt;
    (B) 100 microseconds to <100 milliseconds of order receipt;
    (C) 100 milliseconds to <1 second of order receipt;
    (D) 1 second to <30 seconds of order receipt;
    (E) 30 seconds to <60 seconds of order receipt;
    (F) 60 seconds to <5 minutes of order receipt;
    (G) 5 minutes to <30 minutes of order receipt; and
    (H) >30 minutes of order receipt.
    (2) Dataset of daily volume statistics include the following 
specifications of liquidity-taking orders by security and separating 
held and not-held orders in pipe-delimited ASCII format with field 
names as the first record and a consistent naming convention that 
indicates the exchange and date of the file:
    (i) Code identifying the submitting exchange.

[[Page 13076]]

    (ii) Eight-digit code identifying the date of the calendar day of 
trading in the format ``yyyymmdd.''
    (iii) Symbol assigned to an NMS stock (including ETPs) under the 
national market system plan to which the consolidated best bid and 
offer for such a security are disseminated.
    (iv) Unique, anonymized broker-dealer identification code.
    (v) Order type code
    (A) Market orders; and
    (B) Marketable limit orders.
    (vi) Order size codes
    (A) <100 share bucket;
    (B) 100-499 share bucket;
    (C) 500-1,999 share bucket;
    (D) 2,000-4,999 share bucket;
    (E) 5,000-9,999 share bucket; and
    (F) >10,000 share bucket.
    (vii) Number of orders received.
    (viii) Cumulative number of shares of orders received.
    (ix) Cumulative number of shares of orders cancelled prior to 
execution.
    (x) Cumulative number of shares of orders executed at receiving 
market center.
    (xi) Cumulative number of shares of orders routed to another 
execution venue.
    (e) Exchange Transaction Fee Summary. Throughout the duration of 
the Pilot, including the pre-Pilot Period and post-Pilot Period, each 
national securities exchange that trades NMS stocks shall publicly post 
on its website downloadable files containing information relating to 
transaction fees and rebates and changes thereto (applicable to 
securities having a price greater than $1). Each national securities 
exchange shall post its initial Exchange Transaction Fee Summary prior 
to the start of trading on the first day of the pre-Pilot Period and 
update its Exchange Transaction Fee Summary on a monthly basis within 
10 business days of the first day of each calendar month, to reflect 
data collected for the prior month. The information prescribed by this 
section shall be made available using the most recent version of the 
XML schema published on the Commission's website. All information 
publicly posted pursuant to this paragraph (e) shall be and remain 
freely and persistently available and easily accessible on the national 
securities exchange's website for a period of not less than five years 
from the conclusion of the post-Pilot Period. In addition, the 
information shall be presented in a manner that facilitates access by 
machines without encumbrance, and shall not be subject to any 
restrictions, including restrictions on access, retrieval, 
distribution, and reuse. The Exchange Transaction Fee Summary shall 
contain the following fields:
    (1) SRO Name;
    (2) Record Type Indicator:
    (i) Reported Fee is the Monthly Average;
    (ii) Reported Fee is the Median;
    (iii) Reported Fee is the Spot Monthly;
    (3) Participant Type:
    (i) Registered Market Maker;
    (ii) All Others;
    (4) Test Group:
    (i) Control Group;
    (ii) Test Group 1;
    (iii) Test Group 2;
    (iv) Test Group 3;
    (5) Applicability to Displayed and Non-Displayed Interest:
    (i) Displayed only;
    (ii) Non-displayed only;
    (iii) Both displayed and non-displayed;
    (6) Applicability to Top and Depth of Book Interest:
    (i) Top of book only;
    (ii) Depth of book only;
    (iii) Both top and depth of book;
    (7) Effective Date of Fee or Rebate;
    (8) End Date of Currently Reported Fee or Rebate (if applicable);
    (9) Month and Year of the monthly realized reported average and 
median per share fees;
    (10) Pre/Post Fee Changes Indicator (if applicable) denoting 
implementation of a new fee or rebate on a day other than the first day 
of the month;
    (11) Base and Top Tier Fee or Rebate:
    (i) Take (to remove):
    (A) Base Fee/Rebate reflecting the standard amount assessed or 
rebated before any applicable discounts, tiers, caps, or other 
incentives are applied;
    (B) Top Tier Fee/Rebate reflecting the amount assessed or rebated 
after any applicable discounts, tiers, caps, or other incentives are 
applied;
    (ii) Make (to provide):
    (A) Base Fee/Rebate reflecting the standard amount assessed or 
rebated before any applicable discounts, tiers, caps, or other 
incentives are applied;
    (B) Top Tier Fee/Rebate reflecting the amount assessed or rebated 
after any applicable discounts, tiers, caps, or other incentives are 
applied;
    (12) Average Take Fee (Rebate)/Average Make Rebate (Fee), by 
Participant Type, Test Group, Displayed/Non-Displayed, and Top/Depth of 
Book; and
    (13) Median Take Fee (Rebate)/Median Make Fee (Rebate), by 
Participant Type, Test Group, Displayed/Non-Displayed, and Top/Depth of 
Book.
    The following will not appear in the Code of Federal Regulations.
Exhibit 1: Data Definitions for the Exchange Transaction Fee Summary
    The table below represents the data model for the reporting 
requirements of an Exchange Transaction Fee Summary. This data model 
reflects the disclosures required by proposed 17 CFR 242.610T(e) and 
the logical representation of those disclosures to a corresponding XML 
element. The Commission's proposed XML schema is the formal electronic 
representation of this data model.
     Concept--the information content as described in proposed 
17 CFR 242.610T(e) items 1 through 12.
     Element--a name for the XML element.
     Type--the XML data type, either a list of possible values 
or a general type such as ``number''.
     Spot, Monthly--How the element appears in a record of that 
type.
    [cir] R--Required. The XML file is not valid unless this element is 
present.
    [cir] NA--Not applicable. The element may appear in the record but 
its value is not to be used.
    [cir] O--Optional. The XML file is valid without that element; 
whether it appears for a particular SRO, record type, test group, etc., 
depends on the actual fee being described. XML validation by itself 
cannot determine this.
     When Absent--If the element is absent, its value is 
interpreted as if it had been present with the value shown.
     Definition--Text to be included in the XML definition file 
(``schema'').

