Document ID: SEC-2022-1682-0001
Agency: sec
Document Type: Proposed Rule
Title: Regulation National Market System: Minimum Pricing Increments, Access Fees, and Transparency of Better Priced Orders
Posted Date: 2022-12-29T05:00Z

[Federal Register Volume 87, Number 249 (Thursday, December 29, 2022)]
[Proposed Rules]
[Pages 80266-80359]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-27616]

[[Page 80265]]

Vol. 87

Thursday,

No. 249

December 29, 2022

Part II

Securities and Exchange Commission

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17 CFR Part 242

Regulation NMS: Minimum Pricing Increments, Access Fees, and 
Transparency of Better Priced Orders; Proposed Rule

  Federal Register / Vol. 87 , No. 249 / Thursday, December 29, 2022 / 
Proposed Rules  

[[Page 80266]]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 242

[Release No. 34-96494; File No. S7-30-22]
RIN 3235-AN23

Regulation NMS: Minimum Pricing Increments, Access Fees, and 
Transparency of Better Priced Orders

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'' or 
``SEC'') is proposing to amend certain rules of Regulation National 
Market System (``Regulation NMS'') under the Securities Exchange Act of 
1934, as amended (``Exchange Act'') to adopt variable minimum pricing 
increments for the quoting and trading of NMS stocks, reduce the access 
fee caps, and enhance the transparency of better priced orders.

DATES: Comments should be received on or before March 31, 2023.

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

Electronic Comments

     Use the Commission's internet comment form https://www.sec.gov/rules/submitcomments.html; or
     Send an email to sec.gov">[email protected]sec.gov. Please include 
File Number S7-30-22 on the subject line.

Paper Comments

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

All submissions should refer to File Number S7-30-22. This file number 
should be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method of submission. The Commission will post all 
comments on the Commission's website (https://www.sec.gov/rules/proposed.shtml). Comments are also available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549 on official business days between the hours of 10 
a.m. and 3 p.m. Operating conditions may limit access to the 
Commission's Public Reference Room. 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 our 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: Kelly Riley, Senior Special Counsel, 
Johnna Dumler, Special Counsel, Steve Kuan, Special Counsel, Marc 
McKayle, Special Counsel, and Ted Uliassi, Special Counsel, at (202) 
551-5500, Office of Market Supervision, Division of Trading and 
Markets, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is proposing amendments to 
the following rules under Regulation NMS:

------------------------------------------------------------------------
                                                      CFR citation (17
               Commission reference                         CFR)
------------------------------------------------------------------------
Rule 600(b)(59)...................................                  Sec.
                                                          242.600(b)(59)
Rule 600(b)(78)...................................                  Sec.
                                                          242.600(b)(78)
Rule 603..........................................        Sec.   242.603
Rule 610..........................................        Sec.   242.610
Rule 612..........................................        Sec.   242.612
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I. Introduction
    A. Rule 612--Minimum Pricing Increments
    B. Rule 610--Access to Quotations
    C. Transparency of Better Priced Orders
II. Amendment to Rule 612 of Regulation NMS--Minimum Pricing 
Increment
    A. Background
    B. Rule 612
    1. Exchange Retail Liquidity Programs (``RLPs'')
    C. Tick Size Considerations Since Regulation NMS
    D. Issues Raised in the Current Market Structure
    E. Proposals by Market Participants
    1. Reduce the Tick Size to $0.005 for Tick-Constrained Stocks
    2. Variable Tick Sizes
    F. Proposal to Amend Rule 612
    1. Minimum Pricing Increments
    2. Quotations and Orders in NMS Stocks Priced at $1.00 or More
    3. Quotations and Orders in NMS Stocks Priced Less Than $1.00
    4. Minimum Pricing Increment for Trading
    G. Proposed Implementation Period
    H. Request for Comment
III. Amendments to Rule 610 of Regulation NMS--Fees for Access to 
Quotations
    A. Background
    1. Regulation NMS
    2. Exchange Fee Models
    B. Current Rule 610(c)
    C. Proposal To Reduce Fees for Access to Protected Quotations 
and Increase Fee Transparency
    1. Reduce Fees for Access to Protected Quotations
    2. Require That All Exchange Fees and Rebates Be Determinable at 
the Time of an Execution
    D. Request for Comment
IV. Transparency of Better Priced Orders
    A. Background
    1. Infrastructure Implementation: Phased Transition Plan and 
Current Status
    B. Accelerate Implementation of Round Lots and Odd-Lot 
Information
    1. Odd-Lot Information
    2. Round Lots
    3. Display of Round Lots and Odd-Lot Information
    4. Proposed Compliance Date
    C. Request for Comment
    D. Proposed Definition of Best Odd-Lot Orders
    E. Request for Comment
V. Economic Analysis
    A. Introduction
    B. Market Failure
    C. Baseline
    1. Tick Sizes
    2. Access Fees
    3. Round Lots and Market Data Infrastructure
    4. Affected Entities and Markets
    D. Economic Effects
    1. Modification of Rule 612 To Create a Tiered Tick Structure
    2. Minimum Pricing Increment for Trading
    3. Lower Access Fee Cap
    4. Exchange Fees and Rebates Determinable at the Time of 
Execution
    5. Acceleration of the MDI Rules and Addition of Information 
About Best Odd-Lot Orders
    6. Compliance Costs
    E. Effect on Efficiency, Competition, and Capital Formation
    1. Efficiency
    2. Competition
    3. Capital Formation
    F. Reasonable Alternatives
    1. Alternative Trading Increment
    2. Alternative Tick Sizes
    3. Alternative Access Fee
    4. Do Not Accelerate Odd-Lot Information or Create BOLO
    G. Request for Comment
VI. Paperwork Reduction Act
    A. Summary of Collection of Information
    B. Proposed Use of Information
    C. Respondents
    D. Total Annual Reporting and Recordkeeping Burden
    1. Initial Burden Hours and Costs
    2. Ongoing Burden Hours and Costs
    E. Collection of Information is Mandatory
    F. Confidentiality
    G. Revisions to Current MDI Rules Burden Estimates
    H. Request for Comments
VII. Consideration of Impact on the Economy
VIII. Regulatory Flexibility Act Certification and Initial 
Regulatory Flexibility Act Analysis
    A. Proposed Amendments to Rule 612--Initial Regulatory 
Flexibility Analysis
    1. Reasons for the Proposed Action
    2. Legal Basis
    3. Small Entities Subject to the Rule
    4. Reporting, Recordkeeping, and Other Compliance Requirements

[[Page 80267]]

    5. Duplicative, Overlapping, or Conflicting Federal Rules
    6. Significant Alternatives
    7. Request for Comments
    B. Proposed Amendments to Rule 610
    C. Proposed Amendments to Rule 603 and Definitions Odd-Lot 
Information and Regulatory Data Under Rule 600
Statutory Authority and Text of the Proposed Rule Amendments

I. Introduction

    Section 11A of the Exchange Act \1\ directs the Commission to 
facilitate the establishment of a national market system in accordance 
with specified Congressional findings. In furtherance of this 
direction, the Commission adopted Regulation NMS in 2005, which 
includes several provisions that updated and modernized the national 
market system to take advantage of the data processing and 
communications technology that were available at that time and to 
address the then recent changes that had occurred in the markets. 
Regulation NMS was designed to achieve the objectives of section 11A of 
efficient, competitive, fair and orderly markets.\2\
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    \1\ 15 U.S.C. 78k-1.
    \2\ 15 U.S.C. 78k-1(a).
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    In Section 11A of the Exchange Act, Congress recognized that new 
technology could ``create the opportunity for more efficient and 
effective market operations.'' \3\ The market structure and technology 
available today is vastly different from what was available when 
Regulation NMS was adopted. Today, electronic trading has all but 
supplanted manual trading and electronic trading systems can handle and 
process data at speeds that would have been unheard of when Regulation 
NMS was adopted. As the national market system has evolved, the 
Commission has amended several aspects of Regulation NMS to address and 
reflect changes in the markets.\4\ Most recently, in 2020, the 
Commission adopted rules to update and modernize the equity market 
infrastructure responsible for the collection, consolidation, and 
dissemination of equity market data in the national market system by 
expanding the content of NMS market data and establishing a 
decentralized consolidation model for NMS market data (``MDI 
Rules'').\5\
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    \3\ 15 U.S.C. 78k-1(a)(1)(B).
    \4\ See Securities Exchange Act Release No. 84528 (Nov. 2, 
2018), 83 FR 58338 (Nov. 19, 2018) (``Disclosure of Order Handling 
Information'' in which the Commission adopted new order handling 
disclosure requirements). The Commission has continually reviewed 
the national market system and issues related to equity market 
structure since Regulation NMS was adopted. In 2010, the Commission 
issued a Concept Release on Equity Market Structure seeking public 
comments on high frequency trading, order routing, market data 
linkages, and undisplayed liquidity. See Securities Exchange Act 
Release No. 61358 (Jan. 14, 2010), 75 FR 3594 (Jan. 21, 2010) 
(``Concept Release on Equity Market Structure''). In 2015, the SEC 
formed the Equity Market Structure Advisory Committee (``EMSAC''), 
which considered issues related to Regulation NMS and equity market 
structure. The archives of these meetings are available at https://www.sec.gov/spotlight/emsac/emsac-archives.htm.
    \5\ Securities Exchange Act Release No. 90610 (Dec. 9, 2020), 86 
FR 18596 (Apr. 9, 2021) (``MDI Adopting Release'').
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    While the MDI Rules, in part, updated the NMS market data to enable 
investors to see, and more readily access, better-priced quotations,\6\ 
the Commission believes that other aspects of Regulation NMS need to be 
updated in light of the current trading environment. Investors should 
have access to the best priced quotations available in the national 
market system and such prices generally should be determined by 
competitive market forces. Among the rules adopted under Regulation 
NMS, rule 610 sets forth standards governing access to quotations in 
NMS stocks and rule 612 establishes minimum pricing increments for NMS 
stocks.\7\ In the current trading environment, rule 612 should be 
updated by reducing the minimum pricing increment for certain NMS 
stocks to allow market participants, including investors, to better 
determine the prices at which they would bid or offer. Further, rule 
610 contains maximum access fee caps that were based on the trading 
environment in 2005. These access fee caps should be reduced in 
conjunction with the reduction of the minimum pricing increments under 
rule 612 to help to ensure that the access fee caps do not become too 
large in relation to the minimum pricing increments.\8\ The Commission 
has not revised rule 610 or rule 612 since they were adopted and the 
Commission believes that these rules should be revised to reflect the 
current trading environment and so that they can continue to fulfill 
the goals of section 11A of the Exchange Act. The amendments proposed 
herein--varying and lowering the minimum pricing increments for the 
quoting and trading of certain NMS stocks, reducing the access fee 
caps, and accelerating the dissemination of information about 
quotations in smaller sizes--would enhance trading opportunities for 
all investors. They would also serve to help ensure that orders placed 
in the national market system reflect the best prices available for all 
investors.
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    \6\ Id. at 18601.
    \7\ See 17 CFR 242.610 and 17 CFR 242.612.
    \8\ See infra section III for further discussion of the 
relationship between access fees and minimum pricing increments.
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    Congress' findings promulgated in 1975 as set forth in section 11A 
of the Exchange Act continue to guide the Commission as it considers 
the issues that exist within the national market system in 2022. Among 
the findings that guide the Commission in overseeing the national 
market system, the Commission must consider the availability of ``[n]ew 
data processing and communications techniques [that] create the 
opportunity for more efficient and effective market operations'' \9\ 
and that it is in the public interest, appropriate for investor 
protection and the maintenance of fair and orderly markets to assure 
``economically efficient execution of securities transactions,'' ``fair 
competition among brokers and dealers, among exchange markets, and 
between exchange markets and markets other than exchange markets,'' and 
``the practicality of brokers executing investors' orders in the best 
market.'' \10\ These findings support our decision to propose 
amendments to rules 610 and 612 of Regulation NMS in light of the 
tremendous changes that have occurred in the markets since 2005.
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    \9\ 15 U.S.C. 78k-1(a)(1)(B).
    \10\ 15 U.S.C. 78k-1(a)(1)(c)(i), (ii), and (iv).
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    Further, the MDI Rules are in the process of being implemented.\11\ 
While the content of market data that will be made available within the 
national market system will provide many benefits to investors,\12\ the 
Commission scheduled the implementation of the MDI Rules over a period 
of time to minimize disruption to the markets and to facilitate an 
orderly transition.\13\ As discussed in section IV.B below, in part due 
to implementation delays after the adoption of the MDI Rules, the 
Commission believes that the transition period set forth in the MDI 
Adopting Release should be partially modified so that investors and 
market participants would be provided with some of the benefits of the 
MDI Rules, including greater transparency regarding the best priced 
orders available in the market, sooner than the originally adopted 
implementation schedule.\14\ Section 11A of the Exchange Act provides 
that ``[i]t is in the public interest and appropriate for the 
protection of investors and the maintenance of fair and orderly markets 
to assure . . . the availability to brokers, dealers, and investors of 
information with respect to

[[Page 80268]]

quotations for and transactions in securities.'' \15\ Acceleration of 
some of the MDI Rules would help to fulfill this statutory goal.
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    \11\ See MDI Adopting Release, supra note 5.
    \12\ Id.
    \13\ See id. at 18699. As discussed below, the transition to the 
new MDI Rules has been delayed. See infra note 357 and accompanying 
text.
    \14\ See infra sections IV, V.D.5, and V.D.6 (discussing the 
costs and benefits of accelerating the round lot and odd-lot 
information definitions).
    \15\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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A. Rule 612--Minimum Pricing Increments

    The Commission adopted rule 612 of Regulation NMS to implement 
minimum pricing increments (also known as minimum price variations or 
tick sizes) for NMS stocks. Currently, quotations for NMS stocks priced 
at, or greater than, $1.00 per share the minimum pricing increment is 
$0.01, while quotations for NMS stocks priced less than $1.00 per share 
the minimum pricing increment is $0.0001. Specifically, rule 612(a) 
states that ``[n]o national securities exchange, national securities 
association, alternative trading system, vendor, or broker or dealer 
shall display, rank, or accept from any person a bid or offer, an 
order, or an indication of interest in any NMS stock priced in an 
increment smaller than $0.01 if that bid or offer, order, or indication 
of interest is priced equal to, or greater than, $1.00 per share.'' 
Rule 612(b) applies to bids, offers, orders, and indications of 
interest in any NMS stock priced less than $1.00 per share and 
specifies that the increment cannot be smaller than $0.0001. The 
Commission adopted rule 612 to address concerns about sub-penny quoting 
by protecting displayed limit orders and promoting transparent and 
consistent pricing. The Commission stated that the rule ``was designed 
to limit the ability of a market participant to gain execution priority 
over competing limit orders by stepping ahead by an economically 
insignificant amount.'' \16\
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    \16\ See Exchange Act Release No. 51808 (June 9, 2005), 70 FR 
37496 (June 29, 2005) (``Regulation NMS Adopting Release''). See 
also Exchange Act Release No. 49325 (Feb. 26, 2004), 69 FR 11126 
(Mar. 9, 2004) (``Regulation NMS Proposing Release''). The 
Commission issued a supplemental request for comment on proposed 
Regulation NMS in May 2004. See Securities Exchange Act Release No. 
49749 (May 20, 2004), 69 FR 30142 (May 26, 2004) (``Supplemental 
Release''). On Dec. 16, 2004, the Commission re-proposed Regulation 
NMS in its entirety for public comment. See Securities Exchange Act 
Release No. 50870 (Dec. 16, 2004), 69 FR 77424 (Dec. 27, 2004) 
(``Re-proposing Release'').
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    There are various issues related to market developments which 
suggest that the Commission should update the minimum pricing 
increments for the U.S. equity markets. Specifically, many NMS stocks 
today are constrained by the minimum pricing increment of $0.01 that is 
required under rule 612 and thus are not able to be priced by market 
forces. That is, based on liquidity and price competition, these stocks 
could be priced more aggressively within the spread than is possible 
with the current minimum pricing increment of $0.01. ``Tick-
constrained'' stocks, i.e., stocks that have a time weighted average 
quoted spread of 1.1 cents or less make up the majority of the current 
trading volume, and their presence suggests that the rule 612 minimum 
pricing increment of $0.01 may now be too large for certain stocks, 
which, in turn, results in the pricing of such stocks being 
artificially constrained.\17\ Trading in tick-constrained stocks would 
be improved if competitive market forces could establish prices in sub-
penny increments, which could reduce quoted spreads.
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    \17\ In this release, tick-constrained stocks are defined as 
those that have a time weighted quoted spread of $0.011 or less 
calculated during regular trading hours. See infra note 102 and 
accompanying text, infra note 448 and accompanying text and Table 4.
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    In addition, the competitive dynamic between trading in the certain 
parts of the over-the-counter (``OTC'') market and trading on national 
securities exchanges and alternative trading systems (``ATSs'') caused 
by, among other things, rule 612 has continued to shift over time.\18\ 
Specifically, while rule 612 prohibits exchanges, ATSs and broker-
dealers from displaying, ranking or accepting quotes and orders in NMS 
stocks that are priced at, or greater than, $1.00 per share in sub-
penny increments, the rule does not prohibit trading in sub-penny 
increments. In application, however, certain OTC market participants 
are able to trade more freely in sub-penny increments than others. 
Specifically, while rule 612 requires an OTC market maker to only 
accept priced orders in a penny increment, it does not prevent OTC 
market makers from executing an order in a sub-penny amount. Trading on 
national securities exchanges and ATSs, however, largely occurs in 
penny increments because national securities exchanges and ATSs 
generally execute trades at the prices that orders and quotes must be 
displayed, accepted or ranked under rule 612.\19\ Among other things, 
the ability of OTC market makers to trade more readily in finer 
increments (i.e., offering sub-penny price improvement over the 
displayed quote) compared to the trading on exchanges and ATS has 
contributed to the increased percentage of executions that occur off-
exchange.\20\ Finally, since the adoption of rule 612, there have been 
technological advancements that enable trading and order routing 
systems of market participants to handle the increased message traffic 
that could occur if smaller or varied minimum pricing increments were 
implemented for NMS stocks.
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    \18\ See infra section II.D.
    \19\ Exchanges and ATSs execute orders in sub-penny increments 
if the price of the execution is the midpoint of the national best 
bid and national best offer (``NBBO''), if the orders are benchmark 
trades such as volume-weighted average price (``VWAP'') and time-
weighted average price (``TWAP''), or if an exchange has a retail 
liquidity program (``RLP'') that operates pursuant to exemptions 
granted by the Commission that allow such programs to provide 
executions in tenths of a cent. See Regulation NMS Adopting Release, 
supra note 16, at 37556. See also infra section II.
    \20\ See, e.g., Staff Report on Equity and Options Market 
Structure Conditions in Early 2021 (``Staff Report on Equity and 
Options Market Structure'') at section 2.4 for a discussion of Order 
Execution and Segmentation of Individual Investor Flow. Staff 
reports, Investor Bulletins, and other staff documents (including 
those cited herein) represent the views of Commission staff and are 
not a rule, regulation, or statement of the Commission. The 
Commission has neither approved nor disapproved the content of these 
staff documents and, like all staff statements, they have no legal 
force or effect, do not alter or amend applicable law, and create no 
new or additional obligations for any person. See also Edwin Hu and 
Dermot Murphy, ``Competition for Retail Order Flow and Market 
Quality'' (June 8, 2022), available at https://ssrn.com/abstract=4070056 (retrieved from SSRN Elsevier database) (noting 
that approximately 27% of trading volume is routed from retail 
brokerages to seven internalizing broker-dealers and estimating that 
two of those firms handle 70% of the volume from 2017 to 2021; and 
concluding that promoting more competitive markets for retail order 
flow could save investors billions of dollars in transaction costs).
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    Under section 11A(a)(1) of the Exchange Act, Congress found that 
``[i]t is in the public interest and appropriate for the protection of 
investors and the maintenance of fair and orderly markets to assure--
(i) economically efficient execution of securities transactions; [and] 
(ii) fair competition among brokers and dealers, among exchange 
markets, and between exchange markets and markets other than exchange 
markets. . . .'' \21\ The Commission, consistent with the Congressional 
mandate and direction of section 11A(a)(2) of the Exchange Act to carry 
out these objectives, proposes to amend rule 612 to establish variable 
minimum pricing increments for quotations and orders in NMS stocks that 
are priced at, or greater than, $1.00 per share based on objective and 
measurable criteria and make such minimum pricing increments applicable 
to the trading of all NMS stocks regardless of price, subject to 
certain specified exceptions.\22\
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    \21\ 15 U.S.C. 78k-1(a)(1)(C).
    \22\ The proposed rule would not change the minimum pricing 
increment of rule 612(b), which permits sub-penny increments for 
quotations and orders in NMS stocks that are priced less than $1.00 
per share. See infra section II.F.3.
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    As discussed in section II.F \23\ the Commission is proposing to 
amend rule 612 in a manner that would extend

[[Page 80269]]

beyond tick-constrained stocks. The Commission believes that it is 
timely, and consistent with section 11A of Exchange Act, to replace and 
modernize the current ``one-size-fits-all'' tick approach with an 
objectively calculated and varied approach that would determine the 
minimum pricing increments for particular NMS stocks in a manner that 
would reflect differences in their trading characteristics. The 
Commission believes that the proposed variable minimum pricing 
increments would address the issues related to tick-constrained stocks, 
help to prevent other stocks from becoming tick-constrained, and reduce 
transaction costs for many stocks without harming the displayed 
liquidity in, and execution quality of, NMS stocks that may be higher 
priced and/or trade with wider spreads. In addition, the Commission is 
proposing to apply the amended rule 612 minimum pricing increments to 
the quoting and trading of NMS stocks in order to promote fair 
competition and equal regulation between trading in the OTC market and 
trading on exchanges and ATSs, particularly as it relates to retail 
order flow.
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    \23\ See infra section II.F.
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    The Commission believes that requiring orders to be executed in the 
minimum pricing increment would enhance competition among trading 
centers by ensuring that all trading centers would be able to compete 
in the same price increment. The Commission believes applying the 
proposed minimum pricing increments to the trading of NMS stocks 
regardless of trading venue would also preserve most meaningful price 
improvement opportunities and potentially benefit the market as 
increased competition for orders, and between market participants, 
could promote innovation.\24\
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    \24\ See infra sections V.D.2 and V.E.2.a.
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    As further discussed in section II.F, the Commission is proposing 
to amend rule 612 such that the minimum pricing increment for 
quotations and orders in NMS stocks that are priced at $1.00 or more 
per share would be variable and no smaller than (1) $0.001, if the Time 
Weighted Average Quoted Spread for the NMS stock during the Evaluation 
Period was equal to, or less than, $0.008; \25\ (2) $0.002, if the Time 
Weighted Average Quoted Spread for the NMS stock during the Evaluation 
Period was greater than $0.008 but less than, or equal to, $0.016; (3) 
$0.005, if the Time Weighted Average Quoted Spread for the NMS stock 
during the Evaluation Period was greater than $0.016 but less than, or 
equal to, $0.04; and (4) $0.01, if the Time Weighted Average Quoted 
Spread for the NMS stock during the Evaluation Period was greater than 
$0.04. Under this proposal, the primary listing exchanges would measure 
and calculate the Time Weighted Average Quoted Spread of each NMS stock 
in order to determine the applicable minimum pricing increment for such 
NMS stock during the months of March, June, September, and December of 
a particular calendar year (i.e., ``Evaluation Period'') for the three 
months to follow. Finally, the Commission is proposing that the minimum 
pricing increments set forth by rule 612, subject to specified 
exceptions, be applicable to the trading of all NMS stocks.
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    \25\ Currently, no NMS stock would qualify for this minimum 
pricing increment. See infra note 211.
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B. Rule 610--Access to Quotations

    The Commission adopted rule 610 to help to fulfill the statutory 
objectives of fair and efficient access to the individual markets that 
participate in the national market system.\26\ The Commission described 
rule 610 as supporting the national market system objectives of 
assuring ``the practicability of brokers executing investors' orders in 
the best market'' \27\ and ``the efficient execution of securities 
transactions.'' \28\ Rule 610 addresses three issues related to access 
to quotations: (1) the means of access to quotations; (2) the fees for 
access to protected quotations and any other quotations that are the 
best bid or best offer of an exchange; and (3) locking and crossing 
quotations.
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    \26\ See Regulation NMS Adopting Release, supra note 16, at 
37497, 37538.
    \27\ Id. at 37538. See also 15 U.S.C. 78k-1(a)(1)(C)(iv).
    \28\ See Regulation NMS Adopting Release, supra note 16, at 
37538. See also 15 U.S.C. 78k-1(a)(1)(C)(i).
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    Rule 610 imposes a limit on the fees that can be charged for access 
to protected quotations.\29\ For NMS stocks priced at, or greater than, 
$1.00 per share, a trading center \30\ shall not impose, nor permit to 
be imposed, any fee for the execution of an order against a protected 
quotation that exceeds $0.0030 per share, and for NMS stocks that are 
priced at less than $1.00 per share, a trading center shall not impose, 
nor permit to be imposed, any fee for the execution of an order against 
a protected quotation that exceeds 0.3% of the quotation price per 
share. The Commission adopted the access fee caps to preserve the 
benefits of strengthened price protection and more efficient linkages 
among trading centers that could be disrupted if substantial fees for 
accessing quotations were charged.\31\ The access fee caps were 
calculated based upon the then current fees that were charged by 
certain trading venues and reflect the minimum pricing increment of 
$0.01 per share.\32\ The access fee caps have not changed since their 
adoption in 2005.
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    \29\ A protected quotation is defined in rule 600(b)(71) as ``a 
protected bid or protected offer.'' 17 CFR 242.600(b)(71). A 
protected bid or protected offer is defined as ``a quotation in an 
NMS stock that: (i) Is displayed by an automated trading center; 
(ii) Is disseminated pursuant to an effective national market system 
plan; and (iii) Is an automated quotation that is the best bid or 
best offer of a national securities exchange, the best bid or best 
offer of the Nasdaq Stock Market, Inc., or the best bid or best 
offer of a national securities association.'' 17 CFR 242.600(b)(70).
    \30\ A trading center is defined in rule 600(b)(95) 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.'' 17 CFR 242.600(b)(95).
    \31\ See Regulation NMS Adopting Release, supra note 16, at 
37544.
    \32\ See id. at 37545.
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    In the time since the adoption of rule 610, the national securities 
exchanges have adopted complex fee schedules, with fees charged and 
rebates paid, in part, to encourage the submission of liquidity.\33\ 
The fee schedules of the national securities exchanges also include 
various volume-based tiers that seek to reward market participants for 
submitting a minimum level of liquidity.\34\ The fees included in these 
schedules are largely calculated based on volume in a given month and 
are therefore calculated at month's end. This timing impedes the 
ability of market participants, including investors, to evaluate the 
total price of a trade at the time of execution and impedes a market 
participant's ability to evaluate best execution and order routing.
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    \33\ See infra section III.A.2.
    \34\ See infra section III.A.2.
---------------------------------------------------------------------------

    The Commission proposes to amend rule 610 in two ways. First, to 
reflect the lower variable minimum pricing increments proposed under 
rule 612, the Commission proposes to reduce the access fee caps for 
protected quotations in NMS stocks priced $1.00 or more to $0.0005 per 
share for NMS stocks that have a minimum pricing increment of $0.001; 
and $0.001 per share for NMS stocks that have a minimum pricing 
increment greater than $0.001 per share; and for protected quotations 
in NMS stocks priced less than $1.00 per share to 0.05% of the 
quotation price. The proposed level of the access fee caps seeks to 
balance the need to reduce the access fee caps to accommodate the 
reduction in the minimum pricing increments and preserve the ability of

[[Page 80270]]

the agency market business models to charge fees for access.\35\ 
Consistent with the Commission's proposal to adopt lower variable 
minimum pricing increments, the Commission is proposing reduced 
variable access fee caps based on the minimum pricing increment and the 
price of the protected quotation.\36\ The Commission believes the 
proposed fee caps are consistent with current market practices and 
would lead to pricing that is better aligned with today's transaction 
costs.\37\
---------------------------------------------------------------------------

    \35\ Agency market trading centers are those that bring together 
buyers and sellers and typically charge a fee for their execution 
services. The Commission has previously recognized that ``agency 
trading centers perform valuable agency services in bringing buyers 
and sellers together, and that their business model historically has 
relied, at least in part, on charging fees for execution of orders 
against their displayed quotations.'' See Regulation NMS Adopting 
Release, supra note 16, at 37545.
    \36\ See infra section III.C.1.
    \37\ See infra note 297 and accompanying text.
---------------------------------------------------------------------------

    Second, to facilitate the ability of market participants to 
understand and calculate the total price of transactions at the time of 
execution, the Commission proposes to amend rule 610 to require 
exchanges to make the amounts of all fees and rebates determinable at 
the time of execution.

C. Transparency of Better Priced Orders

    The Commission adopted the MDI Rules, which expanded the content of 
data that will be made available for dissemination within the national 
market system and adopted a decentralized consolidation model for the 
collection, consolidation, and dissemination of consolidated market 
data.\38\ One goal in expanding the data made available within the 
national market system was to increase transparency about better prices 
available in the market.\39\ To accomplish this, the Commission, in the 
MDI Rules, adopted a new definition of round lot, which will increase 
transparency about smaller sized orders in higher priced stocks by 
assigning NMS stocks priced over $250 to round lot sizes that are less 
than the 100 share round lot size that is predominant today.
---------------------------------------------------------------------------

    \38\ MDI Adopting Release, supra note 5. Several exchanges filed 
petitions for review in the U.S. Court of Appeals for the District 
of Columbia Circuit, which were denied on May 24, 2022. The Nasdaq 
Stock Market LLC, et al v. SEC, No. 21-1100 (D.C. Cir. May 24, 
2022).
    \39\ See Securities Exchange Act Release No. 88216 (Feb. 14, 
2020), 85 FR 16726, 16730-31 (Mar. 24, 2020) (``MDI Proposing 
Release''). See infra note 327 for a description of the data 
currently provided within the national market system.
---------------------------------------------------------------------------

    In addition, the MDI Rules included odd-lot information in the data 
that will be made available within the national market system. ``Odd-
lot information'' is defined as (1) odd-lot transactions, and (2) odd-
lots at a price greater than or equal to the national best bid and less 
than or equal to the national best offer, aggregated at each price 
level at each national securities exchange and national securities 
association.\40\ Therefore, once implemented, information regarding the 
prices and sizes of odd-lot orders priced better than the national best 
bid and national best offer (``NBBO'') will be made available within 
the national market system and is expected to be made widely available 
to investors.\41\ These new definitions will significantly enhance 
transparency about better priced orders available in the market. For 
the reasons explained in the MDI Adopting Release, the Commission 
adopted a phased transition plan for the MDI Rules that sequenced the 
implementation of these data elements in the later stages of the 
transition.\42\
---------------------------------------------------------------------------

    \40\ For example, if the national best bid for XYZ, Inc. is 100 
shares at $25.00, and there are three orders of five shares and two 
orders of ten shares at $25.01 on Exchange A, this would be 
represented as ``35 shares at $25.01 on Exchange A'' pursuant to the 
definition of odd-lot information adopted under the MDI Rules. MDI 
Adopting Release, supra note 5, at 18613.
    \41\ MDI Adopting Release, supra note 5, at 18612-13.
    \42\ See id. at 18698.
---------------------------------------------------------------------------

    The Commission proposes to accelerate implementation of the round 
lot and odd-lot information definitions adopted under the MDI Rules so 
that this information is made available to investors within the 
national market system sooner. Information about better priced orders 
available in the market is important for investors to be able to 
understand the current prices and liquidity in the market when entering 
their orders.\43\ This information is also important for market 
participants who have best execution obligations.\44\
---------------------------------------------------------------------------

    \43\ See id. at 18612.
    \44\ Id. See also infra note 359.
---------------------------------------------------------------------------

    Furthermore, while the odd-lot information definition includes all 
prices better than the NBBO for which there is liquidity available in 
an odd-lot size, it does not identify a consolidated best odd-lot 
order. Establishing a defined best odd-lot order would provide further 
relevant information to investors and market participants. A 
consolidated best odd-lot order would be useful to investors in 
deciding the terms of an order by providing information about the 
price, size, and market of the best priced buy and sell orders 
available in the market against which their own orders could execute. 
Further, a best odd-lot order would be useful to investors to measure 
the amount of price improvement they receive for the execution of their 
orders. The Commission believes that amending the definition of odd-lot 
information to include a best odd-lot order would be consistent with 
section 11A of the Exchange Act, which provides, among other things, 
that it is in the public interest and appropriate for the protection of 
investors and the maintenance of fair and orderly markets to assure the 
availability of information with respect to quotations in 
securities.\45\ Further, a best odd-lot order would be consistent with 
section 11A(c)(1)(B) of the Exchange Act as it would assure the 
usefulness of quotation information.\46\ Together with accelerating the 
implementation of the definitions of round lot and odd-lot information, 
these proposed amendments would provide investors with enhanced 
transparency about better priced orders available in the market.
---------------------------------------------------------------------------

    \45\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \46\ 15 U.S.C. 78k-1(c)(1)(B).
---------------------------------------------------------------------------

II. Amendment to Rule 612 of Regulation NMS--Minimum Pricing Increment

A. Background

    Prior to implementing decimal pricing in April 2001, fractions of a 
dollar were utilized to represent the minimum pricing increments for 
the United States equity markets (e.g., \1/8\, \1/16\, and \1/32\ of a 
dollar).\47\ The conversion to decimal pricing reduced the allowable 
minimum pricing increment to $0.01 and the exchanges adopted rules that 
established minimum pricing increments of $0.01 for equities 
trading.\48\ However, after the conversion to decimal pricing, the 
display and execution of sub-penny quotes increased off-exchange.\49\ 
The increase

[[Page 80271]]

of sub-penny quoting and trading in the OTC market raised concerns 
because these quotes were not readily transparent, or accessible, to 
many average investors.\50\
---------------------------------------------------------------------------

    \47\ A tick is the minimum pricing increment that can be used to 
trade securities. Decimalization set the tick size to penny 
increments from fractional increments, such as \1/8\ or \1/16\ of a 
dollar. For a discussion of the implementation of decimal pricing, 
see Order Directing the Exchanges and the Financial Industry 
Regulatory Authority to Submit a Tick Size Pilot Plan, Exchange Act 
Release No. 72460 (June 24, 2014), 79 FR 36840 (June 30, 2014).
    \48\ See Exchange Act Release No. 46280 (July 29, 2002), 67 FR 
50739 (Aug. 5, 2002) (order approving proposed rule changes and 
amendments related to decimal pricing). In this order, the 
Commission approved the proposals of the then-existing exchanges and 
the National Association of Securities Dealers, Inc. (the 
predecessor to the Financial Industry Regulatory Authority, Inc. 
(``FINRA'')) to establish a minimum pricing increment of $0.01 for 
equity issues, $0.05 for option issues quoted under $3.00 a 
contract, and $0.10 for option issues quoted at $3.00 a contract or 
greater.
    \49\ See Regulation NMS Proposing Release, supra note 16, at 
11163. See also Report to Congress on Decimalization, Commission 
(July 2012) (``Decimalization Report'') available at https://www.sec.gov/files/decimalization-072012.pdf.
    \50\ See Regulation NMS Proposing Release, supra note 16 at 
11164.
---------------------------------------------------------------------------

    In 2004, as part of Regulation NMS, the Commission proposed rule 
612 to implement minimum pricing increments for quoting in NMS stocks. 
The Commission stated that while the benefits of decimalization 
justified the costs, there was a potential for costs to investors and 
the markets to surpass the benefits if the minimum pricing increment 
decreased beyond a certain level.\51\ Rule 612 was designed to ``deter 
the practice of stepping ahead of exposed trading interest by an 
economically insignificant amount,'' \52\ which could discourage 
investors from submitting limit orders. The Commission reasoned that 
``if orders lose execution priority because competing orders step ahead 
for an economically insignificant amount, liquidity could diminish.'' 
\53\ Further, the Commission was concerned that sub-penny quotes could 
decrease market depth (i.e., the number of shares of a security that is 
available at any given price), which in turn could increase transaction 
costs and cause institutions ``to rely more on execution alternatives 
away from the exchanges'' and ``[s]uch a trend could increase 
fragmentation of the securities markets.'' \54\ In addition, the 
Commission stated that sub-penny quoting could inhibit the ability of 
broker-dealers to meet certain regulatory obligations by increasing the 
incidences of so-called ``flickering'' quotes.\55\ At the time, the 
Commission did not believe that the potential benefits of marginally 
better prices offered by sub-penny increments for quotes and orders in 
securities priced at, or greater than, $1.00 per share were likely to 
justify the costs of permitting sub-penny quotes to be displayed, 
accepted and ranked.\56\ However, the Commission acknowledged the 
possibility that the markets could evolve over time and cause the 
balance of the costs and benefits to shift.\57\
---------------------------------------------------------------------------

    \51\ See id. at 11165.
    \52\ Id. at 37553.
    \53\ Id. at 37551. Further, the Commission stated that ``[w]hen 
market participants can gain execution priority for an 
infinitesimally small amount, important customer protection rules 
such as exchange priority rules and [FINRA's] Manning rule could be 
rendered meaningless'' and that without such protections, 
``professional traders would have more opportunity to take advantage 
of non-professionals,'' which could lead to lost executions or 
executions occurring at inferior prices. Id.
    \54\ Id. at 37552. The Commission stated that a decrease in 
market depth could ``lead to higher transaction costs, particularly 
for institutional investors (such as pension funds and mutual funds) 
that are more likely to place large orders,'' which ``would likely 
be passed on to retail investors whose assets are managed by the 
institutions.'' Id.
    \55\ Id. at 37552. The Commission described ``flickering 
quotations'' as occurring when the price of a trading center's best 
displayed quotations changes multiple times in a single second and 
stated that flickering quotations ``could make it more difficult for 
broker-dealers to satisfy their best execution obligations and other 
regulatory responsibilities.'' Id.
    \56\ Id. at 37553 (``Even assuming that quoting in sub-penny 
increments would reduce spreads, the Commission continues to 
believe, on balance, that the costs of sub-penny quoting are not 
justified by the benefits.'')
    \57\ Id. (``Nevertheless, the Commission acknowledges the 
possibility that the balance of costs and benefits could shift in a 
limited number of cases or as the markets continue to evolve.'')
---------------------------------------------------------------------------

    When rule 612 was adopted, the Commission considered the impact of 
sub-penny trading but did not believe that such trading raised the same 
concerns as sub-penny quoting. Specifically, the Commission stated 
that, unlike sub-penny quoting, sub-penny executions do not cause quote 
flickering, decrease depth at the inside of the market or raise systems 
capacity issues.\58\ In addition, the Commission stated that sub-penny 
executions were generally beneficial to retail investors.\59\
---------------------------------------------------------------------------

    \58\ See Regulation NMS Adopting Release, supra note 16, at 
37556.
    \59\ See id.
---------------------------------------------------------------------------

B. Rule 612

    In 2005, the Commission adopted rule 612 of Regulation NMS to 
establish uniform minimum pricing increments for NMS stocks. Rule 612 
prohibits national securities exchanges, national securities 
associations, ATSs, vendors and broker-dealers from displaying, 
ranking, or accepting quotations, orders, or indications of interest in 
any NMS stock priced in an increment smaller than $0.01 if the 
quotation, order, or indication of interest is priced equal to, or 
greater than, $1.00 per share. Rule 612 also prohibits national 
securities exchanges, national securities associations, ATSs, vendors, 
and broker-dealers from displaying, ranking or accepting quotations, 
orders and indications of interest in an NMS stock in an increment 
smaller than $0.0001 if the quotation, order or indication of interest 
in an NMS stock is priced less than $1.00 per share. Under rule 612, an 
exchange, association, ATS, vendor or broker-dealer must reject a quote 
or order for an NMS stock that is explicitly priced in an impermissible 
increment.\60\
---------------------------------------------------------------------------

    \60\ See id. See also, e.g., NYSE Rule 7.6 (Trading 
Differentials) (``The minimum price variation (MPV) for quoting and 
entry of orders in securities traded on the Exchange is $0.01, with 
the exception of securities that are priced less than $1.00 for 
which the MPV for quoting and entry of orders is $0.0001.''); see 
also Nasdaq Rule Equity 1 Equity Definitions (a)(13) (``The term 
minimum price increment means $0.01 in the case of a System Security 
priced at $1 or more per share, and $0.0001 in the case of a System 
Security priced at less than $1 per share.'').
---------------------------------------------------------------------------

    Rule 612 does not prohibit quotes and orders from being executed in 
sub-penny increments. In the Regulation NMS Adopting Release, the 
Commission stated that the rule does not prohibit a sub-penny execution 
resulting from a midpoint, volume-weighted algorithm, or from price 
improvement so long as the execution does not result from an 
impermissibly priced sub-penny order or quote.\61\
---------------------------------------------------------------------------

    \61\ See Regulation NMS Adopting Release, supra note 12, at 
37556.
---------------------------------------------------------------------------

1. Exchange Retail Liquidity Programs (``RLPs'')
    After its adoption, the Commission granted exemptions from rule 612 
to various national securities exchanges to establish ``retail 
liquidity programs'' that allow them to accept and rank certain quotes 
and orders from certain participants in sub-penny increments as small 
as $0.001.\62\ RLPs were designed to attract retail orders to exchanges 
by providing such orders potential price improvement at sub-penny 
levels because ``most marketable retail order flow is executed in the 
OTC markets, pursuant to bilateral agreements, without ever reaching a 
public exchange'' and that OTC market makers typically paid retail 
brokers for their order flow.\63\
---------------------------------------------------------------------------

    \62\ NYSE Rule 107C; Securities Exchange Act Release No. 67347 
(July 3, 2012), 77 FR 40673 (July 10, 2012) (approving retail 
liquidity programs on a pilot basis for NYSE and NYSE Amex and 
granting rule 612 exemption) (NYSE Retail Liquidity Program Approval 
Order); CBOE BYX Rule 11.24; Securities Exchange Act Release No. 
68303 (Nov. 27, 2012), 77 FR 71652 (Dec. 3, 2012) (CBOE BYX Retail 
Pilot Program Approval Order); Nasdaq BX Rule 4780; Securities 
Exchange Act Release No. 73702 (Nov. 28, 2014), 79 FR 72049 (Dec. 4, 
2014) (NASDAQ BX Retail Pilot Program Approval Order).
    \63\ See NYSE Retail Liquidity Program Approval Order, supra 
note 62 at 40679.
---------------------------------------------------------------------------

    The Commission stated that ``[i]nternalizing broker-dealer[s] can 
offer sub-penny executions, provided that such executions do not result 
from impermissible sub-penny orders or quotations'' by ``typically 
select[ing] a sub-penny price for a trade without quoting at that exact 
amount or accepting orders from retail customers seeking that exact 
price.'' \64\ The Commission stated that, in contrast, exchange 
members, when submitting orders and quotations to exchanges, ``cannot 
compete for marketable retail order flow on the same basis because it 
would be impractical for exchange electronic systems to generate sub-

[[Page 80272]]

penny executions'' without firms ``having first submitted sub-penny 
orders or quotations, which the Sub-Penny Rule expressly prohibits.'' 
\65\ The Commission found that the first RLP, which was approved on a 
pilot basis, was reasonably designed to benefit retail investors by 
providing price improvement to retail order flow and ``could promote 
competition for retail order flow among execution venues.'' \66\
---------------------------------------------------------------------------

    \64\ Id. at 40862.
    \65\ Id.
    \66\ Id. at 40679.
---------------------------------------------------------------------------

    The Commission also found that the proposed RLPs were reasonably 
designed to minimize the concerns raised by sub-penny quoting.\67\ 
Specifically, using the same analytical framework as the Regulation NMS 
Adopting Release, the Commission reasoned that the proposed RLPs did 
not raise concerns related to quote flickering or reduced depth at the 
inside quotation because the sub-penny prices would not be disseminated 
through the Equity Data Plans.\68\ In addition, the Commission did not 
believe the proposed RLPs would reduce incentives to post limit orders 
because market participants that display limit orders were unable to 
interact with marketable retail order flow that was almost entirely 
executed in the OTC market.\69\ Exchanges proposed RLPs, in part, to 
address the differences in market structure that divert retail 
liquidity off-exchange. However, to date, the RLPs have not attracted a 
significant volume of retail order flow.\70\
---------------------------------------------------------------------------

    \67\ Id. at 40682. See also CBOE BYX Retail Pilot Program 
Approval Order, supra note 62 at 71658; and NASDAQ BX Retail Pilot 
Program Approval Order, supra note 62 at 72053.
    \68\ NYSE Retail Liquidity Program Approval Order at 40682. 
There are three effective national market system plans that govern 
the collection, consolidation, processing, and dissemination of 
certain NMS information. They are: (1) the Consolidated Tape 
Association Plan (``CTA Plan''); (2) the Consolidated Quotation Plan 
(``CQ Plan''); and (3) the Joint Self-Regulatory Organization Plan 
Governing the Collection, Consolidation, and Dissemination of 
Quotation and Transaction Information for Nasdaq-Listed Securities 
Traded on Exchanges on an Unlisted Trading Privileges Basis (``UTP 
Plan'') (together, the ``Equity Data Plans''). See also MDI Adopting 
Release, supra note 5.
    \69\ Id. at 40680.
    \70\ See, e.g., How Can The Buy Side Interact With Retail Flow, 
Rosenblatt Securities, Feb. 14, 2022, available at https://www.rblt.com/market-reports/how-can-the-buy-side-interact-with-retail-flow (``The various exchange retail programs consistently 
account for less than 0.2% of consolidated volume.''). According to 
NYSE, most order handling processes ignore retail interest that is 
available in the RLPs because resting interest in RLPs does not 
display price or size. See NYSE, Price improvement, tick 
harmonization & investor benefit (Aug. 22, 2022) (``NYSE Tick 
Harmonization Paper''), available at https://www.nyse.com/publicdocs/nyse/NYSE_Price_Improvement_202208.pdf. See also https://www.nyse.com/data-insights/what-exchanges-can-and-cannot-offer-retail-traders. See also NYSE Retail Liquidity Program Approval 
Order at 40682.
---------------------------------------------------------------------------

C. Tick Size Considerations Since Regulation NMS

    Minimum pricing increments have been considered several times since 
the Commission adopted rule 612. In 2010, the Commission issued the 
Concept Release on Equity Market Structure, which examined the then 
current equity market structure and invited public comment on various 
market structure issues, including high frequency trading, order 
routing, market data linkages, and undisplayed liquidity.\71\ Among 
other things, the Commission discussed internalization by broker-
dealers and stated that ``[t]here may be greater incentives for broker-
dealer internalization in low-priced stocks than in higher priced 
stocks.'' \72\ The Commission stated that in low-priced stocks, the one 
cent per share minimum pricing increment is much larger on a percentage 
basis than it is in higher-priced stocks.\73\ In the discussion on 
undisplayed liquidity, the Commission sought comment on whether public 
price discovery and execution quality may have suffered and 
specifically questioned whether the minimum pricing increment should be 
reduced for lower priced stocks.\74\ In response, the Commission 
received several letters opposing \75\ and supporting \76\ a pilot 
program to test sub-penny tick increments. The Commission also received 
letters recommending a pilot program to test a wider variety of tick 
sizes.\77\
---------------------------------------------------------------------------

    \71\ See Concept Release on Equity Market Structure, supra note 
4.
    \72\ Id.
    \73\ Id.
    \74\ Id.
    \75\ See, e.g., Letters from Karrie McMillan, General Counsel, 
Investment Company Institute, dated Apr. 21, 2010; Ann Vlcek, 
Managing Director and Associate General Counsel, Securities Industry 
and Financial Markets Association (``SIFMA''), dated Apr. 29, 2010; 
James J. Angel, Associate Professor, McDonough School of Business, 
Georgetown University; Lawrence E. Harris, Fred V. Keenan Chair in 
Finance, Professor of Finance and Business Economics, Marshall 
School of Business, University of Southern California; Chester S. 
Spatt, Pamela R. and Kenneth B. Dunn Professor of Finance, Director, 
Center for Financial Markets, Tepper School of Business, Carnegie 
Mellon University, dated Feb. 23, 2010.
    \76\ See, e.g., Letters from Eric Swanson, General Counsel, BATS 
Exchange, Inc., dated Apr. 21, 2010 and Eric W. Hess, General 
Counsel, Direct Edge, dated Apr. 28, 2010.
    \77\ See, e.g., Letters from Janet M. Kissane, SVP--Legal and 
Corporate Secretary, Office of the General Counsel, NYSE Euronext, 
dated Apr. 23, 2010; and John A. McCarthy, General Counsel, GETCO 
LLC, Christopher R. Concannon, Partner, Virtu Financial LLC, and 
Leonard J. Amoruso, General Counsel, Knight Capital Group, Inc., 
dated July 9, 2010.
---------------------------------------------------------------------------

    In 2010, three exchange operators jointly petitioned the Commission 
to use its exemptive authority under rule 612(c) to allow the exchanges 
to implement a 6-month pilot program that would reduce the minimum 
pricing increment to $0.005 for a limited set of 30 NMS stocks priced 
from $1.00 to $20.00 (including one exchange-traded fund (``ETF'') that 
was trading at greater than $20.00).\78\ The Joint Petition stated that 
at that time a significant percentage of the volume in these securities 
(4%) was transacting at a $0.005 increment and that a large percentage 
of share volume in securities priced below $20 occurred in securities 
that were routinely quoted at the minimum pricing increment, indicating 
a likelihood that price discovery was being constrained.\79\ The Joint 
Petition also stated that ``a disproportionately high percentage of 
transactions in securities priced between $1 and $20 dollars are 
occurring away from lit markets, which [they] believe indicates a lack 
of quote competition.'' \80\ The petitioners stated that the $0.01 
minimum pricing increment resulted in artificially wide publicly-
displayed quotes for certain lower-priced, liquid securities, which, in 
turn, negatively impacted the public price discovery process and 
resulted in inferior execution prices for investors.\81\
---------------------------------------------------------------------------

    \78\ See Letter from Chris Isaacson, Chief Operating Officer, 
BATS Exchange, Inc., Eric Noll, Executive Vice President, NASDAQ OMX 
Group, Inc., and Larry Leibowitz, Chief Operating Officer, NYSE 
Euronext, Inc. to Elizabeth M. Murphy, Secretary, Commission, dated 
on Apr. 30, 2010 (``Joint Petition'') available at https://www.sec.gov/spotlight/regnms/jointnmsexemptionrequest043010.pdf. The 
petitioners stated that the pilot would allow the Commission to 
collect data to study the impact of the reduction of the minimum 
increment without making a long term policy commitment. The 
petitioners did not propose to reduce the access fee caps under rule 
610 because the $0.005 increment would have continued to be higher 
than the access fee cap, which would prevent the public display of a 
protected quote that is not accurate when the access fee is factored 
in. Id. at 7.
    \79\ Id. at 6.
    \80\ Id. at 2.
    \81\ Id. at 1.
---------------------------------------------------------------------------

    In 2012, Congress passed the Jumpstart Our Business Startups Act 
(``JOBS Act''), which contained provisions relating to the impact of 
decimalization on small and middle capitalization companies. Section 
106(b) of the JOBS Act directed Commission to conduct a study on how 
decimalization affected the number of initial public offerings 
(``IPOs'') and the liquidity and trading of smaller capitalization 
company securities. The Commission submitted a staff study to Congress 
in July 2012.\82\ While the Decimalization Report did not reach any 
firm conclusions about the impact of

[[Page 80273]]

decimalization on the number of IPOs or the liquidity and trading of 
small capitalization companies, it did recommend that the Commission 
conduct a roundtable where recommendations could be presented on a 
pilot program that would generate data to allow the Commission to 
further assess decimalization's impact. Commission staff held a 
roundtable on February 5, 2013, during which there was broad support 
among panelists for the Commission to conduct a pilot program to gather 
information, particularly with respect to the impact of wider minimum 
pricing increments on liquidity in smaller capitalization 
companies.\83\ In 2016, the Commission initiated a Tick Size Pilot for 
small- and mid-size capitalized stocks to test larger quoting and 
trading increments (``TSP'').\84\ After the expiration of the 2-year 
pilot program, the Commission staff observed that, on average, 
increasing the tick size resulted in deteriorating market quality for 
stocks that became tick-constrained under the pilot.\85\
---------------------------------------------------------------------------

    \82\ See Decimalization Report, supra note 49.
    \83\ For a complete discussion about the Feb. 6, 2013 roundtable 
and the discussions that led to the implementation of the tick size 
pilot, see Securities Exchange Act Release No. 72460 (June 24, 
2014), 79 FR 36840 (June 30, 2014) (Order Directing the Exchange and 
FINRA to submit a Tick Size Pilot Plan).
    \84\ See Securities Exchange Act Release No. 74892 (May 6, 
2015), 80 FR 27513 (May 13, 2015) (Order Approving the National 
Market System Plan to Implement a Tick Size Pilot Program, available 
at https://www.govinfo.gov/content/pkg/FR-2015-05-13/pdf/2015-11425.pdf).
    \85\ DERA Tick Size Pilot and Market Quality (Jan. 31, 2018), 
available at https://www.sec.gov/dera/staff-papers/white-papers/dera_wp_tick_size-market_quality. See also Who Provides Liquidity, 
And When?, Sida Li, Xin Wang, and Mao Ye, Journal of Financial 
Economics 141, no. 3 (2021) (finding that wider tick sizes reduce 
liquidity, encourage the speed race among high-frequency traders, 
and allocate resources to latency reduction) and Yashar Barardehi, 
Peter Dixon, Qiyu Liu, and Ariel Lohr, Tick Sizes and Market 
Quality: Revisiting the Tick Size Pilot (working paper, Dec. 14, 
2022) available at https://www.sec.gov/files/dera_wp_ticksize-pilot-revisit.pdf (observing that market quality improved at the end of 
the pilot for stocks that were tick constrained under the TSP). 
Dixon, Liu, and Lohr are financial economists in the Division of 
Economic and Risk Analysis at the SEC. Barardehi is at the Argyros 
School of Business & Economics, Chapman University, and is a part-
time consultant with the SEC.
---------------------------------------------------------------------------

D. Issues Raised in the Current Market Structure

    In 2005, when rule 612 was adopted, the markets were still largely 
typified by manual trading on exchange floors.\86\ Since then, the 
markets have overwhelmingly transitioned to electronic trading with 
orders being accepted, routed, displayed, and executed via low latency 
trading systems.\87\ Equity market structure and competitive dynamics 
have also changed,\88\ and trading and order routing systems can handle 
and process an amount of data that would have been unprecedented and 
unfathomable in 2005.\89\ NMS stocks are traded on-exchange (i.e., on 
one or more of the 16 currently registered national securities 
exchanges) or off-exchange (e.g., on one or more of the 33 currently 
registered NMS Stock ATSs \90\ or by OTC market makers).\91\ As of 
September 2022, on-exchange volume is approximately 58% while off-
exchange/OTC volume is approximately 42%,\92\ while in 2007, on-
exchange share volume was 71% and off-exchange/OTC volume was 
approximately 29%.\93\ The market structure of the OTC market that 
permits the execution of orders more readily in sub-penny amounts has 
been a factor that contributes to this result.
---------------------------------------------------------------------------