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                        When
            Concept                          Element                          Type                 Spot     Monthly    absent          Definition
--------------------------------------------------------------------------------------------------------------------------------------------------------
SRO............................  sro...........................  Non-empty Text................        R          R   ........  A required unique code
                                                                                                                                 to identify each SRO in
                                                                                                                                 the Transaction Fee
                                                                                                                                 Pilot.
Record Type....................  rt............................  S or M........................        R          R   ........  A required record type
                                                                                                                                 indicator. M, if the
                                                                                                                                 fee type reported is
                                                                                                                                 the monthly realized
                                                                                                                                 fee (average or median
                                                                                                                                 fee); S, if the fee
                                                                                                                                 type reported is a spot
                                                                                                                                 fee schedule (base or
                                                                                                                                 top tier fee).

[[Page 13077]]

 
Participant Type...............  ptcpt.........................  MM, Other or Blank............        O          O     Blank   MM, if the fees are for
                                                                                                                                 market makers, or else
                                                                                                                                 Other. Required for
                                                                                                                                 spot records if the
                                                                                                                                 exchange charged market
                                                                                                                                 makers and others
                                                                                                                                 different base and top
                                                                                                                                 tier fees. Required for
                                                                                                                                 monthly fee records if
                                                                                                                                 the exchange charged
                                                                                                                                 different average or
                                                                                                                                 median fees or pays
                                                                                                                                 different average or
                                                                                                                                 median fees. Otherwise
                                                                                                                                 blank or absent.
Test Group.....................  grp...........................  1, 2, 3, or C.................        R          R   ........  A required indicator
                                                                                                                                 that identifies the
                                                                                                                                 test or control group
                                                                                                                                 during the Pilot and
                                                                                                                                 post-Pilot Period. 1,
                                                                                                                                 2, 3--Test Groups 1, 2,
                                                                                                                                 3; C--Control group.
Displayed......................  disp..........................  D, N, or B....................        R          R   ........  D--Displayed, N--Not
                                                                                                                                 displayed, B--Both. For
                                                                                                                                 spot fee type records,
                                                                                                                                 if the fees are the
                                                                                                                                 same between displayed
                                                                                                                                 and non-displayed
                                                                                                                                 liquidity, then the
                                                                                                                                 exchange may report
                                                                                                                                 both in a single ``B''
                                                                                                                                 record. For monthly
                                                                                                                                 records, this should be
                                                                                                                                 segmented into the
                                                                                                                                 average and median fee
                                                                                                                                 per share for displayed
                                                                                                                                 liquidity, and the
                                                                                                                                 average and median fee
                                                                                                                                 for non-displayed
                                                                                                                                 liquidity unless there
                                                                                                                                 are no differences
                                                                                                                                 between the average and
                                                                                                                                 median fees for
                                                                                                                                 displayed and non-
                                                                                                                                 displayed liquidity, in
                                                                                                                                 which case the exchange
                                                                                                                                 can report the average
                                                                                                                                 and median fee in a
                                                                                                                                 single ``B'' record.
Top/Depth......................  topOrDepth....................  T, D, or B....................        R          R   ........  T--Fees for top-of-book
                                                                                                                                 liquidity; D--Fees for
                                                                                                                                 depth-of-book
                                                                                                                                 liquidity; B--Both. For
                                                                                                                                 spot records, if the
                                                                                                                                 fees are the same
                                                                                                                                 between top-of-book and
                                                                                                                                 depth-of-book
                                                                                                                                 liquidity, then the
                                                                                                                                 exchange may report
                                                                                                                                 both fees in a single
                                                                                                                                 ``B'' record. For
                                                                                                                                 monthly records, if
                                                                                                                                 there are no
                                                                                                                                 differences between the
                                                                                                                                 fees for top-of-book
                                                                                                                                 and depth-of-book
                                                                                                                                 liquidity, then the
                                                                                                                                 exchange may include
                                                                                                                                 only the average and
                                                                                                                                 median fees in a single
                                                                                                                                 ``B'' record.
Start Date.....................  start.........................  YYYY-MM-DD....................        R          O   ........  The start date element
                                                                                                                                 must be present for a
                                                                                                                                 spot fee record, and
                                                                                                                                 the end element cannot
                                                                                                                                 appear alone. The