    \86\ See Concept Release on Equity Market Structure, supra note 
4.
    \87\ See MDI Adopting Release, supra note 5.
    \88\ The Concept Release on Equity Market Structure describes 
the transition of the modern equity trading markets away from the 
largely centralized, manual structure to the dispersed automated 
structure that exists today. See Concept Release on Equity market 
Structure, supra note 4. See also Staff Report on Algorithmic 
Trading in the U.S. Capital Markets (Aug. 5, 2020) (``Staff Report 
on Algorithmic Trading'') (this staff report updated some of the 
Concept Release's details and described certain developments that 
have occurred since 2010).
    \89\ See Staff Report on Algorithmic Trading (describing the 
broad use of algorithms in contemporary securities markets).
    \90\ See https://www.sec.gov/divisions/marketreg/form-ats-n-filings.htm.
    \91\ See Staff Report on Equity and Options Market Structure, 
supra note 20.
    \92\ Source: Equity consolidated data feeds (CTS and UTDF), as 
collected by MIDAS; NYSE Daily TAQ.
    \93\ Source: Equity consolidated data feeds (CTS and UTDF), as 
collected by MIDAS; NYSE Daily TAQ.
---------------------------------------------------------------------------

    While rule 612 does not prohibit executions from occurring in sub-
penny increments, there are various factors that lead to sub-penny 
trading occurring more frequently off-exchange compared to on-exchanges 
or ATSs. Specifically, exchanges and ATSs typically match quotes and 
orders in the penny increment in which explicitly priced quotes and 
orders must be submitted under rule 612. Sub-penny trading occurs on 
exchanges and ATSs pursuant to either: (1) exchange rules and order 
types that permit executions at midpoint of the NBBO or volume-weighted 
executions or (2) exemptions that have been granted by the Commission 
under rule 612(c) (i.e., RLPs).\94\ Accordingly exchange rules, and the 
requirement that such rules comply with rule 612, limit sub-penny 
trading on exchanges.
---------------------------------------------------------------------------

    \94\ See supra section II.B.1.
---------------------------------------------------------------------------

    OTC market makers execute in sub-penny increments with more 
regularity as a result of their ability to offer price improvement in 
between the NBBO after such orders have been accepted by the OTC market 
maker in the permissible penny increment.\95\ OTC market makers, unlike 
market participants on an exchange or ATS, are not limited by their 
market structure to generally execute orders in the minimum pricing 
increment that the order was accepted. Instead, OTC market makers are 
able to trade as principal with orders that they receive and in the 
increment that they determine. As a result, OTC market makers may trade 
more readily in sub-penny increments which helps to provide an 
advantage over their exchange and ATS counterparts in attracting order 
flow.
---------------------------------------------------------------------------

    \95\ OTC market makers internalize orders by trading principally 
on the other side of the orders that they accept. See Staff Report 
on Equity and Options Market Structure, supra note 20.
---------------------------------------------------------------------------

    Today, most marketable retail order flow is executed off-exchange 
by OTC market makers who, in addition to not being limited by exchange 
rules, offer, in many cases, payment for order flow (``PFOF'') for 
retail orders.\96\ Further, 37% of executions off-exchange are reported 
in sub-penny amounts that are not associated with midpoint trades.\97\ 
As further discussed in the Economic Analysis, data suggests that of 
the total dollar value of sub-penny trades that are not midpoint 
trades, 11% occurred on-exchange while 89% occurred off-exchange.\98\ 
While this dynamic provides retail orders that execute OTC with a 
measure of price improvement, the Commission is concerned that these 
retail orders are not exposed to competitive forces on the public 
market (since these retail orders are typically directed from one 
broker-dealer to another wholesale broker-dealer by contractual 
arrangement). As a result, these retail orders are not publicly 
displayed and do not contribute to the

[[Page 80274]]

price competition and discovery mechanism of the lit markets. The 
Commission is seeking to address concerns about the competitive dynamic 
between exchanges/ATSs and OTC market makers because the ability of OTC 
market makers to more readily trade in finer sub-penny increments than 
exchanges and ATSs factors into the increasing percentage of equity 
volume that is executed off-exchange.\99\
---------------------------------------------------------------------------

    \96\ ``Payment for order flow'' is defined in Rule 10b-10 under 
the Exchange Act. 17 CFR 240.10b-10(d)(8). Rule 10b-10 further 
prescribes information that a broker or dealer must disclose to its 
customer on the customer's confirmation. The rule requires that the 
broker-dealer disclose to the customer, among other things, ``[t]he 
amount of any remuneration received or to be received by the broker 
from such customer in connection with the transaction . . .'' and 
``the source and amount of any other remuneration received or to be 
received by the broker in connection with the transaction. . . .'' 
17 CFR 240.10b-10(a)(2)(B) and (D).
    \97\ See infra section V.C.1.b and accompanying text.
    \98\ See infra section V.C.1.b and Table 8.
    \99\ See Staff Report on Equity and Options Market Structure at 
11. See also Kwan, Amy, Ronald Masulis, and Thomas H. McInish, 
``Trading rules, competition for order flow and market 
fragmentation,'' Journal of Financial Economics 115, no. 2 (2015): 
330-348.
---------------------------------------------------------------------------

    The fact that rule 612 does not prohibit sub-penny trading and the 
underlying regulatory framework that results in greater opportunities 
to trade OTC in sub-penny increments makes it more difficult for 
exchanges and ATSs to compete with OTC market makers for retail order 
flow. The Commission believes that the contrast between on and off-
exchange sub-penny trading and the competitive responses by market 
participants results in market complexity and inefficiencies (e.g., 
inverted taker-maker fee structures, tiered fee structures, 
segmentation via RLPs, excessive fragmentation and 
intermediation).\100\ The proposed amendments to rule 612 would level 
the competitive playing field in this regard by requiring market 
participants, regardless of trading venue, to offer price improvement 
to investor orders in the same minimum pricing increments, unlike today 
where OTC market makers are able to offer investor orders price 
improvement in smaller pricing increments compared to their exchange 
and ATS counterparts.
---------------------------------------------------------------------------

    \100\ See, e.g., Enhancing Competition, Transparency and 
Resiliency in U.S. Financial Markets, Citadel Securities (May 2021) 
available at https://fe7a500fc6adae9c30fb.b-cdn.net/wp-content/uploads/2021/05/EnhancingCompetitionTransparencyandResiliencyinUSFinancialMarkets.pdf
 (``Citadel Report'') (``This regulatorily mandated tick size 
impedes the ability of exchanges to compete for order flow in 
symbols that are highly liquid and commonly trade inside a bid-offer 
spread of a penny. We believe this `constrained' tick size directly 
leads to complexities and inefficiencies--such as driving order flow 
into alternative venues, complex exchange pricing structures, and 
increased overall market fragmentation.''). See also Enhancing U.S. 
Equity Market Structure for Retail Investors, Committee on Capital 
Markets Regulation (Sept. 2021) (``CCMR Report'') available at 
https://www.capmktsreg.org/wp-content/uploads/2021/09/CCMR-Enhancing-Retail-Equity-Market-Structure-09.01.2021-2.pdf.
---------------------------------------------------------------------------

    In addition, some NMS stocks are considered to be tick-constrained, 
meaning that they regularly experience a time-weighted average quoted 
spread of 1.1 cents or less, which indicates that these stocks are 
frequently quoted in the smallest increment permitted under the 
rule.\101\ The Commission identified 1,337 NMS stocks that would be 
considered tick-constrained under this metric.\102\ These tick-
constrained NMS stocks account for 56.1% of estimated share volume and 
23.2% of estimated dollar volume.\103\ NMS stocks become tick-
constrained because rule 612's minimum pricing increment prohibits 
quoting these stocks in increments smaller than provided under the 
rule. These stocks would experience smaller quoted spreads but for the 
requirement under rule 612.
---------------------------------------------------------------------------

    \101\ See infra note 448.
    \102\ See infra note 448 and accompanying text and infra Table 
4.
    \103\ Id.
---------------------------------------------------------------------------

    Certain market participants have conducted data analysis on the 
effects of rule 612 and concluded that a $0.01 increment may not be 
appropriate for all stocks.\104\ For instance, MEMX LLC (``MEMX'') 
issued a report in August 2021, which provided data that suggests that 
``[a] significant portion of the U.S. equity market trades with a 
consistent penny spread throughout most of the trading day.'' \105\ 
MEMX provided data from the first half of 2021 indicating that many 
tick-constrained stocks, based on MEMX's definition, are actively 
traded securities that ``as a group [account] for 47% of volume, 28% of 
trades, and 25% of notional value executed.'' \106\ According to MEMX, 
the ``[q]uoted spreads in these securities are limited not by supply 
and demand, but rather by outdated regulatory constraints that apply 
the same tick regime to securities with different trading 
characteristics.'' \107\
---------------------------------------------------------------------------

    \104\ See, e.g., The Tick-Constrained Stock Problem by Phil 
Mackintosh (Jan. 20, 2022), available at https://www.nasdaq.com/articles/the-tick-constrained-stock-problem) (``Nasdaq Paper''). See 
also Petition for Rulemaking to Amend Rule 612 of Regulation NMS to 
Adopt Intelligent Tick-Size Regime, dated Dec. 16, 2019, submitted 
by John A. Zecca, Executive Vice President, Chief Legal Officer & 
Chief Regulatory Officer, Nasdaq Inc. available at https://www.sec.gov/rules/petitions/2019/petn4-756.pdf (``Nasdaq Intelligent 
Tick Proposal''); The Impact of Tick Constrained Securities on the 
U.S. Equity Market (available at https://www.nyse.com/publicdocs/Tick_Constrained_Stocks.pdf) (``NYSE White Paper'') (no date 
available); and Cboe Proposes Tick-Reduction Framework to Ensure 
Market Structure Benefits All Investors (available at https://www.cboe.com/insights/posts/cboe-proposes-tick-reduction-framework-to-ensure-market-structure-benefits-all-investors/) (``Cboe 
Proposal'').
    \105\ See MEMX Tick Constrained Securities (Aug. 2021) (``MEMX 
Report'') available at https://memx.com/wp-content/uploads/MEMX-Market-Structure-Report-Tick-Constrained-Securities.pdf. MEMX 
reviewed data from the first and second quarter of 2021. MEMX data 
suggested that on average 998 stocks during the period were tick-
constrained, which MEMX defined as those NMS stocks that had an 
average quoted spread of 1.1 cents or less. In addition, on Aug. 30, 
2021, MEMX filed a Request for Exemptive Relief Pursuant to Rule 
612(c) of Regulation NMS to Permit a Minimum Increment of $0.005 in 
``Tick Constrained'' NMS Stocks. See Letter from Adrian Griffiths, 
Head of Market Structure, MEMX to Vanessa Countryman, Secretary, 
Commission dated Aug. 30, 2021 (``MEMX Exemption Request'').
    \106\ MEMX Report, supra note 105, at 9.
    \107\ Id. at 9.
---------------------------------------------------------------------------

    MEMX analyzed tick-constrained stocks across different price 
buckets and found that tick-constraint occurs more frequently in lower-
priced securities, ``where the one cent minimum increment is more 
``economically significant'' relative to the price of a share of 
stock.'' \108\ According to MEMX's analysis, ``two-thirds (66%) of all 
tick-constrained securities trade in the two lowest price buckets,'' 
which included stocks priced between $1.00 and $20.00 per share.\109\ 
MEMX's analysis concluded that low-priced stocks are ``more likely to 
be tick constrained, and the impact of that tick constraint in terms of 
basis point spread, which is relevant when measuring the cost of 
entering into a transaction, is also largest in these securities.'' 
\110\ However, MEMX stated that tick-constraint issues can occur across 
different price buckets, including in high-priced, actively-traded 
stocks.\111\ MEMX's analysis also found that tick-constrained stocks 
typically have more liquidity at the NBBO than stocks that are not 
tick-constrained. The findings were similar for stocks and exchange 
traded products (``ETPs'') with varying notional values traded.\112\
---------------------------------------------------------------------------

    \108\ Id. at 10.
    \109\ Id.
    \110\ Id.
    \111\ Id. at 11.
    \112\ Id. at 15-17.
---------------------------------------------------------------------------

    MEMX analyzed securities that trade at least $100 million notional 
value each day and concluded that more than one half of equity ETPs are 
tick-constrained.\113\ MEMX stated that tick-constrained actively-
traded ETPs have spreads that are artificially wide ``despite the fact 
that ETPs can be priced more efficiently due to the ability to 
accurately derive ETP prices and an effective arbitrage mechanism that 
keeps ETP prices in line with those of its underlying securities.'' 
\114\
---------------------------------------------------------------------------

    \113\ Id. at 13.
    \114\ Id.
---------------------------------------------------------------------------

    The New York Stock Exchange (``NYSE'') published a white paper that 
stated the current $0.01 minimum pricing increment is a wider tick than 
market forces would otherwise produce for tick-constrained stocks.\115\ 
NYSE stated that tick-constrained stocks tend to trade with high 
volume, relatively low prices, and quoted spreads near $0.01, and 
exhibit higher levels of inaccessible liquidity (i.e., order flow

[[Page 80275]]

that is only available to select market participants) \116\ which 
hampers transparency and price discovery.\117\ NYSE stated that the 
uniform rule 612 minimum pricing increment of $0.01 for all NMS stocks 
that are priced at, or above, $1.00 per share increases inaccessible 
liquidity, which results in ``different market experiences for 
different participants.'' \118\
---------------------------------------------------------------------------

    \115\ See NYSE White Paper, supra note 104.
    \116\ NYSE stated that retail order flow is an example of 
inaccessible liquidity because it is largely sent to OTC market 
making firms that can execute such orders on a principal basis at 
prices inside the best displayed prices. Id. at 1. NYSE stated that 
retail order flow has increased as a percentage of the market. Id.
    \117\ Id. at 1.
    \118\ Id. at 2.
---------------------------------------------------------------------------

    NYSE explained that some high-volume, lower-priced securities 
``trade consistently with a spread of exactly $0.01 and maintain very 
deep order books at the national best price.'' \119\ NYSE said that 
this dynamic makes ``it difficult for liquidity providers to receive a 
fill, except at undesirable times such as when the price is about to 
change'' and that ``queue competition contributes to high-cost 
infrastructure deployments'' as market participants need to develop low 
latency technology to be the fastest to a new price and has also led to 
the development of inverted fee venues, ``which allow, for a cost, 
liquidity providers to pay for better queue position.'' \120\ According 
to NYSE, these dynamics show that rule 612 has influenced an ``arms 
race'' in market technology and venue fragmentation. NYSE also stated 
that ``artificially wide tick sizes raise transaction costs and harm 
execution quality.'' \121\ NYSE estimated that ``trading in tick 
constrained securities typically increase[s] transaction costs by about 
one billion dollars per year . . .'' \122\
---------------------------------------------------------------------------

    \119\ Id.
    \120\ Id.
    \121\ Id.
    \122\ Id. at 12.
---------------------------------------------------------------------------

    NYSE developed a ``Tick Constrained Index'' based on consolidated 
quoted spread and NBBO coverage to identify stocks that it considered 
tick-constrained using data from 2019. NYSE's tick-constrained stocks 
represented 538 symbols in the second half of 2020, which had an 
average intraday volume of 4,254,664 shares per symbol, and 25.9% of 
intraday volume. NYSE estimated that the minimum $0.01 spread ``cost 
investors over $1.7 billion in the first half of 2020 . . . [and] $499 
million'' in the second half of 2020.\123\ NYSE also analyzed the 
impact of volatility in 2020 on tick-constrained stocks and concluded 
that tick-constrained stocks responded differently than non-tick-
constrained stocks to extreme volatility. Specifically, tick-
constrained stocks spreads did not widen (52.72%) as much as non-tick-
constrained (163.33%), but the depth at the inside decreased 
significantly more in tick-constrained stocks (-73.24%) compared to 
non-tick-constrained stocks (-39.75%).\124\ According to NYSE, market 
makers managed their risk in tick-constrained stocks by reducing 
liquidity because they could not reduce prices. NYSE also noted that 
exchange market makers are unable to compete with off-exchange 
providers in providing price improvement.\125\
---------------------------------------------------------------------------

    \123\ Id. at 4.
    \124\ Id. at 6-7.
    \125\ Id. at 8.
---------------------------------------------------------------------------

    More recently, NYSE published a study on price improvement and 
minimum pricing increments.\126\ NYSE analyzed consolidated exclusive 
securities information processor (``SIP'') data from January 1, 2022, 
to June 30, 2022.\127\ NYSE estimates that in the first half of 2022 
approximately $72 million per day aggregated price improvement was 
provided and that of this amount 48% was delivered on exchange and 52% 
was delivered off-exchange.\128\ Further, NYSE estimates that 12.4% of 
the total price improvement came from non-midpoint trades in either 
tenths or hundredths of a cent, which are increments that exchanges 
have limited ability to trade.\129\ According to NYSE's analysis, 
harmonizing the trading increment across exchange and non-exchange 
trading ``could yield $6.3MM per day ($1.8B per year) in investor cost 
savings based on projected incremental savings if exchanges could offer 
sub-penny price improvement in a competitive manner.'' \130\
---------------------------------------------------------------------------

    \126\ See NYSE Tick Harmonization Paper, supra note 70 at 2.
    \127\ Id. at 3.
    \128\ Id. at 4.
    \129\ Id.
    \130\ Id. at 2. NYSE described ``trade increment harmonization'' 
as ``equal trade pricing rules for all on and off exchange trading, 
with exchanges able to display quotes at twice the trade pricing 
increment.'' NYSE analyzed the possible impact of a half cent 
quoting increment coupled with a harmonized quarter cent trading 
increment. Id. at 5.
---------------------------------------------------------------------------

    NYSE stated that exchanges currently provide: (1) 1.17x the amount 
of off-exchange price improvement when combining the midpoint and round 
penny trade prices; and (2) 77% as much price improvement as off-
exchange trades when spreads are wider than $0.01.\131\ NYSE applied 
these ratios to current off-exchange sub-penny price improvement 
estimates to calculate an additional $7.3 million in daily price 
improvement.\132\
---------------------------------------------------------------------------

    \131\ Id. at 2.
    \132\ Id.
---------------------------------------------------------------------------

    NYSE also examined data related to stocks that frequently trade 
with a $0.01 spread and found that trades did not frequently execute in 
increments as small as $0.0001, which is the increment that off-
exchange market makers can use in executing trades.\133\ In addition, 
according to NYSE, most price improvement is delivered to trades where 
the bid-offer spread is larger than $0.10. NYSE also examined price 
improvement trends during ``calm'' \134\ and volatile markets.\135\ 
According to NYSE, exchanges tend to provide a larger share of the 
total price improvement during volatile markets, while off-exchange 
venues increase their share of total price improvement when volatility 
drops.\136\
---------------------------------------------------------------------------

    \133\ Id. at 8.
    \134\ NYSE defined a ``calm'' market for purposes of its 
analysis as ``when there is a stable quoted market price for a 
restrictive 100 milliseconds before and after the trade.'' Id. at 9.
    \135\ Id.
    \136\ Id.
---------------------------------------------------------------------------

    Finally, NYSE considered the impact of allowing sub-penny quoting 
on market infrastructure.\137\ NYSE stated that the industry is capable 
of accommodating an increase in message traffic that may accompany 
lower minimum pricing increments.\138\ NYSE calculated several 
estimates of potential increased message traffic that resulted in 
increases in messages of the exchanges' best quotations between 25% and 
152% and stated that these increases would ``lead to small changes in 
messaging levels relative to historical fluctuations and overall 
messaging rates that remain quite modest compared to data volumes 
prevalent in current-day options trading.'' \139\
---------------------------------------------------------------------------

    \137\ Id. at 10-11.
    \138\ Id. at 10.
    \139\ Id. at 11.
---------------------------------------------------------------------------

    The Nasdaq Stock Market (``Nasdaq'') has also conducted studies on 
minimum pricing increments. According to Nasdaq, trading in tick-
constrained stocks is more complicated and more expensive, with 
artificially wider spreads and longer order queues, which slows order 
fulfillment and leads to the increased routing to exchanges that have 
inverted taker/maker fee structures.\140\ Nasdaq stated that as the 
price of the securities falls, the one penny minimum pricing increment 
becomes large as a percentage of value. For example, Nasdaq stated that 
for a stock priced above $1,000 per share, one penny is less than 0.10 
basis point (one basis point is equal to 0.01% or 0.0001), while for a 
stock priced $1.00, one penny represents 100 basis points.

[[Page 80276]]

Nasdaq stated that this is harmful for smaller less liquid stocks 
because the minimum pricing increment represents a higher percentage of 
value which ends up costing investors money. Nasdaq stated that when 
faced with a spread constraint, market participants trade more on 
inverted venues to narrow the spread due to the inverted pricing 
structures. According to Nasdaq, substantial queue lengths result in 
inverted usage and stocks priced lower than $5 tend to have longer 
queues.
---------------------------------------------------------------------------

    \140\ See Nasdaq Paper and Nasdaq Intelligent Tick at 4, supra 
note 104.
---------------------------------------------------------------------------

    For higher priced stocks, Nasdaq stated that a tick size that is 
too small can result in increased volatility and less price competition 
which impairs price discovery. According to Nasdaq, higher stock prices 
from less frequent stock splits can eventually lead to wider spreads 
and more odd-lot trading. Nasdaq found that fill rates are generally 
higher for low-priced stocks, and fill rates begin to decline once a 
stock is priced greater than $100. Further, Nasdaq stated that a tick 
size that is too small can reduce the significance of time priority 
because traders can outbid resting orders by an economically 
insignificant amount. Nasdaq stated that this discourages traders from 
improving displayed prices and reduces incentives to post displayed 
liquidity. Nasdaq stated that certain high priced stocks with spreads 
closer to $1.00 have odd-lots inside the NBBO much more frequently than 
high priced stocks with spreads below $0.02. Nasdaq further stated that 
if high priced stocks traded at a wider tick, there would be more 
displayed depth at each tick increment.
    Nasdaq concluded that if the minimum pricing increment is too wide 
(tick-constrained) or too small (stocks trading in multiple 
increments), the mismatch creates inefficiency that increases the 
issuer's cost of capital, hurting issuers and investor returns, 
potentially harming economic growth and retirement stability.
    Recently, the Cboe Exchange, Inc. (``Cboe'') examined the NBBO of 
all NMS securities above $1.00 from January 3, 2022, to August 23, 
2022, during regular trading hours, excluding opening and closing 
auctions and locked and crossed markets.\141\ Cboe stated that most 
securities are not tick-constrained and that a one-size-fits-all finer 
minimum pricing increment ``risks creating a structure that attempts to 
solve a problem that does not exist for most securities and introduces 
roadblocks to the liquidity aggregation and price discovery process.'' 
\142\
---------------------------------------------------------------------------

    \141\ See Cboe Proposal at 1, supra note 104.
    \142\ Id.
---------------------------------------------------------------------------

    Cboe stated that out of 10,125 securities, only 9% (877) should be 
considered preliminarily tick-constrained, which Cboe defined as stocks 
with an average quoted spread of 1.1 cents or less.\143\ Cboe found 
that these 877 securities represent 49% of average daily volume and 22% 
of average daily notional value traded.\144\ Cboe found that 88% of NMS 
stocks are quoted at spreads above $0.015 and 37% of securities 
representing 25% average daily notional value are being quoted at 
spreads above $0.10.\145\
---------------------------------------------------------------------------

    \143\ Id.
    \144\ Id.
    \145\ Id.
---------------------------------------------------------------------------

E. Proposals by Market Participants

    Various market participants have suggested that rule 612 be 
amended. Throughout the years, market participants have advocated that 
the minimum pricing increment: (1) only be reduced for NMS stocks that 
are tick-constrained; \146\ (2) be varied based on certain objective 
and measurable trading characteristics of a particular NMS stock; \147\ 
or (3) be increased for higher-priced stocks.\148\ The Commission has 
studied and considered the alternative approaches that are described in 
this section, and at this time has determined to propose rule 612 
amendments that would implement variable minimum pricing increments for 
the quoting and trading of NMS stocks priced at, or above, $1.00 per 
share based on the Time-Weighted Average Quoted Spread during an 
Evaluation Period.
---------------------------------------------------------------------------

    \146\ See Joint Petition, supra note 78. See also MEMX Exemption 
Request, supra note 105.
    \147\ See Nasdaq Intelligent Tick Proposal, supra note 104.
    \148\ See TSP, supra note 85.
---------------------------------------------------------------------------

    As discussed more fully in section II.F., the Commission believes 
that the proposed amendments to rule 612 addresses the concerns that 
have arisen since its adoption in a manner that is consistent with the 
Congressional directives, set forth by section 11A of the Exchange Act, 
to facilitate the establishment of the national market system. 
Specifically, the Commission has designed the proposed rule 612 
amendments to achieve the section 11A objectives of fair competition, 
economically efficient executions, and equal regulation by addressing 
concerns related to: (1) tick-constrained stocks; and (2) fair 
competition for retail order flow across trading venues.
1. Reduce the Tick Size to $0.005 for Tick-Constrained Stocks
    Some market participants have recommended that rule 612 be amended 
to lower the minimum pricing increment to $0.005 only for NMS stocks 
that are tick-constrained.\149\ Specifically, MEMX submitted a request 
that the Commission exercise its exemptive authority under rule 612(c) 
of Regulation NMS to permit market participants, including exchanges, 
associations, ATSs, vendors and broker-dealers, to display, rank, and 
accept bids or offers, orders, and indications of interest in $0.005 
\150\ increments for those NMS stocks that are ``tick-constrained,'' 
which MEMX would define as those stocks that trade with an average 
quoted spread of 1.1 cents or less.\151\ MEMX requested that average 
daily spreads be calculated on a monthly basis and that a stock would 
have its minimum pricing increment reduced based upon a prior calendar 
month.\152\ MEMX stated that the current increment ``is demonstrably 
too wide'' for certain stocks and ``imposes unnecessary costs on 
investors.'' \153\ MEMX also stated that quoting in tick-constrained 
stocks is based on ``outdated regulatory constraints'' as opposed to 
``supply and demand'' which in turn ``harm[s] public price discovery 
and increas[es] transaction costs.'' \154\ Further, MEMX stated that 
reducing the minimum pricing increment for tick-constrained stocks 
would minimize implicit trading costs for investors, e.g., spread 
costs.\155\
---------------------------------------------------------------------------

    \149\ See Citadel Report, supra note 91 at 4 and CCMR Report, 
supra note 91 at 10. See MEMX Exemption Request, supra note 105.
    \150\ MEMX did not explain how MEMX arrived at the $0.005 
increment. However, MEMX also requested that orders be permitted to 
execute at the midpoint of the NBBO.
    \151\ MEMX, in conjunction with its request for relief pursuant 
to rule 612(c) to reduce the minimum increment for tick-constrained 
stocks to $0.005, also requested relief pursuant rule 610(c) to 
limit access fees for tick-constrained stocks for any national 
securities exchange, national securities association, or other 
trading center. MEMX stated that the rule 610 access fee and the 
rule 612 minimum increment are ``intimately tied'' to each other. 
See MEMX Exemption Request, supra note 105 at 8.
    \152\ MEMX suggested using a calendar month calculation to be 
similar to the round lot calculation adopted under the MDI Rules. 
MEMX stated that using a similar schedule could reduce complexity. 
See id. at 3.
    \153\ Id. at 2.
    \154\ Id. at 1.
    \155\ Id. at 6.
---------------------------------------------------------------------------

    MEMX stated that reducing the minimum increment ``would reduce 
transaction costs and facilitate more robust price discovery by 
enabling liquidity providers to post more aggressive quotations within 
the current penny spread. . .'' \156\ In addition, MEMX stated that 
reducing the minimum pricing increment for tick-constrained stocks 
would be in the

[[Page 80277]]

public interest and consistent with the protection of investors because 
``the potential savings are likely to be substantial'' due to the 
amount of trading that occurs in tick-constrained stocks.\157\
---------------------------------------------------------------------------

    \156\ Id.
    \157\ Id.
---------------------------------------------------------------------------

    MEMX addressed the factors that the Commission identified in the 
Regulation NMS Adopting Release for consideration of exemptions under 
rule 612(c). In the Regulation NMS Adopting Release,\158\ the 
Commission stated that the factors it would consider and evaluate in 
the context of an exemption request under rule 612(c), amongst other 
things, would include: (1) if the security always trades with a penny 
spread and there is tremendous liquidity available on both sides of the 
market; \159\ (2) whether the NMS stock was an ETF or other derivative 
that could be readily converted into its underlying securities or vice 
versa, in which case the true value of the security is derived from its 
underlying components and might be a sub-penny increment; (3) if there 
is a large volume of sub-penny executions in that security due to price 
improvement; and (4) if the security was low priced. Specifically, MEMX 
stated that ``(1) almost one thousand NMS stocks accounting for nearly 
half of all volume and about a quarter of all trades and notional value 
traded on a daily basis are tick constrained, meaning that they 
consistently trade with a penny increment; (2) such tick constrained 
NMS stocks trade with `tremendous' liquidity at the NBBO as quoting 
activity is forced to cluster at the minimum increment instead of more 
aggressive prices that would offer improved economics to investors; (3) 
tick constraints occur frequently and are most impactful in (A) low-
priced NMS stocks where a one cent spread is more economically 
significant in relation [to] the price of the security; and (B) ETPs 
whose prices can be appropriately derived from their underlying 
constituents.'' \160\
---------------------------------------------------------------------------

    \158\ See Regulation NMS Adopting Release, supra note 16, at 
37554. MEMX did not analyze whether there is large volume of sub-
penny executions due to price improvement. MEMX stated that 
executions in sub-penny increments ``are likely to be indicative of 
retail internalization as opposed to market participants seeking to 
trade within a tick-constrained spread.'' See MEMX Exemption 
Request, supra note 105, at 4.
    \159\ See Regulation NMS Adopting Release, supra note 16, at 
37554 (quoting a commenter).
    \160\ MEMX Exemption Request, supra note 105, at 6 (footnotes 
omitted).
---------------------------------------------------------------------------

    Further, MEMX stated that the objectives underlying rule 612 would 
not be jeopardized if the exemption was granted and the minimum pricing 
increment was reduced. Specifically, MEMX stated that because market 
participants are unable to improve displayed prices for tick-
constrained stocks, the previously articulated policy concern of 
stepping ahead of displayed orders by ``economically insignificant 
amounts'' was not relevant. MEMX stated that reducing the tick size 
would promote price competition for those stocks that are currently 
hindered by regulation.\161\
---------------------------------------------------------------------------

    \161\ See id. at 7.
---------------------------------------------------------------------------

    Citadel also recommended that ``[t]he Commission should reduce the 
minimum tick size to a half-penny for symbols trading above $1.00 per 
share that are tick constrained (i.e., have a penny spread the 
overwhelming majority of the time).'' \162\ Citadel stated that the 
rule 612 minimum pricing increment ``impedes the ability of exchanges 
to compete for order flow in symbols that are highly liquid and 
commonly trade inside the bid-offer spread of a penny.'' \163\ Citadel 
continued that tick constraints lead to ``complexities and 
inefficiencies,'' including ``driving order flow into alternative 
venues, complex exchange pricing structures, and increased overall 
market fragmentation.'' \164\ Citadel stated that a reduced tick size 
for tick-constrained stocks would allow exchanges to display more 
aggressive prices and improve on-exchange execution quality and 
exchange competitiveness.\165\ Citadel also suggested, without 
elaborating, that allowing sub-penny quoting more broadly ``could raise 
other concerns.'' \166\
---------------------------------------------------------------------------

    \162\ Citadel Report, supra note 100 at 4.
    \163\ Id.
    \164\ Id.
    \165\ See id.
    \166\ Id.
---------------------------------------------------------------------------

    Finally, the CCMR recommended that the Commission revise rule 612 
to allow $0.005 increments in stocks that always trade with a penny 
spread.\167\ CCMR cited the analysis conducted by MEMX to support its 
recommendation. CCMR, however, stated that it did not recommend a 
$0.001 tick size. CCMR stated that a tick size that is too narrow can 
harm market quality. CCMR stated that a smaller tick size that is too 
narrow ``can cause ``flickering quotations,'' in which a stock quote 
rapidly switches back and forth between prices complicating broker-
dealer routing decisions and hindering their ability to get the best 
prices for investors.'' \168\ In addition, CCMR stated that smaller 
tick sizes could ``enable ``stepping ahead'' whereby a trader uses an 
economically insignificant quote to ``step ahead'' of an existing 
order, reducing the likelihood that orders posted by fundamental 
investors will be executed,'' which would create a disincentive for the 
public display of orders.\169\
---------------------------------------------------------------------------

    \167\ See CCMR Report, supra note 100 at 10.
    \168\ Id.
    \169\ Id.
---------------------------------------------------------------------------

    More recently, Cboe proposed a framework to reduce the minimum tick 
size to $0.005 for tick-constrained stocks that demonstrate other 
objective criteria.\170\ Specifically, Cboe would designate a security 
as tick-constrained and thus eligible for a $0.005 minimum pricing 
increment if a stock exhibits: (1) a high quote-size-to-trade-size 
ratio; and (2) a high average daily notional turnover.\171\ According 
to Cboe, a high quote-size-to-trade-size ratio demonstrates that ``even 
though there is an abundance of liquidity, the current $0.01 tick 
constraint disincentivizes investors to cross the spread due to high 
costs, resulting in a lack of trade executions.'' \172\ Further, a high 
average daily notional turnover would be an objective criterion 
``because it focuses the tick-reduction effort on high turnover 
securities that would benefit from the ability to trade in finer 
increments.'' \173\ For each criterion, Cboe would include stocks that 
fall within the top 75 percentile in the lower minimum pricing 
increment.\174\ Using its criteria and parameters, Cboe identified 67 
stocks that would be eligible for a reduction in the minimum pricing 
increment.\175\
---------------------------------------------------------------------------

    \170\ See Cboe Proposal, supra note 104, at 9.
    \171\ See id.
    \172\ Id. at 4.
    \173\ Id. Cboe further stated that thinly-traded securities, 
which would have a low notional turnover, should not be the focus of 
reducing minimum pricing increments.
    \174\ See id. at 6.
    \175\ See id. at 7.
---------------------------------------------------------------------------

    Cboe's proposal would include a reevaluation every quarter or bi-
annually for the criteria and parameters.\176\ Cboe would also decouple 
the quoting increments from trading increments.\177\ Cboe stated that 
decoupling the quoting and trading increments would allow retail 
auctions to increase trading competition in finer increments without 
impacting the broader market.\178\ Finally, Cboe proposed a 
consideration of wider ticks to facilitate enhanced liquidity

[[Page 80278]]

aggregation of securities that trade with wider spreads.\179\
---------------------------------------------------------------------------

    \176\ See id.
    \177\ See id.
    \178\ See id. (Cboe also proposed to accelerate the addition of 
odd-lot orders to the exclusive SIPs and to modernize rule 604 to 
increase the threshold to display block orders from 10,000 shares 
and $200,000 to 50,000 shares and $500,000).
    \179\ Id. at 9.
---------------------------------------------------------------------------

2. Variable Tick Sizes
    In December 2019, Nasdaq submitted a petition for rulemaking to 
request that the Commission amend rule 612 to replace the current 
``one-size-fits all'' tick regime with an ``intelligent tick regime'' 
that would utilize multiple tick sizes based on certain measurable 
criteria of NMS stocks.\180\ Under the Nasdaq proposal: (1) stocks 
would trade in one of six increments ($0.005; $0.01; $0.02; $0.05; 
$0.10; and $0.25); (2) stocks would be categorized based upon their 
duration weighted average quoted spread over the measurement period; 
(3) stocks would be assigned the next smallest increment by quoted 
spread (e.g., a stock with average spread of $0.12 would be in the 
$0.10 increment category); and (4) listing exchanges would calculate 
and calibrate quoted spreads, determine applicable increments, and 
publish stock lists. Nasdaq stated that an intelligent tick regime 
``would improve markets and benefit all key stakeholders--investors, 
public companies, and exchange members alike.'' \181\ Nasdaq stated 
that it is sub-optimal to apply the $0.01 increment equally 
``regardless of market capitalization, volume, or share price.'' \182\ 
Nasdaq stated that currently, under rule 612, ``a $2 stock'' quotes 
with the same minimum pricing increment ``as a $2,000 stock.'' \183\
---------------------------------------------------------------------------

    \180\ See Nasdaq Intelligent Ticks, A Blueprint for a Better 
Tomorrow (``Nasdaq Intelligent Tick''), available at https://www.nasdaq.com/docs/2019/12/16/Intelligent-Ticks.pdf.
    \181\ Id. at 4.
    \182\ Id. at 4.
    \183\ Id. at 4.
---------------------------------------------------------------------------

    According to Nasdaq, its proposal would address tick-related issues 
for: (1) low-priced tick-constrained securities; and (2) high-priced 
securities that trade with significantly wider spreads. Nasdaq stated 
that ``if the tick is too wide (tick constrained) or too small (stocks 
trading in multiple tick increments), the mismatch creates inefficiency 
that increases the companies' cost of capital . . . and hurts listed 
companies and investor returns. . . .'' \184\ Specifically, Nasdaq 
stated that tick-constrained stocks tend to have lower prices and that 
``tick-constraints create long quotation queues, [slow] fulfillment . . 
. [create inefficiencies] and . . . [diminish] price discovery. . . 
.'',\185\ which drives trading ``to inverted taker-maker markets . . . 
where larger, lower priced, more liquid stocks tend to trade heavily.'' 
\186\ Nasdaq stated that reducing the minimum pricing increment for 
tick-constrained stocks ``would reduce bid-ask spreads, [save] 
investors money, and make trading more efficient.'' \187\
---------------------------------------------------------------------------

    \184\ Id. at 15.
    \185\ Id. at 6.
    \186\ Id. at 6-7.
    \187\ Id. at 4.
---------------------------------------------------------------------------

    Conversely, Nasdaq stated that high-priced stocks that trade with 
wider spreads ``increase[ ] investor costs, usage of odd-lots, 
flickering quotations, non-displayed trading that doesn't support price 
discovery, and price instability.'' \188\ For such high-priced stocks, 
Nasdaq also states that ``outbidding becomes so inexpensive that time 
priority becomes essentially non-existent'' and ``[destroys] the reward 
and incentive to post passive liquidity and diminishing price 
discovery.'' \189\
---------------------------------------------------------------------------

    \188\ Id. at 4.
    \189\ Id. at 4. See also Cboe Proposal, supra note 104.
---------------------------------------------------------------------------

F. Proposal To Amend Rule 612

    The Commission believes that based on current market conditions it 
is appropriate to update and modernize the rule 612 minimum pricing 
increment for quotes and orders in NMS stocks priced equal to, or 
greater than, $1.00 per share. The proposed amendments to rule 612 
would also help to ensure, among other things, the ``equal regulation 
of all markets for qualified securities and all exchange members, 
brokers, and dealers effecting transactions in such securities.'' \190\ 
Moreover, the proposed amendments to rule 612 also would facilitate 
fair competition and equal regulation that would help market forces to 
determine the prices of NMS stocks.\191\
---------------------------------------------------------------------------

    \190\ 15 U.S.C. 78k-1(c)(1)(F).
    \191\ See Regulation NMS Proposing Release, supra note 49.
---------------------------------------------------------------------------

    In the Regulation NMS Adopting Release, the Commission acknowledged 
the possibility that the balance of costs and benefits of sub-penny 
quoting and trading could shift as the markets evolved. The Commission 
believes such a shift has occurred and the benefits of quoting and 
trading in sub-pennies more broadly and consistently across the 
national market system would be consistent with the goals of section 
11A of the Exchange Act and appropriate in today's market structure. 
Specifically, when rule 612 was adopted the Commission expressed 
concerns related to ``stepping ahead'' and quote flickering. The 
Commission believes that in today's market the concerns related to 
these issues have diminished or have been mitigated. For instance, in 
2005 there was concern that quoting in sub-penny increments would allow 
orders to step ahead of displayed orders by economically insignificant 
amounts. However, data demonstrates that in today's market a 
significant percentage of executions occur in sub-penny increments as a 
result of midpoint executions and sub-penny price improvement provided 
by OTC market makers who internalize retail orders or RLPs on 
exchanges.\192\ For many stocks, including those that are tick-
constrained, a sub-penny execution is no longer economically 
insignificant. A majority of the trading volume for NMS stocks is tick-
constrained, which indicates that the one cent minimum pricing 
increment is too large for such stocks, that a smaller sub-penny 
increment would be an economically meaningful increment for such stocks 
to be able to quote and trade, and that the current minimum pricing 
increment is constraining the ability of market participants to trade 
consistent with the principles of supply and demand. Further, the 
increased speed of quoting and trading has alleviated many of the 
concerns from 2005, as many market participants are now able to react 
to quote changes in microseconds.
---------------------------------------------------------------------------

    \192\ See infra section V.C.1.
---------------------------------------------------------------------------

    As discussed in section V.D.1, the Commission estimates that the 
proposal to amend rule 612 would reduce the minimum pricing increment 
to $0.005 or less for 81.9% of the share volume, which represents 
approximately 60.2% of dollar volume that trades with a spread of 
approximately $0.04 or less.\193\ These stocks generally have lower 
prices and consistent liquidity at the top of the book for both bids 
and offers. As a result of these characteristics, sub-penny increments, 
particularly in relation to the stock price, will generally be 
economically significant.\194\ The Commission believes that because 
liquidity is consistently on both sides of the market for most tick and 
near tick-constrained securities, a smaller minimum pricing increment 
should be economically significant and allow market forces to better 
determine the appropriate price increment and depth for such stocks.
---------------------------------------------------------------------------

    \193\ See infra section V.D.1, Table 8.
    \194\ See also MEMX Exemption Request, supra note 105 at 7.
---------------------------------------------------------------------------

    When rule 612 was adopted, the Commission was concerned about the 
potential for quotes to flicker if the quoting increment was too small. 
The Commission believes that for tick-constrained and near tick-
constrained stocks, the proposed minimum pricing increments are not 
``too small,'' rather,

[[Page 80279]]

the current quoting and trading of these stocks suggest that the 
current minimum pricing increment is too large. Advancements in 
technology since 2005 should reduce flickering quotes concerns.\195\ 
Specifically, the systems currently used in the market by exchanges and 
other market participants can accommodate many levels of data with 
extreme low latency \196\ and should be able to readily adjust to any 
potential increase of system traffic that could result from price 
movements at a smaller minimum pricing increment.\197\
---------------------------------------------------------------------------

    \195\ In the Regulation NMS Re-Proposing Release, the Commission 
described ``flickering'' quotes as quotes that flashed for a short 
period of time solely to earn market data revenues, but were not 
truly accessible and therefore did not add any value to the 
consolidated quote stream. See Regulation NMS Re-Proposing Release, 
supra, note 16. Since 2004, market quotation and trading systems 
have improved along with technological advances. Today, low latency 
systems and ultrafast communication protocols allow market 
participants to access quotes and execute trades in microseconds. 
Therefore, the ``flickering'' issue discussed in 2004 is largely no 
longer relevant today.
    \196\ For example, in the second quarter of 2011, the average 
peak message per second for Tapes A and B as reported by the CTA/CQ 
Plan was 339,855 and for Tape C as reported by the UTP Plan was 
97,370. In the second quarter of 2022, the average peak message per 
second for Tapes A and B was 1,015,000 and for Tape C was 408,300. 
In the second quarter of 2011, the average latency reported was less 
than one millisecond for Tapes A and B and 5.1 milliseconds for Tape 
C. In the second quarter of 2022, the average latency reported for 
Tape A and B was 18 microseconds and for Tape C it was 13.6 
microseconds. See https://www.ctaplan.com/publicdocs/CTA_Operating_Metrics_Q22011.pdf; https://www.ctaplan.com/publicdocs/ctaplan/CTAPLAN_Processor_Metrics_2Q2022.pdf and https://www.utpplan.com/DOC/UTP_website_Statistics_Q2-2022-June.pdf. See 
also MDI Adopting Release, supra note 5, at 18638.
    \197\ For example, market participants that collect options 
market data from the Options Price Reporting Authority (``OPRA'') 
can readily handle message traffic that exceeds the messages 
disseminated in the national market system for NMS stocks. In the 
second quarter of 2022, OPRA reported 36.4 million messages per 
second. See OPRA Key Operating Metrics of U.S. Options Securities 
Information Processor, available at https://www.opraplan.com/document-library. See also NYSE Tick Harmonization Paper, supra note 
126 at 11 (stating that OPRA handles many times more messages than 
the equities market).
---------------------------------------------------------------------------

    In the Regulation NMS Adopting Release, the Commission identified 
several factors that it would consider in the context of a request for 
an exemption from the minimum pricing increments required under the 
rule.\198\ Specifically, the Commission said it would evaluate the 
following factors: (i) if an NMS stock was consistently trading with a 
penny spread with significant liquidity available on both sides of the 
market; \199\ (ii) if the NMS stock is an ETF or other derivative that 
can be readily converted into its underlying securities or vice versa, 
in which case the true value of the security as derived from its 
underlying components might be at a sub-penny increment; \200\ (iii) if 
a large volume of sub-penny executions in an NMS stock occurs due to 
price improvement; and (iv) if the NMS stocks are low-priced. 
Currently, there is evidence that: (1) a significant percentage of the 
total volume of NMS stocks is consistently tick-constrained with 
liquidity on both sides of the market,\201\ (2) the majority of tick-
constrained stocks trade at $30 or less,\202\ and (3) a large volume of 
sub-penny executions occur in the market.\203\ The Commission believes 
that rule 612 should be updated based on current market conditions.
---------------------------------------------------------------------------

    \198\ See Regulation NMS Adopting Release, supra note 16, at 
37554.
    \199\ See id.
    \200\ Rule 612 applies to NMS stocks, including ETFs. In the 
Regulation NMS Adopting Release, the Commission considered whether 
sub-penny quoting of ETFs, which are derivatively priced, raised the 
same concerns as other NMS stocks. The Commission stated that a 
basis may exist to exempt actively traded ETFs from the rule. See 
Regulation NMS Adopting Release, supra note 16, at 37554. MEMX 
stated that its data shows that ``more than half of equity ETPs and 
the vast majority of fixed income, commodity, and other ETPs trading 
at least 100 million notional each day are tick- constrained.'' MEMX 
Exemption Request, supra note 105 at 6. Further, in the Joint 
Petition, the petitioners requested an exemption from rule 612 to 
allow sub-penny quoting for one ETF, the QQQQ. See Joint Petition, 
supra note 78 at 1.
    \201\ See MEMX stated that, according to its research, liquidity 
at the quote for tick-constrained stocks is five to eight times 
higher for corporate securities and nine to 59 times higher for ETPs 
than securities trading with a spread between $0.02 and $0.03. See 
MEMX Report, supra note 105, at 3. See also MEMX Exemption Request, 
supra note 105 at 4. See also NYSE White Paper, supra note 119 at 
10.
    \202\ MEMX provided data that approximately 80% of tick-
constrained stocks traded at $30 per share or less. See MEMX Report, 
supra note 105 at 10.
    \203\ See supra note 192 and accompanying text.
---------------------------------------------------------------------------

    The Commission proposes amendments to rule 612 to: (1) introduce a 
variable minimum pricing increment structure for quotes and orders in 
NMS stocks priced at, or greater than, $1.00 per share; and (2) require 
executions to occur in the minimum pricing increment, both on-exchange 
and OTC, subject to certain exceptions. The Commission preliminarily 
believes the proposed amendments to rule 612 would promote: (1) fair 
and orderly markets and economically efficient executions, particularly 
for tick-constrained NMS stocks and retail order flow; and (2) fair 
competition and equal regulation between OTC market makers, exchanges, 
and ATSs that compete for retail liquidity by requiring that NMS stocks 
trade with the same minimum pricing increment regardless of venue 
(i.e., on or off-exchange). The Commission also believes that amended 
rule 612 would promote price discovery and price competition, 
particularly for tick-constrained stocks and retail order flow, by 
permitting the quoting and trading of certain NMS stocks in finer 
increments that would vary based on objective criteria but must be 
uniform across trading venues. The Commission believes this proposal 
would result in pricing that is more in accordance with the principles 
of supply and demand.\204\
---------------------------------------------------------------------------

    \204\ See infra sections V.C.1 and V.D.1.
---------------------------------------------------------------------------

1. Minimum Pricing Increments
    Currently, rules 612(a) and (b) are structured in a parallel manner 
in that they both contain requirements for national securities 
exchanges, national securities associations, ATSs, vendors, brokers and 
dealers when displaying, ranking and accepting quotations, orders and 
indications of interest. Each paragraph establishes the minimum pricing 
increment based on the price of the quote, order, or indication of 
interest. Proposed rule 612(b), similar to current rules 612(a) and 
(b), would set forth when and how the minimum pricing increment 
requirements would be applicable to specific market participants. 
However, unlike current rules 612(a) and (b), proposed rule 612(b) 
would make the minimum pricing increment applicable to the quoting and 
trading of all NMS stocks. Specifically, proposed rule 612(b) would 
state that ``[n]o national securities exchange, national securities 
association, alternative trading system, vendor, or broker or dealer 
shall display, rank, accept from any person, or execute a bid or offer, 
an order, or an indication of interest in any NMS stock priced in an 
increment smaller than the applicable increment required by paragraph 
(c) or (d).'' As discussed further below, proposed rule 612(c) would 
add the proposed variable minimum pricing increments for quotations, 
orders and indications of interest in NMS stocks priced equal to, or 
greater than, $1.00 per share and proposed rule 612(d) would contain 
the minimum pricing increment for quotations, orders and indications of 
interest in NMS stocks priced less than $1.00 per share.
2. Quotations and Orders in NMS Stocks Priced at $1.00 or More
    The Commission proposes to amend rule 612 to introduce a variable 
minimum pricing increment model for quotations and orders in NMS stocks 
that are priced equal to, or greater than, $1.00 per share. The 
Commission preliminarily believes that a variable

[[Page 80280]]

minimum pricing increment model would allow minimum pricing increments 
to be better suited to the trading characteristics of the particular 
stocks. Since rule 612 was adopted, several commenters have suggested 
that the single minimum pricing increment may not be appropriate for 
all stocks.\205\
---------------------------------------------------------------------------

    \205\ See supra section II.D.
---------------------------------------------------------------------------

    The Commission proposes to vary the minimum pricing increment for 
quotations, orders and indications of interest in NMS stocks priced 
equal to, or greater than, $1.00 per share based on a Time Weighted 
Average Quoted Spread,\206\ which would be calculated by the primary 
listing exchange for the particular NMS stock on a quarterly basis 
during a month long Evaluation Period.\207\ Under this proposal, the 
four potential minimum pricing increments for a particular NMS stock 
would be:
---------------------------------------------------------------------------

    \206\ Proposed rule 612(a)(i) would define ``Time Weighted 
Average Quoted Spread'' as ``the average dollar value difference 
between the NBB and NBO during regular trading hours where each 
instance of a unique NBB and NBO is weighted by the length of time 
that the quote prevailed as the NBB or NBO.'' See infra section 
II.F.2.a.i.
    \207\ Proposed rule 612(a)(ii) would define ``Evaluation 
Period'' as the last month of a calendar quarter (Mar. in the first 
quarter, June in the second quarter, Sept. in the third quarter and 
Dec. in the fourth quarter) of a calendar year during which the 
primary listing exchange shall measure the Time Weighted Average 
Quoted Spread of an NMS stock that is priced equal to or greater 
than $1.00 per share to determine the minimum pricing increment to 
be in effect for an NMS stock for the next calendar quarter, as set 
forth by paragraph (c).'' See infra section II.F.2.a.ii.
---------------------------------------------------------------------------

    (1) $0.001, if the Time Weighted Average Quoted Spread for the NMS 
stock during the Evaluation Period was equal to, or less than, $0.008;
    (2) $0.002, if the Time Weighted Average Quoted Spread for the NMS 
stock during the Evaluation Period was greater than $0.008 but less 
than, or equal to, $0.016;
    (3) $0.005, if the Time Weighted Average Quoted Spread for the NMS 
stock during the Evaluation Period was greater than $0.016 but less 
than, or equal to, $0.04; and
    (4) $0.01, if the Time Weighted Average Quoted Spread for the NMS 
stock during the Evaluation Period was greater than $0.04.
    Under this proposal, because the applicable minimum pricing 
increment for an NMS stock for a calendar quarter would be established 
based on the stock's Time Weighted Average Quoted Spread during the 
Evaluation Period, an NMS stock could have a different minimum pricing 
increment every quarter of the calendar year. The Commission believes 
that the proposal that the applicable minimum pricing increment for a 
particular NMS stock be effective for a three month period is 
appropriate in order to balance the need to update the minimum pricing 
increment at regular intervals such that the increment can reflect 
market conditions without updating too frequently as to introduce undue 
complexity to the market system.\208\
---------------------------------------------------------------------------

    \208\ MEMX suggested in its proposal that NMS stocks be 
evaluated on a monthly basis to determine a stock's average quoted 
spread. MEMX stated that a monthly evaluation would minimize 
complexity as it would be similar to the schedule to determine an 
NMS stock's round lot. See MEMX Exemption Request, supra note 105, 
at 3. The Commission believes that a quarterly evaluation and 
assignment is appropriate to reflect the current trading 
characteristics of an NMS stock. Further, the Commission believes 
that a monthly shift in the pricing of an NMS stock would be more 
complex and disruptive to the markets than a monthly shift in the 
size of a round lot. The Commission requests comment on whether a 
quarterly basis is the appropriate timeframe. See infra section 
II.G.
---------------------------------------------------------------------------

    Preliminarily, the Commission believes that the proposed variable 
minimum pricing increments would address the issues related to tick-
constrained stocks and help to prevent other stocks that trade with 
relatively small spreads from becoming tick-constrained. The Commission 
also believes that the proposal would reduce transaction costs for many 
NMS stocks without harming the execution quality or dispersing the 
liquidity of stocks that are not tick-constrained and trade with wider 
spreads. As discussed below, assigning a small minimum pricing 
increment to a stock that has a wider spread can be harmful to 
displayed liquidity as liquidity would be spread across more price 
increments.\209\ Minimum pricing increments that are too small can also 
add to complexity in trading and increase the risk of stepping ahead. 
The Commission believes that proposing to vary the minimum pricing 
increments based on the Time Weighted Average Quoted Spread represents 
a balancing of pricing, liquidity, complexity, and price improvement 
opportunities.\210\
---------------------------------------------------------------------------

    \209\ See infra section V.C.1.
    \210\ See infra sections V.C.1 and V.D.1.
---------------------------------------------------------------------------