                                                                                                                                 effective date for any
                                                                                                                                 fee changes. This
                                                                                                                                 should correspond to
                                                                                                                                 the effective date
                                                                                                                                 referenced in the Form
                                                                                                                                 19b-4 fee filings
                                                                                                                                 submitted to the
                                                                                                                                 Commission. This is
                                                                                                                                 needed in a monthly
                                                                                                                                 record only if fees
                                                                                                                                 changed on a day other
                                                                                                                                 than the first of the
                                                                                                                                 month; otherwise blank
                                                                                                                                 or absent.
End Date.......................  end...........................  YYYY-MM-DD or Blank...........        O          O     Blank   The last date that a
                                                                                                                                 given fee is viable
                                                                                                                                 prior to any fee
                                                                                                                                 changes. This column
                                                                                                                                 will be blank unless a
                                                                                                                                 mid-month change to
                                                                                                                                 fees is made. This
                                                                                                                                 should correspond to
                                                                                                                                 the last date that a
                                                                                                                                 given fee is applicable
                                                                                                                                 prior to the effective
                                                                                                                                 date of the new fee
                                                                                                                                 reflected in Form 19b-4
                                                                                                                                 fee filings submitted
                                                                                                                                 to the Commission to
                                                                                                                                 capture any revisions
                                                                                                                                 to transaction-based
                                                                                                                                 fees and rebates. This
                                                                                                                                 is needed in a monthly
                                                                                                                                 record only if fees
                                                                                                                                 changed on a day other
                                                                                                                                 than the first of the
                                                                                                                                 month.
Month and Year.................  YearMonth.....................  YYYY-MM.......................       NA          R   ........  The year and month of
                                                                                                                                 the monthly realized
                                                                                                                                 reported average and
                                                                                                                                 median per share fees.
Pre/Post.......................  preOrPost.....................  1, 2, or Blank................        O          O     Blank   An indicator variable
                                                                                                                                 needed only if the
                                                                                                                                 exchange changed fees
                                                                                                                                 on a day other than the
                                                                                                                                 first day of the month.
                                                                                                                                 Blank--there were no
                                                                                                                                 fee changes other than
                                                                                                                                 on the first day of the
                                                                                                                                 month. 1--The average
                                                                                                                                 and median are the pre-
                                                                                                                                 change average and
                                                                                                                                 median for the part of
                                                                                                                                 the month prior to the
                                                                                                                                 change. 2--The average
                                                                                                                                 and median are the post-
                                                                                                                                 change average and
                                                                                                                                 median for the part of
                                                                                                                                 the month after the
                                                                                                                                 change.
Base Taker Fee.................  baseTakeFee...................  Number........................        R         NA   ........  The Base Taker Fee is
                                                                                                                                 the standard per share
                                                                                                                                 fee assessed or rebate
                                                                                                                                 offered before any
                                                                                                                                 applicable discounts,
                                                                                                                                 tiers, caps, or other
                                                                                                                                 incentives are applied.
                                                                                                                                 Fees have a positive
                                                                                                                                 sign; rebates have a
                                                                                                                                 negative sign.
Top Tier Taker Fee.............  topTierTakeFee................  Number........................        R         NA   ........  The Top Tier Taker Fee
                                                                                                                                 is the per share fee
                                                                                                                                 assessed or rebate
                                                                                                                                 offered after all
                                                                                                                                 applicable discounts,
                                                                                                                                 tiers, caps, or other
                                                                                                                                 incentives are applied.
                                                                                                                                 Fees have a positive
                                                                                                                                 sign; rebates have a
                                                                                                                                 negative sign.
Average Taker Fee..............  avgTakeFee....................  Number........................       NA          R   ........  The monthly average
                                                                                                                                 realized Taker fee
                                                                                                                                 assessed or rebate
                                                                                                                                 offered per share by
                                                                                                                                 category (i.e., test
                                                                                                                                 group, participant
                                                                                                                                 type, displayed vs. non-
                                                                                                                                 displayed, and top-of-
                                                                                                                                 book vs. depth-of-
                                                                                                                                 book). Fees have a
                                                                                                                                 positive sign; rebates
                                                                                                                                 have a negative sign.