    This proposal to amend rule 612 to implement variable minimum 
pricing increments would reduce the minimum pricing increment to $0.001 
for all NMS stocks that are priced equal to, or greater than, $1.00 per 
share if the Time Weighted Average Quoted Spread for the NMS stock 
during the Evaluation Period was equal to, or less than, $0.008.\211\ 
Further, proposed rule 612 would reduce the minimum pricing increment 
to $0.002 for all NMS stocks that are priced equal to, or greater than, 
$1.00 per share if the Time Weighted Average Quoted Spread for the NMS 
stock during the Evaluation Period was equal to, or less than, $0.016. 
Proposed rule 612 is designed to directly address the concerns that the 
current minimum pricing increment of $0.01 creates an artificial price 
constraint on certain NMS stocks and prevents such stocks from reaching 
a natural price that would be within a penny spread. The Commission 
estimates that tick-constrained stocks make up over half (approximately 
56.1%) of the market's share volume, which is estimated to be the 
equivalent of 23.2% of dollar volume.\212\ While the Commission cannot 
estimate the number of these stocks that would have a Time Weighted 
Average Quoted Spread of $0.008 or less due to the $0.01 minimum 
pricing increment, the Commission estimates that 1,707 stocks, which 
make up an estimated 64% of share volume, and represent 37.9% of 
estimated dollar volume, have average spreads that are less than 
$0.016.\213\ The Commission believes that reducing the minimum pricing 
increment to $0.001 or $0.002 for such stocks would allow a more 
natural price discovery process to occur and preserve meaningful price 
discovery opportunities between the spread. In addition, the Commission 
believes that investor trading costs due to spreads would be reduced as 
a result of the smaller increments and spreads that would be permitted 
for stocks that are currently tick-constrained.
---------------------------------------------------------------------------

    \211\ Initially, no NMS stock would qualify for the $0.001 
minimum pricing increment due to the current rule 612 one cent 
minimum pricing increment restricting the minimum possible tick 
size. Further, as discussed below, the Commission proposes a 
staggered implementation of the new minimum pricing increments. See 
infra section II.G.
    \212\ See infra section V.C.1.
    \213\ See Table 8 infra section V.D.1.
---------------------------------------------------------------------------

    Currently, approximately 2,648 stocks, which is an estimated 17.9% 
of share volume, and an estimated 22.3% of dollar volume, trade with a 
spread that is greater than $0.016 and less than or equal to 
$0.04.\214\ This proposal would also reduce the minimum pricing 
increment to $.005 for NMS stocks that trade with a Time Weighted 
Average Quoted Spread that is greater than $0.016 and less than or 
equal to $0.04.\215\ The Commission believes that the proposal would 
provide pricing flexibility for these stocks that trade with smaller 
spreads and prevent such stocks from becoming tick-constrained in the 
future. The Commission also believes that, by reducing the minimum 
pricing increments for these stocks that trade with smaller spreads, 
investor trading costs would be reduced as a result of smaller spreads 
while price

[[Page 80281]]

improvement opportunities would be preserved.
---------------------------------------------------------------------------

    \214\ See id.
    \215\ See infra section V.D.1.
---------------------------------------------------------------------------

    The Commission believes that the execution quality for stocks with 
a Time Weighted Average Quoted Spread of equal to, or less than, $0.04 
would not be harmed under the proposal (i.e., NMS stocks that would 
quote and trade with a minimum pricing increment of $0.001, $0.002 or 
$0.005).\216\ Further, the Commission believes that the liquidity at or 
near the NBBO for such stocks would not disperse or thin out across 
price levels because, as discussed below, the proposal is designed such 
that stocks priced equal to, or greater than, $1.00 per share with a 
Time Weighted Average Quoted Spread of less than $0.04 would generally 
have at least 3 to 4 price points but not have more than eight price 
points inside the quoted spread.\217\
---------------------------------------------------------------------------

    \216\ See infra section V.D.1
    \217\ For example, if the bid for a stock is $10.00, and the 
stock has an average quoted spread of $0.010, it would be assigned a 
$0.002 minimum pricing increment and would have four price levels 
within the average quoted spread (i.e., 10.002, 10.004, 10.006, and 
10.008). See also infra section V.D.1. However, if that same stock 
trades with a spread that is wider than the average quoted spread 
used to determine the minimum pricing increment there would be more 
than four price levels. For instance, if the bid for the stock was 
$10.00 and the ask was $10.02 then there would be nine price levels 
with the quoted spread (i.e., 10.002, 10.004, 10.006, 10.008, 10.01, 
10.012, 10.014, 10.016. 10.018).
---------------------------------------------------------------------------

    As further discussed in section V.D.1 below, the Commission 
believes that a certain minimum number of ticks intra-spread would be 
beneficial to market quality in the trading of NMS stocks. The proposal 
would increase the number of increments between the spread for those 
NMS stocks that are tick-constrained. Initially, these stocks would 
transition from having, on average, one increment between the spread to 
either having 1 to 8 increments or 4 to 5 increments between the 
spread, depending on whether the stock would be assigned to a $0.001 or 
$0.002 minimum pricing increment. Thereafter, if, for instance, the 
Time Weighted Average Quoted Spread for one of these NMS stocks widens 
during an Evaluation Period, such stock would be assigned to a larger 
minimum pricing increment for the next quarter. Conversely, if the Time 
Weighted Average Quoted Spread for one of these NMS stock narrows 
during an Evaluation Period, such stock would be assigned to a smaller 
minimum pricing increment for the next quarter, if available. The 
proposal is designed to maintain a certain number of increments between 
the spread for efficient trading, without creating too many increments 
between the spread which could impact execution priority for an 
infinitesimally amount or reduce market depth. Accordingly, NMS stocks 
would be moved between the proposed minimum pricing increments based on 
their quoting characteristics. In sum, the Commission believes that the 
proposal will allow NMS stocks that have relatively small average 
quoted spreads to be priced with minimum pricing increments that are 
more reflective of the principles of supply and demand and mitigate the 
dispersion of liquidity across price points.
    Under the proposal, NMS stocks that are priced equal to, or greater 
than, $1.00 per share that have a Time Weighted Average Quoted Spread 
greater than $0.04 would continue to have a minimum pricing increment 
of $0.01. Based on current market conditions, the Commission estimates 
that approximately 7,792 stocks, which is estimated to be 18.1% of 
share volume, and estimated to be 39.8% of dollar volume, trade with a 
spread that is greater than $0.04.\218\ The Commission believes that 
the proposal would have little or no impact on these NMS stocks that 
would continue to quote at the $0.01 minimum pricing increment.\219\ 
The Commission proposes to retain the current minimum pricing increment 
for stocks that fall into this category because these stocks are 
neither tick-constrained nor near constrained stocks. Stated another 
way, stocks that have a Time Weighted Average Quoted Spread of greater 
than $0.04 are able to be competitively priced based on market forces 
and the principles of supply and demand so would continue to have a 
$0.01 minimum pricing increment. Further, as described above, if these 
stocks were to become tick-constrained, or experience a reduction in 
its average quoted spread, the minimum pricing increment would be 
adjusted downward following the next Evaluation Period.
---------------------------------------------------------------------------

    \218\ See infra section V.D.1, Table 8.
    \219\ See infra section V.D.1.
---------------------------------------------------------------------------

    Although certain market participants recommend that the minimum 
pricing increment be reduced to $0.005 only for tick-constrained 
stocks,\220\ the Commission believes that many stocks that currently 
trade with an average quoted spread of $0.011 could continue to be 
tick-constrained if the minimum pricing increment for such stocks were 
only reduced to $0.005. Accordingly, the Commission is proposing to 
reduce the minimum pricing increment for tick-constrained stocks as 
well as stocks that are near tick-constrained or otherwise have average 
quoted spreads less than $0.04 to either $0.001, $0.002 or $0.005, 
which would likely reduce the minimum quoting increment for more than 
81.9% of the trading volume for NMS stocks. Overall, the Commission 
expects that the impact on liquidity and trade execution would be 
positive because tick constraints prevent market participants from 
quoting the prices that reflect supply and demand, and the reduction in 
the minimum pricing increments would lead to narrower spreads and 
better market quality. The Commission determined to propose the reduced 
minimum pricing increments of $0.001, $0.002, and $0.005, in part, 
because many investors will have familiarity with, or an awareness of, 
trades that occur in these specific increments because of how trading 
is conducted today. The Commission believes this because today, two of 
the most common increments for the price improvement of stocks that 
trade OTC are $0.001 and $0.002, and price improvement on exchanges and 
ATSs often occurs through midpoint executions in an increment of 
$0.005. The Commission also selected these particular pricing 
increments because, as described above, the proposed amendments to rule 
612 are designed to: (1) correlate the Time Weighted Average Quoted 
Spread to the minimum pricing increments, which limits the number of 
potential price points within the spread, which, in turn, should 
mitigate the loss of liquidity that can occur when the minimum tick 
size is reduced and the number of pricing increments increases; \221\ 
and (2) preserve meaningful price improvement for the majority of NMS 
stocks that would trade at minimum pricing increments that are $0.005 
or less.
---------------------------------------------------------------------------

    \220\ See supra section II.E.1.
    \221\ Id.
---------------------------------------------------------------------------

    For stocks priced equal to, or greater than, $1.00 per share with 
Time Weighted Average Quoted Spreads equal to or less than $0.04, the 
Commission believes the reduction in the minimum pricing increment 
would be largely beneficial to the trading environment. Specifically, 
the Commission believes that reducing the minimum pricing increment 
would remove tick-constraints for a large percentage of the total 
trading volume, and allow market participants to quote at the prices 
that equate supply and demand, which in turn would lead to narrower 
spreads and better market quality.
    The Commission also believes the proposal would increase price 
discovery for stocks that are tick-constrained, or near-tick-
constrained, and reduce transaction costs for investors without

[[Page 80282]]

negatively impacting execution quality for stocks that are not tick-
constrained. The Commission's proposal differs from the tiered approach 
for minimum pricing increments suggested by market participants as 
described in section II.E.2. The Commission's proposed variable minimum 
pricing increments are designed to offset the potential dilution of 
liquidity and depth at the top of the book while providing market 
participants with a range of price points (generally four to eight) 
between the quoted spread to provide price improvement opportunities to 
investor orders.
    With regard to changing the minimum pricing increment, the 
Commission proposes to target tick-constrained stocks, and those stocks 
that trade with relatively smaller spreads that could become tick-
constrained by reducing and varying the minimum tick size. While some 
market participants have suggested that the Commission impose larger 
minimum pricing increments for certain NMS stocks,\222\ the proposed 
rule would not change or increase the minimum pricing increment for any 
NMS Stocks that trade with a Time Weighted Average Quoted Spread 
greater than $0.04, or separately for higher-priced stocks. The 
Commission believes that the current $0.01 increment for NMS stocks 
that trade with a Time Weighted Average Quoted Spread greater than 
$0.04, regardless of price, remains sufficient based on their trading 
characteristics.\223\ Commission review of academic literature suggests 
that there are not consistent results as to how a larger tick size 
would affect market quality for stocks with wider spreads.\224\ 
Further, the Commission believes that increasing the tick size, for 
example for higher priced securities, which tend to trade with wider 
spreads, could result in the inadvertent and unintended constraining of 
the pricing of such stocks.\225\ The Commission does not expect the 
trading environment for stocks with prices lower than $1.00 per share, 
or Time Weighted Average Quoted Spreads greater than $0.04, to be 
significantly impacted because under the proposal the minimum pricing 
increment would not change for such stocks.
---------------------------------------------------------------------------

    \222\ See Nasdaq Intelligent Tick Proposal, supra note 180 at 8.
    \223\ See also infra note 548 and accompanying text. Further, 
minimum pricing increments that are too large or static could 
frustrate the natural pricing mechanism of quotes and orders. See 
also supra note 85. The Commission requests comment on whether 
larger tick sizes should be imposed on certain NMS stocks. See infra 
section II.H.
    \224\ Id.
    \225\ See supra note 223. See also supra note 85 and 
accompanying text.
---------------------------------------------------------------------------

a. Proposed Definitions
    Proposed rule 612(a) would define the terms ``Time Weighted Average 
Quoted Spread'' and ``Evaluation Period.''
i. Time Weighted Average Quoted Spread
    Proposed rule 612(a)(i) would define the term ``Time Weighted 
Average Quoted Spread'' as ``the average dollar value difference 
between the NBB and NBO during regular trading hours \226\ where each 
instance of a unique NBB and NBO is weighted by the length of time that 
the quote prevailed as the NBB or NBO.'' The Commission proposes to use 
Time Weighted Average Quoted Spread as the measure for determining the 
minimum pricing increment because it would directly address the issue 
of tick-constrained stocks.\227\ The Commission believes that this 
metric represents what the quoted spread typically would be at any 
point in time during the trading day for an NMS Stock. It also 
represents the expected costs of trading that market participants would 
have experienced throughout the day. In addition, the Commission 
believes that the primary listing exchanges should have experience 
using time weighted average quoted spread as a metric, and that 
calculating the minimum pricing increments for NMS stocks on a 
quarterly basis balances the need for regular updates of the tick size 
for NMS Stock based on the Time Weighted Average Quoted Spread with the 
need to avoid undue complexity related to more frequent updates.
---------------------------------------------------------------------------

    \226\ The Commission proposes to use quotations only during 
regular trading hours because after hours trading is generally less 
liquid and more volatile.
    \227\ Market participants have suggested similar measurements 
for determining minimum pricing increments. For example, MEMX 
suggested looking at the average quoted spread of an NMS stock to 
determine if such stock should be permitted to have a smaller 
minimum pricing increment. See MEMX Exemption Request, supra note 
105 at 3. Nasdaq suggested categorizing stocks to a minimum pricing 
increment based a duration weighted average quoted spread over a 
measurement period. See Nasdaq Intelligent Tick, supra note 180 at 
8. The Commission preliminarily believes that the proposed Time 
Weighted Average Quoted Spread would be more precise than the 
suggestions from MEMX and Nasdaq, and the proposed definition would 
be sufficiently specific to determine a stock's average quoted 
spread.
---------------------------------------------------------------------------

ii. Evaluation Period
    Proposed rule 612(a)(ii) would define the term Evaluation Period as 
``the last month of a calendar quarter (March in the first quarter, 
June in the second quarter, September in the third quarter and December 
in the fourth quarter) of a calendar year during which the primary 
listing exchange shall measure the Time Weighted Average Quoted Spread 
of an NMS stock that is priced equal to, or greater than, $1.00 per 
share to determine the minimum pricing increment to be in effect for an 
NMS stock for the next calendar quarter, as set forth by paragraph 
(c).'' The Commission proposes that the Evaluation Period be one month 
in order to balance the need to select a period that is: (1) long 
enough such that a few extreme or aberrant days of trading activity 
during the Evaluation Period would not unduly effect the Time Weighted 
Average Quoted Spread calculation; and (2) short enough such that the 
calculation of the Time Weighted Average Quoted Spread would likely be 
representative of current market conditions.
    As proposed, the applicable minimum pricing increment for the 
quoting and trading of the particular NMS stock, based on the Time 
Weighted Average Quoted Spread as prescribed by amended rule 612(c), 
would then be established for the following quarter on the first 
business day following the completion of the Evaluation Period.\228\ 
Further, the Commission proposes that the calculation to determine the 
particular tick for an NMS stock be done on a quarterly basis in order 
to balance the need for regular updates of the tick size while not 
introducing undue complexity to the market system by updating the tick 
size too frequently. MEMX suggested that the minimum pricing increment 
be evaluated on a monthly basis.\229\ The MEMX Exemption Request, 
however, would only develop one additional pricing increment for NMS 
stocks that would become tick-constrained. The Commission's proposal 
would be more complex and would require the potential reclassification 
to four minimum pricing increments.
---------------------------------------------------------------------------

    \228\ As proposed, minimum pricing increments would be 
implemented on the first business day after an Evaluation Period. 
The Commission requests comment on whether this would be a 
sufficient amount of time for the market and market participants to 
implement new minimum pricing increments for any NMS stock that may 
experience a change in its Time Weighted Average Quoted Spread. See 
section II.H.
    \229\ See MEMX Exemption Request, supra note 105. See also supra 
section II.E.1.
---------------------------------------------------------------------------

iii. Regulatory Data
    The Commission proposes to amend the definition of regulatory data 
in Rule 600(b)(78) of Regulation NMS to require the primary listing 
exchange for each NMS stock to calculate and provide to competing 
consolidators, self-aggregators, and the exclusive SIPs an

[[Page 80283]]

indicator of the applicable minimum pricing increment required under 
the proposed amendments to rule 612. The Commission believes that it is 
appropriate and important that the primary listing exchanges play a 
central role in the administration of the proposed amendments to rule 
612 by calculating the Time Weighted Average Quoted Spread for each NMS 
stock and to provide this information to the exclusive SIPs and 
competing consolidators for dissemination. The primary listing 
exchanges are well-situated to perform these functions as they have 
direct and immediate access to pricing information about their own 
listed securities, and already perform similar calculations--and 
provide the results to the exclusive SIPs--today.\230\ In addition, 
under the MDI rules, the primary listing exchanges would be required to 
calculate and provide several regulatory data elements to competing 
consolidators and self-aggregators.\231\ For example, the primary 
listing exchange will calculate the average monthly closing price of 
each of its NMS stocks, assign each stock to a round lot size 
corresponding to that average monthly closing price, and include an 
indicator of the applicable round lot size in the data it makes 
available to competing consolidators and self-aggregators.\232\
---------------------------------------------------------------------------

    \230\ See MDI Proposing Release, supra note 39, at 16762; MDI 
Adopting Release, supra note 5, at 18634-35.
    \231\ 17 CFR 242.600(b)(78); see MDI Proposing Release, supra 
note 39, at 16759-63; MDI Adopting Release, supra note 5, at 18633-
35.
    \232\ See MDI Adopting Release, supra note 5, at 18633-35 See 
also infra section IV.B (discussing proposed amendments to the 
definition of ``regulatory data'' that would require the primary 
listing exchange to provide an indicator of the applicable round lot 
size to the exclusive SIPs).
---------------------------------------------------------------------------

    The proposed indicator would thus be included in NMS data \233\ 
disseminated by the exclusive SIPs and competing consolidators, which 
should help to ensure the wide availability of information about the 
applicable minimum pricing increment for each NMS stock, which in turn 
will enable market participants to trade in a more informed manner. 
Further, the Commission believes that information about the relevant 
minimum pricing increment should be provided to the exclusive SIPs, 
competing consolidators, and self-aggregators because the minimum 
pricing increment might change from quarter to quarter.
---------------------------------------------------------------------------

    \233\ See infra note 324.
---------------------------------------------------------------------------

3. Quotations and Orders in NMS Stocks Priced Less Than $1.00
    Currently, the minimum pricing increment for quotations and orders 
in NMS stocks that are priced less than $1.00 per share is $0.0001. 
When it adopted this increment, the Commission stated that the sub-
penny increment would largely represent genuine trading interest for 
low-price stocks rather than attempts to unfairly step ahead of 
displayed orders and that the sub-penny increment represents a 
significant amount of the price of the quotation or order.\234\ The 
Commission believes that this increment remains appropriate for these 
NMS stocks.
---------------------------------------------------------------------------

    \234\ See Regulation NMS Adopting Release, supra note 16, at 
37555.
---------------------------------------------------------------------------

    Due to the other proposed amendments to rule 612, the minimum 
pricing increment for quotations and orders in NMS stocks that are 
priced less than $1.00 per share would be set forth in proposed rule 
612(d). Rule 612(d) as proposed to be amended would state that 
``[e]xcept as provided in paragraph (e), the minimum increment for any 
bid or offer, order, or indication of interest for an NMS stock priced 
less than $1.00 per share shall be no smaller than $0.0001.'' Proposed 
rule 612(b) would make the minimum pricing increment set forth in 
proposed rule 612(d) applicable to the quoting and trading of NMS 
stocks priced less than $1.00 per share. The Commission believes, for 
the reasons discussed below, that the minimum pricing increment should 
be applied to trading as well as quoting.\235\
---------------------------------------------------------------------------

    \235\ See infra section V.C.1.b.
---------------------------------------------------------------------------

4. Minimum Pricing Increment for Trading
    The Commission proposes that the variable minimum pricing 
increments of rule 612 as proposed to be amended would apply to all 
trading--on exchanges, ATSs, and OTC. This means that all quotes and 
orders, regardless of price, would be required to execute in the 
applicable minimum pricing increments set forth by proposed rule 612(c) 
or (d), subject to the specified exceptions set forth in proposed rule 
612(e). Proposed amendments to rule 612(e) would provide exceptions 
for: (1) orders that execute, but are not explicitly priced at, the 
midpoint of the NBBO or the protected bid and protected offer 
(``PBBO''); \236\ and (2) orders that execute at a price that was not 
based, directly or indirectly, on the quoted price of an NMS stock at 
the time of execution and for which the material terms were not 
reasonably determinable at the time the commitment to execute the order 
was made (e.g., VWAP or TWAP trades).\237\
---------------------------------------------------------------------------

    \236\ See 17 CFR 242.600(b)(70) for a definition of PBBO.
    \237\ See supra note 19.
---------------------------------------------------------------------------

    The Commission is concerned about the increase of orders that are 
executed OTC in price increments that exchanges and ATSs cannot 
practically provide,\238\ and believes that harmonization of the 
minimum pricing increment for the quoting and trading across venues 
would promote competition and innovation, while preserving most 
meaningful price improvement opportunities.\239\ The Commission 
believes that amending rule 612 to require executions to occur at the 
relevant minimum pricing increment, subject to the specified 
exceptions, would help to address the competitive disparity that 
occurs, in part, because certain OTC executions may occur more freely 
in sub-penny increments, while the opportunity for sub-penny executions 
on exchanges and ATSs are much more limited.\240\
---------------------------------------------------------------------------

    \238\ See supra section II.D. See also infra section V.C.1.b and 
Table 3.
    \239\ See infra section V.D.2.
    \240\ In the European Union, minimum pricing increments are 
applied to quoting and trading. See Art. 49 of the Directive 2014/
65/EU of the European Parliament and of the Council Directive 2014/
65/EU of the European Parliament and of the Council of 15 May 2014 
on markets in financial instruments and amending Directive 2002/92/
EC and Directive 2011/61/EU and Art. 17a of the Regulation (EU) 
2019/2033 of the European Parliament and of the Council of 27 
November 2019 on the prudential requirements of investment firms and 
amending Regulations (EU) No 1093/2010, (EU) No 575/2013, (EU) No 
600/2014 and (EU) No 806/2014.
---------------------------------------------------------------------------

    Currently, much of the sub-penny trading that occurs OTC is a 
result of price improvement (i.e., executions that occur between the 
spread). The most commonly offered sub-penny increments for price 
improvement are $0.0001, $0.001 and $0.002.\241\ Under this proposal, 
price improvement of $0.0001 would no longer be available for NMS 
stocks that are priced equal to, or greater than, $1.00 per share, but 
trades would be able to occur in $0.001 and $0.002 for those stocks 
that are assigned to such increments.\242\ Further, executions at even 
finer increments would still be permitted to occur at the midpoint.
---------------------------------------------------------------------------

    \241\ See infra section V.D.2.
    \242\ See infra section V.D.2.
---------------------------------------------------------------------------

    The variable minimum pricing increments have also been designed to 
facilitate trading between the spread to accommodate price improvement 
opportunities.\243\ The Commission believes that applying the minimum 
pricing increment to trading across all venues should promote equal 
regulation and fair competition among market participants such as 
exchanges, OTC

[[Page 80284]]

market makers, and ATSs for retail order flow.\244\
---------------------------------------------------------------------------

    \243\ See supra note 217. See also section V.D.2.
    \244\ See 15 U.S.C. 78k-1 (a)(1)(C)(ii) and (c)(1)(F).
---------------------------------------------------------------------------

    Finally, the Commission believes that the proposed exceptions to 
the requirement that orders in NMS stocks be executed in the applicable 
minimum pricing increment would promote fair and orderly markets and 
economically efficient executions.\245\ These proposed exceptions would 
codify current trading activity that is common and widespread under 
rule 612. Today, orders that are not explicitly priced in an 
impermissible sub-penny increment may execute at the midpoint of the 
NBBO/PBBO, even if the midpoint price would be an otherwise 
impermissible sub-penny quoting increment.\246\ Similarly, orders that 
are not explicitly priced in an impermissible sub-penny increment, such 
as benchmark trades (e.g., VWAP or TWAP trades) may execute in an 
otherwise impermissible quoting increment under amended rule 612.\247\ 
Mid-point and benchmark orders are widely used and viewed by liquidity 
providers as important options for handling orders and implementing 
trading strategies that can reduce the market impact of their trades. 
In addition, mid-point liquidity provides price improvement 
opportunities for market participants on the other side of these 
trades.
---------------------------------------------------------------------------

    \245\ See 15 U.S.C. 78k-1 (a)(1)(C)(i).
    \246\ See supra note 61.
    \247\ Id.
---------------------------------------------------------------------------

G. Proposed Implementation Period

    The Commission proposes to stagger the implementation of the 
variable minimum pricing increments for NMS Stocks that are priced 
equal to, or greater than $1.00 in order to facilitate an orderly 
transition for NMS stocks that would have minimum pricing increments 
that are less than $0.01. The implementation period would also provide 
for longer periods than the proposed quarterly time period between 
Evaluation Periods to allow the market and investors to become 
accustomed to the smaller increments.

------------------------------------------------------------------------
         Time period                   Minimum pricing increment
------------------------------------------------------------------------
First Implementation Period    (1) NMS stocks with a Time Weighted
 \a\.                           Average Quoted Spread that is $0.04 or
                                less:
The first and second quarters  $0.005 increment, and
 of effectiveness.             (2) NMS stocks with a Time Weighted
                                Average Quoted Spread greater than
                                $0.04: $0.01.
                               Minimum pricing increments would not
                                apply to trading.
Second Implementation Period   (1) NMS stocks with a Time Weighted
 \b\.                           Average Quoted Spread that is $0.016 or
                                less:
The third and fourth quarters  $0.002 minimum pricing increment,
 of effectiveness.             (2) NMS stocks with a Time Weighted
                                Average Quoted Spread that is greater
                                than $0.016 but less than, or equal to,
                                $0.04: $0.005 minimum pricing increment,
                                and
                               (3) NMS stocks with a Time Weighted
                                Average Quoted Spread that is greater
                                than $0.04: $0.01 minimum pricing
                                increment.
                               Minimum pricing increments would not
                                apply to trading.
Third Implementation Period    Full implementation. All of the minimum
 \c\.                           pricing increments would be effective.
The fifth quarter of           Minimum pricing increments would apply to
 effectiveness.                 trading.
------------------------------------------------------------------------
\a\ The primary listing exchanges would calculate the Time Weighted
  Average Quoted Spreads for NMS stocks during the first Evaluation
  Period that occurs after the proposed rule's effectiveness. For
  example, if the proposed rule was effective in July, the primary
  listing exchanges would calculate the Time Weighted Average Quoted
  Spreads in Sept. and assign the minimum pricing increments for the
  fourth quarter of that year and the first quarter of the following
  year.
\b\ For the second implementation period, the primary listing exchanges
  would calculate the Time Weighted Average Quoted Spreads during the
  month in the Evaluation Period that would fall during the second
  quarter of effectiveness. In the example above, the primary listing
  exchange would calculate the Time Weighted Average Quoted Spreads
  during Mar. and assign minimum pricing increments during the second
  and third quarters of that year.
\c\ For the final implementation period, the primary listing exchanges
  would calculate the Time Weighted Average Quoted Spreads during the
  month in the Evaluation Period that would fall during the fourth
  quarter of effectiveness. In the example above, the primary listing
  exchange would calculate the Time Weighted Average Quoted Spread in
  Sept. and assign the minimum pricing increments for the fourth quarter
  of that year.

    Specifically, for the first implementation period, upon 
effectiveness of any amendments to rule 612, the primary listing 
exchanges would calculate the Time Weighted Average Quoted Spreads for 
all NMS stocks for the first proposed Evaluation Period \248\ and 
assign the relevant minimum pricing increments as required under 
proposed rule 600(b)(78). The minimum pricing increments calculated 
during the first Evaluation Period would be in effect for the following 
two quarters (i.e., for six months). During the first two quarters of 
proposed rule 612's effectiveness, proposed rule 612 would be 
implemented as follows: (1) NMS stocks with a Time Weighted Average 
Quoted Spread of $0.04 or less would be assigned to the $0.005 
increment for the first quarter of effectiveness, and (2) NMS stocks 
with a Time Weighted Average Quoted Spread greater than $0.04 would be 
assigned to remain in the $0.01 minimum pricing increment.\249\ The 
minimum pricing increments that are less than $0.005 (i.e., $0.002 and 
$0.001) would not be implemented during the first quarter of 
effectiveness.
---------------------------------------------------------------------------

    \248\ The initial proposed Evaluation Period (Mar., June, Sept., 
or Dec., as applicable) would be the first full calendar month after 
the effectiveness of rule 612. For example, if the effectiveness 
would be on Feb. 14, then the initial proposed Evaluation Period 
would be Mar. If the effectiveness would be on Mar. 15, then the 
initial proposed Evaluation Period would be June.
    \249\ The proposed changes to rule 610 would become effective 
during the first stage of implementing proposed rule 612. However, 
the $0.0005 access fee cap would not be become relevant until the 
final stage of implementing proposed rule 612 when the $0.001 
minimum pricing increment becomes effective. While proposed rule 610 
has proposed variable access fee caps, the proposed access fee caps 
are based on the relevant minimum pricing increment.
---------------------------------------------------------------------------

    For the second implementation period, at the end of the second 
quarter of effectiveness of any proposed amendments to rule 612, the 
primary listing exchanges would calculate the Time Weighted Average 
Quoted Spreads during the next Evaluation Period (i.e., the month at 
the end of the second quarter of effectiveness) and assign the relevant 
proposed minimum pricing increment as required under proposed rule 
600(b)(78). The minimum pricing increments calculated during the 
Evaluation Period would be in effect for the following two quarters 
(i.e., for six months). During the third and fourth quarters of 
proposed rule 612's effectiveness: (1) NMS stocks with a Time Weighted 
Average Quoted Spread that is $0.016 or less would be assigned

[[Page 80285]]

to the proposed $0.002 minimum pricing increment, (2) NMS stocks with a 
Time Weighted Average Quoted Spread that is greater than $0.016 but 
less than, or equal to, $0.04 would be assigned to the proposed $0.005 
minimum pricing increment, and (3) NMS stocks with a Time Weighted 
Average Quoted Spread of greater than $0.04 would be assigned to the 
proposed $0.01 minimum pricing increment. The $0.001 minimum pricing 
increment would not be implemented during the third and fourth quarters 
of effectiveness.
    Finally, for the third implementation period, at the end of the 
fourth quarter of effectiveness of any proposed amendments to rule 612, 
the primary listing exchanges would calculate the Time Weighted Average 
Quoted Spreads during the next Evaluation Period (i.e., the month at 
the end of the fourth quarter) and assign the relevant proposed minimum 
pricing increment as required under proposed rule 600(b)(78). During 
the fifth quarter of effectiveness of proposed rule 612, all of the 
variable minimum pricing increments would be effective. Accordingly, 
(1) NMS stocks with a Time Weighted Average Quoted Spread that is 
$0.008 or less would be assigned to the proposed $0.001 minimum pricing 
increment, (2) NMS stocks with a Time Weighted Average Quoted Spread 
that is greater than $0.008 but less than, or equal to, $0.016 would be 
assigned the proposed $0.002 minimum pricing increment, (3) NMS stocks 
with a Time Weighted Average Quoted Spread that is greater than $0.016 
but less than, or equal to $0.04, would be assigned to the proposed 
$0.005 minimum pricing increment, and (4) NMS stocks with a Time 
Weighted Average Quoted Spread that is greater than $0.04 would be 
assigned to the proposed $0.01 minimum pricing increment.
    The Commission proposes to implement the requirement to trade in 
the applicable minimum pricing increment during the fifth quarter of 
effectiveness of any proposed amendments to rule 612. Accordingly, 
during the first two implementation periods of effectiveness (i.e., the 
first four quarters), as today, market participants would be permitted 
to trade in increments that differ from those that are required under 
rule 612 for accepting, ranking and displaying of quotes and 
orders.\250\ The Commission believes that delaying the requirement that 
orders in NMS stock be executed in the minimum pricing increments until 
the fifth quarter of effectiveness would help to facilitate an orderly 
transition by allowing market participants additional time to adjust 
and comply with the requirement to quote and trade with the proposed 
minimum pricing increments set forth by the rule for a particular 
category of NMS stocks. As discussed in section II.F.1 above, the 
proposed variable minimum pricing increments have been developed so 
that there are increments at which market participants can trade 
between the spread and they are assigned based on the quoting 
characteristics of each NMS stock. Therefore, the Commission proposes 
to implement the trading requirement once all of the proposed minimum 
pricing increments have become effective.
---------------------------------------------------------------------------

    \250\ See supra section II.D.
---------------------------------------------------------------------------

    Thereafter, at the end of the fifth quarter of effectiveness of 
proposed rule 612, the primary listing exchanges would calculate the 
Time Weighted Average Quoted Spreads during the next Evaluation Period 
and assign the relevant proposed minimum pricing increment as required 
under proposed rule 600(b)(78). All of the variable minimum pricing 
increments for quoting and trading would be effective on a going 
forward basis.

H. Request for Comment

    The Commission requests comment on the proposed amendments to rule 
612 and on other potential alternatives to the proposed minimum pricing 
increments.
    1. Would the proposed variable minimum pricing increments for 
quotes and orders in NMS stocks priced equal to, or greater than, $1.00 
per share address the concerns that have been raised in the market 
about tick-constrained stocks? If not, why not?
    2. Are the proposed minimum pricing increments appropriate for NMS 
stocks? If not, why not, and what minimum pricing increments would be 
appropriate?
    3. Should all NMS stocks have the same minimum pricing increment 
instead of the proposed variable minimum pricing increments determined 
by the proposed Time Weighted Average Quoted Spreads? If so, why? What 
should be the minimum pricing increment?
    4. Are the proposed average quoted spread thresholds for each 
proposed minimum pricing increment appropriate? Why or why not?
    5. Are the proposed minimum pricing increments economically 
significant for the NMS stocks that have the relevant Time Weighted 
Average Quoted Spread? Please explain.
    6. Would the proposed minimum pricing increments cause flickering 
quotes? Please explain.
    7. Would the proposed minimum pricing increments reduce displayed 
liquidity? Please explain.
    8. Is the Time Weighted Average Quoted Spread the appropriate 
measure for assigning a minimum pricing increment for orders in NMS 
stocks that are priced $1.00 or more per share? If not, what would be 
the appropriate measure and why?
    9. Is the Evaluation Period an appropriate time period to calculate 
the Time Weighted Average Quoted Spread? If not, what would be an 
appropriate time period and why?
    10. Should the minimum pricing increment be modified on a quarterly 
basis? If not, how often should the minimum pricing increments be 
potentially modified, e.g., on a monthly basis, on a bi-annual basis, 
on an annual basis?
    11. Should the minimum pricing increment be uniform for all NMS 
stocks based on the per share price of a quote or order similar to 
today? Should there be more than two minimum pricing increments 
structures based on the price of an order or quotation of an NMS stock 
in rule 612? For example, should there be other price cutoffs in 
addition to the $1.00 price cutoff for specifying the relevant minimum 
pricing increment structure? If so, what should the price cutoffs be 
and what should be the minimum increment? If so, what should the 
uniform minimum pricing increment be? What should the price threshold 
be?
    12. Is the $0.01 minimum pricing increment for quotes and orders 
priced equal to, or greater than, $1.00 per share or more, appropriate 
for some NMS stocks? If so, which NMS stocks and why?
    13. Is each of the proposed Time Weighted Average Quoted Spreads 
that would determine the relevant minimum pricing increments 
appropriate for establishing the proposed minimum pricing increments? 
Is each of the Time Weighted Average Quoted Spread thresholds 
appropriate? Is each of the proposed minimum pricing increments related 
to the relevant Time Weighted Average Quoted Spreads appropriate? If 
not, why not, and what would be more appropriate measures and 
increments? Please explain.
    14. The proposed minimum pricing increments are determined based 
upon proposed Time Weighted Average Quoted Spreads and have been 
designed to facilitate trading within the spread to accommodate price 
improvement opportunities. Are the proposed

[[Page 80286]]

minimum pricing increments and the proposed spread requirements 
appropriate to allow price improvement opportunities within the spread? 
If not, why not? Are there too many or not enough minimum pricing 
increments?
    15. Should a minimum pricing increment larger than $0.01 be imposed 
for some NMS stocks, such as high priced stocks with wider spreads? Why 
or why not? If so, what should the increased minimum pricing increment 
be? What objective criteria should be used to identify such NMS stocks 
and why?
    16. Should NMS stocks that have a Time Weighted Average Quoted 
Spread greater than $0.04 retain the $0.01 minimum quoting increment? 
Is the proposed $0.04 Time Weighted Average Quoted Spread appropriate 
for retaining the $0.01 minimum pricing increment for such stocks? If 
not, why not and what would be more appropriate?
    17. Is the $0.0001 minimum pricing increment for quotes and orders 
priced less than $1.00 per share still appropriate? Should it be 
reduced or increased? If so, why?
    18. Should the minimum pricing increment be reduced only for those 
NMS stocks that are tick-constrained? Why or why not? If yes, what 
should the minimum pricing increment for tick-constrained stocks be? If 
yes, what should be the criteria to determine whether an NMS stock is 
tick-constrained?
    19. Should certain types of NMS stocks, such as ETFs or NMS stocks 
with smaller market capitalization, have a different minimum pricing 
increment? \251\ If so, which types of NMS stocks should have a 
different minimum pricing increment and why? If so, what should the 
minimum pricing increment for such stocks be and why?
---------------------------------------------------------------------------

    \251\ Currently, all types of NMS stocks are subject to the 
existing rule 612 minimum pricing increments and rule 612 does not 
differentiate between different types of NMS stocks. See also note 
200, supra.
---------------------------------------------------------------------------

    20. Are there other means to categorize NMS stocks for determining 
a minimum pricing increment? For example, should categories be based on 
share price, market value, trading volume, any other criterion, or a 
combination of criteria? As proposed, NMS stocks would be assigned a 
minimum pricing increment based on the Time Weighted Average Quoted 
Spread. How should average quoted spread be computed, over what time 
horizon, and how often should this criterion be updated? Should the 
formula for calculating Time Weighted Average Quoted Spread accommodate 
other elements, such as, for example, certain corporate actions like 
stock splits and reverse stock splits that changes the price of the 
shares? If so, how?
    21. New minimum pricing increments would be established for the 
following quarter on the first business day following the completion of 
the Evaluation Period. Is the Evaluation Period the appropriate number 
of days to calculate the new minimum pricing increments? Is the 
proposed time to implement, i.e., on the first business day following 
the completion of the Evaluation Period, sufficient for the markets and 
market participants to implement? If not, what would be a more 
appropriate time period to implement the new minimum pricing increment 
and why?
    22. Should the proposed minimum pricing increments apply to 
trading? Should the proposed trading increments be the same as the 
proposed quoting increments? Please explain why or why not.
    23. Do the proposed minimum pricing increments provide sufficient 
price levels for trading within the quoted spread? Are there sufficient 
levels to provide price improvement opportunities given that the 
trading increments would be governed by the proposed rule? Should there 
be different minimum pricing increments for quoting and trading? Please 
explain.
    24. Are the proposed exceptions for trading in the minimum pricing 
increment appropriate? Why or why not? Should there be other exceptions 
from the proposed requirement to trade in the minimum pricing 
increment, such as for retail or segmented orders? How should other 
exceptions, such as retail or segmented orders, be defined? Please 
explain.
    25. Would the proposed variable minimum pricing increments be 
overly burdensome or complex for the markets to implement? Please 
explain.
    26. Would the proposed variable minimum pricing increment be 
confusing for investors? Would the variable minimum pricing increments 
add unnecessary complexity to the market? If so, please explain.
    27. Should the primary listing exchange be required to provide an 
indicator of the applicable minimum pricing increments to competing 
consolidators, self-aggregators, and the appropriate exclusive SIP? Why 
or why not?
    28. In section V.F., the Commission discusses different reasonable 
alternatives--uniform $0.005 tick, a two-tier alternative ($0.005 and 
$0.01 depending on the Time Weighted Average Quoted Spread), $0.001 for 
retail or segmented trades, and variable tick size based on share 
price. Would any of these alternatives address the concerns identified 
in a more appropriate manner? If so, which alternative and why?
    29. Should the Commission stagger the implementation of rule 612 as 
proposed? If yes, are the time periods for the staggered implementation 
appropriate? Should the implementation phases be structured 
differently, and if so, how? If not, should there be an additional time 
period to implement rule 612 so the market and market participants can 
have sufficient time? Should the proposed minimum pricing increments 
for trading be implemented at the end of the implementation period? If 
not, when should the proposed minimum pricing increment be applied to 
trading?

III. Amendments to Rule 610 of Regulation NMS--Fees for Access to 
Quotations

A. Background

1. Regulation NMS
    Regulation NMS, among other things, established intermarket 
protection against trade-throughs for all NMS stocks.\252\ The 
Commission supplemented those requirements with rules addressing fair 
and efficient access to quotations and limits on fees charged to access 
newly protected quotations.\253\ The Commission stated that access to 
displayed quotations, particularly the best quotations of a trading 
center, is ``vital for the smooth functioning of intermarket trading.'' 
\254\ Specifically, the Commission adopted rule 610, which addresses 
three areas related to access to quotations: (1) the means of access to 
quotations; (2) the fees for access to protected quotations and any 
other quotations that are the best bid or best offer of an exchange or 
national securities association; and (3) locking and crossing 
quotations.
---------------------------------------------------------------------------

    \252\ See Rule 611 of Regulation NMS; 17 CFR 242.611.
    \253\ See Regulation NMS Adopting Release, supra note 16, at 
37538-50.
    \254\ See id. at 37539.
---------------------------------------------------------------------------

    In the context of fees for access to quotations, rule 610(c) 
imposes an access fee cap which prohibits a trading center from 
imposing, or permitting to be imposed, any fees for the execution of an 
order against a protected quotation \255\ of the trading center or any 
other quotation of the trading center that is the best bid or best 
offer of an exchange or association that exceed or accumulate to more 
than $0.0030 per

[[Page 80287]]

share for quotations of $1.00 or more per share.\256\ Rule 610(c) also 
imposes an access fee cap of 0.3% of the quotation price if the price 
of the protected quotation or other quotation is less than $1.00 per 
share.\257\ The access fee caps apply to executions against protected 
quotations \258\ and therefore the fees of trading centers that do not 
display protected quotations, such as ATSs or OTC markets makers, are 
not subject to rule 610(c)'s access fee caps.\259\ Further, the rule 
610(c) access fee caps do not apply to non-displayed interest or depth-
of-book quotes.\260\ The Commission adopted the rule 610(c) access fee 
caps in order to prevent high fees from undermining Regulation NMS's 
price protection and linkage requirements, while leaving trading 
centers otherwise free to set fees subject only to other applicable 
standards (e.g., prohibition on unfair discrimination).\261\ The access 
fee caps were designed to ensure that all investors would have fair and 
non-discriminatory access to protected quotations.\262\
---------------------------------------------------------------------------

    \255\ See supra note 29 (defining ``protected quotation'').
    \256\ See 17 CFR 242.610(c). See also Regulation NMS Adopting 
Release, supra note 16, 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 
$0.001 per share, with a total accumulated access fee limit of 
$0.0020 per share in any transaction. See Regulation NMS Proposing 
Release, supra note 16, at 11158-59. 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. at 11157-58. The Commission ultimately adopted 
an access fee cap of $0.0030 in order to simplify the initial 
proposal and align the amount of the cap with the amount charged by 
most trading centers at the time, among other reasons. See 
Regulation NMS Adopting Release, supra note 16, at 37502 and 37545.
    \257\ See Regulation NMS Adopting Release, supra note 16, at 
37545 n.419 (noting that ``[f]or the relatively small number of NMS 
stocks priced under $1.00, fees will be limited to 0.3% of the 
quotation price per share to prevent fees from constituting an 
excessive percentage of share price.'').
    \258\ See supra note 29. As stated above, rule 610(c) also 
applies to any other quotation of a trading center that is the best 
bid or offer of an exchange or association. The Commission stated 
that the access fee caps should apply to manual quotations that are 
the best bid or offer to the same extent that it applies to 
protected quotations to preclude any incentive for trading centers 
to display manual quotations as a means to charge higher access 
fees. See Regulation NMS Adopting Release, supra note 16, at 37546. 
For purposes of this discussion, references to protected quotations 
also include manual quotations that are the best bid or best offer 
of an exchange or association.
    \259\ If an ATS or OTC market maker displayed a protected 
quotation, its fees would be subject to the access fee caps under 
rule 610(c). However, exchange fees and the fees of non-exchange 
trading centers are treated very differently under the Federal 
securities laws. For example, one of the distinguishing features of 
registered national securities exchanges is that--unlike non-
exchange trading centers--their fees are subject to the principles-
based standards set forth in the Exchange Act, as well as the rule 
filing requirements thereunder. In particular, the Federal 
securities laws require the entirety of each and every fee, due, and 
charge assessed by an exchange to be transparent and publicly 
posted, and must be an equitable allocation of reasonable dues, fees 
and other charges and not be unfairly discriminatory. See 15 U.S.C. 
78f(b)(4) and (5). Similar requirements do not apply to the fees of 
non-exchange trading centers that do not provide public transparency 
into their respective fee schedules and typically are negotiated on 
a customer-by-customer basis. The fees assessed by non-exchange 
trading centers are bespoke, and the fees paid (or not paid) by 
market participants to ATSs and other off-exchange venues are 
negotiated between each market participant and the trading venue, 
the result being that the number of fee permutations and differences 
across brokers for any single ATS could be substantial.
    \260\ See Regulation NMS Adopting Release, supra note 16, at 
37546.
    \261\ See id. at 37543-46 (The Commission expressed concern that 
without a fee limitation, the adoption of the Order Protection Rule 
and private linkages could ``significantly boost the viability of 
the outlier business model.'' Such outlier markets ``might well try 
to take advantage of intermarket price protection by acting 
essentially as a toll booth between price levels'' with the high fee 
market likely to 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 such 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.''). Id. at 37546.
    \262\ See id. at 37497.
---------------------------------------------------------------------------

    At the time of adoption, the $0.0030 fee limitation was consistent 
with the then-prevailing market level and general business practices, 
as very few trading centers charged fees in excess of that amount.\263\ 
The Commission adopted the 0.3% fee limitation on quotations priced 
less than $1.00 to prevent fees from constituting an excessive 
percentage of share price.\264\ The purpose of the access fee 
limitation was to help ensure the fairness and accuracy of displayed 
quotations by establishing an outer limit on the cost of accessing such 
quotations.\265\ In adopting the rule, the Commission sought to 
``assure order routers that displayed prices are, within a limited 
range, true prices.'' \266\ Since the adoption of rule 610 in 2005, the 
Commission has continued to consider the impact of access fees on 
market structure and market quality, but has not previously proposed to 
modify the amount of the access fee caps despite significant changes in 
the equity markets.\267\
---------------------------------------------------------------------------

    \263\ The $0.0030 per share cap largely codified the then-
prevailing fee level set through competition among the various 
trading centers. See id. 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.'').
    \264\ See id. at 37544 n.406.
    \265\ See id. at 37502, 37583, and 37595.
    \266\ Id. at 37502. (The Commission stated that the fee 
limitation was necessary to achieve the purposes of the Exchange Act 
because ``[a]ccess fees tend to be highest when markets use them to 
fund substantial rebates to liquidity providers, rather than merely 
to compensate for agency services.'' Consequently, [i]f outlier 
markets are allowed to charge high fees and pass most of them 
through as rebates, the published quotations of such markets would 
not reliably indicate the true price that is actually available to 
investors or that would be realized by liquidity providers.'' 
Section 11A(c)(1)(B) of the Exchange Act authorizes the Commission 
to adopt rules assuring the fairness and usefulness of quotation 
information. In adopting the current fee caps, the Commission stated 
that, for quotations to be fair and useful, ``there must be some 
limit on the extent to which the true price for those who access 
quotations can vary from the displayed price.'' The Commission 
concluded that ``the $0.0030 fee limitation will further the 
statutory purposes of the NMS by harmonizing quotation practices and 
precluding the distortive effects of exorbitant fees.''). Id. at 
37584.
    \267\ See Securities Exchange Act Release No. 84875 (Dec. 19, 
2018), 84 FR 5202 (Feb. 20, 2019) (``Transaction Fee Pilot Adopting 
Release''). Further, the Equity Market Structure Advisory Commission 
also considered, among other things, whether the access fee cap 
should be modified. See Equity Market Structure Advisory Committee, 
Oct. 27, 2015, information available at https://www.sec.gov/spotlight/emsac/emsac-archives.htm.
---------------------------------------------------------------------------

2. Exchange Fee Models
    The predominant pricing structure for transactions that has 
developed among the equities exchanges to attract order flow is the 
``maker-taker'' pricing model, in which the exchange pays a rebate to a 
``maker'' or provider of liquidity and charges a fee to a ``taker'' of 
liquidity.\268\ The exchange 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.\269\ For maker-taker exchanges, the 
amount of the taker fee is typically limited by the access fee caps 
imposed by rule 610(c) on the fees the exchange can charge to access 
its protected

[[Page 80288]]

quotation or best bid/offer for NMS stocks. The rule 610(c) access fee 
caps apply to the fees assessed on an incoming order that executes 
against a resting protected quote, but does not address the rebates 
that may be paid. However, the rule 610(c) access fee caps typically 
indirectly limit the average amount of the rebates that an exchange 
offers to less than $0.0030 per share in order to maintain net positive 
transaction revenues. Thus, an exchange may have higher access fees to 
fund higher liquidity rebates \270\ to attract more trading volume.
---------------------------------------------------------------------------

    \268\ See SRO fee schedules, which are available on each SRO's 
website. See also infra section V.C.2, Table 5. This discussion 
focuses on exchange fees because, currently, only exchanges display 
protected quotations. If an ATS or OTC market maker displayed a 
protected quotation, its fees would be subject to the access fee 
caps under rule 610(c). However, exchange fees and the fees of non-
exchange trading centers are treated very differently under the 
Federal securities laws. See supra note 259.
    \269\ A few exchanges have adopted a ``taker-maker'' pricing 
model (also called an inverted model), in which they charge a fee 
the provider of liquidity and pay a rebate to the taker of 
liquidity. See, e.g., Nasdaq BX fee schedule available at https://www.nasdaqtrader.com/trader.aspx?id=bx_pricing (as of July 5, 2022); 
NYSE National fee schedule available at https://www.nyse.com/publicdocs/nyse/regulation/nyse/NYSE_National_Schedule_of_Fees.pdf 
(as of Jan. 1, 2022); and Cboe EDGA fee schedule available at 
https://www.cboe.com/us/equities/membership/fee_schedule/edga/ (as 
of Apr. 1, 2022). See also infra section V.C.2, Table 5. For taker-
maker exchanges, the amount of the maker fee charged to the provider 
of liquidity is not bounded by the rule 610(c) access fee cap 
because such fee is not a charge to access the market's best bid/
offer for NMS stocks, but such fees typically are no more than 
$0.0030.
    \270\ This was one of the concerns the Commission identified 
when it approved the access fee caps. See Regulation NMS Adopting 
Release, supra note 16, at 37545 (``[T]he fee limitation is 
necessary to achieve the purposes of the Exchange Act. Access fees 
tend to be highest when markets use them to fund substantial rebates 
to liquidity providers, rather than merely to compensate for agency 
services.'').
---------------------------------------------------------------------------

    In recent years, a variety of concerns have been expressed about 
the prevailing maker-taker fee model, in particular the rebates 
exchanges pay to attract orders. For example, many have argued that the 
prevailing access fee structure creates a conflict of interest for 
broker-dealers, who must provide the best execution to their customers' 
orders while facing potentially conflicting economic incentives to 
avoid fees or earn rebates from the trading centers to which they 
direct those orders for execution.\271\ Others have expressed concern 
that maker-taker access fees may: (1) 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; 
\272\ (2) 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; \273\ (3) introduce unnecessary market 
complexity through the proliferation of new exchange order types (and 
new exchanges) designed solely to take advantage of pricing models; 
\274\ (4) drive orders to non-exchange trading centers as market 
participants seek to avoid the higher fees that exchanges charge to 
subsidize the rebates they offer to attract liquidity; \275\ and (5) 
may benefit sophisticated market participants like market makers and 
proprietary traders at the expense of other market participants.\276\
---------------------------------------------------------------------------

    \271\ 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 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2399821 (retrieved from SSRN Elsevier 
database). 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. See 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 https://onlinelibrary.wiley.com/doi/10.1111/jofi.12422/full (``Battalio 
Equity Market Study'').
    \272\ See Letter from Richard Steiner, Global Equities Liaison 
to Regulatory & Government Affairs, RBC Capital Markets, to 
Elizabeth Murphy, Secretary, Commission, at 2-3 (Nov. 22, 2013), 
available at https://www.sec.gov/comments/s7-02-10/s70210-411.pdf 
(``RBC Capital Letter'') (commenting on potential equity market 
structure initiatives).
    \273\ See Larry Harris, ``Maker-Taker Pricing Effects on Market 
Quotations,'' at 24-25 (Nov. 14, 2013), available at https://www.lexissecuritiesmosaic.com/gateway/sec/speech/hujibusiness_Maker-taker.pdf.
    \274\ 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 
https://dealbook.nytimes.com/2014/07/14/how-to-improve-market-structure/?_r=0 (stating that the ``proliferation of order types 
designed to avoid access fees and capture rebates . . . adds 
complexity to the system, requires continuing technology changes and 
creates potential for market instability'' and recommending access 
fees charged by exchanges be ``dramatically reduced, if not 
eliminated''; RBC Capital Letter, supra note 272, at 2.
    \275\ See Menkveld, Albert J., Bart Zhou Yueshen, and Haoxiang 
Zhu, ``Shades of darkness: A pecking order of trading venues.'' 
Journal of Financial Economics 124, no. 3 (2017), at 503-534, 
available at https://www.mit.edu/~zhuh/
MenkveldYueshenZhu_2017JFE_dark.pdf; RBC Capital Letter, supra note 
272, at 2.
    \276\ See RBC Capital Letter, supra note 272, at 2-4; Letter 
from Mehmet Kinak, Vice President--Global Head of Systematic Trading 
& Market Structure, and Jonathan Siegel, Vice President--Senior 
Legal Counsel (Legislative & Regulatory Affairs), T. Rowe Price, to 
Brent J. Fields, Secretary, Commission, dated June 12, 2018, at 2, 
available at https://www.sec.gov/comments/s7-05-18/s70518-3832746-162769.pdf (sec.gov) (commenting on File No. S7-05-18 ``Transaction 
Fee Pilot for NMS Stocks).
---------------------------------------------------------------------------

    Conversely, others argue that the maker-taker model may have 
positive effects by enabling exchanges to compete with non-exchange 
trading centers and by narrowing quoted spreads by subsidizing posted 
prices.\277\ Specifically, maker-taker fees may narrow displayed 
spreads in some securities insofar as the liquidity rebate effectively 
subsidizes the prices of displayed liquidity by allowing a maker to 
post a more aggressive price than it may have in absence of a 
rebate.\278\ In turn, that displayed liquidity may establish the NBBO, 
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.\279\ Accordingly, retail 
orders may benefit indirectly from the subsidy provided by maker-taker 
exchanges.
---------------------------------------------------------------------------

    \277\ See, e.g., Michael Brolley & Katya Malinova, ``Informed 
Trading and Maker-Taker Fees in a Low Latency Limit Order Market,'' 
at 2 (Oct. 24, 2013), available at https://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.'' This article provided theoretical modelling, not 
empirical analysis.); Shawn O'Donoghue, ``The Effect of Maker-Taker 
Fees on Investor Order Choice and Execution Quality in U.S. Stock 
Markets'' (Jan. 23, 2015), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2607302; and Jean-Edouard Colliard & 
Thierry Foucault, ``Trading Fees and Efficiency in Limit Order 
Markets,'' Oxford University Press, at n.13 (Sept. 1, 2012), 
available at https://academic.oup.com/rfs/article/25/11/3389/1566107 
(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).
    \278\ 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 (Sept. 12, 2014), available at https://www.sec.gov/comments/s7-02-10/s70210-419.pdf (commenting on File No. 
S7-02-10 ``Concept Release on Equity Market Structure'' and File No. 
S7-01-13 ``Regulation Systems Compliance and Integrity, and Equity 
Market Structure Review'' by stating ``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 infra section V.C.2.
    \279\ See, e.g., Concept Release on Equity Market Structure, 
supra note 4 (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).
---------------------------------------------------------------------------

B. Current Rule 610(c)

    Rule 610(c) under Regulation NMS prohibits trading centers \280\ 
from imposing, or permitting to be imposed, any fee or fees for the 
execution of an order against a protected quotation of the trading 
center or any other quotation of the trading center that is the best 
bid or best offer of an exchange or association in an NMS stock \281\ 
that exceed or accumulate to more than $0.0030 per share if the price 
of the protected quotation or other quotation is $1.00 or more per 
share.\282\ Rule 610 also imposes an access fee cap of 0.3% of the 
quotation price per share if the price of the protected quotation or 
other quotation is less than $1.00 per share.\283\ As discussed above, 
the access fee caps apply to executions against protected

[[Page 80289]]

quotations \284\ and therefore the fees of non-exchange trading 
centers, such as ATSs or OTC markets makers that do not display 
protected quotations, are not subject to rule 610(c)'s access fee 
caps.\285\
---------------------------------------------------------------------------

    \280\ See supra note 30 (defining ``trading centers'').
    \281\ ``NMS stock'' is defined as ``any NMS security other than 
an option'' under 17 CFR 242.600(b)(55).
    \282\ See 17 CFR 242.610(c). See also Regulation NMS Adopting 
Release, supra note 16, at 37549.
    \283\ See Regulation NMS Adopting Release, supra note 16, at 
37549.
    \284\ See supra note 255 and accompanying text.
    \285\ See supra notes 255 and accompanying text, and 259. Non-
exchange fees are not subject to the requirements applicable to 
exchange fees under section 19(b) and rule 19b-4. While equities 
exchanges charge transaction-based fees, ATSs, especially ``dark 
pool'' ATSs that are part of a large broker-dealer order handling 
business, typically do 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. 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 
ATSs and noting that ATS fees may be bundled with brokerage services 
and such commission rates are typically negotiated between the 
parties).
---------------------------------------------------------------------------

C. Proposal To Reduce Fees for Access to Protected Quotations and 
Increase Fee Transparency

    In light of the amendments proposed to rule 612 as well as the 
decrease in trading costs and increased trading efficiencies since NMS 
was adopted, the Commission believes that rule 610 should be amended in 
two ways. First, because the Commission proposes to reduce the minimum 
pricing increment under rule 612 and introduce a variable tick regime, 
the Commission also proposes to recalibrate the access fee caps that 
limit what a trading center could charge for the execution of orders 
against a protected quotation of the trading center or any other 
quotation of the trading center that is the best bid or best offer of a 
national securities exchange or association. Specifically, if the 
protected quotation or other quotation in an NMS stock is priced at 
$1.00 or more per share, the Commission proposes that the fee or fees 
assessed to execute against such quotation would not be permitted to 
exceed (1) $0.0005 per share for NMS stocks that have a minimum pricing 
increment of $0.001 and (2) $0.001 per share for NMS stocks that have a 
minimum pricing increment greater than $0.001. Further, the Commission 
proposes to reduce the access fee cap for an execution against a 
protected quotation or other quotation priced less than $1.00 per share 
to 0.05% of the quotation price.
    The Commission's proposal with respect to the access fee caps 
modifies only the level of the caps and does not otherwise make any 
changes to its application.\286\ As discussed in the Regulation NMS 
Adopting Release, the rule 610(c) access fee caps were ``designed to 
preclude individual trading centers from raising their fees 
substantially in an attempt to take improper advantage of strengthened 
protection against trade-throughs.'' \287\ The Commission believes that 
retaining access fee caps for executions against protected quotations 
remains appropriate to achieve this purpose.
---------------------------------------------------------------------------

    \286\ Specifically, as discussed above, the access fee caps 
would continue to apply only to executions against protected 
quotations and therefore the fees of non-exchange trading centers, 
such as ATSs or OTC markets makers that do not display protected 
quotations, would continue not to be subject to Rule 610(c)'s access 
fee caps. See supra note 259 and accompanying text.
    \287\ Regulation NMS Adopting Release, supra note 16, at 37545.
---------------------------------------------------------------------------

    The Commission proposes to recalibrate the access fee caps to 
reflect the reduction in trading costs due to market efficiencies since 
rule 610 was adopted,\288\ while minimizing the potential impact of 
reduced fees and rebates on trading centers' business models. Further, 
lowering the access fee caps in connection with the reduction of the 
minimum pricing increment, would help to ensure that the fees charged 
to access a protected quotation do not distort the true price that is 
available to investors.\289\ Absent an adjustment to the current fee 
caps, access fees would make up a larger proportion of the per share 
quotation price than they do today because of the proposed decreases in 
the minimum pricing increments, which could lead to unintended market 
distortions and undermine price transparency. Second, to increase the 
transparency of exchange fees, and potentially help reduce broker 
conflicts of interest by allowing fees and rebates to more readily be 
passed through to customers,\290\ the Commission proposes to amend rule 
610 to require national securities exchanges to make the amounts of all 
fees and rebates determinable at the time of execution.\291\ Each of 
these proposals is discussed below.
---------------------------------------------------------------------------

    \288\ See Letter from Theodore R. Lazo, Managing Director & 
Associate General Counsel, SIFMA, to Brent J. Fields, Secretary, 
Commission, dated May 24, 2018, at 2 (``SIFMA Transaction Fee Pilot 
Letter'') (commenting on File No. S7-05-18 ``Transaction Fee Pilot 
for NMS Stocks'') at 2 (discussing cost savings due to market 
efficiencies and stating that SIFMA has long recommended lowering 
the existing access fee caps because such caps have ``not been 
adjusted to reflect market developments since Regulation NMS was 
adopted more than a decade ago'') and Letter from Theodore R. Lazo, 
Managing Director & Associate General Counsel, SIFMA, to Brent J. 
Fields, Secretary, Commission, dated Mar. 29, 2017), at 3 (``SIFMA 
2017 Letter'') (commenting that because spreads have narrowed and 
commissions have decreased since Regulation NMS was adopted, the 
existing access fee caps have become ``outsized relative to current 
market realities.'') See also infra notes 293, 315, 316, 317, and 
accompanying text.
    \289\ See Regulation NMS Adopting Release, supra note 16, at 
37545 (Section 11A of the Exchange Act ``authorizes the Commission 
to adopt rules assuring the fairness and usefulness of quotation 
information'' and stating that for quotations to be fair and useful, 
there ``must be some limit on the extent to which the true price for 
those who access quotations can vary from the displayed price.'').
    \290\ If broker-dealers could more easily pass-through rebates 
to their customers, the potential financial benefit of such rebates 
would inure to the customer, not the broker-dealer. Thus, the 
potential conflict of interest faced by a broker-dealer when routing 
its customers' orders to a market for execution would be reduced or 
eliminated because the broker-dealer would have no direct economic 
interest in the level of the rebate and would be able to better 
objectively assess best execution for each customer's order.
    \291\ As discussed above, exchange fees and the fees of non-
exchange trading centers are treated differently under the Federal 
securities laws. See supra notes 259 and 285.
---------------------------------------------------------------------------

1. Reduce Fees for Access to Protected Quotations
    The current access fee caps were designed to prevent fees from 
constituting an excessive percentage of the share price and reflected 
the then current rates that were assessed by trading centers.\292\ In 
the intervening seventeen years since rule 610 was adopted, the markets 
have evolved dramatically. Market innovations and technological 
efficiencies have reduced transaction and trading costs (e.g., lower 
commissions and more narrow bid/ask spreads) in the equities 
markets.\293\ In light of the proposed changes to rule 612 discussed in 
section II above, and consistent with the original goals of Regulation 
NMS, the Commission

[[Page 80290]]

believes the current access fee caps should be recalibrated to ensure 
that they do not represent an outsized portion of the displayed 
quotations.\294\ A reduction in the minimum pricing increment without 
reducing the access fee caps could permit fees to become a higher 
percentage of the minimum pricing increment, which could potentially 
undermine price transparency and exacerbate the other concerns with 
maker-taker fees described in section III.A.2 above.
---------------------------------------------------------------------------

    \292\ See Regulation NMS Adopting Release, supra note 16, at 
37544, n.406 and 37545.
    \293\ See, e.g., Citadel Report, supra note 100, at 4 (stating 
that advances in technology and innovation since the adoption of 
Regulation NMS have ``markedly improved conditions for all 
investors, who benefit from dramatically lower trading costs and 
market transparency,'' but recommending the Commission undertake 
further reform measures); SIFMA 2017 Letter, supra note 288, at 3 
and 8 (arguing that the $0.0030 access fee cap is too high relative 
to today's narrower spreads and lower commission rates'' and stating 
``[w]hile net costs to execute a transaction have been largely 
contained since Reg. NMS was adopted, access fees have become and 
remain an outsized element of overall transaction costs and do not 
reflect today's business practices and market realities.''); U.S. 
Equity Market Structure: Order Routing Practices, Considerations, 
and Opportunities, Charles Schwab (Sept. 7, 2022) (``Schwab 
Whitepaper''), available at https://content.schwab.com/web/retail/public/about-schwab/Schwab-2022-order-routing-whitepaper.pdf 
(offering observations on current market structure and 
recommendations for reform). The Schwab Whitepaper states that 
Regulation NMS was a ``watershed'' moment for the securities 
industry and the market evolution that ensued resulted in 
``significantly improved trading outcomes for investors, 
particularly retail investors'' who benefitted from, among other 
things, lower trading costs (bid/ask spreads and commissions) and 
faster executions. Id. at 5.
    \294\ The Commission recognized the importance of reducing costs 
when it adopted Regulation NMS, stating ``[t]he transaction costs 
associated with the prices at which [investor] orders are executed 
represent a continual drain on their long-term savings'' and noting 
that ``[m]inimizing these investor costs to the greatest extent 
possible is the hallmark of efficient markets, which is a primary 
objective of the NMS.'' See Regulation NMS Adopting Release, supra 
note 16, at 37498. See also note 289 and accompanying text.
---------------------------------------------------------------------------

    Therefore, the Commission proposes to reduce the level of the 
access fee cap for protected quotations in NMS stocks priced $1.00 or 
more and proposes to introduce a variable access fee cap structure to 
reflect the variable minimum pricing increments proposed in rule 612 
for quotations priced equal to or greater than $1.00 per share. 
Specifically, for NMS stocks that have a minimum pricing increment of 
$0.001, the Commission proposes a $0.0005 access fee cap, and for NMS 
stocks that have a minimum pricing increment greater than $0.001, the 
Commission proposes a $0.001 access fee cap. This proposal would 
balance several considerations, such as ensuring that the access fees 
do not exceed half the minimum pricing increment \295\ while also 
seeking to preserve the ability of trading centers \296\ to continue to 
operate and affording them continued flexibility to develop and utilize 
different fee structures. For protected quotations in NMS stocks priced 
less than $1.00, the fee cap would be adjusted to 0.05% of the 
quotation price per share to maintain the current proportional 
structure with the access fee caps on protected quotations that are 
priced $1.00 or more. The Commission believes the proposed reduction of 
the access fee caps is necessitated by the changes to the minimum 
pricing increments. The adjustments are also designed to recalibrate 
the access fee caps to better align pricing limitations with current 
transaction costs.\297\ Finally, the Commission has proposed access fee 
cap levels that would balance the need to reduce the access fee to 
reflect the lower minimum pricing increments and reduced trading costs, 
with leaving market centers otherwise free to establish fees to 
preserve the agency market business model.\298\
---------------------------------------------------------------------------

    \295\ See also MEMX Report, supra note 105, at 3 (``coupling . . 
. tick size changes with a targeted reduction in the access fee cap 
. . . would both prevent potential market distortions that could 
occur when fees exceed half the minimum increment and reduce 
industry take fee costs. . . .).'' MEMX requested an exemption from 
rule 612(c) to allow a minimum pricing increment of half of one cent 
($0.005) for tick-constrained stocks and a corollary reduction of 
the fee cap in such stocks from $0.0030 to $0.0015. See MEMX 
Exemption Request, supra note 105, at 1 and 7.
    \296\ In practice, currently, the access fee caps limit only the 
fees imposed by the national securities exchanges because other 
trading centers (e.g., ATSs and OTC market makers) do not have 
protected quotations. If in the future, other trading centers were 
to execute an order against a protected quotation, such trading 
centers' ability to impose fees would be bounded by the access fee 
caps as well.
    \297\ As discussed in section V.C.2, trading venues that utilize 
a flat fee model do not offer rebates. The fees for both taking and 
adding liquidity on such markets are significantly lower than the 
current $0.0030 fee cap and therefore do not appear to be 
economically constrained by rule 610(c). Similarly, ATSs appear to 
charge fees in the range of 10 mils. This suggests that the current 
access fee cap may not be reflective of the actual costs trading 
centers incur to provide execution services against protected 
quotations. See SIFMA 2017 Letter, supra note 288, at 8 (stating ``a 
significant portion of access fees are used to subsidize rebates 
with the exchanges' net capture reflecting today's market norms for 
accessing liquidity, which is approximately 3-5 cents per 100 shares 
traded . . . or 3-5 mils.).'' See also infra notes 303, 315 and 316 
and accompanying text.
    \298\ Imposing a $0.001 access fee cap on executions against 
protected quotations regardless of the minimum pricing increment 
could result in access fees that exceed half the minimum pricing 
increment, which could have a negative impact on quote priority. 
Therefore, the proposal would establish a $0.0005 access fee cap 
only for NMS stocks that have a minimum pricing increment of $0.001 
to ensure that for such stocks, the maximum access fee does exceed 
half the minimum pricing increment. For NMS stocks that have a 
minimum pricing increment greater than 0.001, the access fee cap 
would be $0.001 to avoid interference with existing agency market 
business models. Thus, the Commission's proposed level of the access 
fee caps seeks to balance the need to reduce the access fee caps to 
accommodate the reduction in the minimum pricing increments and 
preserve the ability of the agency market business models to charge 
fees for access.
---------------------------------------------------------------------------

    The proposed reduction in the minimum pricing increments under rule 
612 without a corresponding adjustment to the access fee caps would 
permit access fees to become too high in relation to the minimum 
pricing increment, which would potentially undermine price 
transparency.\299\ The proposed reduction to the access fee caps would 
ensure that access fees continue to be appreciably below the minimum 
pricing increment. If the access fee cap for protected quotations that 
have a minimum pricing increment of $0.001 were kept at the current 
level of $0.0030, an access fee set at the maximum allowed under rule 
610(c) would add an undisplayed additional three ticks per share to the 
displayed price.\300\ The Commission proposes the $0.0005 access fee 
cap for these NMS stocks so that the access fee cap does not exceed 
half the minimum increment, which could disrupt quote priority and 
result in unintended market distortions.\301\
---------------------------------------------------------------------------

    \299\ See supra note 289.
    \300\ See SIFMA Transaction Fee Pilot Letter, supra note 288 at 
2 (recommending that the Commission reduce the access fee cap to 
``no more than five cents per 100 shares because the cap has not 
been adjusted to reflect market developments since Regulation NMS 
was adopted'').
    \301\ See supra note 298.
---------------------------------------------------------------------------

    Further, for an NMS stock that has a proposed minimum pricing 
increment of $0.002, the current access fee cap would be larger than 
the minimum pricing increment. In addition, for an NMS stock that has a 
minimum pricing increment of $0.005, the current access fee cap would 
exceed half the minimum pricing increment. Reducing the access fee caps 
to the proposed levels would help to ensure that the displayed 
protected quotation reflects the price of the quotation, within a 
reasonable range, which would not be the case if the current access fee 
caps were not reduced. In the Regulation NMS Adoption Release, the 
Commission stated when adopting the current limits that, for quotations 
to be fair and useful, ``there must be some limit on the extent to 
which the true price for those who access quotations can vary from the 
displayed price.'' \302\ The proposed change to the access fee caps 
should preserve transparency regarding the true prices of protected 
quotations consistent with the requirements under section 11A(c)(1)(B) 
of the Exchange Act.\303\
---------------------------------------------------------------------------

    \302\ Regulation NMS Adopting Release, supra note 16, at 37545. 
The Commission stated that an important purpose of the fee cap was 
to prevent an ``outlier'' exchange from charging an exorbitant fee 
to access a protected quotation. Id. at 37503. One market 
participant stated that the current cap is ``simply too high'' and 
dislocated from ``true prices in the marketplace.'' See Letter from 
Paul M. Russo, Managing Director, Goldman Sachs & Co. LLC, to Brent 
J. Fields, Secretary, Commission, at 2 (May 24, 2018), available at 
https://www.sec.gov/comments/s7-05-18/s70518-3711788-162473.pdf 
(``Goldman Letter'') (commenting on File No. S7-05-18 ``Transaction 
Fee Pilot for NMS Stocks'').
    \303\ 15 U.S.C. 78k-1(c)(1)(B). See also Goldman Letter, supra 
note 302, at 1 (``[A] reduction in the Fee Cap from $.0030 to $.0010 
per share could be supported today and would be better calibrated 
with present-day trading and execution costs, which have decreased 
substantially since 2005 when the current Fee Cap was adopted.'').
---------------------------------------------------------------------------

    The Commission proposes to allow a higher access fee cap ($0.001 
per share) for those NMS stocks that have a minimum pricing increment 
greater than $0.001. The two proposed access fee caps would allow 
trading centers largely to maintain their current net capture rate and 
not impair the agency market business models, though some

[[Page 80291]]

business models may change.\304\ For example, as discussed in section 
V.C.2, the exchanges use one of three pricing models, which result in 
different net capture rates. Such rates vary between $0.0002 and 
$0.0006 per share. However, the Commission estimates that, for the 
overwhelming majority of trading volume on exchanges, the average total 
net capture is around $0.0004 per share for all trading types and 
likely closer to $0.0002 for non-auction trading in stocks that have a 
price equal to or greater than $1.00.\305\ The proposal to adopt two 
access fee caps for executions against protected quotations priced 
equal to, or greater than, $1.00 per share is designed to allow current 
business practices to continue while adjusting access fee levels to 
align with the proposed lower minimum pricing increments as well as 
reflect market innovations and technological efficiencies that have 
driven transaction costs down since rule 610(c) was adopted.\306\ 
Reducing access fees to amounts slightly above the current net capture 
rates would continue to allow trading centers that choose to operate 
solely by charging transaction fees to continue to do so, while also 
minimizing the costs to investors who must access protected quotations.
---------------------------------------------------------------------------

    \304\ See infra section V.D.3 discussing impact of proposed 
lower access fee caps on exchanges' net capture. ``Net capture'' is 
the amount earned by the trading center for facilitating a 
transaction, which is typically the difference between the average 
access fee charged by the trading center and the average rebate paid 
by the trading center. One market participant stated that a review 
of the maker-taker exchanges fee schedules as of May 2018 indicated 
that the average net capture between the base level fee/rebate and 
the highest level fee/rebate was approximately $0.0005 per share. 
The market participant further stated that lowering the fee cap to 
$0.001 would still allow a maker-taker exchange to yield the same 
$0.0005 per share net capture rate. The market participant concluded 
that lowering the fee cap to $0.001 per share would shrink the range 
within which exchanges could set fees and rebates and fee schedules 
would likely vary less across exchanges, but exchanges could ``still 
choose to offer rebates to incentivize liquidity provision and 
maintain their current net capture rates.'' See Goldman Letter, 
supra note 302, at 3.
    \305\ See note 499 infra and accompanying text. See also SIFMA 
2017 Letter, supra note 288 (stating ``the exchanges' net capture 
reflecting today's market norms for accessing liquidity, which is 
approximately 3-5 cents per 100 shares trading ($0.0003-$0.0005), or 
3-5 mils.''). ATSs typically do not offer rebates, but generally do 
charge fees to access liquidity in the range of 10 mils, suggesting 
a net capture in the range of $0.001 per share. See Letter from 
Stacey Cunningham, President, NYSE, to Brent Fields, Secretary, 
Commission, dated Oct. 2, 2018 (commenting on File No. S7-05-18 
``Transaction Fee Pilot for NMS Stocks'' and noting that a reduction 
of the fee cap to $0.001 per share ``would bring the fees exchanges 
charge for removing liquidity in line with those charged by ATSs''). 
However, the suggestion that the access fee caps be reduced to 
$0.001 per share was made in the context of the minimum pricing 
increment remaining at current levels under rule 612 (i.e., one cent 
for NMS stock quotes and orders priced $1.00 or more). Because the 
Commission proposes to reduce the minimum pricing increment for some 
NMS stocks to $0.001, the Commission is proposing a smaller access 
fee cap for those NMS stocks so that the maximum access fee does not 
have a negative impact on quote priority.
    \306\ See SIFMA Transaction Fee Pilot Letter (stating that over 
time, ``competitive pressures, increased efficiencies from 
automation, and electronic trading have each operated to reduce 
transaction costs throughout the markets'' but ``access fees have 
remained at or near 30 cents per hundred shares.'').
---------------------------------------------------------------------------

    The Commission took into account the then-current business models 
when it adopted the access fee cap levels in rule 610(c).\307\ The 
Commission stated that ``agency trading centers perform valuable agency 
services in bringing buyers and sellers together, and that their 
business model historically has relied, at least in part, on charging 
fees for execution of orders against their displayed quotations.'' 
\308\ At that time, the Commission did not want to unduly harm the 
agency market business model by prohibiting access fees entirely.\309\ 
The Commission's proposal is designed to preserve the fairness and 
usefulness of quotes while minimizing the impact to current agency 
market business models. If the Commission adopted a flat $0.0005 access 
fee cap regardless of the minimum pricing increment, it would 
potentially impair certain agency market business models because such a 
fee level would not allow certain markets to maintain their current net 
capture rates.\310\ Allowing a higher access fee cap for those NMS 
stocks that have a minimum pricing increment greater than $0.001 would 
preserve current agency market business models and would allow trading 
centers continued flexibility in structuring their businesses. The 
Commission's proposal seeks to balance concerns about lowering the 
access fee caps too far such that the reduction would jeopardize 
certain agency market business models while also recognizing that the 
access fee caps need to be reduced to accommodate the lower minimum 
pricing increments, capitalize on technological and cost improvements 
to the market that support lowering the caps, and avoid introducing 
market distortions.
---------------------------------------------------------------------------

    \307\ See Regulation NMS Adopting Release, supra note 16, at 
37545.
    \308\ Id.
    \309\ See Regulation NMS Adopting Release, supra note 16, at 
37545 (stating the adopted fee limitation of $0.0030 will not impair 
the agency market business model). Similarly, the Commission chose 
not to extend the application of the fee cap to all displayed quotes 
of a trading center (e.g., including depth-off-book quotes), but 
instead concluded the fee caps should apply more narrowly only to 
the best bid or offer of a national securities exchange or national 
securities association, in part, to have a ``minimal impact on 
competition and individual business models'' while also preserving 
the fairness and usefulness of quotes. Id. at 37546.
    \310\ See infra note 585 and accompanying text.
---------------------------------------------------------------------------

    The proposed rule would not establish individual access fee cap 
levels for each minimum pricing increment. Introducing four access fee 
caps to go along with the proposed four minimum pricing increments 
would introduce unnecessary complexity into the national market system. 
Exchange fee and rebate schedules are complex and change 
frequently.\311\ The Commission believes that adding four access fee 
caps would increase the complexity of exchange fee and rebate 
structures.\312\ The Commission believes that the two proposed access 
fee caps for protected quotations priced at $1.00 or more is 
appropriate to accommodate the reduction in the minimum pricing 
increments and would not introduce unnecessary complexity.
---------------------------------------------------------------------------

    \311\ See infra section V.C.2.
    \312\ See infra section V.C.2 and Table 5 and accompanying text, 
discussing the complexity of the existing exchange fee schedules and 
the number of changes thereto. The exchanges would likely need to 
develop at least four different fee (and corresponding rebate) 
levels and would be required to file proposed rule changes to 
accommodate the four new access fee caps.
---------------------------------------------------------------------------

    Some market participants have also suggested lowering the access 
fee caps, arguing that a reduction of the access fee caps to reflect 
the reduction in bid-offer spread may be appropriate if the Commission 
were to lower the minimum pricing increment.\313\ Proponents of this 
approach maintain that a reduction in access fees that is proportionate 
to the tick size reduction would reduce trading costs and increase the 
competitiveness of on-exchange trading.\314\ The Commission proposes to

[[Page 80292]]

reduce the access fee caps in conjunction with reducing the minimum 
pricing increment, but is not reducing them proportionally so as to not 
unduly impair current agency market business models within the national 
market system.
---------------------------------------------------------------------------

    \313\ See, e.g., Citadel Report, supra note 100, at 5 (stating 
``[t]o the extent the Commission reduces the minimum tick size for 
certain symbols, the access fee cap should be commensurately reduced 
to reflect the reduction in bid-offer spreads'' and recommending 
reduction of the current access fee cap ``by 50% to 15 cents per 100 
shares for symbols trading above $1.00 per share that are tick 
constrained (i.e., have a penny spread the overwhelming majority of 
the time)''). Citadel recommended the minimum pricing increment for 
tick-constrained symbols trading at or over $1.00 should be $0.005. 
See also MEMX Exemption Request, supra note 105, at 8 (requesting a 
reduction in the access fee cap as a condition to MEMX's request to 
lower the minimum pricing increment for tick-constrained stocks 
noting that ``a lower fee cap may be necessary in connection with an 
exemption that permits certain NMS stocks to trade in $0.005 
increments, as any fee charged to access quotations in such 
securities would make up a commensurately larger proportion of the 
spread'').
    \314\ Citadel Report, supra note 100, at 5. See also MEMX 
Report, at 5 (``[A] change [to the minimum pricing increment for 
tick constrained stocks] should also be coupled with a targeted 
change to the access fee cap . . . further reducing costs in these 
securities.''). MEMX estimates a potential savings of as much as 
$879 million for investors annually if each exchange with a take fee 
of more than $0.0015 were to reduce the take fee to that level in 
tick-constrained securities. See MEMX Report, id. at 20 n.15.
---------------------------------------------------------------------------

    Further, some market participants argue that the historic access 
fee cap reflects a non-competitive and artificially high rate.\315\ 
Specifically, according to one market participant, ``there is well-
developed, general consensus amongst market participants that a $0.0030 
per share Fee Cap is an outdated benchmark for execution costs in 
today's trading environment . . . and creates an upper range that is 
simply too high and far from representative of true prices in the 
marketplace.'' \316\ Others have stated that current pricing models 
have resulted in the kind of distortive pricing that rule 610(c) was 
designed to prevent.\317\
---------------------------------------------------------------------------

    \315\ See, e.g., Letter from Hubert De Jesus, Global Head of 
Market Structure and Electronic Trading, and Joanne Medero, U.S. 
Head of Global Public Policy, BlackRock, Inc., to Brent J. Fields, 
Secretary, Commission, dated May 23, 2018, at 1 (commenting on File 
No. S7-05-18 ``Transaction Fee Pilot for NMS Stocks'' stating 
``[T]he existing access fee cap is outdated and permits market 
forces to drive fees and rebates to excessive levels relative to the 
current magnitude of commissions and bid-ask spreads.''); Letter 
from Tim Gately, Managing Director, Head of Americas Equities, 
Citigroup Global Markets Inc., to Brent J. Fields, Secretary, 
Commission, dated May 25, 2018, at 1-2 (commenting on File No. S7-
05-18 ``Transaction Fee Pilot for NMS Stocks'' stating that 
``today's 30-mil cap on access fees that the exchanges can charge to 
access liquidity on their venues represents a more significant 
percentage of the economics of each trade'').
    \316\ Goldman Letter, supra note 302, at 2 and 4 (stating there 
is ``broad support in favor of lowering the Fee Cap'' and noting 
that since the adoption of Rule 610(c), spreads have narrowed 
considerably and commission rates have contracted and therefore the 
access fee cap ``creates an upper-range that is simply too high and 
far from representative of true prices in the marketplace.''). See 
also Letter from Theodore R. Lazo, Managing Director & Associate 
General Counsel, SIFMA, to Brent J. Fields, Secretary, Commission, 
dated May 24, 2018, at 2 (commenting on File No. S7-05-18 
``Transaction Fee Pilot for NMS Stocks'' and recommending a 
reduction to the access fee cap because ``the cap has not been 
adjusted to reflect market developments since Regulation NMS was 
adopted'' and noting that over time, ``competitive pressures, 
increased efficiencies from automation, and electronic trading have 
each operated to reduce transaction costs throughout the markets--
but not access fees, which have remained at or near 30 cents per 
hundred shares.''); Letter from Stacey Cunningham, President, NYSE, 
to Brent Fields, Secretary, Commission, dated Oct. 2, 2018 
(commenting on File No. S7-05-18 ``Transaction Fee Pilot for NMS 
Stocks'' and acknowledging that ``the primary concern raised by 
EMSAC and many commenters'' is that ``the existing access fee cap is 
anachronistic'' and recommending the Commission study a reduction of 
the fee cap to $0.001 per share, which ``would bring the fees 
exchanges charge for removing liquidity in line with those charged 
by ATSs'').
    \317\ See, e.g., Letter from Susan M. Olson, General Counsel, 
Investment Company Institute, to Brent J. Fields, Secretary, 
Commission, dated May 23, 2018, at 2 (commenting on File No. S7-05-
18 ``Transaction Fee Pilot for NMS Stocks'' stating ``Transaction 
fees and rebates also undermine market transparency because the 
prices displayed by exchanges--and provided on trade reports--do not 
include fee or rebate information and therefore do not fully reflect 
net trade prices.''); Goldman Letter, supra note 302, at 3 (stating 
that ``displayed prices do not reflect the actual economic costs 
because exchange fees and rebates are not reflected in those 
prices''); Letter from Cynthia Lo Bessette, General Counsel & 
Executive Vice President, OFI Global Asset Management, Inc., et al., 
Oppenheimer Funds, Inc., to Brent J. Fields, Secretary, Commission, 
dated May 25, 2018, at 2 (commenting on File No. S7-05-18 
``Transaction Fee Pilot for NMS Stocks'' stating ``[T]o the extent 
that transaction fees and rebates obfuscate the actual price bid or 
offered for a security, the `maker-taker' pricing model has the 
potential to undermine price transparency . . . .''); SIFMA 2017 
Letter, supra note 288, at 8 (stating ``in today's trading 
environment, a significant portion of access fees are used to 
subsidize rebates'').
---------------------------------------------------------------------------

    The rebates exchanges pay to attract liquidity have drawn much 
attention over the years. Typically, brokers do not directly pass along 
exchange fees and rebates to customers.\318\ One academic study 
concluded that this creates conflicts of interest that may harm 
customer order execution quality because brokers route customer orders 
to the trading venues that offer the highest rebates and not the best 
execution quality.\319\ This may also lead to excessive intermediation, 
i.e., excessive quoting in sufficiently liquid securities in order to 
earn rebates, which crowds out individual investors from being able to 
supply liquidity, in tick-constrained stocks. The proposed reduction in 
the access fee caps to reflect the proposed changes in the minimum 
pricing increments might have the ancillary effect of addressing some 
of the concerns regarding the rebates exchanges pay to attract order 
flow because the reduction in the access fee caps might reduce the 
amount exchanges could offer as rebates and thus reduce the incentives 
available to divert order flow to a particular venue.\320\
---------------------------------------------------------------------------

    \318\ See Battalio Equity Market Study, supra note 271, at 2194.
    \319\ See id., at 2193-2238.
    \320\ See MEMX Report, supra note 105, at 20 n.14 (stating 
``[a]lthough the access fee cap pursuant to Rule 610(c) does not 
explicitly limit rebates provided by trading centers, it imposes a 
practical limitation on rebates as the amount that can be recouped 
by the trading center is limited by the access fee that it can 
charge'').
---------------------------------------------------------------------------

    Finally, the Commission is also proposing to delete the references 
to ``The Nasdaq Stock Market, Inc.'' in rule 610(c). Since the Nasdaq 
Stock Market is now a national securities exchange, the language is 
redundant.
2. Require That All Exchange Fees and Rebates Be Determinable at the 
Time of an Execution
    Today, many of the fees and rebates of the exchanges are calculated 
at the end of the month, which impedes the ability of market 
participants to understand at the time of execution the full cost of 
their transaction. For example, the exchanges have developed complex 
fee and rebate schedules, some of which include tiers or other 
incentives based on a market participant's relative monthly trading 
volume or relative volume compared to the consolidated trading volume 
in the current month, with higher volume tiers receiving a higher 
(lower) per unit rebate (fee). This means that the exact fee or rebate 
for an order cannot be determined until the end of the month, after an 
execution occurs, and is not known to the parties to the trade at the 
time of execution. This lack of transparency impedes the ability of 
market participants to understand at the time of execution the full 
cost of their transaction. Uncertainty regarding the fee amount at the 
time of execution has implications for market participants conducting 
best execution analyses and can affect order routing decisions.
    To provide further transparency regarding transaction pricing, the 
Commission proposes to amend rule 610 to add a new subsection (d) 
``Transparency of Fees,'' which would prohibit a national securities 
exchange from imposing, or permitting to be imposed, any fee or fees, 
or providing, or permitting to be provided, any rebate or other 
remuneration (e.g., discounted fees, other credits, or forms of linked 
pricing) for the execution of an order in an NMS stock unless such fee, 
rebate or other remuneration can be determined at the time of 
execution. Under the proposal, any national securities exchange that 
imposes a fee or provides a rebate that is based on a certain volume 
threshold, or establishes tier requirements or tiered rates based on 
minimum volume thresholds, would be required to set such volume 
thresholds or tiers using volume achieved during a stated period prior 
to the assessment of the fee or rebate so that market participants are 
able to determine what fee or rebate level would be applicable to any 
submitted order at the time of execution.\321\ For example, if an

[[Page 80293]]

exchange proposed a lower fee for members that reach a certain level of 
trading volume in a month, the required level of trading volume would 
have to be achieved based on a month prior to the imposition of the fee 
or payment of the rebate.\322\
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    \321\ National securities exchanges establish and amend their 
fee schedules by filing proposed fee rule changes, pursuant to 
section 19(b) of the Exchange Act and rule 19b-4 thereunder, for 
Commission review. Some national securities exchanges currently use 
volume calculated on a monthly basis to determine the applicable 
threshold or tier rate. See, e.g., fee schedules of Nasdaq PSX 
available at https://listingcenter.nasdaq.com/rulebook/phlx/rules/Phlx%20Equity%207 (as of July 2022) (calculating fees based on 
``average daily volume during the month'') and Cboe EDGA available 
at https://www.cboe.com/us/equities/membership/fee_schedule/edga/ 
(as of Apr. 1, 2022) (calculating fees based on ``average daily 
volume'' and ``daily volume'' on a monthly basis).
    \322\ This proposal does not alter an exchange's ability to 
determine the measurement period during which volume is calculated 
(e.g., a week prior, two weeks prior, prior monthly, two months 
prior, or quarterly with one month lead time), rather it would 
instead require the measurement period to be prior to the date of 
execution so that market participants can determine the amount of 
the fee at the time of execution.
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    The Commission believes that requiring all exchange fees, rebates 
and other forms of remuneration to be determinable at the time of 
execution would have several benefits. Certainty about the cost of a 
transaction at the time of the trade may help broker-dealers make 
better order routing decisions. The proposal should reduce order 
routing incentives that are based on achieving a threshold in order to 
gain a specific fee or rebate. Today, lower fees or higher rebates 
based on volume achieved in a current trading month can lead to routing 
to exchanges solely for purposes of achieving a certain level of volume 
or attaining a possible tier level rather than routing to achieve best 
execution.\323\ In addition, the proposal would allow market 
participants to know with certainty the cost of their transactions at 
the time of the trade, which would facilitate a broker-dealer's ability 
to pass through the fee/rebate associated with a transaction because it 
would know at the time of the transaction the amount of the fee/rebate 
that is applicable to each execution. Further, the proposal would 
provide more transparency into whether a broker-dealer may be routing 
to certain venues based on the fee/rebate that venue assesses. 
Investors could more readily request details about fees and rebates 
related to their orders. If market participants pass through exchange 
fees/rebates, an ancillary benefit of the proposed amendment would be 
that the potential inducement to broker-dealers to route orders solely 
based on garnering the highest rebate/paying the lowest fee would be 
reduced since broker-dealers would no longer directly benefit from such 
remuneration, but instead would pass along such fees/rebates to their 
customers. Although a broker-dealer could still choose not to pass 
along fee/rebate, the proposal would facilitate a customer's ability to 
ask more direct questions of its broker-dealer about how the broker-
dealer handles fees and rebates, which could increase accountability of 
the broker-dealer, which in turn could lead to better order execution 
and more transparency regarding fees/rebates.
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    \323\ While tiers that are based on volume from a previous time 
period could still induce routing by a broker-dealer to try to 
secure a higher rebate/lower fee tier in the following month, the 
proposal would allow broker-dealers to pass those fees and rebates 
through to their customers and enable investors to identify whether 
a broker-dealer is routing to secure a higher rebate/lower fee.
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    The proposed rule would enhance transparency about the cost of 
executing a trade at the time of execution and would allow market 
participants to better assess the current state of the market when 
making trading and order routing decisions.

D. Request for Comment

    The Commission requests comment on the proposed changes to rule 610 
and on other potential reasonable alternatives, including:
    30. Are the proposed levels of the access fee caps appropriate? Why 
or why not? If not, what factors should be considered in determining 
the appropriate level of the access fee caps?
    31. Are the current access fee caps too high? What would be the 
appropriate level of an access fee cap(s)?
    32. Should reduction of the access fee caps be proportional to the 
reduction of the minimum pricing increment? Why or why not?
    33. Should rule 610(c) include access fee caps for each proposed 
minimum pricing increment? Why or why not?
    34. If an access fee cap is proportional to the minimum pricing 
increment, what should the proportion of the access fee cap to the 
minimum pricing increment be and why?
    35. Would two access fee caps for executions against protected 
quotations priced equal to, or greater than, $1.00 per share introduce 
additional complexity in the market? If so, please describe.
    36. How would the proposed reduction in the amount of the access 
fee caps affect rebates provided by exchanges?
    37. Would the proposed access fee caps preserve current agency 
market business models and allow for sufficient flexibility in 
structuring innovative business models? If not, why not?
    38. Do current exchange fees and rebates impact order routing 
decisions? Would a reduction of the current access fee caps impact 
order routing decisions? If so, how?
    39. Would proposed rule 610(d) affect the provision of volume-based 
discounts or other tiered fee structures by exchanges? If so, how?
    40. Proposed rule 610(d) is designed to increase transparency 
regarding the amount of volume-based discounts and other tiered fee 
structures available at the time of execution. Do volume-based 
discounts and other tiered fee structures affect order routing 
decisions? If so, please explain. Do volume-based discounts and other 
tiered fee structures increase market complexity, present conflicts of 
interest, or burden competition? Why or why not? Is proposed rule 
610(d) sufficient to address these concerns? If not, why not? What 
would be an appropriate means to address these concerns, for example, 
should volume based discounts or other tiers be limited or otherwise 
restricted?
    41. Should exchange fees based on volume be determinable at the 
time of execution? Why or why not?
    42. Would proposed rule 610(d) cause market participants to pass 
through fees and rebates to their customers? Why or why not?
    43. In section V.F.3, the Commission discusses different reasonable 
alternatives to the proposed amendment to rule 610(c) access fee caps, 
including, for example, implementing higher or lower access fee caps 
than the levels proposed; implementing access fee caps that maintain 
the current 30% proportional relationship to the minimum pricing 
increment; adopting a uniform $0.001 access fee cap regardless of the 
minimum pricing increment; implementing a uniform $0.0003 or $0.0004 
access fee cap regardless of minimum pricing increment; banning rebates 
and retaining the current access fee caps; or banning rebates and 
reducing the current access fee caps. Would any of these reasonable 
alternatives address the concerns identified regarding the current 
access fee caps in a more appropriate manner? If so, which alternative 
and why?

IV. Transparency of Better Priced Orders

A. Background

    On December 9, 2020, the Commission adopted the MDI Rules, which 
expanded the data that will be made available for dissemination within 
the national market system (``NMS data'') and adopted a decentralized 
consolidation model--pursuant to which ``competing consolidators'' will 
eventually replace the exclusive SIPs--for the collection, 
consolidation, and

[[Page 80294]]

dissemination of this data.\324\ The MDI Rules have been adopted but 
have not yet been implemented.\325\ Therefore, the data currently 
disseminated within the national market system by the exclusive SIPs 
\326\ includes, for each NMS stock, the price, size, and exchange of 
each last sale, each exchange's current highest bid and lowest offer 
and the shares available at those prices (the ``best bid and best 
offer'' or ``BBO''), the NBBO, odd-lot transaction information, and 
certain regulatory and administrative data (``SIP data'').\327\ 
Information on NMS stock quotations is provided in round lots, which, 
until the round lot definition adopted pursuant to the MDI Rules is 
implemented, continue to be defined in exchange rules.\328\ For most 
NMS stocks, a round lot is defined as 100 shares.\329\ Information 
about orders that have a size less than a round lot, i.e., odd-lot 
orders, is available on individual exchange proprietary data feeds, and 
market participants interested in quotation data for individual odd-lot 
orders must purchase these proprietary feeds.\330\
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    \324\ See MDI Adopting Release, supra note 5. For purposes of 
this release, ``NMS data'' refers to the ``information with respect 
to quotations for and transactions in securities'' that is 
collected, consolidated and disseminated within the national market 
system pursuant to section 11A of the Exchange Act. See 15 U.S.C. 
78k-1(a)(1)(C). Under the existing exclusive SIP model, this 
consists of SIP data. See infra note 327 and accompanying text. 
Under the decentralized consolidation model, this will consist of 
``consolidated market data,'' including ``core data,'' as defined in 
the MDI Rules. See 17 CFR 242.600(b)(19), (21).
    \325\ See infra notes 344-358 and accompanying text.
    \326\ Currently, the Securities Industry Automation Corporation 
(``SIAC,'' an affiliate of the New York Stock Exchange) is the 
exclusive SIP for the CTA and CQ Plans, and Nasdaq is the exclusive 
SIP for the UTP Plan. See MDI Adopting Release, supra note 5, at 
18728.
    \327\ See MDI Proposing Release, supra note 39, at 16730.
    \328\ See id. at 16738. A ``round lot'' is not defined in the 
Exchange Act and, prior to the MDI Rules, it was not defined in 
Regulation NMS. Exchange rules typically define a round lot as 100 
shares, but they also allow the exchange, or the primary listing 
exchange for the stock, discretion to define it otherwise. See, 
e.g., NYSE rule 7.5 (``A `round lot' is 100 shares, unless specified 
by the primary listing market to be fewer than 100 shares.''); 
Nasdaq rule 5005(a)(40) (```Round Lot' or `Normal Unit of Trading' 
means 100 shares of a security unless, with respect to a particular 
security, Nasdaq determines that a normal unit of trading shall 
constitute other than 100 shares.'').
    \329\ According to NYSE Trade and Quote (``TAQ'') Data, as of 
Apr. 2022, eleven stocks had a round lot size other than 100. Nine 
stocks had a round lot of ten and two stocks had a round lot of one.
    \330\ See MDI Proposing Release, supra note 39, at 16738; MDI 
Adopting Release, supra note 5, at 18599.
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    One goal of the expansion of NMS data in the MDI Rules is to 
increase transparency about the best priced quotations available in the 
market. To accomplish this goal, the Commission amended Regulation NMS 
to include a definition of round lot that assigns each NMS stock to a 
round lot size based on the stock's share price.\331\ Specifically, for 
NMS stocks priced $250.00 or less per share, a round lot will be 100 
shares; for NMS stocks priced $250.01 to $1,000.00 per share, a round 
lot will be 40 shares; for NMS stocks priced $1,000.01 to $10,000.00 
per share, a round lot will be 10 shares; and for NMS stocks priced 
$10,000.01 or more per share, a round lot will be 1 share.\332\ As a 
result of the round lot definition, each exchange's BBO and the NBBO 
for an NMS stock can be based upon smaller, potentially better-priced 
orders,\333\ which will improve transparency regarding the better 
priced quotations available in the market and the ability of market 
participants to access these quotations.\334\
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    \331\ 17 CFR 242.600(b)(82); MDI Adopting Release, supra note 5, 
at 18617.
    \332\ 17 CFR 242.600(b)(82). The MDI Rules also required that a 
round lot indicator be included in NMS data so that market 
participants would know the size of a round lot for each NMS stock. 
Specifically, the definition of regulatory data requires the primary 
listing exchange to provide, among other things, an ``indicator of 
the applicable round lot size'' to competing consolidators and self-
aggregators. 17 CFR 242.600(b)(78); MDI Adopting Release, supra note 
5, at 18634. In addition, the MDI Rules require competing 
consolidators to represent quotation sizes for certain core data 
elements in terms of the number of shares, rounded down to the 
nearest multiple of a round lot. 17 CFR 242.600(b)(21)(iii); MDI 
Adopting Release, supra note 5, at 18615.
    \333\ As shown in the MDI Proposing and Adopting Releases, 
orders currently defined as odd-lots often reflect superior pricing. 
See MDI Proposing Release, supra note 39, at 16740 (describing 
analysis that found, among other things, that ``43% of [ ] odd-lot 
transactions [in Sept. of 2019] (representing approximately 39% of 
all odd-lot volume) occurred at a price better than the NBBO''); MDI 
Adopting Release, supra note 5, at 18616 (describing analysis that 
made similar findings using data from May of 2020). More recent data 
and updated analyses confirm that these pricing patterns in odd-lot 
trading have continued. See infra notes 364-369 and accompanying 
text.
    \334\ MDI Adopting Release, supra note 5, at 18613, 18742.
---------------------------------------------------------------------------

    In addition, to further increase the transparency and availability 
of better priced orders in the market, the Commission adopted a 
definition of odd-lot information as part of the MDI Rules.\335\ Odd-
lot information is defined as (1) odd-lot transactions,\336\ and (2) 
odd-lots at a price greater than or equal to the national best bid and 
less than or equal to the national best offer, aggregated at each price 
level at each national securities exchange and national securities 
association.\337\ Therefore, once implemented, information on odd-lot 
orders priced better than the NBBO \338\ will be included in NMS data 
that is made available to market participants within the national 
market system.\339\
---------------------------------------------------------------------------

    \335\ 17 CFR 242.600(b)(59); MDI Adopting Release, supra note 5, 
at 18613.
    \336\ Odd-lot transaction information is currently collected, 
consolidated, and disseminated by the exclusive SIPs. See Securities 
Exchange Act Release Nos. 70793 (Oct. 31, 2013), 78 FR 66788 (Nov. 
6, 2013) (order approving Amendment No. 30 to the UTP Plan to 
require odd-lot transactions to be reported to consolidated tape); 
70794 (Oct. 31, 2013), 78 FR 66789 (Nov. 6, 2013) (order approving 
Eighteenth Substantive Amendment to the Second Restatement of the 
CTA Plan to require odd-lot transactions to be reported to 
consolidated tape).
    \337\ 17 CFR 242.600(b)(59); MDI Adopting Release, supra note 5, 
at 18613.
    \338\ Unlike orders in the round lot sizes adopted pursuant to 
the MDI Rules, odd-lots are not ``protected quotations.'' See 17 CFR 
242.600(b)(70), (71), (11).
    \339\ Under the MDI Rules, competing consolidators are permitted 
to offer consolidated market data products that contain a subset of 
the information included in the definition of consolidated market 
data. See MDI Adopting Release, supra note 5, at 18659. The 
Commission, however, stated that it believed that there will be 
widespread demand for a product that contains all elements of 
consolidated market data, and particularly for the additional 
information included in core data. See id. at 18659-60.
---------------------------------------------------------------------------

    The Commission believes that this information about the best priced 
orders available in the market should be readily and widely available. 
For the reasons discussed below, as part of a broader transition period 
for the implementation of the MDI Rules, the Commission decided to 
phase in the implementation of the definitions of round lot and odd-lot 
information.\340\ However, in light of delays in the implementation of 
the MDI Rules,\341\ the Commission now believes that a timelier 
implementation of these new data elements would allow investors to 
benefit from greater transparency and accessibility of better priced 
orders and improved execution quality \342\ sooner. In addition, the 
Commission now believes that the best priced interest available in the 
market, including the best odd-lot order, should be identified and made 
widely and readily available. Identifying the best odd-lot order would 
enhance the utility of NMS data for trading and order routing and 
facilitate the ability of investors to assess execution quality.\343\ 
Therefore, the Commission proposes to: (1) accelerate the 
implementation of the previously-adopted round lot and the odd-lot 
information definitions; and (2) amend the definition of odd-lot 
information to

[[Page 80295]]

include a new data element for the best odd-lot orders available in the 
market.
---------------------------------------------------------------------------

    \340\ See infra section IV.A.1; notes 381-384 and accompanying 
text.
    \341\ See infra notes 356-360 and accompanying text.
    \342\ See infra notes 360-363 and accompanying text.
    \343\ See infra notes 421-425 and accompanying text.
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1. Infrastructure Implementation: Phased Transition Plan and Current 
Status
    The Commission outlined a phased transition plan for the 
implementation of the MDI Rules.\344\ Pursuant to the transition plan, 
the round lot definition is currently set to be implemented as part of 
the last phase and odd-lot quotation information is currently set to be 
implemented during a ``parallel operation period.'' \345\
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    \344\ MDI Adopting Release, supra note 5, at 18698-18701.
    \345\ Id. at 18700-01. See also infra note 351 and accompanying 
text (describing the parallel operation period).
---------------------------------------------------------------------------

    The first step in the implementation of the MDI Rules was the 
filing of amendments to the effective national market system plan(s) as 
required under rule 614(e).\346\ The Commission's approval of such 
amendments will be the starting point for the rest of the 
implementation schedule. While the Commission can approve NMS plan 
amendments within 90 days of the date of their publication in the 
Federal Register if the Commission finds them to be consistent with the 
standards set forth in rule 608 of Regulation NMS,\347\ the Commission 
may, under rule 608(b)(2)(i), institute proceedings to determine 
whether to approve or disapprove proposed amendments, which proceedings 
must conclude within 180 days of notice publication of the proposed 
amendments but can be extended by an additional 120 days.\348\ 
Therefore, the maximum time permitted under rule 608 for Commission 
action is 300 days.
---------------------------------------------------------------------------

    \346\ 17 CFR 242.614(e). The Operating Committees of CTA Plan 
and UTP Plan filed proposed amendments on Nov. 5, 2021, which were 
published for comment in the Federal Register. See Securities 
Exchange Act Release Nos. 93615 (Nov. 19, 2021), 86 FR 67800 (Nov. 
29, 2021); 93625 (Nov. 19, 2021), 86 FR 67517 (Nov. 26, 2021); 93620 
(Nov. 19, 2021), 86 FR 67541 (Nov. 26, 2021); 93618 (Nov. 19, 2021), 
86 FR 67562 (Nov. 26, 2021) (``MDI Plan Amendments'').
    \347\ See 17 CFR 242.608(b)(2) (``The Commission shall approve a 
national market system plan or proposed amendment to an effective 
national market system plan . . . if it finds that such plan or 
amendment is necessary or appropriate in the public interest, for 
the protection of investors and the maintenance of fair and orderly 
markets, to remove impediments to, and perfect the mechanisms of, a 
national market system, or otherwise in furtherance of the purposes 
of the Act.'').
    \348\ See 17 CFR 242.608(b)(2). The Commission instituted 
proceedings to determine whether to approve or disapprove the MDI 
Plan Amendments. See Securities Exchange Act Release Nos. 94310 
(Feb. 24, 2022), 87 FR 11748 (Mar. 2, 2022); 94309 (Feb. 24, 2022), 
87 FR 11763 (Mar. 2, 2022); 94308 (Feb. 24, 2022), 87 FR 11755 (Mar. 
2, 2022); 94307 (Feb. 24, 2022), 87 FR 11787 (Mar. 2, 2022).
---------------------------------------------------------------------------

    After the Commission finds that the plan amendments required under 
rule 614(e) are consistent with the Rule 608 standards and approves 
such amendments,\349\ the next step will be a 180-day development 
period, during which competing consolidators can register with the 
Commission. The development period is followed by a 90-day testing 
period.\350\ Once the testing period concludes, a 180-day parallel 
operation period will begin during which the exclusive SIPs and the 
decentralized consolidation model will operate in parallel.\351\
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    \349\ See supra note 347.
    \350\ See MDI Adopting Release, supra note 5, at 18699-700.
    \351\ During the parallel operation period, the exclusive SIPs 
will continue to disseminate the data that they currently 
disseminate and competing consolidators will be permitted to offer 
consolidated market data products, including odd-lot information. 
Because the round lot definition will be implemented during a later 
phase, the exclusive SIPs and competing consolidators will collect, 
consolidate and disseminate NMS data that will be based on the 
current exchange definitions of round lot. Id. at 18699-18701. See 
also supra note 328.
---------------------------------------------------------------------------

    Within 90 days of the end of the parallel operation period, the 
Operating Committee of the effective national market system plan(s), in 
consultation with relevant market participants, will make a 
recommendation to the Commission as to whether the exclusive SIPs 
should be decommissioned. The exclusive SIPs will only cease operations 
if the Commission approves an amendment pursuant to rule 608 to the 
effective national market system plan(s) to effectuate such a 
cessation.\352\ Following the cessation of the operations of the 
exclusive SIPs, the changes necessary to implement the new round lot 
sizes will be tested for 90 days and then implemented.\353\
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    \352\ MDI Adopting Release, supra note 5, at 18701.
    \353\ Id.
---------------------------------------------------------------------------