[[Page 13078]]

 
Median Taker Fee...............  medianTakeFee.................  Number........................       NA          R   ........  The monthly median
                                                                                                                                 realized Taker fee
                                                                                                                                 assessed or rebate
                                                                                                                                 offered per share by
                                                                                                                                 category (i.e., test
                                                                                                                                 group, participant
                                                                                                                                 type, displayed vs. non-
                                                                                                                                 displayed, and top-of-
                                                                                                                                 book vs. depth-of-
                                                                                                                                 book), across broker-
                                                                                                                                 dealers. Fees have a
                                                                                                                                 positive sign; rebates
                                                                                                                                 have a negative sign.
Base Maker Fee.................  baseMakeFee...................  Number........................        R         NA   ........  The Base Maker Fee is
                                                                                                                                 the standard per share
                                                                                                                                 fee assessed or rebate
                                                                                                                                 offered before any
                                                                                                                                 applicable discounts,
                                                                                                                                 tiers, caps, or other
                                                                                                                                 incentives are applied.
                                                                                                                                 Fees have a positive
                                                                                                                                 sign; rebates have a
                                                                                                                                 negative sign.
Top Tier Maker Fee.............  topTierMakeFee................  Number........................        R         NA   ........  The Top Tier Maker Fee
                                                                                                                                 is the per share fee
                                                                                                                                 assessed or rebate
                                                                                                                                 offered all applicable
                                                                                                                                 discounts, tiers, caps,
                                                                                                                                 or other incentives are
                                                                                                                                 applied per share. Fees
                                                                                                                                 have a positive sign;
                                                                                                                                 rebates have a negative
                                                                                                                                 sign.
Average Maker Fee..............  avgMakeFee....................  Number........................       NA          R   ........  The monthly average
                                                                                                                                 realized Maker fee
                                                                                                                                 assessed or rebate
                                                                                                                                 offered per share by
                                                                                                                                 category (i.e., test
                                                                                                                                 group, participant
                                                                                                                                 type, displayed vs. non-
                                                                                                                                 displayed, and top-of-
                                                                                                                                 book vs. depth-of-
                                                                                                                                 book). Fees have a
                                                                                                                                 positive sign; rebates
                                                                                                                                 have a negative sign.
Median Maker Fee...............  medianMakeFee.................  Number........................       NA          R   ........  The monthly median
                                                                                                                                 realized Maker fee
                                                                                                                                 assessed or rebate
                                                                                                                                 offered per share by
                                                                                                                                 category (i.e., test
                                                                                                                                 group, participant
                                                                                                                                 type, displayed vs. non-
                                                                                                                                 displayed, or top-of-
                                                                                                                                 book vs. depth-of-
                                                                                                                                 book), across broker-
                                                                                                                                 dealers. Fees have a
                                                                                                                                 positive sign; rebates
                                                                                                                                 have a negative sign.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    By the Commission.

     Dated: March 14, 2018.
Brent J. Fields,
Secretary.
[FR Doc. 2018-05545 Filed 3-23-18; 8:45 am]
 BILLING CODE 8011-01-P