    Therefore, based on the times provided in the transition plan for 
implementation of the MDI Rules, the full implementation of the MDI 
Rules, including the implementation of the round lot definition and the 
inclusion of odd-lots priced better than the NBBO based on the new 
round lot definition,\354\ will be at least two years after the 
Commission's approval of the plan amendment(s) required by rule 614(e).
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    \354\ Odd-lots priced better than the current round lot NBBO 
(typically based on orders of 100 shares or more) will be made more 
widely available in the national market system and could be included 
in the consolidated market data products offered by competing 
consolidators during the parallel operation period, which is 
scheduled to begin nine months after the Commission's approval of 
the plan amendment(s) required by rule 614(e). See also supra note 
351 and accompanying text.
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    The Operating Committees of the CTA/CQ Plan and UTP Plan filed the 
MDI Plan Amendments on November 5, 2021.\355\ On February 24, 2022, 
pursuant to rule 608(b)(2)(i), the Commission instituted proceedings to 
determine whether to approve or disapprove the proposed MDI Plan 
Amendments.\356\ On September 21, 2022, the Commission disapproved the 
proposed amendments.\357\ As a result, the participants to the 
effective national market system plan(s) will need to develop and file 
new proposed amendments pursuant to rule 608.
---------------------------------------------------------------------------

    \355\ See supra note 346.
    \356\ See supra note 348.
    \357\ See Securities Exchange Act Release Nos. 95848 (Sept. 21, 
2022), 87 FR 58544 (Sept. 27, 2022); 95849 (Sept. 21, 2022), 87 FR 
58592 (Sept. 27, 2022); 95850 (Sept. 21, 2022), 87 FR 58560 (Sept. 
27, 2022); 95851 (Sept. 21, 2022), 87 FR 58613 (Sept. 27, 2022).
---------------------------------------------------------------------------

    Accordingly, the implementation of the MDI Rules will take 
significantly longer than the Commission estimated when it adopted the 
transition plan.\358\ At this time, because amendments to the effective 
national market system plan(s) required under rule 614(e) are not yet 
in place, full implementation pursuant to the phased implementation 
schedule likely will not occur until at least two years after new 
proposals are developed, filed, and approved by the Commission.
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    \358\ The amendments to the effective national market system 
plan(s) required under rule 614(e) were published in the Federal 
Register in Nov. 2021 and, if consistent with the standard set forth 
in rule 608(b), could have been approved by the Commission by Feb. 
2022. See supra notes 346-347 and accompanying text. Thereafter, the 
180-day development period, 90-day testing period, and 180-day 
parallel operation period would have concluded by May 2023. See 
supra notes 350-351 and accompanying text. Plan amendment(s) to 
effectuate the cessation of the operations of the exclusive SIPs 
could then have been proposed and approved, and round lot testing 
and implementation completed, in 2024. See supra notes 352-353 and 
accompanying text.
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B. Accelerate Implementation of Round Lots and Odd-Lot Information

    In light of the delay in the implementation of the MDI Rules, the 
Commission proposes to accelerate the implementation of the round lot 
and odd-lot information definitions. The Commission believes that the 
transition plan for implementing the MDI Rules should be modified so 
that the benefits of the round lot and the odd-lot information 
definitions would be made available to investors and other market 
participants sooner. Earlier implementation would accelerate the 
transparency benefits of these definitions by making information about 
better priced interest available in the

[[Page 80296]]

market more widely available on a faster timetable.\359\
---------------------------------------------------------------------------

    \359\ In addition to the round lot and odd-lot information 
definitions, the MDI Rules expanded the content of NMS data by, 
among other things, adopting definitions of ``depth of book data'' 
and ``auction information.'' See 17 CFR 242.600(b)(26), (5); see 
also MDI Adopting Release, supra note 5, at 18602. The Commission is 
proposing to accelerate the implementation of the round lot and odd-
lot information definitions in particular because their inclusion in 
NMS data would offer investors direct opportunities to obtain price 
improvement by transacting against the best priced orders available 
in the market. Moreover, these definitions could be efficiently 
implemented under the current exclusive SIP model. See infra 
sections IV.B.4, V.D.5, V.D.6.c, and VI.D.
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    With respect to round lots, the Commission described in the MDI 
Rules that smaller sized orders in higher priced stocks are often 
priced better than the orders that are currently in round lots.\360\ 
The Commission reduced the round lot size for high-priced NMS stocks to 
``better ensure the display and accessibility of significant liquidity 
for higher-priced stocks'' and ``improve the comprehensiveness and 
usability of core data, facilitate the best execution of customer 
orders, and reduce information asymmetries.'' \361\ The round lot 
definition will ``make these quotes [in sizes less than 100 shares for 
stocks priced over $250] visible . . . thereby improving transparency'' 
and ``narrow NBBO spreads for most stocks with prices greater than 
$250.'' \362\ With respect to odd-lot information, the Commission 
stated that including better priced odd-lot orders in odd-lot 
information will ``help investors and other market participants to 
trade in a more informed and effective manner and to achieve better 
executions and reduce the information asymmetries that currently exist 
between subscribers to SIP data and subscribers to proprietary data.'' 
\363\
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    \360\ See supra note 333.
    \361\ MDI Adopting Release, supra note 5, at 18615-16.
    \362\ Id. at 18742.
    \363\ Id. at 18612. The additional transparency resulting from 
the inclusion of better priced odd-lots in core data extends to 
lower priced stocks as well. See id. at 18618 (``The Commission 
acknowledges that increasing the minimum stock price for the first 
sub-100 share round lot tier from $50 to $250 will not improve odd-
lot transparency for stocks priced between $50 and $250. However, as 
discussed above, the Commission is including information about all 
odd-lots priced at or better than the NBBO in core data, which will 
counterbalance this loss of odd-lot transparency.'') (citations 
omitted).
---------------------------------------------------------------------------

    Since the adoption of the MDI Rules, the market dynamics that 
supported the Commission's adoption of the round lot and odd-lot 
information definitions have persisted. Average stock prices have 
continued to increase over time,\364\ and odd-lot quoting and trading 
rates remain high, particularly for higher priced stocks.\365\ Odd-lot 
quotes in higher priced stocks continue to offer prices that are 
frequently better than the round lot NBBO for these stocks,\366\ and 
this better priced odd-lot liquidity is distributed across multiple 
price levels.\367\ In addition, odd-lot rates have increased among 
lower priced stocks.\368\
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    \364\ See MDI Proposing Release, supra note 39, at 16739 
(stating that ``between 2004 and 2019, the average price of a stock 
in the Dow Jones Industrial Average nearly quadrupled.''). Between 
Jan. of 2020 and Aug. of 2022, the average price of a stock in the 
Dow Jones Industrial Average increased by 18%. Sources: Equity 
consolidated data feeds (CTS and UTDF), as collected by MIDAS; NYSE 
Daily TAQ; Indices, Dow Jones Industrial Average, FINANCIAL TIMES 
(last visited Nov. 29, 2022), available at https://markets.ft.com/data/indices/tearsheet/constituents?s=DJI:DJI (describing the 
current constituent stocks of the Dow Jones Industrial Average); S&P 
Dow Jones Indices, Salesforce.com, Amgen and Honeywell International 
Set to Join Dow Jones Industrial Average (Aug. 24, 2020), available 
at https://www.spglobal.com/spdji/en/documents/indexnews/announcements/20200824-1208960/1208960_aug20aaplsplitcrmxomamgnpfehonrtxdjia.pdf (describing 
changes to the constituents of the Dow Jones Industrial Average in 
Aug. of 2020); Aparna Narayanan, Raytheon Technologies Debuts On The 
Dow As Rival GE Deepens Cuts (Apr. 3, 2020), available at https://www.investors.com/news/raytheon-technologies-stock-debuts-dow-jones-industiral-average-ge-aviation-cuts/(describing changes to the 
constituents of the Dow Jones Industrial Average in Apr. of 2020).
    \365\ Based on data from the SEC's MIDAS analytics tool, the 
daily exchange odd-lot rate (i.e., the number of exchange odd-lot 
trades as a proportion of the number of all exchange trades) for all 
corporate stocks ranged from approximately 52% to 64% of trades and 
the daily exchange odd-lot rate for all ETPs ranged from 33% to 46% 
of trades in 2021. More recently, in June 2022, the daily exchange 
odd-lot rate for all corporate stocks averaged 65% and reached 
almost 41% for all ETPs in the same period. Exchange odd-lot volume 
as a proportion of total exchange-traded volume also rose in June 
2022, reaching approximately 19% for all corporate stocks (and over 
39% for the top decile by price) and approximately 7% for all ETPs. 
These levels are higher than the levels observed in the data from 
2018 and 2019. See MDI Proposing Release, supra note 39, at 16739; 
MIDAS, available at https://www.sec.gov/marketstructure/midas.html. 
See also Cboe, An In-Depth View Into Odd Lots (Oct. 27, 2021), 
available at https://www.cboe.com/insights/posts/an-in-depth-view-
into-odd-lots/
#:~:text=Odd%20lots%20currently%20make%20up,the%20beginning%20of%20th
e%20year (``Odd lots currently represent 54.8% of all trades in the 
U.S. financial markets, up from 43% at the beginning of 2020 . . . 
While odd lot average daily executed share volume has decreased 
about 22% from the highs reached in Feb. and Mar. [of 2021], their 
percentage of trades continues to increase, and overall share volume 
remains higher than the prior year . . . As stock price increases, 
odd lot share volume percentage also increases. Since first-quarter 
2020, the percentage of odd lots has increased across all price 
groups. The largest increase was in stocks priced between $100 and 
$499.99, where odd lots increased 3.3% to comprise 15.2% of share 
volume.''); Robert P. Bartlett, Justin McCrary, and Maureen O'Hara, 
The Market Inside the Market: Odd-lot Quotes (2022), available at 
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4027099 
(retrieved from SSRN Elsevier database) (finding that the proportion 
of trades in S&P 500 stocks occurring in odd-lots increased from 
around 30% in 2016 to 65% in 2021 and that, based upon data from 
Jan. through Mar. of 2021, ``the rate of odd lot orders ranges from 
5.6% of all submitted orders for less than 500 shares [for stocks 
priced $20 or lower] to 46.9% of all such orders [for stocks priced 
over $250].'').
    \366\ See Elliot Banks, BMLL Technologies, Inside the SIP and 
the Microstructure of Odd-Lot Quotes (observing an upward trend in 
odd-lot trading inside the NBBO from Jan. 2019 to Jan. 2022); 
Bartlett et al., supra note 365, at 2 (stating, based upon data from 
Jan. through Mar. of 2021, that ``[p]erhaps most intriguing are our 
results on the incidence of superior odd lot quotes relative to the 
NBBO. While for the lower price stocks this is only the case an 
average 5.1% of the time, this incidence reaches almost 30% for 
[stocks priced between $100 and $250] and it averages 42% for 
[stocks priced over $250]'').
    \367\ MDI Adopting Release, supra note 5, at 18616 (describing 
analysis that examined quotation data for the week of May 22-29, 
2020 for stocks priced from $250.01 to $1000.00 and found that there 
is odd-lot interest priced better than the new round lot NBBO 28.49% 
of the time, and, in 48.49% of those cases, there are better priced 
odd-lots at multiple price levels). A similar analysis using data 
from all trading days in Mar. 2022 confirms that better-priced odd-
lots continue to be distributed across multiple price levels.
    \368\ For example, odd-lot rates for corporate stock price 
deciles 1-3 (the lowest priced corporate stocks comprising 30% of 
all corporate stocks) have been higher on average in 2021 and June 
2022 (34%, 39%) as compared to 2019 and 2020 (26%, 29%). Similarly, 
ETPs also exhibit higher average odd-lot rates in price quartiles 1 
and 2 (the lowest priced ETPs comprising 50% of all ETPs) on average 
in 2021 and June 2022 (26%, 29%) compared to 2019 and 2020 (20%, 
23%). See MIDAS, available at https://www.sec.gov/marketstructure/midas.html.
---------------------------------------------------------------------------

    Furthermore, as shown in Tables 1 and 2--which examine the portion 
of all corporate stock and ETP volume and trades executed on an 
exchange, transacted in a quantity less than 100 shares, at a price 
better than the prevailing NBBO, occurring in a quantity that would be 
defined as a round lot under the MDI Rules--the tier structure 
reflected in the round lot definition the Commission adopted in the MDI 
Rules continues to capture significant percentages of better priced 
odd-lot trades and volume.

[[Page 80297]]

                                                     Table 1
----------------------------------------------------------------------------------------------------------------
                                                                        Portion of all corporate stock and ETP
                                                                         share volume executed on an exchange,
                                                                        transacted in a quantity less than 100
                                                                          shares, at a price better than the
             Round lot tier                     Round lot size         prevailing NBBO, occurring in a quantity
                                                                      that would be defined as a round lot under
                                                                                     the MDI Rules
                                                                     -------------------------------------------
                                                                          May 2020 (%)      Mar. 25-31, 2022 (%)
----------------------------------------------------------------------------------------------------------------
$0-$250.00..............................  100 Shares................                     0                     0
$250.01-$1,000..........................  40 Shares.................                 65.35                 54.77
$1,000.01-$10,000.00....................  10 Shares.................                 88.28                 79.36
$10,000.01 or more......................  1 share...................                100.00                100.00
----------------------------------------------------------------------------------------------------------------
Source: Equity consolidated data feeds (CTS and UTDF), as collected by MIDAS; NYSE Daily TAQ.

                                                     Table 2
----------------------------------------------------------------------------------------------------------------
                                                                        Portion of all corporate stock and ETP
                                                                      trades executed on an exchange, transacted
                                                                       in a quantity less than 100 shares, at a
                                                                        price better than the prevailing NBBO,
             Round lot tier                     Round lot size           occurring in a quantity that would be
                                                                      defined as a round lot under the MDI Rules
                                                                     -------------------------------------------
                                                                          May 2020 (%)      Mar. 25-31, 2022 (%)
----------------------------------------------------------------------------------------------------------------
$0-$250.00..............................  100 Shares................                     0                     0
$250.01-$1,000..........................  40 Shares.................                 20.19                 14.71
$1,000.01-$10,000.00....................  10 Shares.................                 39.81                 26.48
$10,000.01 or more......................  1 share...................                100.00                100.00
----------------------------------------------------------------------------------------------------------------
Source: Equity consolidated data feeds (CTS and UTDF), as collected by MIDAS; NYSE Daily TAQ.

    Moreover, using exchange direct feed data from MIDAS for every 
trading day in March 2022, a simulation was conducted of a competing 
consolidator feed that provides quotation information for a sample of 
NMS stocks priced at or over $250.01 using the priced-based round lot 
sizes adopted in the MDI Rules as opposed to the round lot size that is 
applicable today (which is usually 100). Snapshots of this simulated 
feed were compared against snapshots of the exclusive SIP feed for that 
NMS stock at the same point in time. For each of the three price tiers 
and corresponding round lot sizes, the simulated feed showed better 
prices, on average, than the exclusive SIP feed. For stocks priced 
between $250.01 and $1,000.00 per share, which will have a round lot 
size of 40 under the round lot definition, the price reflected in the 
simulated competing consolidator feed was better than the exclusive SIP 
feed 21.47% of the time and worse less than .1% of the time. For stocks 
priced between $1,000.01 and $10,000.00 per share, which will have a 
round lot size of 10 under the round lot definition, the price 
reflected in the simulated competing consolidator feed was better than 
the exclusive SIP feed 64.67% of the time and worse less than .1% of 
the time.\369\
---------------------------------------------------------------------------

    \369\ Only one stock, which is already quoted in one share round 
lots on the exclusive SIP feed, was priced over $10,000 per share, 
so the simulated feed and exclusive SIP feed showed the same prices 
for this stock.
---------------------------------------------------------------------------

    Since the adoption of the MDI Rules, some market participants have 
called for earlier implementation of the new round lot definition or 
otherwise welcomed its implementation.\370\ In addition, the Operating 
Committees of the CTA and UTP Plans published a request for comment on 
a potential proposal to include the best priced odd-lots from each 
exchange, if at or better than that exchange's round lot BBO, as well 
as an ``Odd-Lot NBBO,'' if at or better than the round lot NBBO, on the 
exclusive SIP feeds.\371\
---------------------------------------------------------------------------

    \370\ See MEMX, Why We Should Change Round Lots Now (June 2021), 
available at https://memx.com/wp-content/uploads/MEMX_Round-Lots_white-paper.pdf (``MEMX White Paper'') (``There is significant 
consensus among market participants on round lot reform and 
implementing these changes now will result in fairer and more 
efficient markets. Based on our analysis, it should also save 
investors billions in transaction costs over the next three years. 
As the saying goes, `time is money' and investors will be left 
footing the bill if we don't act soon to expedite these changes. 
That's why we're asking the listing exchanges to work together with 
us and the industry to get round lot reform implemented ahead of 
schedule by voluntarily changing round lot sizes in their listed 
securities to match the infrastructure rule's requirements.''); 
letter from Citadel to CTA and UTP Plan Operating Committees (Apr. 
27, 2022) available at https://www.ctaplan.com/publicdocs/ctaplan/Citadel_Securities_Comment_Letter_on_the_Odd_Lot_Proposal.pdf at 2 
(``Citadel Odd-Lot Letter'') (stating, in response to a request for 
comment on a proposal from the Operating Committees of CTA and UTP 
Plans to add certain odd-lot quotes to SIP data, that ``[a] better 
solution to address the growth in odd lot trading is to recalibrate 
the definition of a round lot as directed by the SEC in its final 
Market Data Infrastructure Rule . . . we recommend that the SIP 
Operating Committees . . . pursue a market-led approach that is 
consistent with the Market Data Infrastructure Rule (including 
revising the round lot definition)''); Citadel Report, supra note 
100, at 7 (``It is also important to note that the Commission 
recently finalized, but has yet to implement, a revised round lot 
definition that is tiered based on the price of a stock . . . We 
supported this revised round lot definition and look forward to it 
being implemented.'').
    \371\ See Proposal of the CTA and UTP Operating Committees 
Regarding Odd Lots on the SIPs (``2022 SIP Odd-Lot Request for 
Comment''), available at https://www.ctaplan.com/publicdocs/ctaplan/CTA_Odd_Lots_Proposal_2022.pdf. The 2022 SIP Odd-Lot Request for 
Comment would not include all odd-lot information as defined in rule 
600(b)(59). Specifically, the 2022 SIP Odd-lot Request for Comment 
would include only the best odd-lot quote of each exchange, if at or 
better than that exchange's round lot BBO, and an ``Odd Lot NBBO,'' 
if at or better than the round lot NBBO, in SIP data. Id. at 2. By 
contrast, the Commission's definition of odd-lot information 
includes all odd-lot quotes priced at better than the NBBO at every 
price level (aggregated at each such price level by exchange). 17 
CFR 242.600(b)(59).
---------------------------------------------------------------------------

    While the implementation of the MDI Rules proceeds, investors are 
not yet

[[Page 80298]]

receiving the benefits \372\ of increased transparency of better priced 
orders available in the market through the distribution of NMS data. If 
the implementation of the definitions of odd-lot information and round 
lot is not accelerated, market participants--particularly those that do 
not subscribe to proprietary data products containing odd-lot quotation 
data--would not receive information about opportunities to trade 
against liquidity that has superior pricing, which could result in 
inferior executions and significant costs for investors.\373\ By 
accelerating implementation of the round lot and odd-lot information 
definitions, investors and market participants would be able to receive 
these benefits and avoid these costs sooner and for a more extended 
period of time.\374\ This period of time would vary depending upon the 
timing of any Commission adoption of an earlier implementation of the 
round lot and odd-lot information definitions and Commission approval 
of the plan amendments required under rule 614(e), but it is likely to 
be significant. For example, assuming 90 days after Federal Register 
publication of any Commission adoption of an earlier implementation of 
the round lot and odd-lot information definitions and the Commission's 
approval of the plan amendment(s) required by rule 614(e) occur at 
roughly the same time, the benefits of the round lot and odd-lot 
information definitions would accrue to investors and other market 
participants approximately two years sooner.
---------------------------------------------------------------------------

    \372\ See supra notes 361-363 and accompanying text.
    \373\ See MEMX White Paper, supra note 370, at 6 (estimating 
that investors could lose up to $7.5 billion if round lot 
implementation is delayed by three years). Cf. Letter from Cboe to 
CTA and UTP Plan Operating Committees re 2022 SIP Odd-Lot Request 
for Comment (Apr. 13, 2022) available at https://www.ctaplan.com/publicdocs/ctaplan/Cboe_Comment_Letter_2022_Odd_Lot_Proposal.pdf at 
4 (``Cboe Odd-Lot Letter'') (``[C]ontinuing to withhold Odd Lot 
Quotations from the SIP would needlessly deprive investors of having 
access to the best prices available in the market.''). See also 
infra section IV.B.1.
    \374\ Letter from MEMX to CTA and UTP Plan Operating Committees 
re 2022 SIP Odd-Lot Request for Comment (Apr. 26, 2022) available at 
https://www.ctaplan.com/publicdocs/ctaplan/Odd_Lot_20220426_MEMX_Comments_SIP_Proposal.pdf at 3 (``MEMX Odd-Lot 
Letter'') (``Investors would . . . benefit from this information 
being made available sooner than may be the case if the industry 
were compelled to wait for competing consolidators to begin 
disseminating such data.'').
---------------------------------------------------------------------------

    Therefore, the Commission proposes to accelerate the implementation 
of the round lot and odd-lot information definitions so that market 
participants can reap the benefits of increased transparency and 
enhanced execution quality sooner than originally planned.\375\ 
Specifically, the Commission proposes to require compliance with the 
round lot and odd-lot information definitions 90 days from the 
publication of any Commission adoption of an earlier implementation of 
the round lot and odd-lot information definitions in the Federal 
Register.
---------------------------------------------------------------------------

    \375\ See supra notes 361-363 and accompanying text.
---------------------------------------------------------------------------

1. Odd-Lot Information
    Today, information about odd-lot quotations and transactions that 
is defined as odd-lot information in rule 600(b)(59) is provided in 
several ways. Odd-lot transaction information is collected, 
consolidated, and disseminated by the exclusive SIPs.\376\ Odd-lot 
quotation and transaction information is also disseminated via the 
individual exchange proprietary feeds.\377\ Pursuant to the MDI Rules, 
odd-lot quotation information as defined in rule 600(b)(59)(ii) will 
not be required to be collected, consolidated, or disseminated by the 
exclusive SIPs. Rather, this information will be collected, 
consolidated, and disseminated by competing consolidators, beginning 
during the parallel operation period.\378\
---------------------------------------------------------------------------

    \376\ See supra note 336. Odd-lot information as defined in rule 
600(b)(59)(i) includes ``[o]dd-lot transaction data disseminated 
pursuant to the effective national market system plan or plans 
required under Sec.  242.603(b) as of April 9, 2021.''
    \377\ See MDI Proposing Release, supra note 39, at 16738; MDI 
Adopting Release, supra note 5, at 18599. Odd-lot information as 
defined in rule 600(b)(59)(ii) includes ``[o]dd-lots at a price 
greater than or equal to the national best bid and less than or 
equal to the national best offer, aggregated at each price level at 
each national securities exchange and national securities 
association.''
    \378\ See supra notes 351-354 and accompanying text.
---------------------------------------------------------------------------

    To accelerate the compliance date for odd-lot information as 
defined in rule 600(b)(59), the Commission proposes to require self-
regulatory organizations (``SROs'') to provide the data necessary to 
generate odd-lot information to the exclusive SIPs and to require the 
exclusive SIPs to collect, consolidate, and disseminate odd-lot 
information. Specifically, the Commission proposes to amend rule 603(b) 
to require the national securities exchanges and national securities 
associations to make all data necessary to generate odd-lot information 
available to the exclusive SIPs and to require the exclusive SIPs to 
collect, consolidate, and disseminate odd-lot information.\379\
---------------------------------------------------------------------------

    \379\ While the MDI Rules do not require competing consolidators 
to disseminate all consolidated market data elements, such as odd-
lot information, in consolidated market data products, the 
Commission proposes to require the exclusive SIPs to collect, 
consolidate, and disseminate odd-lot information. Under the 
decentralized consolidation model, competing consolidators will be 
permitted to design consolidated market data products with different 
elements of consolidated market data for their subscribers and 
subscribers will be able to choose competing consolidators and 
consolidated market data products that meet their needs. See MDI 
Adopting Release, supra note 5, at 18659; supra note 339 and 
accompanying text. Under the existing exclusive SIP model, the 
exclusive SIPs are the only source of consolidated NMS data and--
while proprietary data products offer some of the same data content, 
including odd-lot quotations--subscribers would have no alternative 
providers of consolidated NMS data if such data were not required to 
be collected, consolidated, and disseminated by the exclusive SIPs. 
Therefore, the Commission proposes that the exclusive SIPs be 
required to disseminate odd-lot information.
---------------------------------------------------------------------------

    The Commission proposes to divide rule 603(b) into three new 
subsections to reflect the requirements under rule 603(b) that remain 
in effect until the changes to rule 603(b) that were adopted under the 
MDI Rules are implemented. Proposed rule 603(b)(1) would govern the 
applicability of proposed rules 603(b)(2) and (b)(3) by describing the 
compliance dates set forth in the MDI Rules for each of these proposed 
subsections. Specifically, proposed rule 603(b)(1) would state that 
compliance with proposed rule 603(b)(2) is required 180 calendar days 
from the date of the Commission's approval of the amendments to the 
effective national market system plan(s) required under rule 
242.614(e).\380\ It would also state that compliance with proposed rule 
603(b)(3) is required until the date indicated by the Commission in any 
order approving amendments to the effective national market system 
plan(s) to effectuate a cessation of the operations of the plan 
processors that disseminate consolidated information regarding NMS 
stocks. Proposed rule 603(b)(2) would govern the provision of 
consolidated market data by competing consolidators and self-
aggregators pursuant to the decentralized consolidation model set forth 
in the MDI Rules, which includes the collection, consolidation, and 
dissemination of odd-lot information. Proposed rule 603(b)(3) would 
govern the provision of NMS data by the exclusive SIPs, including the 
new requirements regarding the collection, consolidation, and 
dissemination of odd-lot information.
---------------------------------------------------------------------------

    \380\ See MDI Adopting Release, supra note 5, at 18700, n.1355.
---------------------------------------------------------------------------

    In the MDI Adopting Release, the Commission did not require the 
exclusive SIPs to collect, consolidate, or disseminate odd-lot 
information, stating that ``requiring the existing exclusive SIPs to 
continue disseminating the same data that they currently do will 
prevent the imposition of unnecessary costs--namely, any change to the 
data content

[[Page 80299]]

the SIPs currently disseminate--on the existing exclusive SIPs 
immediately prior to their retirement.'' \381\ However, in light of the 
delay of the implementation of the MDI Rules and the benefits--
including enhanced transparency and usability of NMS data and improved 
execution quality \382\--that would be provided to the market by the 
ready and widespread availability of odd-lot information, the 
Commission believes that the exclusive SIPs should be required to 
collect, consolidate and disseminate odd-lot information. Moreover, in 
light of the delay in the implementation of the MDI Rules and the 
corresponding extension in the amount of time that the exclusive SIPs 
will continue to operate, the costs imposed on the exclusive SIPs by 
this requirement would not represent ``unnecessary costs'' on the 
exclusive SIPs ``immediately prior to their retirement.'' \383\
---------------------------------------------------------------------------

    \381\ Id. at 18700.
    \382\ See supra notes 360-363 and accompanying text.
    \383\ MDI Adopting Release, supra note 5, at 18700. See also 
infra sections V.D.6.c and VI.D (describing the estimated costs of 
the proposed requirement that the exclusive SIPs collect, 
consolidate, and disseminate odd-lot information). Although the 
scope of the odd-lot quotation data that would be included in SIP 
data pursuant to the 2022 SIP Odd-Lot Request for Comment is more 
limited than odd-lot information as defined in the MDI Rules, see 
supra note 371, the 2022 SIP Odd-Lot Request for Comment nonetheless 
demonstrates that the Operating Committees of the CTA and UTP Plans 
may be willing to enhance SIP data content for a period of time 
before the exclusive SIPs are ultimately retired and to incur the 
costs of such enhancements. Similarly, many comments submitted in 
response to the 2022 SIP Odd-Lot Request for Comment reflect support 
for earlier availability of some odd-lot quotation data via the 
exclusive SIPs, as opposed to waiting for odd-lot information to 
become available pursuant to the original implementation schedule 
set forth in the MDI Rules. See generally comment file for 2022 SIP 
Odd-Lot Request for Comment, available at https://www.ctaplan.com/oddlots.
---------------------------------------------------------------------------

2. Round Lots
    The Commission proposes to accelerate the implementation of the 
round lot definition set forth in rule 600(b)(82). In the MDI Adopting 
Release, the Commission stated that ``sequencing [round lot 
implementation] after the parallel operation period is important to 
avoid either: (1) potential confusion and market disruption that could 
result from two different round lot structures operating at the same 
time; or (2) imposing reprogramming costs on the exclusive SIPs for a 
limited time period prior to their retirement.'' \384\ However, in 
light of the delay in the overall implementation of the MDI Rules and 
the benefits that would be available to investors sooner if 
implementation of this aspect of the MDI Rules is accelerated, the 
Commission believes that the benefits justify the costs.\385\
---------------------------------------------------------------------------

    \384\ MDI Adopting Release, supra note 5, at 18701. The 
Commission stated that ``the consolidated market data products 
offered by competing consolidators during the initial parallel 
operation period would be based on the current definition of round 
lot.'' Id. at 18700. However, because the Commission now proposes to 
accelerate implementation of the round lot definition, the exclusive 
SIPs would be providing SIP data that reflects the new round lot 
sizes during the initial parallel operation period. Further, the 
acceleration of the implementation of the round lot definition would 
result in its use during the parallel operation period by both the 
exclusive SIPs and competing consolidators.
    \385\ See infra sections V.D.5.a and V.D.6.c.
---------------------------------------------------------------------------

    The Commission also proposes to amend an element of the definition 
of ``regulatory data'' under rule 600(b)(78) to facilitate the 
accelerated implementation of the round lot definition. Specifically, 
the Commission proposes to add new paragraph (b)(78)(iv) to require the 
primary listing exchanges also to make the indicator of the applicable 
round lot size available to the exclusive SIPs.\386\ Under the MDI 
Rules, the definition of ``regulatory data'' requires the primary 
listing exchange to make an indicator of the applicable round lot size 
for each NMS stock available to competing consolidators and self-
aggregators, but not to the exclusive SIPs (as they were to be retired 
by that time).\387\ The Commission stated that this indicator will 
``help market participants ascertain the applicable round lot size for 
each NMS stock on an ongoing basis'' \388\ and ``reduce confusion as 
market participants adjust to the new round lot sizes.'' \389\ 
Therefore, for these same reasons, the Commission believes that this 
indicator should be provided to the exclusive SIPs for collection and 
dissemination.\390\
---------------------------------------------------------------------------

    \386\ The Commission proposes that the compliance date for this 
requirement would coincide with the proposed compliance date for the 
round lot definition (i.e., 90 days from the publication of any 
Commission adoption of an earlier implementation of the round lot 
and odd-lot information definitions in the Federal Register).
    \387\ See supra note 332.
    \388\ MDI Proposing Release, supra note 39, at 16762.
    \389\ MDI Adopting Release, supra note 5, at 18619.
    \390\ As discussed below, since the MDI Rules already require 
the primary listing exchanges to provide an indicator of the 
applicable round lot size to competing consolidators and self-
aggregators, the Commission believes that the incremental cost of 
providing this indicator to the two exclusive SIPs would be low. See 
infra section VI.G.
---------------------------------------------------------------------------

3. Display of Round Lots and Odd-Lot Information
    Because the exclusive SIPs would be required to collect and 
disseminate SIP data in the new round lot sizes,\391\ the Commission 
proposes--consistent with the quotation size representation and 
rounding conventions required of competing consolidators under the MDI 
Rules \392\--to require the exclusive SIPs to represent quotation sizes 
in SIP data in terms of the number of shares and to round quotation 
sizes, except for odd-lot quotations, down to the nearest multiple of a 
round lot.\393\ Currently, quotation sizes are represented in SIP data 
in terms of the number of round lots.\394\ However, after the 
implementation of the round lot definition, which assigns each stock to 
one of four round lot sizes based on its share price, this convention 
could be confusing because the number of round lots will represent 
different quotation sizes depending upon the price of the stock.\395\ 
In addition, in the MDI Rules, the Commission adopted a provision 
requiring the rounding of quotation sizes,\396\ except for odd-lot 
quotations,\397\ down to the nearest multiple of a round lot to help 
ensure that certain core data elements, such as each exchange's BBO, 
``reflect orders of meaningful size'' and that, with respect to the 
NBBO in particular, ``the protected portion of the order is clearly 
represented, which addresses concerns about impacts on investor 
confidence and confusion that could result from showing unprotected 
size at the

[[Page 80300]]

NBBO.'' \398\ For these reasons, the Commission proposes to require the 
exclusive SIPs to represent quotation sizes in SIP data in terms of the 
number of shares, rounded down to the nearest multiple of a round lot, 
except for odd-lot quotations.\399\
---------------------------------------------------------------------------

    \391\ See supra section IV.B.2; infra section IV.B.4.
    \392\ Under the MDI Rules, the definition of ``core data'' 
requires competing consolidators to represent certain core data 
elements, including the best bid and best offer, the NBBO, and 
protected quotations--but not including odd-lot information--in 
terms of the number of shares, rounded down to the nearest multiple 
of a round lot. MDI Adopting Release, supra note 5, at 18615; 17 CFR 
242.600(b)(21)(iii).
    \393\ This amendment would be reflected in proposed rule 
603(b)(3), which would govern the provision of NMS data by the 
exclusive SIPs. See supra section IV.B.1. See also MDI Adopting 
Release, supra note 5, at 18615 (providing the following example of 
the required quotation size representation and rounding convention: 
``a 275 share buy order at $25.00 for a stock with a 100 share round 
lot would be disseminated as ``200.'').
    \394\ MDI Adopting Release, supra note 5, at 18615 (``For 
example, if a 200 share bid at $25.00 establishes the national best 
bid, the SIP feed shows ``2'' at $25.00.'').
    \395\ Id. (``For example, an investor would have to know that, 
for a $300 stock, ``2'' means 80 shares pursuant to the adopted 
round lot sizes.'').
    \396\ ``Quotation size'' is defined in rule 600(b)(76). 17 CFR 
242.600(b)(76).
    \397\ Consistent with the approach taken in the MDI Rules, see 
supra note 392, the Commission is proposing to exclude odd-lot 
quotations from the rounding convention that would be required of 
the exclusive SIPs under proposed rule 603(b)(3) because it would 
defeat the purpose of including odd-lots in NMS data--particularly 
the transparency and usability benefits associated with their 
inclusion--to round odd-lots down to the nearest round lot; since 
odd-lots are, by definition, less than a round lot, such an approach 
would result in ``0'' being shown rather than the number of shares 
associated with an odd-lot quotation.
    \398\ See rule 600(b)(21)(iii); MDI Adopting Release, supra note 
5, at 18615.
    \399\ The Commission proposes that the compliance date for this 
requirement would coincide with the proposed compliance date for the 
round lot definition (i.e., 90 days from the publication of any 
Commission adoption of an earlier implementation of the round lot 
and odd-lot information definitions in the Federal Register) so that 
the exclusive SIPs could continue the current convention of 
representing quotation sizes in terms of the number of round lots 
until such time as they would be required to provide SIP data using 
the new round lot definition, at which point that convention would 
become confusing.
---------------------------------------------------------------------------

4. Proposed Compliance Date
    The Commission proposes to amend the date by which market 
participants must comply with the odd-lot information and round lot 
definitions, including, as required under proposed rule 603(b)(3), that 
national securities exchanges and associations make the data necessary 
to generate odd-lot information available to the exclusive SIPs and 
that the exclusive SIPs disseminate odd-lot quotation information as 
defined in rule 600(b)(59). Specifically, the Commission proposes to 
require compliance with the odd-lot information and round-lot 
definitions 90 days from Federal Register publication of any Commission 
adoption of an earlier implementation of the round lot and odd-lot 
information definitions. Advancing the compliance date for odd-lot 
information to 90 days from Federal Register publication of any 
Commission adoption of an earlier implementation of the round lot and 
odd-lot information definitions would significantly move up the date by 
which this information would be more widely available in the national 
market system.\400\ Under the implementation schedule set forth in the 
MDI Adopting Release, the odd-lot information definition will not be 
fully implemented in the near term. Specifically, odd-lot quotation 
information as defined in rule 600(b)(59)(ii) that is based on the 
definitions of round lot set forth in the rules of national securities 
exchanges \401\ will not be made available until the ``parallel 
operation period,'' which does not begin until nine months after 
Commission approval of the amendments to the effective national market 
system plan(s) required by rule 614(e).\402\
---------------------------------------------------------------------------

    \400\ Currently, odd-lot quotation information is available only 
on the exchanges' proprietary data feeds. See supra note 330 and 
accompanying text. By moving up the compliance date for odd-lot 
information, this data would no longer be limited to the exchanges' 
proprietary data products.
    \401\ See supra note 328.
    \402\ See supra note 351 and accompanying text. ``Odd-lot'' is 
defined as ``an order for the purchase or sale of an NMS stock in an 
amount less than a round lot.'' 17 CFR 242.600(b)(58). Hence, until 
the round lot definition is implemented, odd-lot quotation 
information will reflect the existing, exchange-based definition of 
round lot. See also MDI Adopting Release, supra note 5, at 18700 
(``The consolidated market data products offered by competing 
consolidators during the initial parallel operation period would be 
based on the current definition of round lot.'').
---------------------------------------------------------------------------

    Pursuant to the MDI Rules implementation schedule, the round lot 
definition set forth in rule 600(b)(82) will be implemented after the 
retirement of the exclusive SIPs, which the Commission estimates will 
be at least two years after the approval of the effective national 
market system plan(s) amendment required under rule 614(e).\403\ The 
implementation of the round lot definition affects the full 
implementation of odd-lot information definition, as odd-lot 
information that is based on round lots as defined in rule 600(b)(82) 
will not occur until the round lot definition is implemented.\404\ 
Therefore, full implementation of the odd-lot information definition 
will not occur until the exclusive SIPs have been retired, which, as 
estimated above, will be at least two years from the Commission's 
approval of the plan amendment(s) required by rule 614(e).\405\
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    \403\ See supra note 354 and accompanying text. Further, this 
time frame could potentially be considerably longer depending upon a 
number of factors, including the evaluation of the performance of 
the decentralized consolidation model during the parallel operation 
period by the Operating Committee of the effective national market 
system plan(s), the timing of when an NMS plan amendment to 
effectuate the cessation of the exclusive SIPs is submitted to the 
Commission, and whether and when the Commission approves such an 
amendment.
    \404\ See supra note 402.
    \405\ See supra note 354 and accompanying text.
---------------------------------------------------------------------------

    The Commission preliminarily believes that a compliance date of 90 
days from Federal Register publication of any Commission adoption of an 
earlier implementation of the round lot and odd-lot information 
definitions would provide market participants with sufficient time to 
make the changes necessary to implement the round lot and odd-lot 
information definitions.\406\ These changes would include reprogramming 
systems to facilitate the acceptance and handling of orders in the one 
round lot size that is not currently in use (i.e., 40) and to assign 
the approximately 181 NMS stocks priced above $250 \407\ to their 
relevant round lot size, and systems enhancements to support the 
distribution and consumption of odd-lot information.
---------------------------------------------------------------------------

    \406\ Cf. supra note 371 and accompanying text (comparing the 
scope of odd-lot data that the exclusive SIPs would disseminate 
pursuant to the 2022 SIP Odd-Lot Request for Comment with the data 
included in the definition of odd-lot information adopted as part of 
the MDI Rules); 2022 SIP Odd-Lot Request for Comment, supra note 
371, at 1 (stating that the Operating Committees of the CTA and UTP 
Plans anticipate that certain odd-lot data could be made available 
through the exclusive SIPs by the first half of 2023); MDI Adopting 
Release, supra note 5, at 18701 (``For a period of 90 days starting 
with the date of the cessation of the operation of the exclusive 
SIPs, the changes necessary to implement the new round lot sizes 
will be tested. At the end of the 90 day test period, the new round 
lot sizes will be implemented.'').
    \407\ Based on average closing prices on the primary listing 
exchange in Mar. 2022, there are 181 NMS stocks priced over $250.
---------------------------------------------------------------------------

    For the round lot definition, broker-dealers would need to modify 
their systems to accept and handle orders in the new round lot sizes. 
Trading centers would need to modify their systems to accept and 
process orders in the new round lot sizes.\408\ The exclusive SIPs 
would need to modify their systems to accept and process orders in the 
new round lot sizes. The exclusive SIPs would also have to make systems 
changes to represent quotation sizes in the number of shares rounded 
down to the nearest multiple of a round lot.\409\
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    \408\ The exchanges that have defined round lots in their rules 
would need to file proposed rule changes pursuant to section 19(b) 
of the Exchange Act and rule 19b-4 thereunder to change their rules 
to reflect the implementation of rule 600(b)(82). See supra note 
328.
    \409\ See supra note 399 and accompanying text.
---------------------------------------------------------------------------

    For odd-lot information, broker-dealers would need to make changes 
to their systems that accept SIP data that would now reflect additional 
information, i.e., certain quotations in odd-lot sizes as defined in 
rule 600(b)(59)(ii). The SROs would have to make systems changes to 
provide the information necessary for the generation of odd-lot 
information to the exclusive SIPs, and the exclusive SIPs would have to 
make systems changes to collect, consolidate, and disseminate odd-lot 
information. As discussed above, the SROs already provide, and the 
exclusive SIPs already collect, consolidate, and disseminate, 
transaction information for executions of odd-lot orders. Therefore, 
the systems changes necessary for the SROs and exclusive SIPs related 
to implementing the odd-lot information definition would be limited to 
changes necessary to accommodate quotations in odd-lots as defined in 
rule 600(b)(59)(ii). These systems changes would include modifications 
necessary to aggregate odd-lot quotes at each price better than the 
NBBO at each exchange.
    As discussed below, the Commission does not believe that the 
proposed

[[Page 80301]]

accelerated compliance date for the round lot and the odd-lot 
information definitions--rather than implementing these definitions 
under the implementation schedule set forth in the MDI Adopting 
Release--would greatly increase the costs of implementing these 
definitions.\410\ The acceleration of the implementation of the round 
lot and odd-lot information definitions, however, would impose costs on 
the exclusive SIPs that would not have resulted from the MDI Rules. The 
exclusive SIPs would have to make systems changes in order to collect, 
consolidate, and disseminate SIP data that reflects the round lots as 
defined in rule 600(b)(82) and odd-lot quotation information. The 
Commission believes that the costs of these changes would be relatively 
modest. First, round lot sizes of 100, 10, and 1 are already in 
existence today, so the exclusive SIPs can already accept information 
in three out of the four new round lot sizes, which would limit the 
scale of the necessary reprogramming. Further, the round lot definition 
affects a relatively low number of NMS stocks. Based on pricing during 
March 2022, only 181 stocks would have been assigned a new round lot 
size as a result of having a share price that is $250 or higher.\411\ 
However, representing quotation sizes in terms of the number of shares, 
rounded down to the nearest multiple of a round lot, would be a 
departure from the current convention of representing quotation sizes 
in terms of the number of round lots, and would require the exclusive 
SIPs and the users of SIP data to modify their systems.\412\
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    \410\ See infra sections V.D.5 and V.D.6.
    \411\ See supra note 407 and accompanying text.
    \412\ See MEMX White Paper, supra note 370, at 8 
(``Specifically, the infrastructure rule requires: (1) the 
dissemination of an indicator that displays the applicable round lot 
size for the security; and (2) that information disseminated in 
consolidated market data be represented in actual shares. Of these 
two changes, the potential implementation burden rests almost 
entirely with the dissemination of actual shares, which would 
require systems changes for both the SIPs and downstream users of 
SIP data whose systems may also need to be coded to the new 
specifications.'').
---------------------------------------------------------------------------

    For odd-lot information, the exclusive SIPs would have to modify 
their systems to collect, consolidate, and disseminate quotations that 
are included in the definition of odd-lot information. The additional 
odd-lot information would likely increase message traffic coming in to 
the exclusive SIPs and in the exclusive SIP feeds.\413\ Therefore, the 
exclusive SIPs would have to modify their systems to accommodate 
increased message traffic and to calculate odd-lot information. The 
Commission believes that the benefits of implementing the round lot 
definition and providing odd-lot information would justify the costs of 
the necessary technological changes.\414\
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    \413\ Cf. 2022 SIP Odd-Lot Request for Comment, supra note 371, 
at 4 (``The OCs project that this proposal will result in a 35% 
increase in the amount of quotation traffic sent to the SIPs each 
day, as well as a 35% increase in the quotation messages generated 
during peak periods.''). As the exclusive SIPs already collect and 
disseminate odd-lot transaction data, see supra note 336 and 
accompanying text, accelerated implementation of the odd-lot 
information definition would impose no additional costs on the 
exclusive SIPs with respect to odd-lot transaction data.
    \414\ See infra sections V.D.5 and V.D.6. Cf. Cboe Odd-Lot 
Letter, supra note 373, at 3 (``[T]he technology efforts needed to 
manage Odd Lot Quotations on the SIPs will be far outweighed by the 
benefits Odd Lot Quotations will provide to today's investors.'').
---------------------------------------------------------------------------

C. Request for Comment

    The Commission requests comment on all aspects of the proposed 
accelerated implementation of the round lot and odd-lot information 
definitions. In particular the Commission solicits comment on the 
following:
    44. Should the implementation of the round lot definition adopted 
as part of the MDI Rules be accelerated? Why or why not?
    45. If so, by how much time should the round lot definition be 
accelerated? Does the proposal to require compliance with the new 
definition within 90 days of Federal Register publication of any 
Commission adoption of an earlier implementation of the round lot and 
odd-lot information definitions provide market participants with 
sufficient time to make necessary changes and adjustments? Please 
explain the specific modifications that each type of market 
participant--including, but not limited to, broker-dealers, trading 
centers, and the exclusive SIPs--would have to make to comply with the 
round lot definition. In addition, please explain the amount of time 
each type of market participant would need to make such modifications 
and whether a timeframe shorter or longer than the proposed compliance 
date of 90 days from Federal Register publication of any Commission 
adoption of an earlier implementation of the round lot and odd-lot 
information definitions would be more appropriate?
    46. Should the exclusive SIPs be required to represent quotation 
sizes in terms of the number of shares, rounded down to the nearest 
multiple of a round lot, rather than the number of round lots? Why or 
why not? If not, would investors be confused by representing quotation 
sizes in the number of lots? Please describe any systems changes to the 
exclusive SIPs, SIP data users, or other market participants that would 
be necessary to represent quotation sizes in terms of the number of 
shares, rounded down to the nearest multiple of a round lot.
    47. Should the primary listing exchange be required to provide an 
indicator of the applicable round lot size for each NMS stock to the 
appropriate exclusive SIP? Why or why not?
    48. Should the implementation of the definition of odd-lot 
information, which would include odd-lots priced better than the NBBO 
in NMS data, be accelerated? Why or why not?
    49. If so, by how much time should the odd-lot information 
definition be accelerated? Does the proposal to require compliance with 
the new definition 90 days after publication of any Commission adoption 
of an earlier implementation of the round lot and odd-lot information 
definitions in the Federal Register provide market participants with 
sufficient time to make necessary changes and adjustments? Please 
explain the specific modifications that each type of market 
participant--including, but not limited to, broker-dealers, trading 
centers, and the exclusive SIPs--would have to make to comply with the 
odd-lot information definition. In addition, please explain the amount 
of time each type of market participant would need to make such 
modifications and whether a timeframe shorter or longer than the 
proposed compliance date of 90 days from Federal Register publication 
of any Commission adoption of an earlier implementation of the round 
lot and odd-lot information definitions would be more appropriate.
    50. Should the round lot and odd-lot information definitions be 
accelerated by different amounts of time (as opposed to requiring 
compliance with both definitions 90 days after publication of any 
Commission adoption of an earlier implementation of the round lot and 
odd-lot information definitions in the Federal Register, as proposed)? 
For example, would the modifications necessary to comply with the round 
lot definition take longer to implement than the modifications 
necessary to comply with the odd-lot information definition (or vice-
versa)? Please explain.
    51. Do the costs or benefits of the round lot or odd-lot 
information definitions depend upon when they are implemented? Please 
explain.

D. Proposed Definition of Best Odd-Lot Orders

    As discussed above, in the MDI Rules, the Commission defined odd-
lot

[[Page 80302]]

information to include odd-lots at a price greater than or equal to the 
national best bid and less than or equal to the national best offer, 
aggregated at each price level at each national securities exchange and 
national securities association.\415\ The Commission stated that ``this 
better-priced odd-lot liquidity needs to be reflected in core data 
because it will help investors and other market participants to trade 
in a more informed and effective manner and to achieve better 
executions and reduce the information asymmetries that currently exist 
between subscribers to SIP data and subscribers to proprietary data.'' 
\416\
---------------------------------------------------------------------------

    \415\ See 17 CFR 242.600(b)(59); see also supra note 335 and 
accompanying text.
    \416\ MDI Adopting Release, supra note 5, at 18612.
---------------------------------------------------------------------------

    The Commission proposes to amend the definition of odd-lot 
information to include a specified best odd-lot order to buy and best 
odd-lot order to sell.\417\ Specifically, for each NMS stock, the best 
odd-lot order to buy would mean the highest priced odd-lot order to buy 
that is priced higher than the national best bid, and the best odd-lot 
order to sell would mean the lowest priced odd-lot order to sell that 
is priced lower than the national best offer.\418\ Similar to the 
definition of the NBBO, in the event that two or more national 
securities exchanges or associations provide odd-lot orders at the same 
price, the exclusive SIPs, competing consolidators and self-aggregators 
would be required to determine the best odd-lot order by ranking all 
such identical odd-lot buy orders or odd-lot sell orders (as the case 
may be) first by size (giving the highest ranking to the odd-lot buy 
order or odd-lot sell order associated with the largest size), and then 
by time (giving the highest ranking to the odd-lot buy order or odd-lot 
sell order received first in time).\419\
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    \417\ The best odd-lot order would not be a ``protected 
quotation'' for purposes of Regulation NMS, including rules 611 
(order protection rule) and 610 (access to quotations). 17 CFR 
242.611, 610. The term ``protected quotation'' is defined in rule 
600(b)(71) as a protected bid or protected offer; the term bid or 
offer is further defined in rule 600(b)(11) and is limited to round 
lots. See 17 CFR 242.600(b)(11), (71).
    \418\ The best odd-lot order to buy (sell) will only be included 
in NMS data when it is priced higher (lower) than the NBB (NBO). 
Because the best odd-lot order will be defined as odd-lot 
information, the proposed amendments to rule 603(b) to require SROs 
to provide the data necessary to generate odd-lot information to the 
exclusive SIPs and to require the exclusive SIPs to disseminate odd-
lot information, see supra note 379, will require the SROs to 
provide the data necessary to generate the best odd-lot order to the 
exclusive SIPs and the exclusive SIPs to disseminate the best odd-
lot order.
    \419\ See 17 CFR 242.600(b)(50) (defining NBBO and setting forth 
the manner in which the NBBO is determined ``in the event two or 
more market centers transmit to the plan processor, a competing 
consolidator or a self-aggregator identical bids or offers for an 
NMS security'').
---------------------------------------------------------------------------

    The Commission believes that proposing to require the 
identification and dissemination of the best odd-lot orders to buy and 
sell \420\ consolidated across all national securities exchanges and 
national securities associations is consistent with the goals set forth 
in section 11A of the Exchange Act because it would make information 
about quotations in NMS stocks available to broker-dealers and 
investors \421\ and would enhance the usefulness of odd-lot 
information.\422\ Although odd-lot liquidity better than the NBBO often 
resides at multiple price levels and information reflecting all of 
these odd-lot prices is already included in the definition of odd-lot 
information,\423\ requiring the identification and dissemination of the 
best of all such inside the NBBO odd-lots on both the buy and sell side 
would help inform market participants of the best possible prices at 
which their orders (or their customers' orders) could--in whole or in 
part--be executed. The identification and dissemination of the price, 
size, and market of the best odd-lot orders would enhance the ability 
of market participants to make effective trading and order routing 
decisions using NMS data and facilitate best execution.\424\
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    \420\ See supra note 418.
    \421\ 15 U.S.C. 78k-1(a)1)(C)(iii).
    \422\ 15 U.S.C. 78k-1(c)(1)(B).
    \423\ See supra note 367 and accompanying text; 17 CFR 
242.600(b)(59).
    \424\ The 2022 SIP Odd-Lot Request for Comment contains an 
``odd-lot NBBO,'' similar to this proposal's best odd-lot order. See 
supra note 371 and accompanying text. See also comment file for 2022 
SIP Odd-Lot Request for Comment, available at https://www.ctaplan.com/oddlots.
---------------------------------------------------------------------------

    Moreover, including the best odd-lot order in odd-lot information 
would help to ensure the wide availability of a useful metric against 
which investors could assess the execution quality of their orders. For 
example, rule 605 execution quality statistics \425\ could leverage 
this data point to provide more meaningful information, such as the 
quantity of orders that are executed at, outside, or with price 
improvement with respect to the best odd-lot order. Using the best odd-
lot orders as a benchmark in this manner could provide investors with 
an enhanced view of how their orders are handled and executed.
---------------------------------------------------------------------------

    \425\ 17 CFR 242.605 (requiring market centers to make available 
standardized, monthly reports of statistical information concerning 
their order executions). The Commission has issued a proposal to 
amend rule 605, which includes execution quality metrics based on 
the best odd-lot order. Securities Exchange Act Release No. 96493 
(Dec. 14, 2022) (File No. S7-29-22) (Disclosure of Order Execution 
Information). The Commission encourages commenters to review that 
proposal to determine whether it might affect their comments on this 
proposing release.
---------------------------------------------------------------------------

    The Commission proposes a compliance date of 90 days from Federal 
Register publication of any Commission adoption of an amended 
definition of odd-lot information to include the best odd-lot orders in 
NMS data. The Commission preliminarily believes this timeframe should 
be sufficient to make the systems changes necessary to implement this 
data element because the process of determining and disseminating the 
best odd-lot quote at a given time from among the odd-lot quotes 
submitted to the exclusive SIPs by the national securities exchanges 
and associations is fundamentally similar to the process of determining 
and disseminating the prevailing NBBO, which the exclusive SIPs already 
do today based on the quotation information they receive from national 
securities exchanges and associations.\426\
---------------------------------------------------------------------------

    \426\ MDI Proposing Release, supra note 39, at 16738-39; 17 CFR 
242.600(b)(50). In addition, the proposed definition of best odd-lot 
order and the method by which it is determined from among the 
information submitted by national securities exchanges and 
associations is modelled upon and parallel to the definition of 
NBBO. See supra notes 418-419 and accompanying text.
---------------------------------------------------------------------------

E. Request for Comment

    The Commission requests comment on all aspects of the proposed 
definition of best odd-lot order. In particular, the Commission 
solicits comment on the following:
    52. Should the definition of odd-lot information include the best 
odd-lot order to buy and best odd-lot order to sell? Why or why not?
    53. How would market participants use information about the best 
odd-lot orders to buy and sell? Do commenters believe this information 
would be useful for market participants? How so? Would it promote more 
informed trading or facilitate best execution? Please explain.
    54. Should rule 605 require the reporting of execution quality 
statistics in which the best odd-lot order is used as a benchmark? If 
so, what specific statistics would be most useful? Please explain.
    55. Should the definition of ``consolidated display'' \427\ be 
amended so that rule 603(c), known as the ``Vendor Display Rule,'' 
would require the best odd-lot orders to buy and sell to be provided in 
contexts in which a trading or order-routing decision can be 
implemented? Please explain the costs and benefits of such a 
requirement.
---------------------------------------------------------------------------

    \427\ See 17 CFR 242.600(b)(17).
---------------------------------------------------------------------------

    56. Should national securities exchanges and associations be 
required

[[Page 80303]]

to provide the data necessary to generate odd-lot information, 
including the best odd-lot orders to buy and sell, to the exclusive 
SIPs, and should the exclusive SIP be required to identify and 
disseminate this information? Why or why not? By how much would such a 
requirement increase message traffic for the exclusive SIP feeds?
    57. Is 90 days from Federal Register publication of any Commission 
adoption of an amended definition of odd-lot information to include the 
best odd-lot orders in NMS data an appropriate amount of time for the 
exclusive SIPs to make any changes necessary to calculate and 
disseminate the best odd-lot orders? Would other market participants--
including, but not limited to, broker-dealers and trading centers--need 
to make modifications to facilitate the calculation, dissemination, or 
use of the best odd-lot orders? Please describe any such modifications 
and the amount of time each type of market participant would need to 
make such modifications and whether a timeframe shorter or longer than 
90 days from Federal Register publication of an amended definition of 
odd-lot information to include the best odd-lot orders in NMS data 
would be more appropriate.

V. Economic Analysis

A. Introduction

    The Commission has considered the economic effects of the proposed 
Rule and, wherever possible, the Commission has quantified the likely 
economic effects of the proposed Rule.\428\ The Commission is providing 
both a qualitative assessment and quantified estimates of the potential 
economic effects of the proposed Rule where feasible. The Commission 
has incorporated data and other information to assist it in the 
analysis of the economic effects of the proposed Rule. However, as 
explained in more detail below, because the Commission does not have, 
and in certain cases does not believe it can reasonably obtain, data 
that may inform the Commission on certain economic effects, the 
Commission is unable to quantify certain economic effects. Further, 
even in cases where the Commission has data, it is not practicable to 
quantify certain economic effects due to the number and type of 
assumptions necessary, which render any such quantification unreliable. 
Our inability to quantify certain costs, benefits, and effects does not 
imply that such costs, benefits, or effects are less significant. The 
Commission requests that commenters provide relevant data and 
information to assist the Commission in quantifying the economic 
consequences of the proposed Rule.
---------------------------------------------------------------------------

    \428\ Section 3(f) of the Exchange Act requires the Commission, 
whenever it engages in rulemaking and is required to consider or 
determine whether an action is necessary or appropriate in the 
public interest, to consider, in addition to the protection of 
investors, whether the action would promote efficiency, competition, 
and capital formation. Additionally, section 23(a)(2) of the 
Exchange Act requires the Commission, when making rules under the 
Exchange Act, to consider the impact such rules would have on 
competition. Exchange Act section 23(a)(2) 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.
---------------------------------------------------------------------------

    The Commission believes that the proposed amendments to rule 612 
establishing a variable minimum pricing increment, where the tick size 
would be determined by the stock's Time-Weighted Average Quoted Spread, 
would result in lower transaction costs for the subset of affected 
stocks. The Commission expects lower transaction costs primarily 
because the proposed tiered tick size regime would help mitigate the 
impact of some mechanical impediments currently preventing the market 
from realizing otherwise more competitive bid and ask prices. Thus, the 
proposal prescribes a tick size reduction to the NMS stocks that have 
Time-Weighted Average Quoted Spread of $0.04 or less.\429\
---------------------------------------------------------------------------

    \429\ See infra sections V.D.1 and V.E.1 for a discussion of the 
effects of the proposed changes to tick size on trade execution and 
market efficiency.
---------------------------------------------------------------------------

    The Commission believes it is reasonable to assume that the 
proposed changes to rule 612 to apply a minimum pricing increment to 
trade executions, subject to exceptions, could result in greater 
competition between exchanges and ATSs with other OTC market 
makers,\430\ including wholesalers,\431\ while still preserving 
opportunities for economically meaningful price-improvement.\432\ Due 
to their greater reliance on quotations, harmonizing the minimum 
pricing increment for the quoting and trading would allow exchanges and 
ATSs to better compete on price for order flow with OTC market makers. 
When taken together with harmonization, the proposed changes to the 
tick size are expected to maintain sufficient intra-spread price levels 
to allow OTC market makers to continue to provide economically 
meaningful price improvement over the best displayed quotes.
---------------------------------------------------------------------------

    \430\ See infra section V.E.2.a for a discussion of the effects 
of tick size harmonization on competition for execution services.
    \431\ Wholesalers are OTC market makers that, according to CAT 
analysis, execute around 90% of the dollar volume of individual 
investor NMS stock orders on a principal basis via internalization. 
There are currently 6 wholesalers in the U.S. handling NMS stock 
orders.
    \432\ See supra section II.F.4 for a description of the possible 
exceptions.
---------------------------------------------------------------------------

    The Commission expects that the proposed amendments to rule 610, 
which would lower the access fee caps, would also lower transaction 
costs and promote market efficiency. Lowering the access fee caps would 
lower the total amount of access fees collected and rebates 
distributed, reducing, though not eliminating, any distortionary 
effects of exchange rebates on order routing and likely improving 
market efficiency.\433\ The reduction in access fees would lower 
transaction costs for liquidity demanders.\434\
---------------------------------------------------------------------------

    \433\ Absent a reduction in the 30 mil access fee cap, 
distortions could increase because the access fee could, in some 
instances, exceed the spread. See infra note 713.
    \434\ See infra section V.C.2 for a discussion of the effects of 
access fees and rebates on the markets. See infra section V.D.3 for 
a discussion of the benefits of the proposed lower access fee cap.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the primary impact of 
earlier implementation of the definition of round lots and including 
odd-lot information in NMS data would be to accelerate some, but not 
all, of the benefits articulated in the MDI Adopting Release.\435\ 
Given the delay in the full implementation of the MDI Rules, the 
Commission believes that putting off longer the benefits of those 
provisions is not justified and, as a result, the Commission is now 
proposing to accelerate the implementation of those portions of the MDI 
Rules.\436\ The Commission expects that the proposed amendments to 
accelerate the implementation of the new definition of round lot and 
the inclusion of odd-lot information in NMS data, would improve price 
transparency and facilitate monitoring execution quality.\437\
---------------------------------------------------------------------------

    \435\ See MDI Adopting Release, supra note 5.
    \436\ For the reasons explained in the MDI Adopting Release, 
when adopting the MDI Rules the Commission decided not to implement 
the adopted provisions for the round-lot definition and 
incorporating odd-lot information into NMS data until after the 
competing consolidator model came online. See MDI Adopting Release, 
supra note 5, at 18701.
    \437\ As the proposal would not accelerate the implementation of 
the decentralized consolidation model adopted pursuant to MDI Rules, 
it would not result in the acceleration of the benefits of the 
decentralized consolidation model, including the consolidation and 
dissemination to market participants of NMS data at lower latencies.
---------------------------------------------------------------------------

    The Commission expects that the proposed amendments to specify the 
best odd-lot orders to buy and sell (BOLO) would further facilitate 
execution quality monitoring by providing a standard benchmark with 
which to compare trades. Odd-lot trades make up an increasingly 
important part

[[Page 80304]]

of the market.\438\ However only round-lot quotes are disseminated as 
part of the NMS data; having a standardized price for the best 
available odd-lot orders would provide a more relevant benchmark than 
the round-lot NBBO for odd-lot trades. As the Commission anticipates 
that the BOLO will be an important benchmark for estimating the 
execution quality of some trades, requiring the exclusive SIPs and 
competing consolidators to compute and disseminate the BOLO would 
promote standardization.\439\
---------------------------------------------------------------------------

    \438\ One academic paper, examining order book data from 2009 to 
2011, finds that odd-lot trades make up 24% of trades in the median 
stock. See Maureen O'Hara, et al., What's Not There: Odd Lots and 
Market Data, 69 J. Fin. 2199 (Oct. 2014). Another, more recent 
study, finds evidence that odd-lot quotes provide valuable 
information to traders with access to the data. See Bartlett, et al. 
(2022), supra note 365. See also MDI Adopting Release, supra note 5, 
at 18729.
    \439\ This would also avoid other market participants having to 
estimate their own BOLO, as they would currently do if using it as a 
benchmark.
---------------------------------------------------------------------------

    Lastly, the proposed amendments would make fees and rebates 
determinable at the time of trade. Certainty about the cost of 
transactions at the time of trade could help broker-dealers make better 
order routing decisions.\440\ Second, being able to determine the fees 
and rebates at the time of trade would make it easier for customers to 
ask more direct questions of broker-dealers and facilitate broker-
dealers passing on fees and rebates to end customers if they so 
desire.\441\ Passing fees and rebates through to end customers may 
mitigate or eliminate the potential conflicts of interest caused by 
exchange rebates.\442\
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    \440\ Broker-dealer fees and rebates are generally tied to the 
monthly aggregate trading volume of the broker-dealer on different 
exchanges.
    \441\ Under Rule 606(b)(3), broker-dealers are required to 
provide a customer, upon request, a report on the broker-dealer's 
handling of that customer's NMS stock orders, which includes 
information on the average fees and rebates paid/received from those 
orders. If fees and rebates were determinable at the time of 
execution, customers could more easily evaluate the 606(b)(3) 
disclosures or request additional, more specific information. See 
Disclosure of Order Handling Information, supra note 4.
    \442\ If broker-dealers had to internalize and could not pass 
through fees (but were free to pass through rebates), a potential 
conflict of interest would still exist as there would exist an 
incentive to minimize fees at the potential expense of other factors 
important to order execution.
---------------------------------------------------------------------------

    The proposal would result in a number of costs. For affected 
stocks, the proposed smaller tick size may increase the cost of 
executing large orders by fragmenting liquidity across multiple price 
levels and increasing the complexity of locating shares for the 
orders.\443\ The Commission expects the proposed reduction in the 
access fee caps would decrease the overall net capture of exchanges 
primarily due to the decreased fees from sub-$1.00 stocks.\444\ Rebate 
disbursement is expected to decrease under the proposal, and so firms 
that profit from rebates, such as high-frequency trading firms that 
specialize in rebate capture trading strategies, would experience 
revenue declines and some that rely on rebates could exit the 
market.\445\ Reduced access fees could increase the amount of volume 
routed to exchanges compared to off exchange by making exchanges less 
expensive venues to transact and potentially causing some order flow 
that was previously directed off exchange to avoid high fees to revert 
to exchanges.
---------------------------------------------------------------------------

    \443\ See section V.D.1 for a discussion of the potential costs 
of a smaller tick size.
    \444\ See section V.D.3.
    \445\ See section V.D.3 and section V.E.2.a.
---------------------------------------------------------------------------

    There would be implementation and ongoing compliance costs 
associated with the proposal. Exchanges and market participants would 
need to update systems to account for the new tick sizes. Market 
participants would need to reconfigure order routing strategies to 
account for the different tick sizes and lower access fees. 
Additionally, market participants would experience an acceleration of 
many of the costs associated with odd-lot information articulated in 
the MDI Adopting Release including the need for exchanges to adjust and 
maintain systems to provide odd-lot information to the NMS data feed. 
The exclusive SIPs would need to adjust and maintain systems to receive 
and disseminate odd-lot information, and market participants receiving 
SIP data would need to adjust systems to receive odd-lot 
information.\446\
---------------------------------------------------------------------------

    \446\ Some of these adjustments might constitute new rather than 
accelerated costs if they are incompatible with future data feeds 
under MDI's competing consolidator model.
---------------------------------------------------------------------------

B. Market Failure

    The Commission is proposing to update regulations that set and 
apply a minimum pricing increment (tick size), reduce the access fee 
caps to better improve the market's capacity for efficient price 
competition, and promote more efficient order routing by resolving 
deficiencies in the information available to market participants. 
Current tick sizes for NMS stocks restrict price competition in stocks 
for which the tick size may be too large, leading to greater 
transaction costs. The lack of harmonization between minimum quoting 
and trading increments has also restricted the degree to which 
exchanges and ATSs can compete on price with OTC market makers 
including wholesalers.
    The minimum achievable bid-ask spread for a stock is constrained by 
the minimum pricing increment and limits price competition. A high tick 
size can artificially increase transaction costs, keeping the bid-ask 
spread wider than it might otherwise be. Consider, for example, a stock 
that would trade at an ask price of $10.005 absent the $0.01 tick, 
should the tick size be $0.005. If forced to trade at a $0.01 tick 
size, the prevailing ask price would most likely be $10.01, namely a 
half cent worse.\447\ Stocks that would otherwise trade with a spread 
less than the tick size, were they allowed to do so, are considered to 
be tick-constrained. Because these stocks cannot trade with spreads 
less than the tick size, they typically trade with spreads that are at 
or near the minimum tick size.\448\ A stock that is near-tick-
constrained is one that has a reasonable probability of becoming tick-
constrained in the course of normal trading, or one for which the tick 
is a substantial portion of the spread.\449\ Even if a stock is not 
tick-constrained but is near-tick-constrained, Commission analysis 
suggests that the tick size increases transaction costs for market 
participants. This may be because the tick constraint sometimes binds 
for these stocks, or because there may be market participants who want 
to

[[Page 80305]]

improve the price and offer a narrower spread, but not to the point 
where they are willing to narrow the spread by an entire tick. In the 
first 5 months of 2022 approximately 56% of share volume transacted in 
NMS stocks was considered to be tick-constrained while an additional 
16% traded in stocks that was considered to be near-tick-
constrained.\450\ Thus, approximately 72% of share volume transacted in 
stocks that are tick or near-tick-constrained during that time period.
---------------------------------------------------------------------------

    \447\ This thought experiment considers only the direct effect 
of the reduction in spread on the tick size in order to define what 
it means to be tick-constrained. Note that the spread is unlikely to 
ever be zero due to inventory costs, adverse selection risks, the 
direct costs associated with providing liquidity, and trading rules 
meant to prevent the locking and crossing of markets. See P.C. 
Kumar, Bid-Ask Spreads in U.S. Equity Markets, 43 Q. J. Bus. & Econ 
85 (2004).
    \448\ For the purpose of empirically identifying stocks that are 
constrained by the $0.01 tick; tick-constrained stocks are those 
with time weighted quoted spreads equal to $0.011 or less calculated 
during regular trading hours on a given day. See supra note 17 and 
accompanying text defining ``tick-constrained'' for the release, and 
infra Table 4 and accompanying text. Because of the $0.01 minimum 
pricing increment for NMS stocks priced equal to or greater than 
$1.00 per share, a stock cannot have a quoted spread less than $0.01 
unless markets become locked or crossed. The existence of locked and 
crossed markets can in some cases result in time weighted quoted 
spread that are very slightly lower than $0.01. Even for stocks with 
spreads most constrained by the tick, a large trade can exhaust 
liquidity deeper in the limit order book such that the stock's 
quoted spread temporarily increases from $0.01. Thus, time weighed 
quoted spreads will virtually always be greater than $0.01. 
Consequently, the Commission has selected the threshold of $0.011 as 
the threshold that identifies stocks that are likely tick-
constrained. These stocks quote at $0.01 most of the time and thus 
could be considered tick-constrained.
    \449\ Empirically, near-tick-constrained stocks are defined as 
those with time average quoted spreads between $0.011 and $0.02 
during regular trading hours.
    \450\ See supra note 17 for a definition of tick-constrained, 
and supra note 449 for a definition of near-tick-constrained. See 
infra note 458 for discussion of near-tick-constrained stocks. See 
also Table 4 and surrounding text for a further discussion of 
volumes associated with tick-constrained and near-tick-constrained 
stocks.
---------------------------------------------------------------------------

    Access fees and their associated rebates tend to increase 
transaction costs for demanders of liquidity as well as exacerbate a 
problem of liquidity oversupply for stocks with narrow spreads while 
doing very little to enhance liquidity in stocks with wide 
spreads.\451\ Broadly speaking, spreads reflect a price of liquidity 
and, when they are constrained to be wider than they could otherwise 
be, a greater amount of liquidity will be supplied at the constrained 
price point. This extra liquidity supply corresponds to longer limit 
order queues, which makes it more difficult for non-high-frequency 
traders to execute their trades via passive orders. Thus, they will 
resort to using liquidity-demanding orders more frequently, thus 
increasing transaction costs.\452\ In the current predominant maker-
taker structure, where demanders of liquidity pay an access fee while 
providers of liquidity receive a rebate, the fee and rebate effectively 
widen the spread. In other words, the distortion from being tick-
constrained is exacerbated by adding the access fee and rebates, which 
further effectively widens an already too wide spread.
---------------------------------------------------------------------------

    \451\ The effect of access fees and rebates as incentives 
becomes less pronounced as spreads widen. For example, if the spread 
is 10 cents wide, an access fee of 30 mils would represent only 6% 
of the half spread. Thus, as spreads widen the effectiveness of 
rebates to induce liquidity provision diminishes.
    \452\ See infra sections V.C.1.c and V.C.2 for additional 
discussion on why the trading environment of tick-constrained stocks 
tends to favor high-frequency traders.
---------------------------------------------------------------------------

    The lack of harmonization between quoting and trading increments 
has also restricted the degree to which exchanges and ATSs can compete 
on price with OTC market venues.\453\ This competitive disparity is 
particularly acute in competition for order-flow in tick-constrained 
and near-tick-constrained stocks where the ability to publicly quote a 
more competitive price is restricted.
---------------------------------------------------------------------------

    \453\ See section V.C.1.b and section V.C.1.a for discussion of 
how applying a minimum pricing increment to quotes but not trades 
limits price competition between exchanges and ATSs and other OTC 
market venues.
---------------------------------------------------------------------------

    Some minimum pricing increment is necessary for proper functioning 
of markets.\454\ The problem of coordinating across multiple venues and 
participants suggests a role for setting a price increment through 
regulation rather than leaving it to market forces. In principle, 
variation in fees and rebates across trading venues could allow for a 
degree of intra-tick pricing, though it has offsetting costs in terms 
of fragmentation and complexity, making it an inefficient 
solution.\455\
---------------------------------------------------------------------------

    \454\ See, e.g., Lawrence E. Harris, Minimum Price Variations, 
Discrete Bid-Ask Spreads, and Quotation Sizes, 7 Rev. Fin. Stud. 149 
(1994). See also Anne Dyhrberg, et al., When Bigger is Better: The 
Impact of a Tiny Tick Size on Undercutting Behavior, J. Fin. & 
Quantitative Analysis (2022).
    \455\ For example, consider the case of one maker-taker and one 
inverted exchange, both with rebates and fees equal to 20 mils with 
both exchanges quoting a 1.01x1.02 spread. Using net-fee/rebate 
prices, the maker-taker exchange would effectively be quoting at 
1.008x1.022 whereas the inverted exchange would be quoting at 
1.012x1.018. The degree of intra-spread pricing would be limited to 
the number of exchanges and the variation in their fees and rebates. 
For example, a market with 3 exchanges could collectively make 
possible only 3 intra-spread levels to any one market participant at 
a time. See infra section V.D.3 for a discussion of intra-tick 
pricing. See infra section V.C.2 for a discussion of current state 
of the fees and rebates and the variation in pricing structure 
across exchanges.
---------------------------------------------------------------------------

    The Commission does not believe that exchanges will lower access 
fees or their associated rebates absent the proposed regulatory action 
to lower the access fee cap. Contrasted with marketable orders, market 
participants have greater discretion in the routing of liquidity-
supplying orders. Under rule 611, the NBBO restricts the routing 
behavior of marketable orders and often forces liquidity demanders to 
pay the access fee to trade against a NBBO order. Exchanges are thus 
incentivized to attract more competitively priced liquidity with large 
rebates, which are funded by similarly large access fees, in order to 
capture more trading volume. The effects of these incentives are 
evident: both average fees and rebates have remained near the 30 mil 
access fee cap introduced in 2005, despite technological and market 
structure changes.\456\ The Commission believes that the exchanges do 
not lower their access fees and rebates because a unilateral reduction 
in rebates would likely cause market participants to route their 
competitive liquidity-providing orders to another exchange.\457\
---------------------------------------------------------------------------

    \456\ Technological advances that would improve the efficiency 
of exchange functions such as matching trades, as well as changes in 
the market environment such as the proliferation of high frequency 
market making that increases the amount of trading volume, could 
increase the feasibility for exchanges to lower fees and/or rebates 
without reducing revenues.
    \457\ The Commission believes that the exchanges do not lower 
their access fees and rebates because doing so may cause the 
exchange to lose market share. Notably, research surrounding a 
NASDAQ experiment where it unilaterally lowered fees and rebates 
found that NASDAQ lost market share to other maker-taker venues with 
a higher rebate. See, e.g., Yiping Lin, et al., A Model of Maker-
Taker Fees and Quasi-Natural Experimental Evidence (working paper 
Feb. 8, 2021), available at https://ssrn.com/abstract=3279712 
(retrieved from SSRN Elsevier database). Consequently, it could be 
harmful to an exchange to unilaterally reduce access fees and their 
associated rebates if other exchanges do not follow suit. Further, 
even if each of the exchanges lowered its fees, there would be the 
risk that a new exchange would see the opportunity and enter the 
market with high fees and rebates and thus capture market share, 
inducing the other exchanges to abandon their low fee models to 
remain competitive.
---------------------------------------------------------------------------

C. Baseline

    A significant fraction of total trading volume occurs in stocks 
that are tick- or near-tick-constrained, which can cause them to trade 
at spreads wider than they would otherwise.\458\ Access fees, which are 
frequently used to fund rebates to liquidity providers, increase the 
relative cost of demanding liquidity, particularly for stocks with 
narrower spreads. Exchange access fees and rebates are also complex. 
Lastly, the delay in the implementation of the MDI Rules postpones 
their anticipated benefits.
---------------------------------------------------------------------------

    \458\ As a concept, the degree to which a stock is tick-
constrained lies on a continuum. At one end of the continuum are 
stocks that would always trade narrower if the tick size constraint 
was relaxed, and on the other are stocks that would only rarely 
trade narrower than the current tick size given a smaller tick. For 
empirical purposes tick-constrained stocks are defined as in supra 
note 17. See also section I.A, and supra note 448 for additional 
details. We define near-tick-constrained stocks as those with time 
average quoted spreads less than two ticks wide ($0.02) but greater 
than $0.011 (the threshold for being defined as tick-constrained) 
during regular trading hours. See supra note 449. In contrast to 
tick-constrained stocks which quote at the tick size all or most of 
the time, near-tick-constrained stocks will alternate between 
quoting at the tick size or at one tick size wider implying that 
that they are sometimes tick-constrained and other times not tick-
constrained. See also Table 4 and surrounding text for a further 
discussion of volumes associated with tick-constrained and near-
tick-constrained stocks.
---------------------------------------------------------------------------

1. Tick Sizes
    Rule 612 of Regulation NMS establishes tick sizes and applies to 
ranking, accepting, and displaying quotes. In determining what tick 
size is optimal for any given stock, there is a tradeoff between price 
competition on the one hand, and incentives for liquidity provision on 
the other. A smaller tick allows liquidity providers to better compete 
on price. On the other hand, a smaller tick can also leads to

[[Page 80306]]

pennying, which reduces the economic gains to posting liquidity, 
leading to a lower incentive to post liquidity.\459\ The tick size 
determines the minimum amount of price improvement required to gain 
priority over existing quotes, as the tick size gets smaller the value 
of time priority at a price becomes less important.\460\ Other 
considerations include market complexity and the spreading of liquidity 
over more price levels (though it is also the case that market 
complexity may increase with wider ticks, as participants adjust to 
inefficient pricing), and the fact that too small ticks may 
inefficiently award speed.\461\ As discussed below in Section V.C.1.c, 
the Commission estimates that 72% of share volume and 45% of dollar 
volume in U.S. equity markets occurs in stocks that are tick or near-
tick-constrained stocks, suggesting that for many stocks the tick size 
may be a hindrance to market quality.
---------------------------------------------------------------------------

    \459\ The term `pennying' refers to when a market participant 
gets to the front of the queue by posting an economically trivial 
price improvement.
    \460\ See text at infra note 478 for a further discussion of 
this effect.
    \461\ See Barardehi, et al. (2022), supra note 85, for 
additional analysis of this tradeoff.
---------------------------------------------------------------------------

a. Current Regulations
    Rule 612 of Regulation NMS, which was adopted on April 6, 2005, and 
had a compliance date of January 31, 2006, prohibits a national 
securities exchange, national securities association, ATS, vendor, or 
broker or dealer from displaying, ranking, or accepting quotations, 
orders, or indications of interest in any NMS stock priced in an 
increment smaller than $0.01 if the quotation, order, or indication of 
interest is priced equal to or greater than $1.00 per share. If the 
quotation, order, or indication of interest is priced less than $1.00 
per share, the minimum pricing increment is $0.0001. Most listing 
exchanges require stocks listed on their exchanges to maintain a price 
greater than $1.00 per share, and consequently $0.01 is the prevailing 
tick size for most quotes and orders for NMS Stocks.\462\ Regulation 
NMS effectively establishes $0.01 as the minimum spread that can be 
quoted for stocks priced equal to, or greater than, $1.00 per share 
because the NBBO is determined by the best displayed round lot quotes, 
and locked and crossed markets are prohibited.
---------------------------------------------------------------------------

    \462\ See, e.g., NYSE Continued Listing Standards, Sec.  
802.01C, available at https://www.nyse.com/listings/resources (last 
visited Sept. 29, 2022); The Nasdaq Stock Market LLC Rules, Sec.  
5400, available at https://listingcenter.nasdaq.com/rulebook/nasdaq/rules (last visited Sept. 29, 2022).
---------------------------------------------------------------------------

b. Sub-Penny Transactions
    While NMS stocks cannot be quoted in a sub-penny increments, they 
may trade in sub-penny increments.\463\ Sub-penny trading on exchanges 
and ATSs occurs in limited circumstances while sub-penny trading by 
off-exchange market makers occurs more often. Sub-penny trading on 
exchanges and ATSs occurs primarily as a result of midpoint orders and 
benchmark trades. Benchmark trades, such as VWAP and TWAP orders, may 
not be explicitly priced in an impermissible sub-penny increment, but 
the ultimately determined execution price may be in a sub-penny 
increment. Additionally, ATSs sometimes offer order types where the 
execution price is determined to be some fraction of the way between 
the prevailing midpoint and the NBB or NBO. Sub-penny trading on 
registered exchanges may also occur as a result of their RLPs. Since 
2012, the Commission has offered limited exemptive relief from rule 612 
for these programs so that they may offer qualifying retail trades 
price improvement relative to the NBBO, usually in increments of 
$0.001.\464\ Exchanges established RLPs as a competitive response to 
the various market structure and trading dynamics that divert retail 
order flow from exchanges to OTC market makers, referred to as 
wholesalers, who can trade more readily in sub-penny increments.\465\
---------------------------------------------------------------------------

    \463\ See supra section II.F.4.
    \464\ NYSE Retail Liquidity Program Approval Order, supra note 
62. See supra note 62 and accompanying text for a discussion 
regarding exchange RLPs. See also Pankaj K. Jain, et al., An 
Examination of the NYSE's Retail Liquidity Program, 80 Q. Rev. Econ. 
Fin. 367 (2021), for a discussion of and analysis of NYSE's RLP.
    \465\ See Sean Foley, et al., Tick Size Wars: The Market Quality 
Effects of Pricing Grid Competition (working paper Dec. 2, 2021), 
available at https://ssrn.com/abstract=2866943 (retrieved from SSRN 
Elsevier database).
---------------------------------------------------------------------------

    ATSs also offer sub penny transactions separate from midpoint or 
benchmark trades. Some ATSs offer order types which effectively split 
the distance between the NBB or NBO and the midpoint. These trades 
offer price improvement to the liquidity demander--though not at the 
same levels as a midpoint trade--while still enabling the liquidity 
provider to earn at least some spread on the transaction. They are a 
form of pre-set price-improvement trades.
    Trading at sub-penny increments also occurs as a result of broker-
dealers, including some OTC market makers known as wholesalers, 
internalizing customer order flow at sub-penny prices.\466\ OTC market 
makers, including wholesalers, receive market orders and offer price 
improvement over the NBBO for the orders they receive, which often 
originate from individual investors, often in sub-penny 
increments.\467\ For example, if a broker-dealer acting as a 
wholesaler, has two customers, and one submits a market order to buy a 
stock while the other submits a market order to sell a stock, the 
wholesaler is not required to send those orders to an exchange or ATS 
for execution. Rather, the broker-dealer can internalize the two trades 
by executing both against internal inventory; it could also cross the 
two trades internally at a price that is within the NBBO because doing 
so would not involve a quote subject to rule 612, or it could route 
some or all of the trades to an exchange or ATS for execution. If the 
wholesaler chooses to act in a principal capacity and transact both 
orders against its own inventory--earning the bid-ask spread in the 
process--the wholesaler can execute the order in any pricing increment 
that it chooses so long as the wholesaler meets its best execution 
obligation.\468\ Increments of $0.01, $0.001 and $0.0001 are typical in 
off-exchange trading.\469\ Using data from FINRA for the first quarter 
of 2022, we estimate that wholesalers internalized approximately 24% of 
all share volume.\470\
---------------------------------------------------------------------------

    \466\ The term ``wholesaler'' is not defined in Regulation NMS, 
but commonly refers to a broker-dealer acting as an OTC market maker 
that primarily focuses on attracting orders from broker-dealers that 
service the accounts of a large number of individual investors, 
referred to in this release as ``retail brokers.''
    \467\ Based on analysis of retail broker rule 606(a)(1) reports, 
there are six broker-dealers classified as wholesalers.
    \468\ If the wholesaler uses proprietary data feeds that offer a 
more complete view of the market than the SIP feeds offers--for 
example--for their own trades, then FINRA would expect that 
wholesaler to use that same data to determine the range of prices at 
which the broker can internalize trades. See FINRA, Regulatory 
Notice 15-46, 1, 3 n.12 (2015) (``The exercise of reasonable 
diligence to ascertain the best market under prevailing market 
conditions can be affected by the market data, including specific 
data feeds, used by a firm. For example, a firm that regularly 
accesses proprietary data feeds, in addition to the consolidated SIP 
feed, for its proprietary trading, would be expected to also be 
using these data feeds to determine the best market under prevailing 
market conditions when handling customer orders to meet its best 
execution obligations.''). See also Securities Exchange Act Release 
No. 65895 (Dec. 5, 2011), 76 FR 77042 (Dec. 9, 2011) (approving 
FINRA Rule 5310 on best execution).
    \469\ However, research suggests that $0.0001 is a common 
increment used by wholesalers. See Ekkehart Boehmer, et al., 
Tracking Retail Investor Activity, 76 J. Fin. 2249 (Oct. 2021).
    \470\ FINRA OTC (Non-ATS) Transparency Data Monthly Statistics 
provides monthly information on wholesaler execution volumes. This 
data, is combined with Cboe historical market volume data, and U.S. 
historical market volume data FINRA data. See OTC Transparency Data, 
FINRA, available at https://otctransparency.finra.org/otctransparency/OtcData (last visited Sept. 29, 2022); see also 
Historical Market Volume Data, Chi. Bd. Options Exch., available at 
https://cboe.com/us/equities/market_statistics/historical_market_volume/ (last visited Sept. 29, 2022).

---------------------------------------------------------------------------

[[Page 80307]]

    Not all price improvement occurs in sub-penny increments. A trade 
receives price improvement if it transacts at a price superior to the 
NBBO. Trades can transact inside the NBBO on an exchange due to an odd-
lot order priced better than the NBBO or due to hidden orders. Table 3 
provides price improvement statistics for the first half of 2022.\471\ 
Summing the total dollar value of price improvement associated with 
trades that execute in sub-penny increments that are not midpoint 
trades (rows 5, 7, 9, and 11) reveals that approximately 18% of the 
daily dollar value of price improvement, or approximately $12 million, 
was from trades which transacted at a sub-penny pricing increment and 
was not associated with a midpoint or VWAP trade--i.e., trades that 
make use of the fact that rule 612 does not apply to trading.\472\ Of 
this value, 11% occurred on exchange, and the remaining 89% occurred 
off exchange. Extrapolating from these estimates, by multiplying the 
$12 million of price improvement in trades which executed at sub-penny 
pricing increments by 252 trading days, suggests that sub-penny pricing 
enabled by rule 612 not applying to trades offers investors price 
improvement relative to the NBBO of approximately $3 billion per year.
---------------------------------------------------------------------------

    \471\ The analysis uses data from prior to the implementation of 
the MDI Rules and once implemented, the changes to the current 
arrangements for consolidated market data may impact the numbers 
reported in Table 3 and throughout, including by reducing those for 
realized spread, effective spread, and amount of price improvement. 
The NBBO will likely tighten in stocks priced greater than $250 
because it will be calculated based on a smaller round lot size. A 
tighter NBBO spread could increase the number of NMS stocks which 
are considered tick-constrained or near-tick-constrained. See infra 
section V.C.3. The effects on effective and realized spreads is more 
uncertain, because they are measured against the NBBO midpoint, 
which may not change if both the NBB and NBO decrease by the same 
amount. However, if marketable orders are more likely to be 
submitted when there are imbalances on the opposite side of the 
limit order book (i.e., more marketable buy orders are submitted 
when there is more size on the offer side of the limit order book 
than the bid side), then the NBBO midpoint may change such that it 
is closer to the quote against which the marketable order executes, 
which may decrease the effective and realized spreads in stocks 
above $250 when the MDI Rules are fully implemented. It is also 
uncertain how or to what degree these changes would affect the 
proportion of trading volume that executes off-exchange. This 
analysis is qualitatively and quantitatively similar to the analysis 
provided by NYSE in its NYSE Tick Harmonization Paper, supra note 
70.
    \472\ For the purposes of this analysis a sub-penny transaction 
is any regular trade for which the execution price of the trade is 
not a multiple of $0.01. See Table 3 note a.

                                      Table 3--Price Improvement Statistics Daily Average Jan. to June 2022 \a\ \b\
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                            Panel A: Price Improvement Volume
--------------------------------------------------------------------------------------------------------------------------------------------------------
Row                 Midpoint............  On or off...........  Odd or.............  Sub-penny..........       Number of    Share volume   Dollar volume
                                          exchange............  round lot..........                               trades      (millions)      (billions)
                                                                                                              (millions)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.................  Yes.................  On..................  Odd................  ...................             3.8            85.9             7.3
2.................  Yes.................  On..................  Round..............  ...................             2.9           488.8            23.8
3.................  Yes.................  Off.................  Odd................  ...................             2.1            35.9             3.7
4.................  Yes.................  Off.................  Round..............  ...................             2.4           735.1            37.3
5.................  No..................  On..................  Odd................  Sub-Penny..........             0.4             9.5             0.6
6.................  No..................  On..................  Odd................  Penny..............            12.5           249.7            42.0
7.................  No..................  On..................  Round..............  Sub-Penny..........             0.7           130.2             4.7
8.................  No..................  On..................  Round..............  Penny..............             2.8           369.9            38.9
9.................  No..................  Off.................  Odd................  Sub-Penny..........             3.7            64.6             7.8
10................  No..................  Off.................  Odd................  Penny..............             1.5            27.9             6.0
11................  No..................  Off.................  Round..............  Sub-Penny..........             2.6          1413.3            60.0
12................  No..................  Off.................  Round..............  Penny..............             0.9           219.4            22.9
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     Panel B: Daily Average Price Improvement Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Row                 Midpoint............  On or off...........  Odd or.............  Sub-penny..........              PI           Total              PI
                                          exchange............  round lot..........                         (millions of             (%)           (BPS)
                                                                                                                dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.................  Yes.................  On..................  Odd................  ...................             2.0             3.0             5.7
2.................  Yes.................  On..................  Round..............  ...................             6.3             9.3             7.6
3.................  Yes.................  Off.................  Odd................  ...................             1.5             2.3             7.0
4.................  Yes.................  Off.................  Round..............  ...................            14.1            20.8             8.2
5.................  No..................  On..................  Odd................  Sub-Penny..........             0.2             0.3             5.9
6.................  No..................  On..................  Odd................  Penny..............            11.5            16.9             4.8
7.................  No..................  On..................  Round..............  Sub-Penny..........             1.1             1.6             7.1
8.................  No..................  On..................  Round..............  Penny..............            10.7            15.8             7.0
9.................  No..................  Off.................  Odd................  Sub-Penny..........             1.4             2.0             3.1
10................  No..................  Off.................  Odd................  Penny..............             1.7             2.5             6.2
11................  No..................  Off.................  Round..............  Sub-Penny..........             9.2            13.6             3.7
12................  No..................  Off.................  Round..............  Penny..............             8.0            11.8             8.9
                                                                                                         -----------------------------------------------

[[Page 80308]]

 
    Total PI......  ....................  ....................  ...................  ...................            67.8             100  ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ This table provides estimates of the average daily volume of trades receiving some form of price improvement from Jan. 2022 to June 2022, as well as
  estimates of the magnitude of the price improvement received. For purposes of this table, a trade is determined to have received price improvement if
  it occurred within the prevailing NBBO at the time of the trade. The numbers in the table represent daily averages. Panel A provides statistics for
  the total number of trades as well as the total share and dollar volume of trades that receive some form of price improvement while Panel B provides
  estimates of the total dollar value of the price improvement that is received. Price improvement statistics are computed for 12 categories of trade
  representing a unique combination of trading volume associated with midpoint, on versus off exchange, round versus odd-lot, and sub-penny versus penny
  transactions. The analysis includes all normal trades that execute during normal trading hours from TAQ. Normal trades are identified in TAQ data by
  sale conditions ``blank, @, E, F, I, S, Y'' which correspond to regular trades, intermarket sweep orders, odd lot trades, split trades, and yellow
  flag regular trades. A trade receives price improvement if it executes inside the prevailing NBBO. Price improvement for trades that occur above the
  prevailing midpoint is equal to the (NBO-price)*number of shares transacted, for trades that occur below the prevailing midpoint price improvement is
  equal to the (price-NBB)*number of shares transacted. For trades that occur at the midpoint price improvement is equal to one half the spread between
  the NBO and NBB multiplied by the number of shares transacted. Estimates are provided based on midpoint, location of the trade, odd-lot status, and
  sub-penny status. A trade is defined as a midpoint trade if it occurs at exactly the midpoint of the NBB and NBO at the time of the trade. Off
  exchange trades are those with exchange code `D' attached to the trade. Odd-lot trades are trades in sizes other than multiples of 100, and sub penny
  trades are those executing in prices with three or more decimal places.
\b\ See MDI Adopting Release, supra note 5. The effect of amending the definition of odd-lot information to include the best odd-lot quotes and
  accelerating the inclusion of odd-lot information might be marginal should the proposal described in a Mar. 2022 request for comment by the SIPs, CTA/
  UTP SIP Odd-Lot Request for Comment (available at https://www.ctaplan.com/publicdocs/ctaplan/CTA_Odd_Lots_Proposal_2022.pdf), be filed with the
  Commission as a proposed Plan amendment and approved. Even if that proposal were filed with the Commission and approved, however, it would result in
  the provision of less odd-lot information than would become available under this proposed rule. See supra notes 374, 386.

c. Tick Sizes and Quoted Spreads
    Table 4 presents data on trading volume in the first five months of 
2022 based on average time weighted quoted spreads. The analysis breaks 
trading volume each day into one of 16 average quoted spread buckets. 
The first bucket is for tick-constrained stocks, which we define 
empirically as stocks that have time weighted quoted spreads less than 
or equal to $0.011 on a given day.\473\ The second bucket is for near-
tick-constrained stocks with quoted spreads less than $0.02. Each 
succeeding bin increases the spread by $0.01 until the last bin which 
contains all stocks with quoted spreads greater than $0.15. This 
analysis indicates that 56% of share trading volume (23% of dollar 
volume) occurs in stocks that are tick-constrained. That is, in the 
absence of a one cent tick, these stocks would likely have quoted 
spreads that are narrower than what they currently experience. Table 4 
also reports that 15% of share volume (22% of dollar volume) occurs in 
stocks that are near-tick-constrained. Table 4 also reports the daily 
average number of stocks in each bin.
---------------------------------------------------------------------------

    \473\ Other studies may define tick-constrained stocks 
differently. See also supra note 17 and supra note 448 and 
accompanying text defining and discussing ``tick-constrained'' for 
the release.

                           Table 4--Share Volume by Quoted Spread Jan. to May 2022 \a\
----------------------------------------------------------------------------------------------------------------
                                                                   Share volume    Dollar volume     Average #
                          Quoted spread                                 (%)             (%)           stocks
----------------------------------------------------------------------------------------------------------------
Quoted Spread < $0.011..........................................            56.1            23.2           1,337
$0.011< Quoted Spread <= $0.02..................................            15.5            21.7           1,093
$0.02 < Quoted Spread <= $0.03..................................             7.8             9.8           1,170
$0.03 < Quoted Spread <= $0.04..................................             4.2             5.7             946
$0.04 < Quoted Spread <= $0.05..................................             2.5             3.2             762
$0.05 < Quoted Spread <= $0.06..................................             1.8             2.5             629
$0.06 < Quoted Spread <= $0.07..................................             1.2             1.8             531
$0.07 < Quoted Spread <= $0.08..................................             1.2             2.1             468
$0.08 < Quoted Spread <= $0.09..................................             1.0             1.7             426
$0.09 < Quoted Spread <= $0.10..................................             0.9             1.5             383
$0.10 < Quoted Spread <= $0.11..................................             0.8             1.3             337
$0.11 < Quoted Spread <= $0.12..................................             0.7             1.1             279
$0.12 < Quoted Spread <= $0.13..................................             0.6             1.0             243
$0.13 < Quoted Spread <= $0.14..................................             0.5             0.9             214
$0.14 < Quoted Spread <= $0.15..................................             0.5             0.8             190
$0.15 < Quoted Spread...........................................             4.8            21.6           2,500
----------------------------------------------------------------------------------------------------------------
\a\ This table provides share volume by stocks with different quoted spread profiles. To create this table, for
  each day the universe of stocks covered in the WRDS Intra-Day Indicators data are assigned into one of the 16
  quoted spread bins based on that days' time-weighted quoted spread as computed by WRDS Intra-Day Indicators.
  Then all share and dollar trading volume across all trading days in Jan.-May 2022 is aggregated for each of
  the 16 quoted spread bins. Percentages based on these totals are then computed. This table also presents the
  daily average number of stocks in each bin. To compute this variable, for each trading day in Jan.-May 2022
  the number of stocks in each bin is tabulated, then the average across all trading days is presented here.
  Certain items in this Table 4 may also be affected by the MDI Rules once they are fully implemented. See Table
  3 note b.

[[Page 80309]]

    For tick-constrained stocks, spreads are potentially wider than 
they would otherwise be. Wider quoted spreads mean greater cost to 
liquidity demanders and greater revenue to liquidity suppliers.\474\ An 
artificially wide spread due to the tick constraint subsidizes 
liquidity provision. Because the compensation is above what would exist 
in a competitive market there is an increased incentive to provide 
liquidity via limit orders, so queues of limit orders tend to be 
longer, wait times to get a limit order executed also tend to be 
longer, and, thus the likelihood that the market moves away from an 
investor's limit order increases, leading to lower overall fill rates 
for limit orders.\475\ These dynamics mean that some investors who 
might originally have wanted to trade using a limit order and earn the 
quoted spread instead trade using a marketable order and pay the quoted 
spread.\476\ There is also evidence that when tick sizes are too wide 
volatility can increase.\477\
---------------------------------------------------------------------------

    \474\ Market participants can use inverted exchanges or ISO 
orders to help ameliorate some of the negative effects of tick size 
constraints.
    \475\ See e.g., Barbara Rindi and Ingrid M. Werner, U.S. Tick 
Size Pilot (working paper Mar. 4, 2019), available at https://ssrn.com/abstract=3041644 (retrieved from SSRN Elsevier Database); 
Mao Ye and Chen Yao, Tick Size Constraints, Market Structure and 
Liquidity (working paper Dec. 26, 2019), available at https://ssrn.com/abstract=2359000 (retrieved from SSRN Elsevier database); 
Phil Mackintosh, Why Ticks Matter, Nasdaq (May 19, 2022), available 
at https://www.nasdaq.com/articles/why-ticks-matter; and MEMX 
Report, supra note 105.
    \476\ See, e.g., Roberto Ricc[oacute] et al., Optimal Market 
Asset Pricing (working paper Feb. 4, 2021), available at https://ssrn.com/abstract=3779195 (retrieved from SSRN Elsevier database) 
(showing in a theoretical model that rebates can be optimal for 
exchanges because they both induce and attract high-frequency 
trading activity).
    \477\ See, e.g., Edwin Hu, et al., Tick Size Pilot Plan and 
Market Quality (DERA White Paper, Jan. 31, 2018), available at 
https://www.sec.gov/files/dera_wp_tick_size-market_quality.pdf; 
Hendrick Bessembinder, Trade Execution Costs and Market Quality 
After Decimalization, 38 J. Fin. & Quantitative Analysis 747 (2003); 
and Tavy Ronen and Daniel G. Weaver, Teenies Anyone?, 4 J. Fin. Mkt. 
231 (2001).
---------------------------------------------------------------------------

    When a stock is tick-constrained or near-tick-constrained it is 
particularly important for a liquidity provider to get its quote to the 
front of the queue (i.e., establish price/time priority on an order 
book). Stock exchange priority rules give greater priority to better 
priced orders and generally factor order entry time into the priority 
of limit orders at the same price. Because liquidity providers cannot 
establish price priority in when the NBBO spread is one tick, 
establishing time priority becomes more important.\478\ Consequently, 
an environment where stocks are tick-constrained with artificially 
wider spreads and longer order queues tends to favor traders who are 
better able to establish positions more quickly so they can be at the 
front of the queue. Often the key differentiator to get to the front of 
the queue, and to avoid unfavorable executions once there, is 
speed.\479\ If a liquidity provider is too slow to establish a new 
quote, then that quote could be buried in the queue. Conversely, even 
with a favorable position in the queue, if the market moves in an 
economically disadvantageous manner to a liquidity provider, it will 
seek to avoid an adverse execution (e.g., by canceling an order) and 
adjust its order to account for the new prevailing price of the NBB 
(NBO). Liquidity providers that are too slow run the risk of having 
their now-stale quote ``sniped.'' \480\ Sniping is costly to those 
liquidity providers who get sniped and, so, effectively adds to adverse 
selection risk for slower liquidity providers.\481\
---------------------------------------------------------------------------

    \478\ An order with time priority is executed first when 
multiple orders are at the best price, regardless of how many orders 
are at the best price. In longer order queues, liquidity-providing 
orders deeper in the queue, which do not have time priority, are 
less likely to be filled in a timely manner and, conditional on 
being filled, the probability of the order having been adversely 
selected tends to be greater compared to orders with greater fill 
priority. Typically, liquidity providers compete to gain priority 
over other resting orders by quoting a better price but tick-
constraints make doing so difficult. In the case when the spread is 
constrained to a single tick, it would be impossible to improve on 
the displayed price without locking markets. Even for near-tick-
constrained stocks, when the quoted spread may be greater than a 
single tick, improving the price by an entire tick may be too much 
in the sense that doing so may narrow the spread beyond what the 
liquidity providers could tolerate. A narrower tick de-emphasizes 
time priority on a stock exchange by making it easier to compete on 
price. See Hu, et al. (2018), supra note 477; and Todd G. Griffith 
and Brian S. Roseman, Making Cents of Tick Sizes: The Effect of the 
2016 U.S. SEC Tick Size Pilot on Limit Order Book Liquidity, 101 J. 
Banking Fin. 104 (2019).
    \479\ See, e.g., Chen Yao and Mao Ye, Why Trading Speed Matters: 
A Tale of Queue Rationing Under Price Controls, 31 Rev. Fin. Stud. 
2157 (2018).
    \480\ Sniping occurs when prices move against a quote and a very 
fast market participant executes the now stale quote before the 
quote submitter can cancel the now stale quote. See Sida Li, et al., 
Who Provides Liquidity, and When?, 141 J. Fin. Econ. 968 (2021).
    \481\ Id.
---------------------------------------------------------------------------

    Trading quality among stocks that are near-tick-constrained, can 
also be significantly affected by the tick size.\482\ For example, 
consider a stock that would otherwise trade at an offer price of 
$10.015 and a bid of $10.005 absent the $0.01 tick. This stock would 
have a spread of $0.01. However, due to tick constraints the stock will 
quote at the best feasible ask price above $10.015 \483\ which is 
$10.02 and the best feasible bid price below $10.005 which is 
$10.00.\484\ Consequently, due to the tick constraint, the stock's 
actual quoted spread is $0.02 instead of $0.01, or 100% wider than the 
spread would otherwise be. According to the analysis in Table 4 
approximately 16% of trading volume occurs in stocks that are near-
tick-constrained. Combining this volume with the 56% of trading volume 
that occurs in tick-constrained stocks means that approximately 72% of 
share trading volume in current markets occurs in stocks that are tick-
constrained or near-tick-constrained.
---------------------------------------------------------------------------

    \482\ See supra notes 449 and 458 for the empirical definition 
and discussion of near-tick-constrained stocks. Near-tick-
constrained stocks are those with time average quoted spreads 
greater than $0.011 and less than $0.02.
    \483\ This assumes that stock prices are expected to revert to 
the next worse level. This may occur because standard economic 
theory suggests that in a competitive market liquidity providers 
will compete to provide liquidity until the spread--i.e., their 
compensation for providing liquidity--is equal to the break-even 
point for liquidity provision. See also Jonathan Brogaard and Corey 
Garriott, High-frequency Trading Competition, 54 J. Fin. & 
Quantitative Analysis 1469 (2019) (documenting that as more high-
frequency liquidity providers enter the market, spreads decrease 
until they converge to competitive levels).
    \484\ The range of infeasible quoting prices narrows somewhat in 
the presence of rebates for liquidity providers. Section V.C.2 
discusses these effects.
---------------------------------------------------------------------------

2. Access Fees
    The market for trading services in NMS stocks where traders either 
demand or supply liquidity is primarily served by the national equity 
exchanges and ATSs along with 6 wholesalers who internalize large 
portions of individual investor order flow. Exchanges and ATSs charge 
an access fee or pay a rebate to either those demanding liquidity or to 
those supplying it. Liquidity is typically provided through the 
provision of passive limit orders, which commit to execute against 
marketable orders that take liquidity. Rebates are typically captured 
by traders, such as market makers and some high-frequency traders, 
which specialize in the provision of liquidity and access fees are 
typically paid by demanders of liquidity.
    Rule 610(c) limits exchange fees for accessing protected quotations 
with prices of $1.00 per share or greater to $0.0030 per share (or 30 
cents per 100 shares). This level is commonly referred to as 30 mils. 
The rule also prohibits access fees in excess of 0.3% of the price for 
stocks priced less than $1.00 per share. The 30 mil fee cap was adopted 
as a part of Regulation NMS in conjunction with the order protection 
rule and was implemented to prevent exchanges from charging excessive 
fees to orders that were required to trade with a protected quote. The 
30 mil fee

[[Page 80310]]

cap was also determined based on existing market practices.\485\ Rule 
610(c) only regulates fees to access protected quotes; it does not 
regulate fees to access non-protected quotes, nor does it regulate 
rebates that exchanges can offer. However, the 30 mil fee cap has 
become a central component of the structure of fees and rebates as 
access fees for non-protected quotes generally do not exceed the 30 mil 
fee cap, nor do average rebates.
---------------------------------------------------------------------------

    \485\ See Regulation NMS Adopting Release, supra note 16, at 
section I.C.2 (page 28 in the SEC version) which states that the 
selection of the access fee cap was chosen because ``it will not 
seriously interfere with current business practices'' and ``[i]n 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.''
---------------------------------------------------------------------------

    Fee/rebate schedules can be quite complex, and the fee schedules 
change frequently.\486\ The actual fee or rebate that an investor is 
assessed on most exchanges also generally depends on which tier a 
market participant falls into based on trading volume in that month, 
with higher volume market participants receiving a higher rebate or a 
lower fee.\487\ Exchanges file their fee and rebate schedules with the 
Commission and post them on their websites, which means that the rebate 
and fee rates associated with each volume based tier can be known at 
the time a market participant trades. However, market participants may 
not know which volume based tier they would fall under at the time of 
the trade (and thus the fee or rebate rate that would apply to their 
particular trade) because the volume tier they would fall under is 
determined based on their trading volume during the current month, 
which is not finalized until the end of the month.\488\ More 
specifically, the volume based fees or rebates a market participant 
receives from an exchange are often determined by a market 
participant's average total daily traded share volume on the exchange 
during the month as a percentage of either the average total daily 
market volume reported by one of the consolidated tapes during the 
month or as a percentage of the average total daily market volume 
reported by all consolidated tapes during the month.\489\
---------------------------------------------------------------------------

    \486\ See Table 5 for information on how often exchanges amend 
their fees.
    \487\ See Letter from Richard Steiner, Electronic Trading 
Strategist, RBC Capital Markets, to Brent Fields, Secretary, 
Commission (Oct. 16, 2018), available at https://www.sec.gov/comments/s7-05-18/s70518-4527261-176048.pdf (commenting on the 
transaction fee pilot).
    \488\ See Chester Spatt, Is Equity Market Exchange Structure 
Anti-Competitive?, (Dec. 28, 2020) (unpublished manuscript), 
available at https://www.cmu.edu/tepper/faculty-and-research/assets/docs/anti-competitive-rebates.pdf. However, not all exchanges offer 
volume-based tiers in their fee structures. For example, LTSE does 
not charge fees to transact and IEX does not offer volume based 
tiering. For exchanges like these, it is possible to determine with 
certainty the cost to transact prior to executing a trade.
    \489\ The Equity Data Plans disseminate SIP data over three 
separate networks: (1) Tape A for securities listed on the New York 
Stock Exchange (``NYSE''); (2) Tape B for securities listed on 
exchanges other than NYSE and Nasdaq; and (3) Tape C for securities 
listed on Nasdaq. These tapes are referred to as the ``consolidated 
tapes.'' The CTA Plan governs the collection, consolidation, 
processing, and dissemination of last sale information for Tape A 
and Tape B securities. The CQ Plan governs the collection, 
consolidation, processing, and dissemination of quotation 
information for Tape A and Tape B securities. Finally, the UTP Plan 
governs the collection, consolidation, processing, and dissemination 
of last sale and quotation information for Tape C securities. For 
details on exchange volume based fees and rebates, see, e.g., Add 
and Remove Rates, NASDAQ, available at https://www.nasdaqtrader.com/Trader.aspx?id=PriceListTrading2; New York Stock Exchange Price List 
2022, NYSE, available at https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Price_List.pdf; and Cboe U.S. Equities Fee 
Schedules EDGX Equities, Chi. Bd. Options Exch., available at 
https://www.cboe.com/us/equities/membership/fee_schedule/edgx/.
---------------------------------------------------------------------------

    Some information on average exchange fees and rebates is also 
available through reports available under rule 606. With respect to 
held orders, rule 606(a)(1) requires broker-dealers to produce 
quarterly public reports regarding their routing of non-directed orders 
\490\ in NMS stocks that are submitted on a held basis. Along with 
other information, these reports require the broker-dealer to report 
both the total dollar amount and per share average of net transaction 
fees paid and net transaction rebates received for different order 
types for each trading venue to which the broker-dealer reports routing 
orders.\491\ Additionally, rule 606(b)(3) requires broker-dealers to 
produce reports pertaining to order handling upon the request of a 
customer that places, directly or indirectly, one or more orders in NMS 
stocks that are submitted on a not held basis, subject to a de minimis 
exception.\492\ For each venue to which the broker-dealer routed the 
customer's orders, these reports require the broker-dealer to disclose, 
among other things, the average net execution rebate or fee for shares 
of orders providing liquidity and the average net execution rebate or 
fee for shares of order s removing liquidity.\493\ However, these 
reports only provide market participants with information on historical 
average transaction fees and rebates and may not accurately reflect the 
current exchange fees and rebates a market participate would encounter 
at the time of its transaction.\494\
---------------------------------------------------------------------------

    \490\ A ``non-directed order'' means any order from a customer 
other than a directed order. See 17 CFR 242.600(b)(56). A ``directed 
order'' means an order from a customer that the customer 
specifically instructed the broker or dealer to route to a 
particular venue for execution. See 17 CFR 242.600(b)(27).
    \491\ Rule 606(a)(1) requires broker-dealers to report separate 
information for market orders, marketable limit orders, non-
marketable limit order, and other orders. See 17 CFR 242.606(a)(1) 
for the items that need to be disclosed in reports under rule 
606(a)(1).
    \492\ See 17 CFR 242.606(b)(3). In addition, under rule 
606(b)(5)'s customer-level de minimis exception, broker-dealers need 
not provide upon request execution quality reports for customers 
that traded on average each month for the prior six months less than 
$1,000,000 of notional value of not held orders in NMS stocks 
through the broker-dealer. See 17 CFR 242.606(b)(5).
    \493\ See 17 CFR 242.606(b)(3)(iii) and (iv).
    \494\ Reports under rule 606(a)(1) are produced by broker-
dealers at the end of the quarter and disclose information on 
average fees and rebates for each month in that quarter. Reports 
issued by broker-dealers to their customers under rule 606(b)(3) 
disclose summarized information on the handling of the customer's 
orders for each calendar month over the prior six months. The 
broker-dealer must issue these reports to the customer within seven 
business days of receiving the customer's request.
---------------------------------------------------------------------------

    The fee structure on an exchange can take one of three forms. The 
most common is maker-taker, in which liquidity demanders (i.e., takers) 
are assessed the access fee and liquidity providers (i.e., makers) are 
offered a rebate. Exchanges can also be inverted (also known as taker-
maker), in which liquidity demanders are offered a rebate and liquidity 
providers are assessed an access fee. The last form of fee structure is 
flat; a flat exchange either charges one or both sides a fee but does 
not offer rebates. While the exchanges are free to subsidize rebates 
beyond what they earn through collecting access fees, in practice this 
does not appear to happen.\495\ The difference between the average 
access fee charged and the average rebate paid is the net capture 
earned by the exchanges for facilitating a transaction.
---------------------------------------------------------------------------

    \495\ See infra section V.D.1 for more discussion on why 
exchanges may not subsidize rebates from other sources of revenue. 
See also Eric Budish, et al., A Theory of Stock Exchange Competition 
and Innovation: Will the Market Fix the Market? (working paper May 
22, 2019) available at https://ssrn.com/abstract=3391008 (retrieved 
from SSRN Elsevier database).
---------------------------------------------------------------------------

    The regulatory access fee cap is most relevant for maker-taker 
markets where the trader accessing a protected quote must pay the 
access fee. This is because the access fee cap applies only to fees for 
accessing protected quotations and does not apply to fees for posting 
quotations. Therefore, on an inverted venue the exchange is not 
restricted by rule 610 in terms of the rebate that it can offer to 
access a protected quote or the fee to post a protected quote.\496\ 
Flat rate

[[Page 80311]]

venues, which do not offer rebates, do not appear to be economically 
constrained by rule 610(c) as their fees for both taking and adding 
liquidity are significantly lower than the 30 mil fee cap.
---------------------------------------------------------------------------

    \496\ As can be seen from Table 5, which presents information on 
access fees and rebates for the 16 operating exchanges, in practice 
the fee that is charged on an inverted fee venue to post liquidity 
is generally very close to the 30 mil access fee cap even though not 
constrained by rule 610.
---------------------------------------------------------------------------

    Table 5 provides an analysis of current fee and rebate schedules 
based on rule 19b-4 filings with the Commission for each of the equity 
exchanges operating in the United States as of June 1, 2022 as well as 
a review of the transaction prices that each exchange posts.\497\ What 
becomes apparent from this analysis is that the current structure of 
fees and rebates is complex and consistently changing. On average, each 
exchange filed 11.4 rule 19b-4 filings per year with the Commission. 
Market participants interacting with all exchanges had to adjust to an 
average of 155 fee changes per year across all exchanges. Exchanges 
also tend to have numerous fee and rebate categories. The effect of the 
30 mil fee cap as an anchor point is also apparent. For most exchanges 
the maximum fee assessed, presumably for non-protected quotes, is close 
to the 30 mil fee cap for protected quotes. The maximum rebate is 
generally in the vicinity of 30 mils, further suggesting the 30 mil 
access fee cap effectively limits what the exchanges offer as rebates.
---------------------------------------------------------------------------

    \497\ Panel A of Table 5 provides the category of exchange, 
maker-taker, inverted, or flat/free, the number of fee revisions 
since Jan. 2018 as indicated by the number of transaction fee 
specific rule 19b-4 filings that the exchange has filed with the 
Commission, the date that each exchange's website states that the 
fee schedule posted there is effective and the range of fees and 
rebates along with the number of categories of fees and rebates for 
transactions priced equal to, or greater than, $1.00 per share.
---------------------------------------------------------------------------

    Panel B provides information on the exchange's fee schedules for 
stocks priced lower than $1.00. For these transactions the fee 
schedules tend to be simpler. Most exchanges do not offer a rebate for 
transactions lower than $1.00 even if the exchange offers rebates for 
other transactions--only two exchanges offer any sort of baseline 
rebate.\498\ Additionally, the exchanges tend to charge the maximum 
access fee of 0.3% of the share price. A few exchanges charge a fee to 
both sides to transact with one exchange charging 0.3% to both sides of 
a transaction.
---------------------------------------------------------------------------

    \498\ The two are Cboe EDGX and Members MEMX.

                             Table 5--Summary of Transaction-Based Fee Schedules for U.S. National Equities Exchanges as of
                                                                      May 2022 \a\
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                              Panel A: Fees and Rebates for Transactions Greater than $1.00
--------------------------------------------------------------------------------------------------------------------------------------------------------
Exchange                                    Fee model....................  Number of revisions     Date of fee                 Fees              Rebates
                                                                            Jan 2018-June 2022        schedule           (number of           (number of
                                                                                    (per year)                          categories)          categories)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cboe BZX \b\..............................  Maker-Taker..................                   98        4/1/2022              $0.0030    [$0.0000-$0.0032]
                                                                                        (21.8)                                  (5)                 (11)
Cboe BYX \c\..............................  Inverted.....................                   42        5/2/2022    [$0.0010-$0.0030]    [$0.0000-$0.0015]
                                                                                         (9.3)                                 (10)                  (6)
Cboe EDGA \d\.............................  Inverted.....................                   26        4/1/2022    [$0.0008-$0.0030]    [$0.0000-$0.0024]
                                                                                         (5.8)                                 (12)                  (9)
Cboe EDGX \e\.............................  Maker-Taker..................                   71        5/2/2022    [$0.0000-$0.0030]    [$0.0000-$0.0032]
                                                                                        (15.8)                                  (7)                 (14)
BX \f\....................................  Inverted.....................                   45      10/12/2021    [$0.0010-$0.0030]    [$0.0000-$0.0021]
                                                                                        (10.0)                                  (9)                 (15)
Phlx (PSX) \g\............................  Maker-Taker..................                   48        1/2/2022              $0.0030    [$0.0005-$0.0020]
                                                                                        (10.7)                                  (1)                  (5)
Nasdaq \h\................................  Maker-Taker..................                   83       4/12/2022  [$0.0004-$-$0.0030]   [$0.0000-$0.00325]
                                                                                        (18.4)                                  (3)                  (7)
NYSE Arca \i\.............................  Maker-Taker..................                   77        5/1/2022    [$0.0000-$0.0030]    [$0.0000-$0.0032]
                                                                                        (17.1)                                 (15)                 (21)
NYSE American.............................  Maker-Taker..................                   11        5/1/2022    [$0.0010-$0.0030]    [$0.0020-$0.0030]
                                                                                         (2.4)                                  (9)                 (10)
NYSE......................................  Maker-Taker..................                   82        5/1/2022    [$0.0000-$0.0030]    [$0.0000-$0.0030]
                                                                                        (18.2)                                 (50)                 (69)
NYSE National.............................  Inverted.....................                   27        1/2/2022    [$0.0022-$0.0029]              $0.0000
                                                                                         (6.0)                                 (16)                  (1)
NYSE Chicago..............................  Maker-Taker..................                    7        5/1/2022    [$0.0010-$0.0010]              $0.0010
                                                                                         (1.6)                                  (5)                  (6)
IEX \j\...................................  Flat.........................                   19        4/1/2022    [$0.0006-$0.0010]              [$0.000
                                                                                         (4.2)                                  (2)                  (1)
Members MEMX \k\..........................  Maker-Taker..................                   NA        6/1/2022    [$0.0000-$0.0030]    [$0.0018-$0.0035]
                                                                                                                                (3)                  (4)
Miami MIAX \l\............................  Maker-Taker..................                   NA       9/24/2020              $0.0028    [$0.0022-$0.0028]
                                                                                                                                (1)                  (2)
Long Term LTSE \m\........................  Free.........................                   NA             N/A              $0.0000              $0.0000
                                                                                                                                (1)                  (1)
--------------------------------------------------------------------------------------------------------------------------------------------------------

 
 
----------------------------------------------------------------------------------------------------------------
                             Panel B: Fees and Rebates for Transactions Under $1.00
----------------------------------------------------------------------------------------------------------------
Exchange                           Fee model..........  Rebate.............          Fee  Charged
                                                                                          both sides
----------------------------------------------------------------------------------------------------------------
Cboe BZX.........................  Maker-Taker........  0..................         0.30
Cboe BYX.........................  Inverted...........  0..................         0.10
Cboe EDGA........................  Inverted...........  0..................         0.30
----------------------------------------------------------------------------------------------------------------

[[Page 80312]]

 
 
----------------------------------------------------------------------------------------------------------------
Exchange                           Fee model..........  Rebate.............          Fee  Charged
                                                                                          both sides
----------------------------------------------------------------------------------------------------------------
Cboe EDGX........................  Maker-Taker........  0.00009 (per share)         0.30
BX...............................  Inverted...........  0..................         0.30
Phlx (PSX).......................  Maker-Taker........  0..................         0.20
Nasdaq...........................  Maker-Taker........  0..................         0.30
NYSE Arca........................  Maker-Taker........  0..................         0.30
NYSE American....................  Maker-Taker........  0..................         0.25
NYSE.............................  Maker-Taker........  0..................         0.30
NYSE National....................  Inverted...........  0..................            0
NYSE Chicago.....................  Maker-Taker........  0..................         0.10  Yes.
IEX..............................  Flat...............  0..................         0.30  Yes.
Members MEMX.....................  Maker-Taker........  0.10% (of value)...         0.25
Miami (MIAX).....................  Maker-Taker........  0..................         0.30
Long Term (LTSE).................  Free...............  0..................         0.30
----------------------------------------------------------------------------------------------------------------
\a\ The number of fee revisions is obtained by counting each rule 19b-4 filing for each exchange that is not
  clearly marked for a non-transaction fee related purpose such as connectivity fees, listing fees, options
  fees, etc. To determine the fee and rebate information each exchange's webpage was searched for its current
  posted access fee and rebate schedule and collected information only on access fees and rebates pertaining to
  non-auction trading in stocks priced equal to, or greater than, $1.00 per share. Sources for Current Access
  Fee Data were effective on the dates shown in Panel A of Table 5, and were accessed during May 2022 at the
  websites shown beneath the table.
\b\ https://www.cboe.com/us/equities/membership/fee_schedule/bzx/.
\c\ https://www.cboe.com/us/equities/membership/fee_schedule/byx/.
\d\ https://www.cboe.com/us/equities/membership/fee_schedule/edga/.
\e\ https://www.cboe.com/us/equities/membership/fee_schedule/edgx/.
\f\ https://listingcenter.nasdaq.com/rulebook/bx/rules/BX%20Equity%207.
\g\ https://listingcenter.nasdaq.com/rulebook/phlx/rules/phlx-equity-7.
\h\ https://listingcenter.nasdaq.com/rulebook/nasdaq/rules/Nasdaq%20Equity%207.
\i\ All NYSE Exchange Family fees: https://www.nyse.com/markets/fees.
\j\ https://exchange.iex.io/resources/trading/fee-schedule/.
\k\ https://info.memxtrading.com/fee-schedule/.
\l\ https://www.miaxoptions.com/sites/default/files/alert-files/MIAX_PEARL_Equities__Initial_FS_09242020.pdf.
\m\ https://ltse.com/trading/faqs.

    Complex fee schedules and volume based tiers mean that it is 
difficult to determine the net capture on a given exchange (the 
difference between average fees levied and rebates paid). Additionally, 
financial statements for exchange groups generally do not break down 
performance on a per venue level and they generally combine auction 
access fees collected with regular trading access fees. Furthermore, 
some exchanges are privately held and thus do not release the same 
financial statements that public exchanges do. Using information from 
the financial statements of the three major exchange groups which 
collectively account for the overwhelming majority of trading volume on 
exchanges, the Commission estimates that the average total net capture 
is around 4 mils for all trading types.\499\ However, the Commission 
understands based on Staff conversations with industry members that the 
net capture for non-auction trading in stocks that have a price equal 
to or greater than $1.00 is likely close to 2 mils, and in further 
analysis where the net capture needs to be assumed, we use 2 mils. This 
analysis suggests that the primary reason that access fees remain near 
30 mils on most exchanges is to fund rebates. For stocks trading below 
$1.00 the Commission estimates an average net capture of around 0.28% 
of the transaction volume.\500\ This amount is very close to the 0.30% 
access fee cap and arises because, as seen in Panel B of Table 5, most 
exchanges set their baseline fee at 0.30% but do not offer baseline 
rebates for transactions under $1.00 and some charge fees to both sides 
of the transaction leading to more than 0.30% per trade earned by the 
exchange.
---------------------------------------------------------------------------

    \499\ Intercontinental Exchange, the parent firm of NYSE, 
reports on page 51 of its 2021 Form 10-K filing that their net 
capture for U.S. equity transactions was approximately 4.2 mils in 
2021. Nasdaq did not report its net capture in its Form 10-K filing, 
however Nasdaq provides information on its investor relations web 
page which, when we average the relevant 2021 volumes, indicates 
that the average net capture across all Nasdaq platforms for U.S. 
equity transactions was 5.9 mils (see Nasdaq 2022/2021 Monthly 
Volumes, NASDAQ, available at https://ir.nasdaq.com/static-files/465d2157-c476-4546-a9f7-8d7ad0c9be77). Cboe reports in its Form 10-K 
filing that its net capture for U.S. equity transactions was 
approximately 2 mils.
    \500\ The estimate for the 0.28% net capture is obtained by 
taking the estimated net transaction fee for each exchange and 
multiplying it by the dollar trading volume presented in Panel B of 
Table 6 below.
---------------------------------------------------------------------------

    Table 6 presents tabulations of the total share (Panel A) and 
dollar (Panel B) trading volume executed on the 16 exchanges in the 
first six months of 2022. This table provides estimates for the total 
volume that executed below $1.00 and that which executed above $1.00. 
These numbers represent an estimate of the total number of shares that 
would have been subject to the access fees and rebates discussed in 
this release.

          Table 6--Trading Volume by Exchange, Exchange Type, and Exchange Group Jan. to June 2022 \a\
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
                                              Panel A: Share Volume
----------------------------------------------------------------------------------------------------------------
Exchange name                   Exchange type...      <$1 Volume     >=$1 Volume     >=$1 Volume            % of
                                                      (billions)           tick-       non-tick-        exchange
                                                                     constrained     constrained          volume
                                                                      (billions)      (billions)
----------------------------------------------------------------------------------------------------------------
Off Exchange..................  ................            67.6           258.1           296.6  ..............
Nasdaq........................  Maker-Taker.....            13.3           111.8           169.2            26.5
----------------------------------------------------------------------------------------------------------------

[[Page 80313]]

     Table 6--Trading Volume by Exchange, Exchange Type, and Exchange Group Jan. to June 2022 \a\--Continued
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Exchange name                   Exchange type...      <$1 Volume     >=$1 Volume     >=$1 Volume            % of
                                                      (billions)           tick-       non-tick-        exchange
                                                                     constrained     constrained          volume
                                                                      (billions)      (billions)
----------------------------------------------------------------------------------------------------------------
NYSE Arca.....................  Maker-Taker.....             8.7            62.2            53.5            14.1
NYSE..........................  Maker-Taker.....             1.2            48.8            54.9            12.9
Cboe BZX......................  Maker-Taker.....             2.8            45.3            38.3            10.6
EDGX..........................  Maker-Taker.....             7.1            38.8            40.7            10.3
MEMX..........................  Maker-Taker.....             1.9            36.8            22.9             7.6
IEX...........................  Flat............             0.5            14.7            26.0             5.2
EDGA..........................  Inverted........             0.7            13.1             9.6             2.9
Cboe BYX......................  Inverted........             0.7            14.1            6,.5             2.6
MIAX Pearl....................  Maker-Taker.....             0.4            10.6             4.0             1.9
NYSE National.................  Inverted........             0.2            10.9             3.0             1.8
Nasdaq OMX PSX................  Maker-Taker.....            0.08             9.3             3.9             1.6
Nasdaq OMX BX.................  Inverted........             0.2             4.2             4.1             1.0
NYSE American.................  Maker-Taker.....             0.7             3.8             2.5             0.9
NYSE Chicago..................  Maker-Taker.....            0.02             0.5             1.9             0.1
LTSE..........................  Free............           0.002           0.003            0.01             0.0
                                                 ---------------------------------------------------------------
    Total.....................  ................           106.0           683.1           737.6  ..............
    Exchange Total............  ................            38.4           425.1           441.0  ..............
----------------------------------------------------------------------------------------------------------------
                                             Panel B: Dollar Volume
----------------------------------------------------------------------------------------------------------------
Exchange name                   Exchange type...      <$1 Volume     >=$1 Volume  >=$1 Non-tick-            % of
                                                      (billions)           tick-     constrained        exchange
                                                                     constrained      (billions)          volume
                                                                      (billions)
----------------------------------------------------------------------------------------------------------------
Off Exchange..................  ................           $31.5        $5,947.1       $23,715.1  ..............
Nasdaq........................  Maker-Taker.....             6.6         2,896.6        15,518.6            30.2
NYSE Arca.....................  Maker-Taker.....             4.0         1,953.9         5,274.7            15.1
NYSE..........................  Maker-Taker.....             0.6         1,080.5         4,034.4            11.5
Cboe BZX......................  Maker-Taker.....             1.2         1,278.2         3,807.3            11.3
EDGX..........................  Maker-Taker.....             3.5           857.5         3,213.9             8.9
MEMX..........................  Maker-Taker.....             1.0           841.3         1,588.8             5.5
IEX...........................  Flat............             0.2           387.7         2,356.1             6.3
EDGA..........................  Inverted........             0.4           373.0           802.4             2.7
Cboe BYX......................  Inverted........             0.4           319.8           626.2             2.1
MIAX Pearl....................  Maker-Taker.....             0.2           285.2           424.8             1.6
NYSE National.................  Inverted........            0.09           280.4           209.4             1.1
Nasdaq OMX PSX................  Maker-Taker.....            0.04           270.7           411.5             1.5
Nasdaq OMX BX.................  Inverted........            0.09           139.1           438.9             1.3
NYSE American.................  Maker-Taker.....             0.3            90.0           222.9             0.7
NYSE Chicago..................  Maker-Taker.....            0.01            20.3           351.5             0.3
LTSE..........................  Free............           0.001             0.1             1.0             0.0
                                                 ---------------------------------------------------------------
    Total.....................  ................            50.1        17,021.7        62,997.5  ..............
    Exchange Total............  ................            18.6        11,074.6        39,282.4  ..............
----------------------------------------------------------------------------------------------------------------
\a\ This table is created by aggregating all trade information from the TAQ database for every trading day in
  Jan. to June 2022. Only trading volume reflecting normal trades during regular trading. Normal trades are
  identified in TAQ data by sale conditions ``blank, @, E, F, I, S, Y'' which correspond to regular trades,
  intermarket sweep orders, odd lot trades, split trades, and yellow flag regular trades. We aggregate total
  remaining share volume by exchange, exchange type (maker-taker, inverted, flat, free), and exchange family
  (NYSE, Nasdaq, CBOE, Independent). We combine volume from exchange codes T and Q into `Nasdaq.' Panel A
  presents share volume totals and Panel B presents dollar volume totals. Certain items in this Table 6 may also
  be affected by the MDI Rules once they are fully implemented. See Table 3 note b.

    Transaction fees for trades in stocks priced equal to or greater 
than $1.00 are generally levied per share transacted. From Table 6 we 
see that in the first half of 2022, there were approximately 1.4 
trillion shares transacted at prices equal to or greater than $1.00 per 
share across all venues, 59% of which (866 billion shares) were 
executed on a registered exchange.\501\ Of these on-exchange 
transactions priced equal to or greater than $1.00 per share, 
approximately half were in tick-constrained securities while the other 
half were not. These numbers provide the basis for estimating the total 
amount of access fees and rebates collected and distributed in 
transactions priced equal to, or greater than, $1.00 per share. For 
transactions less than $1.00 per share the access fee is generally 
levied as a percent of the transaction share price. In Panel B we see 
that in the first half of 2022 there was approximately $18 billion 
transacted on exchanges in shares priced less than $1.00 per share.
---------------------------------------------------------------------------

    \501\ 1.4T shares 683 billion tick-constrained shares + 737 
billion non-tick-constrained shares. Also, off exchange trading 
volume has increased in recent years. See, e.g., Jonathan Brogaard 
and Jing Pan, Dark Pool Trading and Information Acquisition, 35 Rev. 
Fin. Studies 2625 (2022).
---------------------------------------------------------------------------

    Panels A and B of Table 7 break down the share and dollar volume 
statistics presented in Table 5 by venue type: maker-taker, inverted, 
and flat/free. The overwhelming majority of both dollar and share 
exchange trading volume occurs on maker-taker venues with approximately 
88% of both dollar and share volume executing on maker-taker

[[Page 80314]]

venues. Inverted exchanges capture about 6% of both dollar and share 
volume, and the remaining share volume transact on flat/free exchanges.

        Table 7--Volume by Exchange Type and Estimated Access Fee/Rebate Estimates Jan. to June 2022 \a\
----------------------------------------------------------------------------------------------------------------
                                                          Price >$1 tick-     Price >$1 non-
                                          Price <$1         constrained     tick- constrained       % Total
                                          (billions)         (billions)         (billions)
----------------------------------------------------------------------------------------------------------------
                                  Panel A: Exchange Share Volume By Venue Type
----------------------------------------------------------------------------------------------------------------
Maker-Taker.........................               35.5              364.1              389.3               88.7
Inverted............................                1.9               38.4               18.9                6.6
Flat/Free...........................                0.5               14.7               26.1                4.6
----------------------------------------------------------------------------------------------------------------
                                  Panel B: Exchange Dollar Volume by Venue Type
----------------------------------------------------------------------------------------------------------------
Maker-Taker.........................               17.1            9,484.4           34,625.4               88.4
Inverted............................                1.0              986.1            2,036.9                6.1
Flat/Free...........................                0.2              387.8            2,357.1                5.5
----------------------------------------------------------------------------------------------------------------
                      Panel C: Estimated Fees Collected and Rebates Distributed (Billions)
----------------------------------------------------------------------------------------------------------------
Fees Collected......................  .................              $2.55  .................  .................
Rebates Distributed.................  .................               2.31  .................  .................
Exchange Capture....................  .................               0.24  .................  .................
----------------------------------------------------------------------------------------------------------------
                         Panel D: Total Estimated Net Fees by Liquidity Type (Billions)
----------------------------------------------------------------------------------------------------------------
Demander............................  .................              $2.13  .................  .................
Provider............................  .................              -1.89  .................  .................
Exchange Capture....................  .................               0.24  .................  .................
----------------------------------------------------------------------------------------------------------------
\a\ Certain items in this Table 7 may also be affected by the amendments in the MDI Rules once they are fully
  implemented. See Table 3 note b.

    Panel C provides an estimate of the total amount of access fees 
collected and rebates distributed.\502\ In the first 6 months of 2022 
there were an estimated $2.55 billion in access fees collected across 
all exchanges and $2.31 billion in rebates distributed, resulting in a 
net capture to all exchanges of $242 million.
---------------------------------------------------------------------------

    \502\ These estimates are computed by assuming a 30 mil access 
fee and 28 mil rebate on all transactions that occur on maker-taker 
or inverted exchanges and an 8 mil access fee (and no rebate) on the 
volume priced equal to, or greater than, $1.00 per share that occurs 
on IEX. For trading in sub $1.00 transactions, the various access 
fees and rebates for each exchange presented in Panel B of Table 5 
are multiplied by the corresponding dollar volume of trade in 
transactions priced less than $1.00 per share to compute the total 
access fees collected and rebates distributed for this volume. The 
figures are summed together to provide the estimates of total access 
fees collected and rebates distributed.
---------------------------------------------------------------------------

    Panel D of Table 7 provides estimates of the net access fee paid by 
liquidity demanders and liquidity suppliers.\503\ In the first 6 months 
of 2022 liquidity demanders paid an estimated $2.1 billion in net 
access fees and liquidity providers received an estimated $1.89 billion 
in rebates. With the difference of $242 million being the exchanges' 
estimated net capture.
---------------------------------------------------------------------------

    \503\ This estimate presumes that for shares transacted in 
prices equal to or greater than $1.00 per share on maker-taker 
venues the liquidity demander pays a 30 mil access fee and the 
liquidity provider receives a 28 mil rebate. On inverted exchanges 
the opposite occurs. On IEX it is presumed that liquidity demanders 
pay an 8 mil access fee and liquidity providers receive no rebate. 
For trading in sub $1.00 transactions the various access fees and 
rebates for liquidity suppliers and demanders are computed by taking 
the respective fees and rebates for sub $1.00 transactions for each 
exchange presented in Panel B of Table 5 and multiplying them by the 
corresponding dollar volume of trade in transactions priced less 
than $1.00 to compute the total access fees collected and rebates 
distributed for liquidity-providing and demanding trades. The 
figures are summed together to provide the estimates of total access 
fees collected and rebates distributed.
---------------------------------------------------------------------------

    Although not subject to rule 610(c), because they do not post 
protected quotes, ATSs also often assess transaction fees.\504\ As of 
the second quarter of 2022 there were 32 ATSs that reported trading 
volume to FINRA transacting a total of 81 billion shares.\505\ Unlike 
exchanges, the fees that ATSs charge generally do not have a standard 
structure and are often negotiated between the ATS and the customer. 
Based on a review of item 19 in form ATS-N, ATSs generally do not 
provide rebates, and when transaction fees are explicitly discussed, 
they are often in the range of 10 mils.
---------------------------------------------------------------------------

    \504\ IntelligentCross ATS, for example, offers matching 
processes for all NMS stocks eligible for trading, and disseminates 
bids and offers in real-time to subscribers to the ATS's proprietary 
data feed, but these are not protected quotes. See IntelligentCross, 
Form ATS-N, Item 15 (Display) (dated Apr. 11, 2022) available at 
https://www.sec.gov/Archives/edgar/data/1708826/000170882622000002/xslATS-N_X01/primary_doc.xml.
    \505\ See ATS Transparency Data Quarterly Statistics, available 
at https://www.finra.org/filing-reporting/otc-transparency/ats-quarterly-statistics.
---------------------------------------------------------------------------

3. Round Lots and Market Data Infrastructure
    Currently, information on odd-lots inside the NBBO is only 
available to investors who subscribe to proprietary data feeds, and 
comprehensive odd-lot information is only available to market 
participants who subscribe to the proprietary data feeds of all the 
exchanges.\506\ The implementation of the MDI Rules will include odd-
lot information inside the NBBO.\507\ The MDI Rules will also change 
the definition of a round lot. Specifically, the MDI Rules will lower 
the round lot size to 40 shares for stocks priced greater than $250 and 
less than $1,000. The round lot definition will become 10 shares for 
stocks priced greater than $1,000 and less than $10,000. The round lot 
definition will become 1 share for stocks priced greater than $10,000.
---------------------------------------------------------------------------

    \506\ See supra note 371 and accompanying text for a discussion 
of a current request for comment by the exclusive SIPs about the 
potential to amend the plans to include some odd-lot information in 
the SIP data.
    \507\ See supra section IV.A.1 for a discussion on the expected 
time of the implementation of the MDI Rules.

---------------------------------------------------------------------------

[[Page 80315]]

    When adopting the MDI Rules, the Commission enumerated numerous 
economic effects specifically related to changing the round lot 
definition and including odd-lot information as a part of core data. 
For the change in the definition of round lots, these effects include: 
(1) a mechanically tighter NBBO for higher priced stocks due to the 
redefinition of the round lot sizes,\508\ (2) increased transparency 
and better order execution,\509\ and (3) potentially more orders for 
high priced stocks being routed to exchanges instead of ATSs.\510\ The 
costs of changing the round lot definition are also discussed and 
include upgrading systems to account for additional message traffic and 
modifying and reprogramming systems.\511\ The Commission also discussed 
the expected effect that changing the round lot definition would have 
on other rules and regulations.\512\
---------------------------------------------------------------------------

    \508\ See MDI Adopting Release, supra note 5, section 
V.C.1.(b).(i) for the full discussion of the effect of changing the 
round lot size on the NBBO.
    \509\ See MDI Adopting Release, supra note 5, sections 
V.C.1.b.(ii) and V.C.i.b.(iii) for the full discussion of the effect 
of changing the round lot size on transparency and execution 
quality.
    \510\ See MDI Adopting Release, supra note 5, section 
V.C.1.b.(iv) for the full discussion of the effect of changing the 
round lot size on exchange competition and order routing.
    \511\ See MDI Adopting Release, supra note 5, section 
V.C.1.b.(vi) for the full discussion of the expected costs of 
changing the round lot size.
    \512\ See MDI Adopting Release, supra note 5, section 
V.C.1.b.(vii) for the full discussion of the effect of changing the 
round lot size on other rules and regulations.
---------------------------------------------------------------------------

    For the inclusion of odd-lot information inside the NBBO to core 
data,\513\ these effects include reducing information asymmetries 
between investors who currently have access to odd-lot information 
through proprietary data feeds and those who do not, leading to better 
order execution and price efficiency.\514\ Providing a reasonable 
alternative to some market participants to proprietary data will allow 
some market participants to reduce data expenses required for 
trading.\515\ The costs of including odd-lot information inside the 
NBBO include: \516\ the cost of upgrading existing infrastructure and 
software to handle the dissemination of additional core data message 
traffic, the cost to SROs to implement system changes required in order 
to make regulatory data and other data needed to generate consolidated 
market data available to competing consolidators, the cost of 
technological investments market participants might have to make in 
order to receive the new core message traffic, and lastly, the cost to 
users of proprietary data whose information advantage would dissipate 
somewhat.\517\
---------------------------------------------------------------------------

    \513\ See MDI Adopting Release, supra note 5, section 
V.C.1.c.(i) for the full discussion of the effect of including odd-
lot information inside the NBBO in its definition of core data.
    \514\ Id.
    \515\ Id.
    \516\ See MDI Adopting Release, supra note 5, sections 
V.C.1.c.(iv), for the full discussion of the costs associated with 
expanding core data to include odd-lot information inside the NBBO.
    \517\ Id.
---------------------------------------------------------------------------

    The MDI Rules do not require the competing consolidators to 
disseminate odd-lot information. However, the Commission estimated that 
at least one competing consolidator will disseminate the odd-lot 
information because it believed that there will be demand for the 
data.\518\
---------------------------------------------------------------------------

    \518\ See MDI Adopting Release, supra note 5, at footnote 1945 
and surrounding text.
---------------------------------------------------------------------------

4. Affected Entities and Markets
    The proposal would affect trading in NMS Stocks, particularly on 
exchanges that charge high access fees and in stocks with lower quoted 
spreads, many odd-lots inside the spread, or higher prices. Therefore, 
the proposal would affect a wide variety of market participants, 
including national securities exchanges, other trading venues, 
exclusive SIPs and their data users, competing consolidators 
(eventually), broker-dealers operating order entry and order routing 
systems, and others who engage in the trading of NMS Stocks, including 
investors.
    There are 16 national securities exchanges on which NMS Stocks are 
traded that would be affected by the proposal. The exchanges compete 
with each other and other trading venues to attract order flow. 
Exchanges compete with each other in how they set the rules that 
dictate how orders routed to it interact given the broader requirements 
of the Exchange Act and rules thereunder. Such rules are coded into the 
systems of exchanges that match buy and sell orders. Exchanges also 
differentiate themselves with the access fees they charge or the 
rebates they pay out for particular order types.\519\ As a subset of 
national securities exchanges, the five listing exchanges, set rules 
for listing standards for securities and are responsible for tracking 
certain regulatory information regarding their listed stocks.
---------------------------------------------------------------------------

    \519\ Exchanges can also facilitate the routing of orders to 
other exchanges.
---------------------------------------------------------------------------

    Other trading venues, including 33 ATSs and 238 other FINRA 
members, including OTC market makers, also compete with exchanges and 
each other to attract order flow in NMS Stocks and can route orders to 
the various trading venues. The order flow they attract depends on a 
number of factors such as fees and price improvement over the NBBO 
amongst other aspects of execution quality.
    Pending the full implementation of the MDI rules, the market for 
market data is serviced by the two exclusive SIPs and exchange 
proprietary feeds. The two exclusive SIPs collect trade, quote, and 
regulatory data from the 16 exchanges and three trade reporting 
facilities,\520\ consolidate those data, determine an NBBO, and 
disseminate those data directly to users or through vendors and broker-
dealers. The exclusive SIPs can also collect information from the 
alternative display facility (``ADF'') operated by FINRA though no one 
currently uses the ADF to display quotes. Upon full implementation of 
the MDI Rules, the exclusive SIPs will be retired and an unknown number 
of competing consolidators will take over the collection, 
consolidation, estimation, and dissemination. The volume of data to be 
processed through these competing consolidators will be greater than 
that currently processed through exclusive SIPs, but competing 
consolidators will have flexibility to design data products tailored to 
different user types. In addition to the exclusive SIPs, the exchanges 
also disseminate market data to paying subscribers via proprietary data 
feeds. These proprietary data feeds provide more data than the 
exclusive SIPs at a lower latency.\521\ Following the transition to a 
competing consolidator model for market data, the Commission expects 
total fees for market data are likely to decline.\522\
---------------------------------------------------------------------------

    \520\ Trade Reporting Facilities (TRFs) are facilities through 
which FINRA members report off-exchange transactions in NMS stocks, 
as defined in SEC Rule 600(b)(47) of Regulation NMS.
    \521\ See supra note 330 and infra note 612 and associated text 
for a further discussion on the nature of proprietary data feeds.
    \522\ See MDI Adopting Release, supra note 5, at 18773-64.
---------------------------------------------------------------------------

    Broker-dealers typically route their own orders or their customers' 
orders for execution to trading venues. There were 3,564 registered 
broker-dealers as of the end of calendar year 2021. A portion of these 
broker-dealers focus their business on individual and/or institutional 
investors in the market for NMS stocks.\523\ According to CAT data,

[[Page 80316]]

there were approximately 1,037 broker-dealers that originated NMS 
stocks orders on behalf of individual investors and approximately 909 
broker-dealers originated NMS stocks orders on behalf of institutional 
investors.\524\ Institutional investor orders are typically ``not 
held'' orders, which provides the broker-dealer with more time and 
price discretion to execute the order or to minimize price impact.\525\ 
In contrast, broker-dealers must attempt to execute a marketable held 
order immediately, which typically better suits individual investors 
who tend to seek immediate executions and rely less on broker-dealer 
order handling discretion since their orders typically have much lower 
price impacts.\526\ Brokers-dealers serving individual investors often 
distinguish themselves by the customer service and financial advice 
they provide and the accessibility and functionality of their trading 
platforms.
---------------------------------------------------------------------------

    \523\ Based on information from broker-dealers' 2021 FOCUS 
Report Form X-17A-5 Schedule I. This includes both carrying broker-
dealers, who maintain custody of customer funds and securities, and 
introducing broker-dealers, who accept customer orders and introduce 
their customers to a carrying broker-dealer that will hold the 
customers' securities and cash.
    \524\ Customer accounts are identified in CAT as accounts 
belonging to either the ``Institutional Customer'' account type, 
defined as accounts that meet the definition in FINRA Rule 4512(c), 
or the ``Individual Customer'' account holder type, defined as 
accounts that do not meet the definition of FINRA Rule 4512(c) and 
are also not a proprietary account.
    \525\ See Disclosure of Order Handling Information, supra note 4 
at nn.59-60 and corresponding text. Meanwhile, a broker-dealer must 
attempt to execute a held order immediately, which typically better 
suits individual investors who seek immediate executions and rely 
less on broker-dealer order handling discretion.
    \526\ FINRA's best execution obligation requires that, ``A 
member must make every effort to execute a marketable customer order 
that it receives fully and promptly.'' See FINRA Rule 5310, 
Supplementary Material paragraph .01.
---------------------------------------------------------------------------

    Many broker-dealers that handle customer accounts do not directly 
access national securities exchanges or ATSs for their orders and rely 
on other broker-dealers to facilitate market access for them through 
those broker-dealers' order entry systems. The Commission estimates 
that there are 1,192 broker-dealers with order entry systems that 
submit orders in NMS stocks to exchanges in the minimum pricing 
increments.\527\ Of these broker-dealers, an estimated 282 broker-
dealers operate smart order routers to facilitate order routing.
---------------------------------------------------------------------------

    \527\ See infra note 625.
---------------------------------------------------------------------------

D. Economic Effects

    The Commission expects the proposal to lead to lower transaction 
costs for liquidity demanders on exchanges trading in stocks with 
narrow spreads. The proposal for a minimum increment to trading would 
improve exchanges' and ATSs' abilities to potentially innovate in ways 
that could potentially increase competition for retail order flow. A 
lower access fee cap would reduce the transaction costs of liquidity 
demanders in the predominant maker-taker structure. Making fees and 
rebates determinable at the time of trade may enhance broker-dealer 
order routing by helping mitigate a potential conflict of interest and 
providing clarity in terms of all in execution costs. Accelerating the 
inclusion of odd-lot information into the exclusive SIPs, updating the 
definition of a round lot, and providing the best odd-lot order, would 
accelerate some of the benefits of the MDI Rules, and could also lead 
to better order-execution by enhancing benchmarking. The proposed rule 
would also impose compliance costs on various market participants.
1. Modification of Rule 612 To Create a Tiered Tick Structure
    The proposal would create a smaller tick size for some NMS stocks. 
A smaller tick, as proposed, would have two competing effects on 
transaction costs. First, a smaller tick leads to pricing that more 
effectively balances liquidity supply and demand--which, all else 
equal, can lower transaction costs. Second, a smaller tick fragments 
liquidity in the order book into more price levels, which can increase 
complexity and the incidence of pennying \528\--which could harm 
liquidity. The primary mechanism by which a smaller tick would lead to 
improved market quality is by reducing the tick size constraints that 
prevent spreads from narrowing. The proposal would not change the tick 
for NMS stocks when their prices drop below $1.00 or for stocks with 
Time-Weighted Average Quoted Spread greater than $0.04 during an 
evaluation month. The Commission expects that the trading environment 
for stocks with these characteristics is unlikely to be significantly 
affected.\529\
---------------------------------------------------------------------------

    \528\ See supra note 459 for the definition of pennying.
    \529\ It is possible that changes in the stocks priced greater 
than $1.00 with quoted spreads of less than $0.04 could have spill-
over effects in these stocks, but the net effect of such is 
uncertain and likely insignificant. For instance, tighter spreads in 
stocks receiving a tick size reduction could potentially result in 
the withdrawal of some liquidity providers from all markets (which 
would harm liquidity in stocks with no tick size adjustment) and/or 
lead some liquidity providers to shift their activity to stocks with 
no tick size adjustment (improving liquidity in those stocks).
---------------------------------------------------------------------------

    The proposal assigns each NMS stock priced equal to, or greater 
than, $1.00 to one of 4 tick sizes: $0.001, $0.002, $0.005, and $0.01 
depending on the stock's Time-Weighted Average Quoted Spread during an 
evaluation month. Table 8 presents estimates of the amount of share 
trading volume that would have been associated with each of the four 
tick sizes.

                               Table 8--Proposed Tick Sizes and Quoted Spread \a\
----------------------------------------------------------------------------------------------------------------
                                                                     Number of      Estimated %     Estimated %
             Average quoted spread                     Tick           stocks       share volume    dollar volume
----------------------------------------------------------------------------------------------------------------
Spread <=$0.016................................   $0.001, 0.002            1,707            64.0            37.9
$0.016 https://www.nasdaq.com/articles/looking-for-the-perfect-stock-price-2019-09-19.
---------------------------------------------------------------------------

    All else equal, reducing the tick size could narrow the spread. In 
a competitive market, and in the absence of rebates or other price 
distortions, the prevailing bid or ask price would be the feasible 
price equal to just worse than the price that equates liquidity supply 
and demand--as any price better than this would lead to an excess of 
liquidity demand which would induce more liquidity providers. This tick 
size effect diminishes as spreads widen. As a conceptual example, 
consider a stock that, should the tick size be $0.0005, would trade at 
an ask of $10.0065 and a bid of $10.0045. If the minimum tick were at a 
penny, absent other effects, it is reasonable to believe that the ask 
would be $10.01 and the bid $10.00. In contrast, were the tick size to 
be $0.001, it would be feasible to have an ask of $10.007 and a bid of 
$10.004. Rather than $0.01, the spread would be $0.003. In this 
conceptual example that abstracts from other effects described below, 
the stock would receive a 70% reduction in its quoted spread if the 
tick size decreased from $0.01 to $0.001.
    As spreads widen, tick-size-induced distortions attenuate. To see 
this, consider the same example above, but two orders of magnitude 
larger where the prices that equate liquidity supply and demand are an 
ask price of $1000.65 and a bid price of $1000.45. In the current one-
cent tick regime, the prevailing ask and bid would equal the spread 
that equates liquidity supply and demand and there would be no tick-
size induced distortion. Consequently, reducing the tick size could 
have a significant effect for stocks with narrow spreads, and this 
effect may attenuate as the stock's spread widens. A risk of a smaller 
tick is that it spreads liquidity over more price levels, which may 
potentially create adverse effects--particularly for larger orders.
    Additionally, a smaller tick could increase the incidence of 
pennying, which occurs when limit order providers get to the front of 
the queue by providing economically trivial price improvement, and 
could reduce the importance of time priority. The risk of being pennied 
could discourage liquidity provision, particularly by market 
participants that are slower to respond to changes in market 
conditions, and could increase trading costs for these investors.\532\ 
To compensate for additional costs associated with a fragmented order 
book, liquidity providers may post less aggressive quotes leading to 
worse market quality. The reduction in the importance of time priority 
would lower the risk of sniping and increase the opportunity for slower 
traders (non-high-frequency traders) to fill orders using liquidity-
providing instead of liquidity-demanding transactions.\533\ This could 
reduce adverse selection costs for these traders, countering the 
effects of pennying.
---------------------------------------------------------------------------

    \532\ See Dyhrberg, et al., supra note 454, studying the effects 
of imposing a tick size on a crypto exchange that previously did not 
have a tick size. The authors report an improvement in market 
quality due largely to a reduction in pennying behavior.
    \533\ See supra note 478 and related text.
---------------------------------------------------------------------------

    In contrast to the pricing effect discussed above, the pennying 
effect would be most pronounced for stocks with wide spreads because 
there are more intra-spread price levels and the cost of gaining 
priority over other liquidity providers, by updating the best price by 
a single tick, is lower.\534\ For example, a stock with a spread of one 
cent, and a $0.001 tick, would have 10 price levels within the spread, 
whereas a stock with a $0.10 spread would have 100. Because price has 
first priority in order execution, a primary way to gain priority for a 
trader providing liquidity is to price-improve over existing orders. 
Without a small tick size relative to the spread, getting to the front 
of the queue via price improvement would be more costly, requiring 
larger relative price concessions.\535\
---------------------------------------------------------------------------

    \534\ The pennying effect would be particularly acute for wide 
spread stocks with lower stock prices because a lower stock price 
reduces the amount of capital needed to supply a round-lot quote and 
hence make pennying less capital intensive.
    \535\ For example, if a stock has a spread of one cent and a 
$0.001 tick, gaining priority through price improvement would 
require narrowing the half-spread (i.e., the distance between the 
current quote and the midpoint) by 20%. If instead a stock has a 
spread of $0.10 with a $0.001 tick, a market participant would only 
need to improve the half spread by 2% to get to the front of the 
queue.

---------------------------------------------------------------------------

[[Page 80318]]

    In the presence of an NBBO and a differentiation between pricing 
feeds that disseminate top of book versus depth of book data, there may 
be informational consequences of a change in the tick size. As 
mentioned above, fragmenting of the order book reduces the displayed 
liquidity at the NBBO. This would temporarily reduce the information 
about liquidity available in the market for market participants who do 
not receive depth of book information from proprietary data feeds. 
Having less information about available liquidity could make it more 
difficult, more complex, and more expensive to locate shares for larger 
trades and to manage liquidity provision strategies.\536\
---------------------------------------------------------------------------

    \536\ However, the inclusion of odd lot information helps to 
mitigate this effect, and the eventual inclusion of depth of book 
information in consolidated market data due to the implementation of 
the MDI rules would render this effect temporary. At that point in 
time, consolidated market data is expected to contain depth 
information at many more price points, which would largely 
counteract the effects of a reduction in displayed depth from a 
reduction in tick size.
---------------------------------------------------------------------------

    For those who do not currently receive depth of book data or those 
who would otherwise not purchase depth of book data from competing 
consolidators, the proposal could increase the demand to purchase depth 
of book data. Before the full implementation of the MDI Rules, this 
could result in more market participants purchasing data from exchange 
depth of book proprietary data feeds than do currently. Afterward, this 
could result in more market participants purchasing depth of book data 
from either competing consolidators or exchanges than in the absence of 
the proposal.
    The expectation that a smaller tick size would lead to tighter 
spreads for stocks that currently have narrow spreads finds empirical 
support. The academic literature examining the effect of tick sizes on 
financial markets largely studies two events: decimalization, which 
occurred in 2001 \537\ and reduced the tick from 1/16th ($0.0625) to 
$0.01; and the TSP which ran from October 2016 to October 2018 and 
temporarily increased the minimum tick increment to $0.05 for a sample 
of small cap stocks.\538\ Most of the literature surrounding 
decimalization suggests that, on average, decimalization was associated 
with a decline in spreads consistent with the notion that, on average, 
and during this time period, lowering the tick relieved distortions 
related to having a tick size that is too wide.\539\ Industry studies 
show examples of reverse splits leading to large reductions in spreads 
and hence trading costs.\540\ When a stock undergoes a reverse split 
its share price goes up, the current penny tick is lower as a fraction 
of the share price, implying that in economic terms, the stock could go 
from being tick-constrained to non-tick-constrained.
---------------------------------------------------------------------------

    \537\ See, e.g., Exchange Act Release No. 42914 (June 8, 2000), 
65 FR 38010 (June 19, 2000) (``Decimal Pricing Release''); 
Commission Notice: Decimals Implementation Plan for the Equities and 
Options Markets, SEC (July 24, 2000), available at https://www.sec.gov/rules/other/decimalp.htm.
    \538\ See supra note 84.
    \539\ See Bessembinder (2003) supra note 477. See also Michael 
A. Goldstein and Kenneth A. Kavajecz, Eighths, Sixteenths and Market 
Depth: Changes in Tick Size and Liquidity Provision on the NYSE, 56 
J. Fin. Econ. 125 (2000) and Charles M. Jones and Marc L. Lipson, 
Sixteenths: Direct Evidence on Institutional Execution Costs, 59 J. 
Fin. Econ. 253 (2001), both examining the earlier tick size change 
from \1/8\ to \1/16\ of a dollar. See also Sugato Chakravarty, 
Venkatesh Panchapagesan, and Robert A. Wood, Did Decimalization Hurt 
Institutional Investors?, 8 J. Fin. Mkts. 400 (Nov. 2005) and Sugato 
Chakravarty, Bonnie F. Van Ness, and Robert A. Van Ness, The Effect 
of Decimalization on Trade Size and Adverse Selection Costs, 32 J. 
Bus. Fin. & Acc. 1063 (June/July 2005), both suggesting that large 
institutional trades may have become more costly following 
decimalization.
    \540\ See MEMX Report, supra note 105; see also Adrian 
Griffiths, The Tick Size Debate Revisited, MEMX (Jan. 2022), 
available at https://memx.com/wp-content/uploads/MEMX_MSR_Tick-Constrained-Securities-2_03b.pdf.
---------------------------------------------------------------------------

    The Commission supplements existing analysis with its own analysis 
on the TSP. Focusing on the TSP, as opposed to decimalization, has 
several advantages. Additionally, the Commission relies more on its own 
analysis and the existing literature on the TSP than that for 
decimalization for this purpose because market dynamics have changed 
dramatically in the more than two decades since decimalization. Most 
notably over that period, electronic, algorithmic, and high-frequency 
trading have come to dominate the trading landscape today, whereas they 
were much less prominent in 2001.\541\
---------------------------------------------------------------------------

    \541\ See, e.g., Terrence Hendershott, Charles M. Jones, and 
Albert J. Menkveld, Does Algorithmic Trading Improve Liquidity?, 66 
J. Fin. 1 (Feb. 2011).
---------------------------------------------------------------------------

    Using the TSP for analysis also has limitations because the TSP 
affected a subset of small cap stocks and primarily focused on changes 
in tick size \542\--it did not affect access fee caps for instance. The 
TSP also did not contain ETPs. Nonetheless, the fact that it concluded 
relatively recently suggests that its outcomes may be more 
generalizable to current markets than decimalization.
---------------------------------------------------------------------------

    \542\ See Barardehi, et al. (2022) supra note 85.
---------------------------------------------------------------------------

    The academic literature studying the TSP shows that for stocks with 
average quoted spreads close to $0.05 prior to the TSP (namely, stocks 
likely to fall under our conceptual definition of tick-constrained), 
the TSP led to an increase in effective and quoted spreads.\543\ That 
is, these stocks tended to trade better with a $0.01 tick than with a 
$0.05 tick. These results suggest that a tick that is too wide 
increases the cost of transacting small and average sized orders. 
Mechanically wider spreads in some stocks could mean that relatively 
small orders that do not need to take advantage of any additional NBBO 
depth may execute at a higher cost.\544\
---------------------------------------------------------------------------

    \543\ See Hu, et al. (2018), supra note 477; Kee H. Chung, et 
al., Tick Size Liquidity for Small and Large Orders, and Price 
Informativeness: Evidence From the Tick Size Pilot Program, 136 J. 
Fin. Econ. 879 (2020); Rindi and Werner (2019) supra note 475; 
Griffith and Roseman (2019) supra note 478; Barardehi, et al. 
(2022), supra note 85. Part of this effect may be mechanical.
    \544\ See, e.g., Chung, et al. (2020) supra note 543; Rindi and 
Werner (2019) supra note 475; and Maureen O'Hara, et al., Relative 
Tick Size and the Trading Environment, 9 Rev. Asset Pricing Stud. 47 
(2019).
---------------------------------------------------------------------------

    The TSP literature provides mixed results with regards to the 
trading costs for large orders.\545\ Multiple academic studies have 
found that a wider tick increases depth at the NBBO.\546\ This finding 
is intuitive because all the quotes that would have been placed within 
the spread with a $0.01 tick prior to the TSP, congregated at the next 
best available prices under the $0.05 tick. In addition, any wider 
spreads and greater pennying costs associated with a larger tick would 
also serve to attract more liquidity to the NBBO. More depth at the 
NBBO would mean that a larger order could execute without having to go 
deeper into the book--potentially decreasing the cost to executing a 
larger order if the added depth at the NBBO is sufficient to overcome 
costs from the wider tick. However, one empirical study using different 
data for the TSP found evidence suggesting that the TSP led to a 
decrease in cumulative liquidity beyond the NBBO for test group stocks 
with an average pre-pilot quoted spread less than $0.05 suggesting an 
increase in the cost to transact a large order--although the authors do 
not articulate a clear mechanism for this result.\547\
---------------------------------------------------------------------------

    \545\ Griffith and Roseman (2019) supra note 478 find evidence 
that the imposition of the TSP had either no effect on or slightly 
increased the cost of trading large trades for treatment stocks with 
an average pre-pilot quoted spread greater than $0.05, though the 
results were not statistically significant. They found statistically 
significant evidence that trading costs for large trades increased 
for treatment stocks with an average pre-pilot quoted spread less 
than $0.05. Barardehi, et al. (2022), supra note 85, and Chung, et 
al. (2020), supra note 543, both document that depth increases and 
the cost of executing large trades decreases.
    \546\ See, e.g., sources cited supra note 543.
    \547\ Griffith and Roseman (2019), supra note 478, use the order 
book data from (NASDAQ) and find that cumulative depth away from the 
BBO is lower and larger trades became more costly to execute for 
treatment stocks with an average pre-pilot quoted spread less than 
$0.05 and hence became tick-constrained by the TSP. By focusing on a 
single exchange the paper does not take into consideration depth 
available on other exchanges, which could affect the paper's measure 
of trading cost.

---------------------------------------------------------------------------

[[Page 80319]]

    The current literature offers little guidance regarding the 
expected effect of a tick size change for stocks with wider spreads. 
For stocks that were not tick-constrained by the $0.05 tick, i.e., 
those with quoted spreads wider than $0.05 prior to the TSP, the 
literature examining the TSP is much less uniform in its assessment of 
the effect of a wider tick on market quality for stocks with wider 
spreads.\548\ The fact that this literature does not provide consistent 
results on how a wider tick affects stocks with wider spreads is likely 
the result of the different researchers using different definitions of 
tick-constrained, and by virtually all studies simply bifurcating 
stocks into either tick or non-tick-constrained stocks to perform 
comparisons and assuming that all non-tick-constrained stocks will be 
affected in a similar manner by the tick size change.\549\ In contrast, 
the theoretical discussion at the beginning of this section suggests 
that a simple bifurcation might not be the proper way to study the 
effect of tick size on stocks with various quoted spreads, since the 
relation between market quality and tick size is unlikely to be a 
binary function of whether or not the stock is tick-constrained, but 
rather depends on the number of ticks within the spread. That is, if 
there were to be negative effects on spreads when ticks are made too 
narrow, theory suggests that these would be most likely to be observed 
in stocks for which spreads are especially wide, with many ticks within 
the spread.
---------------------------------------------------------------------------

    \548\ Existing studies do not to agree on the overall impact of 
a wider tick for stocks that were not tick-constrained by the $0.05 
tick. For example, Rindi and Werner (2019), supra note 475, document 
that while quoted spreads increased among non-tick-constrained 
stocks, effective spreads decreased for these same stocks suggesting 
that while displayed prices were worse with a $0.05 spread, the 
actual transaction prices that investors received improved. Chung, 
et al., (2020), supra note 543 find that in general, transaction 
costs among stocks that were not tick-constrained decreased with a 
$0.05 tick. Griffith and Roseman (2019), supra note 478 find that 
the $0.05 tick was not associated with any change in order book 
depth for non-tick-constrained stocks. Additionally, DERA White 
Paper (2018), supra note 477 finds that for non-tick-constrained 
stocks, the imposition of a $0.05 spread led to no change in quoted 
spreads and very little change in effective spreads.
    \549\ The exact threshold, in terms of the time weighted quoted 
spread at which a stock is considered tick-constrained, is subject 
to debate and researchers use various thresholds. The Commission's 
review of the literature and of industry publications suggests that 
a time-weighted quoted spread of $0.011 is the most commonly used. 
That spread is used for the analysis herein.
---------------------------------------------------------------------------

    The Proposal would reduce the tick size for some stocks with 
narrower spreads that do not meet the definition of tick-constrained. 
To provide greater insight into the impact of tick sizes on various 
aspects of market quality across the quoted spread spectrum, Table 9 
provides additional analysis that examines the impact of the TSP on a 
wider range of quoted spread profiles than simply tick-constrained or 
not. This analysis focuses on the end of the TSP, when the tick size 
was reduced from $0.05 back to $0.01, because that event more closely 
matches the proposal, which considers a tick size reduction.
    The analysis presented in Table 9 uses a difference-in-difference 
methodology to study the effect of lowering the tick size from $0.05 to 
$0.01 on TSP stocks at the end of the TSP.\550\ TSP treated and control 
stocks are assigned near the end of the TSP into one of four bins 
ranging from the most tick-constrained in the first bin to the least 
constrained in the fourth bin.\551\ Key variables such as quoted depth 
and spreads were measured before and after the tick size was lowered 
and difference in difference estimation methods were used to examine 
how these variables reacted to the tick size change. The analysis uses 
ordinary least squares \552\ and quantile (median) regressions \553\ to 
estimate the following regression model: \554\
---------------------------------------------------------------------------

    \550\ Difference-in-differences is a statistical technique in 
which the effect that a treatment has on some response variable is 
estimated by comparing the average change in the response over time 
in the treatment group to the average change in the control group.
    \551\ Bin assignments are calculated according to the stock's 
average quoted spreads for May and June of 2018, near the end of the 
TSP. Specifically, we use WRDS Intra-day indicators to collect the 
time-weighted quoted spread for all TSP and control stocks for each 
trading day in May and June 2018. Then for each stock we calculate 
the equally-weighted average quoted spread across all trading days. 
Based on this average, TSP and control stocks are sorted into one of 
four bins. The first bin is for stocks with quoted spreads ($0.00, 
$0.06). Empirically, for stocks in the TSP, this bin is said to 
include those stocks that were tick-constrained by the $0.05 tick 
increment during the pilot. The second bin is for stocks with quoted 
spreads in the range ($0.06, $0.09]. For stocks in the TSP, this bin 
is said to include those stocks that were near-tick-constrained by 
the $0.05 tick increment during the pilot. The third bin is for 
stocks that had quoted spreads of ($0.09, $0.15) or approximately 2-
3 ticks intra at a $0.05 tick increment. The fourth bin is for 
stocks with quoted spreads greater than $0.15. The TSP had three 
test groups: the first group applied the $0.05 tick only to quoting, 
the second group applied the $0.05 tick to quoting and trading (with 
exceptions for benchmark and midpoint trades and for certain retail 
price improvement trades), and the third group applied the $0.05 
tick to trades and quotes the same as the second group but also had 
a trade at rule applied. Because the proposal would apply the tick 
size to both trading and quoting, the analysis presented here 
includes only stocks in the latter two groups--i.e., test groups two 
and three. Barardehi, et al. (2022), supra note 85 provide similar 
analysis, and also expand the analysis in many dimensions and find 
evidence that all key results presented here are robust to the test 
group analyzed and to many other factors.
    \552\ Ordinary least squares (OLS) regression refers to a 
statistical technique for estimating the linear relationship between 
an independent variable and dependent variables by minimizing the 
sum of squared errors between the estimate and the observed 
independent variable. The use of OLS and quantile regressions is 
common in the literature on the TSP pilot.
    \553\ The primary advantage to quantile regressions is that they 
are less sensitive to outliers that can affect mean inference in 
OLS. Thus median regressions provide additional robustness to the 
analysis and ensure that results are not driven by outliers.
    \554\ In this equation the variable Y denotes the response 
variable of interest such as quoted spread and depth. The subscripts 
j and t serve to index stocks and days respectively. [alpha]0, 
[alpha]p, [alpha]e, and [beta] are coefficients (to be estimated), 
and uj,t is the error term. Pilotj is an indicator variable that 
equals 1 if stock j was in the treatment group, or 0 if stock j was 
in the control group. Eventt is a indicator variable which is equal 
to 1 if the day t was post the treatment event and equals 0 
otherwise. Table 9 reports the difference-in-difference estimator of 
[beta] for a different response variable Y across the different 
spread bins.

Yj,t = [alpha]0 + [alpha]PPilotj + [alpha]EEventt 
---------------------------------------------------------------------------
+ [beta](Pilotj x Eventt) + uj,t

where the quantile regression optimizes: \555\
---------------------------------------------------------------------------

    \555\ In this equation uj,t is the error term from the previous 
regression specification equation, supra note 554, and the loss 
function is defined as: [rho]t(u) = [tau] max(u, 0) + (1-[tau]) 
max(-u, 0) ; where 0 < [tau] <1.
[GRAPHIC] [TIFF OMITTED] TP29DE22.000

[[Page 80320]]

                                    Table 9--Effects of a Reduction in Tick Size on Quoting and Trading Outcomes \a\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          OLS                                    Quantile (median) regression
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                           Quoted spread ($) May & June 2018                   Quoted spread ($) May & June 2018
--------------------------------------------------------------------------------------------------------------------------------------------------------
                  Spread bin #                        1st          2nd          3rd          4th          1st          2nd          3rd          4th
--------------------------------------------------------------------------------------------------------------------------------------------------------
Depth (100 shares)..............................    *** -22.5    *** -5.30    *** -1.55        -0.51    *** -11.8    *** -3.16    *** -0.96    *** -0.21
                                                     [-12.02]      [-7.09]      [-4.40]      [-1.30]     [-16.99]     [-23.52]     [-17.81]      [-4.30]
Depth ($1,000)..................................    *** -16.7    *** -8.41    *** -4.67    *** -2.06    *** -11.2    *** -7.27    *** -3.96    *** -1.48
                                                     [-14.58]     [-10.94]      [-7.82]      [-3.66]     [-22.04]     [-20.70]     [-12.58]      [-4.14]
Quoted Spread ($)...............................   *** -0.033   *** -0.027    *** 0.023     *** 0.12   *** -0.034   *** -0.031    *** 0.012     *** 0.12
                                                     [-18.71]      [-6.46]       [2.99]       [5.51]     [-35.41]     [-10.31]       [2.03]       [6.80]
Relative quoted Spread..........................  *** -0.0049   * -0.00097      0.00034   *** 0.0046  *** -0.0041  *** -0.0014      0.00021   *** 0.0034
                                                      [-9.59]      [-1.80]       [0.53]       [3.30]      [-8.54]      [-6.89]       [0.74]       [4.66]
Effective spread ($)............................   *** -0.027       -0.026    *** 0.029     ** 0.038   *** -0.026   *** -0.021      -0.0018    *** 0.051
                                                      [-4.97]      [-1.43]       [5.17]       [2.16]     [-58.10]     [-12.81]      [-0.63]       [4.81]
Relative eff. spread............................  *** -0.0039      0.00043       0.0055   *** 0.0028  *** -0.0030  *** -0.0010     -0.00013   *** 0.0016
                                                      [-3.12]       [0.17]       [1.36]       [4.42]     [-10.78]      [-9.58]      [-1.09]       [3.23]
Cancel-to-trade.................................     *** 5.10     *** 6.69     *** 7.56     *** 18.8     *** 4.56     *** 5.49     *** 6.87     *** 12.3
                                                       [5.99]       [6.38]       [6.79]       [8.44]       [7.75]       [7.79]      [10.44]      [10.61]
Odd-lot rate (%)................................     *** 4.89     *** 5.61     *** 2.85      ** 1.49     *** 5.59     *** 6.39     *** 3.29      ** 1.85
                                                       [9.62]       [8.04]       [4.35]       [2.15]       [8.02]       [8.99]       [4.72]       [2.51]
Realized spread ($).............................   *** -0.014   *** -.0099       .00037    *** 0.040   *** -0.014   *** -0.013  *** -0.0068    *** 0.038
                                                     [-27.94]      [-7.43]       [0.12]       [4.45]     [-48.36]     [-17.96]      [-5.13]       [5.64]
Relative real. spread...........................   *** -.0024      -.00032      -.00039     ** .0014   *** -.0014  *** -.00054  *** -.00013    *** .0012
                                                     [-11.82]      [-1.36]      [-1.25]       [2.37]     [-14.08]     [-12.52]      [-2.77]       [3.65]
Volume (1,000 shares)...........................         26.5      ** 30.3         12.5        -5.41         19.1         3.35         0.20     ** -3.25
                                                       [1.30]       [2.13]       [1.32]      [-1.07]       [1.42]       [0.40]       [0.04]      [-2.44]
Cum Depth 10c from mdpt.........................    *** -0.17    *** -0.26     ** -0.27     ** -0.34    *** -0.49    *** -0.54    *** -0.45     ** -0.63
                                                      [-3.93]      [-5.00]      [-2.59]      [-2.37]      [-5.51]      [-6.29]      [-4.91]      [-3.15]
Cum Depth -10c from mdpt........................    *** -0.22    *** -0.19    *** -0.37     ** -0.45    *** -0.49    *** -0.42    *** -0.50     ** -0.79
                                                      [-5.28]      [-3.74]      [-3.44]      [-2.83]      [-6.33]      [-5.21]      [-5.68]      [-2.75]
CRT 10 round lots...............................   *** -0.026       -0.001    *** 0.035     *** 0.14   *** -0.037    *** 0.085    *** 0.035     ** 0.075
                                                     [-19.56]      [-0.19]       [3.99]       [1.03]      [-2.72]       [2.75]       [4.20]       [2.37]
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ This table presents the effects of a reduction in minimum tick size from $0.05 to $0.01 cent on various quoting and trading outcome variables. The
  1st bin is most tick-constrained and the 4th bin is least tick-constrained. See supra note 554 for bin descriptions. A difference in difference
  regression with no control variables is estimated using data covering Control, Test Group 2, and Test Group 3 TSP stocks from 08/01/2018-11/30/2018.
  All observations are at the stock day level. The same model is used for all outcome variables. See supra note 554 for a discussion of why Test Group 2
  and Test Group 3 were selected. For each outcome variable Yjt, the table presents only the difference in difference coefficient estimates that
  indicate the effect of the TSP on the dependent variable. Estimates are performed by past quoted spread subsamples that decompose the sample based on
  average quoted spreads during June and July of 2018. Each regression is estimated using both OLS and quantile (median) regressions. The first four
  columns present the result from OLS regression results, the last four columns present the results from quantile regression results. Column titles 1st,
  2nd, 3rd, and 4th represent results estimated for bin 1, bin 2, bin 3 and bin 4 stocks respectively. The quoted spread refers to the distance between
  the NBBO midpoint and the NBBO quote. The effective spread is the distance between the NBBO midpoint and the realized trade price; the realized spread
  is the distance between a future NBBO midpoint (5-minutes ahead) and the trade price. Relative spread measures are calculated as the spread scaled by
  the NBBO midpoint. The cancel-to-trade ratio is the daily number of order cancellations divided by the number of trades, for displayed orders. The odd-
  lot rate is the percentage of trades in a day which executed against an odd-lot quote. CRT 10, or the cost of a round-trip trade of 10 round lots,
  measures the cumulative transaction costs from buying and then immediately selling 10 round lots. The CRT assumes that an order that is larger than
  the displayed depth at the best price will not execute in full at that price. Instead, the assumed unfilled portion will execute at worse prices until
  completely filled with displayed depth. All data are Winsorized at the 1% and 99% level. The numbers in the [ ] brackets reflect t-statistics that are
  based on two-way stock-and-date clustered standard errors. Symbols *, **, and *** reflect statistical significance at 10%, 5%, and 1% type-1 error
  levels.

    This analysis provides evidence of a fundamental tradeoff between 
accurate pricing on one hand and incentives for liquidity provision on 
the other. Across all specifications, the end of the TSP was associated 
with a decrease in depth at the NBBO, when the tick size was reduced 
from $0.05 to $0.01, as signified by the negative and, in most cases, 
statistically significant coefficients reported. The magnitude of the 
coefficients suggest that the reduction in shares available at the NBBO 
was the greatest for stocks with tighter spreads and smaller for stocks 
with wider spreads. The finding that tighter spread stocks experience 
the greatest decline in depth at the NBBO is consistent with the -idea 
that, for these stocks, the $0.05 tick was the most constraining, and 
so liquidity that would have naturally spread out within the quoted 
spread given a smaller tick, bunched at the wider tick increments, and 
that once the tick-constraint was relaxed this liquidity naturally 
spread out over the additional price levels. For less tick-constrained 
stocks, the bunching was less severe since liquidity already had some 
room to spread out.
    For stocks in the first or second bins, we find that lowering the 
tick to $0.01 leads to significantly lower quoted spreads. These stocks 
went from having approximately 1-2 ticks inside the spread, with a 
$0.05 tick, to having 1-10 ticks inside the spread, with a $0.01 tick. 
For these bins, relaxing the tick size served to narrow the spread. 
This finding is consistent with the idea that for stocks that are tick-
constrained, or near-tick-constrained, the effect of decreasing the 
tick size will narrow spreads by improving competition. For the stocks 
in the third and fourth bins, the story is different, as the reduction 
in the tick size was associated with a widening of the quoted spread. 
These stocks went from having more than two or more ticks within the 
spread, with a $0.05 tick, to having more than 10 ticks within the 
spread, with a $0.01 tick. This result is consistent with the idea that 
for wider spread stocks, the prevailing effect of reducing the tick 
size was to increase fragmentation of liquidity and the risk of 
pennying which made trading more costly leading to wider spreads. This 
pattern of results--namely narrower spreads for the first and second 
bins and wider spreads for the fourth--holds regardless of whether 
dollar spreads, relative spreads, OLS, or quantile regressions are 
used, suggesting this as a robust outcome of the end of the TSP.
    The pattern for effective spreads is similar to that observed for 
quoted spreads. Effective spreads measure the average realized 
transaction cost for trades as it measures the absolute distance 
between the realized trade price and the NBBO midpoint at the time of 
the trade. Effective spreads do not always equal quoted spreads because 
trades can execute inside the NBBO for numerous reasons, such as odd-
lot trades, midpoint trades, and

[[Page 80321]]

hidden orders. For stocks in bin one--i.e., stocks for which the $0.05 
tick was the most restrictive--all specifications suggest that reducing 
the tick size was associated with a decrease in realized transaction 
costs as measured by effective spreads. For stocks in bin four, those 
with the widest spreads prior to the tick size reduction, all 
specifications suggest that the reduction in the tick size lead to an 
increase in transaction costs, measured by effective spreads. For 
stocks in between these extremes in bins two and three, the results are 
not as uniform. For stocks in bin two, the sign of the coefficients for 
all estimates (dollar effective spreads, relative effective spreads, 
OLS, and quartile regressions) suggest that lowering the tick size 
decreased effective spreads, although not all specifications agree as 
to statistical significance. The OLS regressions suggest that the 
effect was statistically insignificant, while the quantile regressions 
found a statistically significant effect and suggest that effective 
spreads decreased. For stocks in the third bin, the analysis did not 
find a consistent, statistically significant change in effective 
spreads, or in other words, lowering the tick size did not appear to 
reliably help or harm transaction costs as measured by effective 
spreads.
    These results, like the results for quoted spread, suggest that for 
stocks for which the narrowing of the spread meant that the stock went 
from having less than 2 ticks within the spread to 1-10 ticks within 
the spread, the effect of reducing the tick was beneficial in terms of 
reducing transaction costs. For stocks with very wide spreads, reducing 
the tick size appeared to harm liquidity, which is consistent with 
fragmentation and pennying being the prevailing effect.
    The theoretical discussion above suggests that executing an order 
may become more complex with a smaller tick size--meaning it may take 
visiting more venues as well as across more price levels to execute an 
order with a smaller tick size. This potential outcome is explored 
using the ``cancel-to-trade'' ratio. A higher ratio indicates more 
frequent canceling of orders per the amount of trading volume, and is 
an indication that market participants are more active in managing 
their quotes and their order strategies. In this analysis, both the OLS 
and the quantile regressions confirm that a smaller tick resulted in a 
statistically significant increase in the cancel to trade ratio, 
suggesting more complexity. Additionally, the magnitude of the effect 
is increasing in the quoted spread, with wider quoted spreads having 
larger coefficients, suggesting a larger effect in the cancel-to-trade 
ratio than stocks with narrower spreads. This pattern is consistent 
with pennying and increased complexity having a greater impact on 
stocks with wider spreads.
    The analysis also looks at the effect of lowering the tick size at 
the end of the TSP on the usage of odd-lot orders. Across all quoted 
spread bins, the usage of odd-lot orders increases when the tick size 
decreases. This finding is consistent with the notion that liquidity 
would be spread out over more levels and liquidity providers would be 
willing to offer less liquidity at a given price level--leading to an 
increased use of odd-lot orders to allow liquidity providers to offer 
smaller levels of liquidity at finer price increments. This result also 
suggests that a lower tick size increases the need for market 
participants to have ready access to odd-lot information given that the 
lower tick size can be expected to increase the usage of odd-lot 
quotes.
    Effective spreads provide a measure of liquidity providers' revenue 
and the contrasting economic effects also have implications for how 
liquidity providers' revenue would be affected by a lower tick. The 
effective spread captures the liquidity premium, paid by those 
submitting orders for immediate execution, and can theoretically be 
decomposed into two components: Effective Spread = Realized Spread + 
Price Impact.\556\ One component of the effective spread is the price 
impact or adverse selection component. It is the change in the NBBO 
midpoint at the time of trade to some point in the future. This 
component of the spread captures the portion of the spread liquidity 
providers lose from trading with investors who are more informed than 
they are, and is also referred to as the adverse selection component of 
the bid ask spread. The remainder of the effective spread, after 
removing the adverse selection component, is the realized spread. This 
portion of the spread acts as a proxy \557\ for the compensation to the 
liquidity provider for its non-adverse selection costs. If a smaller 
tick decreases revenue for liquidity providers, by allowing bid and ask 
prices to more accurately reflect supply and demand, then this effect 
should manifest as a decrease in realized spreads for liquidity 
providers. However, if increased order book fragmentation and pennying 
risk increase the cost of providing liquidity, then liquidity providers 
would need to be compensated for these costs in order to provide 
liquidity and, thus, realized spreads would increase. To the extent 
that the two effects offset one another, realized spreads might not 
change.
---------------------------------------------------------------------------

    \556\ Effective spreads can be interpreted as what liquidity 
providers expect to earn from providing liquidity, assuming that 
prices do not change before the liquidity provider is able to unwind 
its position and realize their profit. Under this interpretation, 
realized spreads would proxy for what they actually earn, taking 
into account that the market price may have moved against the 
liquidity provider before it could unwind its position. Effective 
Spread = Realized Spread + Price Impact. For a full mathematical 
decomposition of effective spreads into realized spread and price 
impact components see Peter N. Dixon, Why Do Short Selling Bans 
Increase Adverse Selection and Decrease Price Efficiency, 11 Rev. 
Asset Pricing Stud. 122 app. at 165 (2021).
    \557\ Realized spreads do not measure the actual trading profits 
that market makers earn from supplying liquidity. In order to 
estimate the trading profits that market makers earn, we would need 
to know at what times and prices the market maker executed the off-
setting position for a trade in which it supplied liquidity (e.g., 
the price at which the market maker later sold shares that it bought 
when it was supplying liquidity). If market makers offset their 
positions at a price and time that is different from the NBBO 
midpoint at the time lag used to compute the realized spread measure 
(Rule 605 realized spread statistics are measured against the NBBO 
midpoint 5 minutes after the execution takes place), then the 
realized spread measure is an imprecise proxy for the profits market 
makers earn supplying liquidity.
---------------------------------------------------------------------------

    For tick-constrained stocks in bin one, the analysis indicates a 
decrease in realized spreads across all specifications, and when using 
dollar or relative realized spreads when the tick size was reduced from 
$0.05 to $0.01. This result is consistent with the notion that 
liquidity providers' non-adverse selection revenues would decrease due 
to bid and ask prices being more reflective of supply and demand with a 
smaller tick. The opposite occurs for stocks with wide spreads in bin 
four, where realized spreads increase significantly--consistent with 
liquidity providers needing to be compensated for the increased cost 
and complexity associated with trading a wide spread stock in a small 
tick environment. For stocks in the middle two bins, the effect of 
lowering the tick size on realized spreads is unclear, as about half of 
the specifications indicate no change in realized spreads while the 
other half indicate lower effective spreads. The specifications often 
do not agree between relative and effective spread specifications and 
between OLS and quantile regressions.
    The analysis also uses MIDAS data to study how the tick size change 
affected liquidity deeper in the book. Analyzing liquidity deeper in 
the book is valuable because it gives an indication of how trading 
larger orders that must go deeper in the book to be fulfilled may be 
affected by a change in the tick size. This analysis uses MIDAS data to 
calculate the daily average cumulative

[[Page 80322]]

shares available at $0.10 above and below the midpoint for control and 
treated stocks, and uses the same difference-in-difference analysis to 
examine the effect of reducing the tick size on cumulative depth.\558\ 
Our analysis suggests that reducing the tick size also reduced the 
total depth available deeper in the book with the coefficient for bin 
4--i.e., those with the widest spreads--being the largest in magnitude. 
This finding is consistent with a smaller tick discouraging the posting 
of displayed liquidity due to pennying concerns for stocks with wide 
spreads.
---------------------------------------------------------------------------

    \558\ In the regressions we take the natural log of shares 
available. This conversion helps standardize shares available for 
stocks with different prices by making the interpretation in terms 
of percentage changes.
---------------------------------------------------------------------------

    These depth of book findings do not directly imply that trading 
deeper in the book became more expensive for two reasons. First, 
research suggests the use of non-displayed quotations increases 
significantly when the tick size is reduced.\559\ Thus the decline in 
liquidity that we document is only a decline in displayed liquidity. 
Second, quotes tend to congregate at the price just worse than the 
quoter's desired price so that the quoter does not lose money on a 
transaction. When a wider tick is tightened, quotes that were 
previously congregated at the wide tick will spread out at prices 
better than the previous tick allowed. Thus, a market participant 
taking liquidity from multiple price layers in the order book to 
fulfill an order would have some shares that transact at superior 
prices than it would have with the wider tick.\560\
---------------------------------------------------------------------------

    \559\ See analysis presented in Nasdaq Intelligent Tick 
Proposal, supra note 180; see also Justin Cox, et al., Increasing 
the Tick: Examining the Impact of the Tick Size Change on Maker-
Taker and Taker-Maker Market Models, 54 Fin. Rev. 417 (2019); Amy K. 
Edwards, Paul Hughes, John Ritter, Patti Vegella, and Hao Zhang, The 
Effect of Hidden Liquidity: Evidence from an Exogenous Shock 
(working paper Mar. 1, 2021), available at https://ssrn.com/abstract=3766512 (2021) (retrieved from SSRN Elsevier database).
    \560\ Consider a numeric example. A market with a $0.05 tick is 
quoting asks of 500 shares at $10.05 and 500 shares at $10.10. An 
investor wishing to purchase 700 shares would purchase 500 at $10.05 
and 200 at $10.10 for a total price of $7,045. If the tick shrinks 
to $0.01 and cumulative shares posted decline by 20%--for example--
but those shares are spread evenly over the finer grid then there 
would be 80 shares at each price level from $10.01 to $10.10. An 
investor wishing to buy 700 shares would need to purchase 80 shares 
at each price level from $10.01 to $10.08 and 60 shares at $10.09 
for a total purchase price of $7,034. So even though total depth 
declined, the cost to execute a 500 share trade would decrease due 
to more efficiently spreading liquidity across more price levels.
---------------------------------------------------------------------------

    Table 9 also presents the effect of the TSP conclusion on the 
round-trip cost to transact a trade for 10 round lots (1,000 
shares).\561\ This analysis suggests mixed results for the effect of 
the tick size reduction on the cost of executing a 10 round lot trade. 
For pilot stocks that were tick-constrained by the Pilot with a $0.05 
tick, the total round-trip cost of a 10 round lot trade decreased when 
the tick size was lowered--suggesting an improvement in liquidity 
deeper in the book. For near-tick-constrained stocks, the effect was 
not clear. The OLS regressions suggested no effect, while the quantile 
regressions suggested an increase in trading cost. For stocks in bins 3 
and 4 (i.e., those that were not tick-constrained by the $0.05 tick), 
the effect of lowering the tick size was to increase transaction costs 
for larger trades. These results cohere with the idea that when stocks 
are tick-constrained the pricing efficiency made possible by a smaller 
tick improves liquidity, and for stocks with wider spreads a smaller 
tick harms liquidity by making individuals less willing to post 
displayed liquidity due to complexity and the risk of pennying.
---------------------------------------------------------------------------

    \561\ A round trip trade refers to executing an order to buy or 
sell the stock and immediately reversing the position with an equal 
countervailing order. We compute the cost of a round trip trade 
following the methodology laid out in Griffith and Roseman (2019), 
supra note 478, and Chung, et al. (2020), supra note 543. The 
methodology uses MIDAS data to take snapshots of the order book at 
15 minute increments throughout the trading day and calculates the 
transaction costs associated with walking the book up 5 or 25 round 
lots to execute a large trade.
---------------------------------------------------------------------------

    In conclusion, the analysis provided here suggests that, for stocks 
that were limited to just 1-2 ticks intra-spread by the $0.05 tick, the 
reduction to a $0.01 tick provided an improved trading environment. 
Thus, trading in an approximate 1-10 tick range intra-spread provided a 
superior environment to trading in a 1-2 ticks intra spread range. 
Additionally, for stocks with spreads greater than $0.15, where a $0.01 
tick implied more than 15 ticks intra-spread, a $0.05 tick where there 
were only 3 ticks intra-spread, appeared to provide a superior trading 
environment. For stocks with spread between $0.10 and $0.15, it is not 
clear which tick size provided a superior trading environment.
    These conclusions are consistent with results in Barardehi, et al. 
(2022), which more broadly examines the effect of tick size changes 
under the TSP.\562\ Barardehi, et al. (2022) arrives at the same 
conclusions with respect to the effects of a tick size reduction in the 
context of the TSP while using different methodology. Specifically, the 
Commission's analysis focuses on the end of the TSP, when the tick size 
for treated stocks was reduced, because the proposal would lower the 
tick size for some stocks. In addition to looking at the end of the 
TSP, Barardehi, et al. (2022) also considers the effect of raising the 
tick size at the initiation of the TSP. Both the Commission's analysis 
and Barardehi, et al. (2022) find that stocks that either were tick-
constrained or near-tick-constrained by the $0.05 tick benefited from a 
reduction in the tick size. Examining the imposition of the TSP, 
Barardehi, et al. (2022) additionally found a deterioration in market 
quality for stocks that became tick-constrained by the $0.05 tick. All 
together, these results provide robust support for the benefits of 
reducing the tick size in tick-constrained stocks.
---------------------------------------------------------------------------

    \562\ See supra note 461.
---------------------------------------------------------------------------

    Another methodological difference between the Commission's analysis 
and Barardehi, et al. (2022) is in the selection of TSP stocks used in 
the analyses. The Commission's analysis focuses on comparing TSP test 
groups that experienced a change in both trading and quoting 
increments, whereas Barardehi, et al. (2022) looked at a wider set of 
TSP test group combinations, including looking at the test groups 
separately.\563\ Robustness checks in Barardehi, et al. (2022) show 
that analytical conclusions are similar regardless of the test groups 
used, thereby showing the robustness of the Commission's results as 
well. Barardehi, et al. (2022) further provide additional tests of the 
effect of tick size changes on trading costs, none of which provide 
results inconsistent with the Commission's analysis.\564\
---------------------------------------------------------------------------

    \563\ See supra note 551. Barardehi, et al. (2022), supra note 
85 use stocks from TSP test groups 1 and 2 in their analysis. In 
order to provide more statistical power the authors, in addition to 
test group 1, include test group 2 stocks, citing that extant 
literature had shown little statistical differences between test 
group 1 and test group 2 stocks. By contrast, Table 9 analyzes test 
groups 2 and 3 because these involved comparing TSP test groups that 
experienced a change in both trading and quoting increment--with the 
caveat that the conclusion of the tick size pilot ended the 
harmonization of the quote and trade increments that had been 
implemented under that program, while this proposal would introduce 
it.
    \564\ Barardehi, et al. (2022), supra note 85 also included 
additional analysis to demonstrate that the results were also robust 
to bifurcating the TSP sample into high and low trading volume, to 
the exclusion of penny stocks, and using quantile regressions at the 
25th and 75th quantiles as opposed to the median.
---------------------------------------------------------------------------

    Barardehi, et al. (2022) includes an exhibit with more granular 
analysis on the impact of a reduction in tick size at the end of the 
TSP, from 5 cents to 1 cent, on investor transaction costs, as captured 
by effective spreads. That exhibit is included below in Figure 1, and 
its results are broadly consistent

[[Page 80323]]

with the findings reported in Table 9. Figure 1 shows how the quoted 
spread of a stock during the pilot (``pre-shock dollar quoted spread'') 
correlates with how effective spreads changed when the pilot ended. For 
stocks with an average of fewer than two ticks intra-spread (those with 
pre-shock quoted spreads of $0.10 or less), a reduction in tick size 
from 5 cents to 1 cent significantly reduces effective spreads.\565\ 
Whereas for stocks with an average of more than three ticks intra-
spread (those stocks with pre-shock quoted spreads greater than $0.15), 
a narrower tick size increases effective spreads.
---------------------------------------------------------------------------

    \565\ Barardehi, et al. (2022), supra note 85, subset their 
sample into overlapping segments of TSP stocks based on their quoted 
spreads and perform difference-in-difference analyses on each 
segment to quantify the effect of a narrower tick size as a function 
of number of intra-spread ticks. In their setting, each segment of 
stocks is identified based on average quoted spreads in a period 
prior to the end of the TSP (08/08/2018-11/20/2018), where tick size 
decreased from 5 cents to 1 cent for pilot stocks. The stocks are 
grouped into overlapping 6-cent intervals of average May and June 
2018, (pre-shock) quoted spreads in cents {($0.00, $0.06), ($0.01, 
$0.07), ($0.02, $0.08), . . . , ($0.15, $0.21), ($0.16, 
$0.22){time} . For each intervals, the effect of a tick size change 
on dollar effective spreads are estimated in a difference-in-
difference setting using quantile (median) regressions that control 
for date fixed effects and double-cluster standard errors by stock 
and date. Point estimates of the treatment effects along with the 
corresponding 95% confidence intervals are plotted against the 
median pre-shock quoted spread in the respective interval.
[GRAPHIC] [TIFF OMITTED] TP29DE22.001

    The Commission's results in Table 9 help provide guidelines for 
predicting how the proposed tick size reductions may affect market 
quality for stocks priced at, or greater than, $1.00 per share compared 
to the current baseline. For stocks that are tick-constrained by the 
current $0.01 tick, the proposal would increase the number of ticks 
intra-spread from 1 to either 1-8, or 4-5 depending on whether the 
stock was assigned a $0.001 or a $0.002 tick. The analysis in Table 9 
suggests that 1-10 ticks intra spread provides a better trading 
environment than does just one tick intra-spread.\566\ Additionally, 
the results for bin 2 stocks suggest that moving from 1-2 ticks intra 
spread to 5-10 ticks also generally improves market quality across most 
measures. Regardless the tick size that a current tick-constrained 
stock receives ($0.001 or $0.002) Table 9 suggests that across most 
liquidity metrics, liquidity would likely improve for these stocks. For 
stocks with a time-weighted average spread below $0.016, there are 
currently an average of 1-1.6 ticks intra spread. The proposal would 
increase this number to 4-8 ticks intra-spread by assigning a $0.002 
tick to these stocks. The analysis of bin 2 stocks is analogous to 
stocks that would be subject to the $0.002 tick in terms of the effect 
of the tick size change on market quality. In both cases, the stocks 
are moving from

[[Page 80324]]

an environment with just less than two ticks intra spread to one of 5-
10 ticks intra spread in the case of the TSP, or 4-8 ticks in the case 
of the proposal. These changes are likely similar enough that 
comparison of the two groups is instructive. The analysis of bin 2 
stocks in Table 9 indicated that across most liquidity metrics these 
stocks experienced improved liquidity with the smaller tick. 
Consequently, the Commission also expects that on average, stocks 
receiving the $0.002 tick size would likely experience an improvement 
in market quality. The analysis is less clear about the effect of the 
proposal in trading in stocks that would receive the $0.05 increment: 
stocks with Time-Weighted Average Quoted Spreads between $0.016 and 
$0.04. These stocks would transition from having an average 1.6-4 ticks 
intra spread to having 3-8 ticks intra spread. The TSP analysis in 
Table 9 suggested that, for stocks with approximately 2-3 ticks intra 
spread, moving to 10-15 ticks intra spread was not clear, while for 
stocks with 3 or more ticks intra spread, moving to 15 or more ticks 
intra spread appears to have been harmful.\567\ None of the stocks in 
the proposed $0.005 tick group would have prevailing spreads with more 
than 15 ticks intra spread, so for this group the analysis does not 
provide clear predictions regarding the effect of the tick size 
reduction on transaction costs for these stocks.
---------------------------------------------------------------------------

    \566\ One academic theoretical paper suggests that having a two 
tick spread is optimal. See Sida Li and Mao Ye, The Optimal Nominal 
Price of a Stock: A Tale of Two Discretenesses, (working paper Nov. 
3, 3021), available at https://ssrn.com/abstract=3763516 (retrieved 
from SSRN Elsevier database). The paper suggests that stocks reach 
their optimal price whenever the quoted spread is two ticks wide. 
While the paper advocates for a lower tick size, particularly for 
tick-constrained stocks, the two tick spread conclusion is the 
result of a highly stylized trading model which does not take into 
account pertinent factors from outside the model which likely affect 
spreads such as considerations of time priority and pennying 
concerns. Conditional on there being non-infinitesimal tick and 
round-lot sizes, their model suggests that a two-tick wide spread is 
optimal. Otherwise, their model suggests an optimal policy choice of 
infinitesimal tick and round-lot sizes.
    \567\ Barardehi, et al. (2022), supra note 85, show that 
statistical results for wider spread stocks, such stocks in bin #4 
in Table 9, vary somewhat when they estimate their model separately 
on data for each of the three TSP groups. When separately estimated, 
the effects for lower spread stocks, bins 1 and 2, remain consistent 
and statistically significant across all three TSP test groups.
---------------------------------------------------------------------------

    Quoted spreads are not static from day to day. It is possible that 
a stock could have a narrow quoted spread during an evaluation month, 
and thus be assigned a small tick, and then during the following month 
it could experience points in time where the quoted spread is much 
wider.\568\ If the spread widens sufficiently, relative to the quote, 
then the stock could trade in a range of ticks intra-spread that may 
harm market quality.\569\ To provide an estimate of the fraction of 
trading volume that could be affected in this manner, the following 
estimation is computed. March 2022 is treated as a hypothetical 
evaluation month and all stocks are assigned a tick size based on their 
prevailing time-weighted quoted spread during this month.\570\ No stock 
is assigned a $0.001 tick in this estimation, as Time-Weighted Average 
Quoted Spreads for stocks priced at, or greater than, $1.00 per share 
are currently have a lower bound because of the $0.01 tick. Thus, all 
stocks with Time-Weighted Average Quoted Spreads below $0.016 are 
assigned a tick of $0.002. Then, for the months of April through June 
2022, all trading volume during regular trading hours is evaluated for 
all stocks and the Time-Weighted Average Quoted Spread is determined at 
the time of trade. If the NBB for the trade is below $1.00, that trade 
is assigned a tick size of $0.0001. Trading volume with an NBB greater 
than $1.00 that would have received a tick size lower than $0.01 based 
on March 2022 Time-Weighted Average Quoted Spreads is then analyzed. 
The total trading volume within this subsample that executed at a time 
when the quoted spread would have had more than 10 or 15 ticks within 
the spread if it had had the lower tick size is computed and presented 
in Table 10 as a fraction of total trading volume during the period.
---------------------------------------------------------------------------

    \568\ Likewise, two stocks with equal average quoted spreads may 
not be equally tick-constrained. For example, one stock with a $0.02 
average quoted spread could have a $0.01 quoted spread 40% of the 
time while another has a $0.01 spread 10% of the time. The effect of 
the proposal on market quality could differ in much the same way as 
the effects described in this paragraph.
    \569\ The empirical analysis in this section suggesting that a 
lower tick size benefits tick and near-tick-constrained stocks is an 
``on average'' result. While the Commission expects that a lower 
tick would on average decrease transaction costs for tick and near-
tick-constrained stocks, for some of these stocks, a smaller tick 
could lead to wider spreads. For these stocks, if spreads increase 
to a sufficient degree then the stock could be re-assigned a wider 
tick after the next evaluation month.
    \570\ We use WRDS intra-day indicators for all stocks in the 
database to estimate the time weighted quoted spreads for Mar. 2022. 
No stock is assigned a $0.001 tick in this estimation as quoted 
spreads for stocks priced $1.00 or more per share are currently 
constricted by the $0.01 tick. Thus all stocks with Time-Weighted 
Average Quoted Spread below $0.02 are assigned a tick of $0.002.

 Table 10--Volume Receiving a Tick Reduction Executing During Periods of
                            Wide Spreads \a\
------------------------------------------------------------------------
                                                       10 +       15 +
                                                      ticks      ticks
                                                       (%)        (%)
------------------------------------------------------------------------
Share Volume......................................        3.4        1.1
Dollar Volume.....................................        7.4        2.2
------------------------------------------------------------------------
\a\ This table provides estimates of the amount of share and dollar
  trading volume in stocks that meet the following conditions. The NBB
  is greater than $1.00 per share at the time of trade. The stock had a
  time-weighted quoted spread of less than $0.04 in Mar. 2022, and the
  stock's quoted spread was greater than 10 or 15 times its hypothetical
  tick size based on Mar. 2022 time-weighted quoted spreads computed
  from the WRDS Intra-day indicators. The universe of securities in the
  WRDS intra-day indicators dataset is used. Only trading volume
  associated with normal trades during regular trading hours is
  considered. Normal trades are identified in TAQ data by sale
  conditions ``blank, @, E, F, I, S, Y'' which correspond to regular
  trades, intermarket sweep orders, odd lot trades, split trades, and
  yellow flag regular trades. We exclude these trades because they are
  not typically representative: for example the codes include trades
  that result from an acquisition, trades reported out of sequence, and
  extended hour trades.

    Table 10 provides an estimate that approximately 3.4% of total 
share trading volume met the following conditions. It would have been 
associated with a stock receiving a lower tick size and would have 
executed when spreads were wider than 10 ticks based on the estimated 
tick size. Table 10 also provides an estimate that 1.1% of total share 
volume would have executed when spreads were more than 15 ticks wide. 
For this fraction of trading volume, it is possible that the reduction 
in the tick size could lead to a worse trading environment for the 
period of time that spreads remain significantly higher than the 
evaluation period compared to what the trading environment could have 
been had the stock retained a $0.01 tick. This effect would not be 
indefinite because, if a stock's spread remains elevated, then at the 
end of the next evaluation period, the stocks would be assigned a wider 
tick--mitigating the negative consequences of having a tick size that 
is too narrow relative to the quoted spread.
2. Minimum Pricing Increment for Trading
    The proposal would require all trades that are not midpoint or 
benchmark trades, including trades executed by OTC market makers, 
including wholesalers, to execute in increments determined by the 
minimum pricing increment for trading, which would be harmonized with 
the minimum pricing increment for quoting. Applying a minimum pricing 
increment to trading, coupled with reducing the minimum pricing 
increment for quoting, could affect measures of the frequency and 
magnitude of price improvement either

[[Page 80325]]

positively, negatively or insignificantly, on average. The Commission 
recognizes that any changes to these measures could affect transaction 
costs paid by investors or could affect where broker-dealers route 
customer order flow, or both, potentially leveling the playing field 
between exchanges/ATSs and off-exchange dealers in attracting retail 
order flow. Because of this competitive pressure, the Commission 
expects that trading venues will continue to compete on providing price 
improvement and that the harmonization of trading and quoting 
increments will not mitigate the execution quality improvements from a 
reduction in the minimum pricing increment.
    Requiring trades to occur at the minimum pricing increment would 
have uncertain net effects on total price improvement, which is the 
primary mechanism for the economic effects of a trading increment. The 
Commission expects that for most trading volume receiving a smaller 
tick, quoted spreads would likely narrow, on average. While narrower 
spreads mean less opportunity for further price improvement, investors 
would not be getting worse trade prices under the proposed rules, 
because the narrower spreads imply better prices for most trades. While 
price improvement is a measure of execution quality, lower price 
improvement does not necessarily translate into worse outcomes for 
investors, particularly when quoted spreads are narrowing. Because 
price improvement is measured relative to the quoted spreads, price 
improvement is a more meaningful measure of execution quality when 
quoted spreads are held constant. Therefore, an increase in the 
frequency and level of price improvement in conjunction with an 
expected narrowing of quotes does not inform on overall investor 
execution quality from the proposal, though it may inform on whether 
the harmonization furthers or mitigates the expected improvements from 
narrower quotes in execution quality for investors.
    The Commission does not anticipate that the proposal for a minimum 
trading increment would affect most current price improvement. In 
particular, Table 3 indicates that most price improvement in stocks 
with prices greater than $1 currently occurs as a result of midpoint 
trades or in increments of $0.01, neither of which would be affected by 
the proposed trading increment.\571\
---------------------------------------------------------------------------

    \571\ Here, price improvement is defined as any trade that 
transacts inside the NBBO and includes midpoint and intra-spread 
trades executed on ATSs and exchanges in addition to OTC market 
maker internalized trades. A $0.01 price improvement would be 
feasible with any of the tick sizes considered in this proposal.
---------------------------------------------------------------------------

    From Panel B of Table 3, we observe that 82.5% of the dollar value 
of price improvement fits this description. The remaining 17.5% of 
price improvement ($12 million per day) \572\ occurred in sub-penny 
increments and were not associated with midpoint trades and, therefore, 
could potentially be affected by the rule. In addition, the 
harmonization of tick sizes across venues will likely have very little 
impact on trades for stocks priced less than $1.00. The designated 
increment of $0.0001 already appears to be the minimum pricing 
increment for wholesaler price improvement.\573\
---------------------------------------------------------------------------

    \572\ This figure does not represent the potential harm to 
retail investors. The discussion later in this section explains that 
these trades could be positively or negatively affected. Further, 
trades that do not have an opportunity for price improvement 
currently, could have an opportunity for price improvement under the 
proposed rules.
    \573\ See, e.g., Boehmer, et al. (2021), supra note 469. For 
this reason, the remainder of the discussion in this section focuses 
on the effects of harmonization on stocks priced equal to, or 
greater than, $1.00 per share.
---------------------------------------------------------------------------

    The proposed pricing increment for quoting and the proposed 
acceleration of the round lot definition would have an effect on price 
improvement that alters the basis by which the isolated effects of the 
trading increment are compared. However, the Commission is uncertain of 
the effect these proposals would have on the magnitude of price 
improvement, but anticipates they could increase the frequency of price 
improvement and change the basis for the effects of the trading 
increment. Because price improvement is benchmarked to the NBBO, the 
magnitude of price improvement available could decline as a result of 
reductions in the NBBO from the change in the round lot definition, 
which would narrow the spread in stocks priced more than $250, or from 
a smaller tick, which could narrow the spread in tick-constrained 
stocks. Conversely, the frequency and magnitude of price improvement 
could also increase for stocks that are currently tick-constrained 
because, for tick-constrained stocks, the only way to offer price 
improvement on an exchange or ATS is with a midpoint trade. If the 
reduction in tick sizes results in tick-constrained stocks no longer 
being tick-constrained, then exchanges and ATSs could accept odd-lot 
orders inside the NBBO that offer price improvement relative to the 
NBBO. It is unclear which effect would dominate: the decline in the 
NBBO spread leading mechanically to less reported price improvement or 
the increased ability to offer price improvement on stocks that are 
currently tick-constrained.
    For currently price improved trades the effect of the proposal 
would depend on a few factors. Consistent with the analysis in Table 3, 
one study also reports that common price improvement levels are 
$0.0001, $0.001 and $0.002.\574\ For stocks priced equal to or greater 
than $1.00, price improvement of $0.0001 would no longer be achievable. 
However, for a stock priced at $20, price improvement of $0.0001 
represents only 0.05 bps of price improvement, which is not 
economically meaningful. The Commission expects that on such trades the 
wholesaler would likely round down to the price improvement that it 
offers in the majority of cases to the nearest permissible increment 
reducing price improvement by $0.0001 per share traded by retail 
investors, which could mitigate some of the benefits of the proposal as 
a whole. This is because the cost to an OTC market maker of rounding up 
almost an entire tick could be high. For price improvement that occurs 
in increments of $0.001 or $0.002 the effect of the rule would be 
dependent on the stock's designated tick size. For the estimated 
approximately half of trading volume that would likely receive a $0.001 
tick, price improvement of either $0.001 or $0.002 would still be 
possible because both increments align with the $0.001 tick size. For 
the fraction of trading volume receiving a $0.002 tick, price 
improvement of $0.001 would not be possible but price improvement of 
$0.002 would still be possible. For the subset of retail trades in 
stocks that would have a $0.002 tick and would have received price 
improvement of $0.001 absent harmonization, the OTC market maker could 
offer greater price improvement on these trades to $0.002, or it could 
choose to not offer price improvement. Both options come with costs to 
the OTC market maker, so the decision depends on the margins earned by 
OTC market makers when internalizing trades. If it chooses to price 
improve from $0.001 to $0.002 it would earn $0.001 less per share 
transacted. However, if it fails to price improve then both the total 
price improvement offered to retail investors and the fraction of 
trades receiving price improvement would decline, potentially making 
the OTC market maker appear less competitive in terms of attracting 
retail order flow. Additionally, the less price improvement that OTC 
market makers in sum offer to retail traders, the less attractive they 
might appear to the broker-dealers who handle retail traders. This 
coupled with the fact that OTC

[[Page 80326]]

market makers would be restricted to the same minimum trading increment 
as exchanges and ATSs would put competitive pressure on OTC market 
makers to price improve trades because exchanges and other ATSs would 
have an increased ability to potentially innovate and compete for 
retail order with OTC market makers, including wholesalers.\575\
---------------------------------------------------------------------------

    \574\ See Boehmer, et al. (2021), supra note 469.
    \575\ See infra sectionV.E.2.a. for further discussion on these 
competitive effects.
---------------------------------------------------------------------------

    Similar arguments follow for stocks that receive a tick size of 
$0.005 or $0.01. A wholesaler would not be able to offer price 
improvement at common levels and could thus offer less or no price 
improvement--which might harm its competitive standing in terms of 
competing for retail order flow. To offset this consequence the OTC 
market makers, including wholesalers, could instead increase the amount 
of price improvement that it offers.
    To the extent that OTC market makers choose to not offer as much 
price improvement, total price improvement received by retail investors 
might decrease. But, to the extent that OTC market makers choose to 
increase the levels of price improvement to match the tick, then retail 
price improvement might increase. If OTC market makers increase price 
improvement in some instances to match the tick and decrease it in 
others, the net effect for retail price improvement could be positive, 
negative, or neutral.\576\ The Commission believes that investors may 
benefit overall from harmonizing trading and quoting increments 
regardless of the effect on price improvement because of the potential 
long-term competitive effects.\577\
---------------------------------------------------------------------------

    \576\ Market participants have also expressed similar 
uncertainty. NYSE, providing an analysis of the potential effect of 
a $0.0025 tick increment that applies in all settings, stated, ``We 
expect the reaction to [harmonizing the tick increment] will be some 
mix of favorable and unfavorable changes for marketable orders. For 
example, some buy orders will pay higher prices, but some will also 
pay lower prices as additional market participants can effectively 
use price points previously available only on bilateral trades.'' 
See NYSE Tick Harmonization Paper, supra note 126 at 6. Given the 
uncertainty regarding how OTC market makers, including wholesalers 
could react to applying the tick size to trading situations, the 
Commission is not providing quantitative estimates of the effect of 
the proposal on retail price improvement.
    \577\ See infra section V.E.2.a. for further discussion on these 
competitive effects.
---------------------------------------------------------------------------

3. Lower Access Fee Cap
    The proposal would lower the access fee cap from $0.003 per share 
(30 mils) to $0.001 per share (10 mils) for NMS stocks priced $1.00 or 
greater and having a minimum pricing increment greater than $0.001, 
from $0.003 (30 mils) to $0.0005 (5 mils) for NMS stocks priced $1.00 
or greater and a minimum pricing increment of $0.001, and from 0.3% to 
0.05% of the share price for stocks with prices less than $1.00.
    Most exchanges currently charge the maximum access fee allowed 
under the cap. For stocks with narrow spreads such as tick-constrained 
stocks, a 30 mil access fee can increase the cost of demanding 
liquidity by as much as 60%.\578\ The direct economic effect of a lower 
access fee cap is therefore likely to be a lower price to take 
liquidity, and thereby lowering the cost of trading for many investors. 
Moreover, to avoid increasing distortions in order routing, a reduction 
in the tick size must be accompanied by a reduction in the access fee 
cap in the presence of the NBBO. Because the NBBO offers quote 
protection, a liquidity taker must go to the best quote regardless of 
the fee, limiting the ability for market forces alone to lower access 
fees. Some reduction in the access fee cap would be necessary to 
prevent a situation in which the access fee exceeds the quoted spread.
---------------------------------------------------------------------------

    \578\ For a tick-constrained stock, the cost of demanding 
liquidity is one half the spread ($0.005) plus the access fee. An 
increase of $0.005 to $0.008 is a 60% increase.
---------------------------------------------------------------------------

    At present, many exchanges offer rebates for liquidity providers 
and charge fees for liquidity takers (Section V.C.2), with a net 
capture rate of 2 mils for stocks with prices greater than or equal to 
$1.00. Table 11 estimates the rebates exchanges would pay, should this 
2 mil capture fee prevail; that is, for stocks with a 10 mil access 
fee, the rebate would on average be 8 mils per share, for example. The 
analysis also assumes that the behavior of inverted exchanges and off-
exchange venues changes proportionally, though the proposal would not 
require this. As shown in Table 11 below, the Commission estimates that 
the reduction in the access fee cap would lead to a decrease in the 
total access fees collected and rebates distributed of approximately 
$3.8 billion per year, amounting to a 73% reduction in access fees paid 
or an 80% reduction in rebates distributed.\579\ Balancing out expected 
rebates paid on make-take, inverted, and flat fee venues, the 
Commission expects that liquidity demanders would pay $3.2 billion per 
year less in access fees netted across all venues under the proposal 
and liquidity providers would receive $3.2 billion per year less in 
rebates netted across all venues. These numbers represent an 80% 
reduction in rebates received by liquidity providers and a 73% 
reduction in access fees paid by liquidity demanders. Additionally, the 
Commission estimates that the reduction in the access fee cap could 
decrease the net capture of the exchanges by $89 million per year with 
the decline in net capture coming almost exclusively from a lower net 
capture for trading in stocks priced less than $1.00 (see below).\580\
---------------------------------------------------------------------------

    \579\ Estimates in this paragraph are computed by multiplying by 
two the estimates in Table 11.
    \580\ The exception is IEX, which the Commission estimates might 
experience a reduction in access fees collected on trading in tick-
constrained stocks greater than $1.00. This is because the 5 mil 
access fee cap for these stocks is lower than the estimated 6 mils 
that IEX currently charges to access protected quotes. Thus the 
Commission estimates that the IEX might lose approximately $3 
million per year in transaction revenue on trading in these 
securities.
---------------------------------------------------------------------------

    The analysis in this section assumes that exchanges would maintain 
the practice of financing rebates through access fees, and thus for 
transactions in stocks priced $1.00 or more the Commission expects the 
average access fee to be near the 10 or 5 mil access fee cap and the 
rebate to be approximately 2 mils lower on average.\581\ There are 
several reasons for this assumption to hold, at least approximately. 
First, on inverted venues, there is currently no restriction on the 
level of fees for taking liquidity or rebates for posting, yet as shown 
in Table 5 inverted venues generally have fee and rebate levels similar 
to maker-taker venues and approximately a 2 mil capture rate. Second, 
this proposal does not directly alter the ability or the incentives for 
an exchange to subsidize rebates. Additionally, if exchanges were to 
subsidize rebates by taking a net loss per share transacted, they would 
be vulnerable to experiencing extreme and unpredictable losses if 
volumes spike. Trading volumes can vary significantly through time with 
very little ability to predict the timing and magnitude of changes in 
trading volume. For example, in January 2021 volume spiked dramatically 
for certain stocks relative to pre-January 2021 levels.\582\ The 
Commission nonetheless acknowledges uncertainty over whether this 2 mil 
capture rate would persist or be lower. The capture rate could be lower 
should exchanges choose to subsidize rebates on stocks priced $1.00 or 
more to a greater extent, choose to subsidize trading on stocks with 
prices less than $1.00, or choose to alter their business model in 
response to the changes.
---------------------------------------------------------------------------

    \581\ At certain pricing tiers rebates may exceed the access fee 
cap. However, because total overall fees exceed the total rebates 
paid out, the average rebate would remain lower than the average 
access fee.
    \582\ See Staff Report on Equity and Options Market Structure, 
supra note 20.
---------------------------------------------------------------------------

    Table 11 uses volume estimates from Table 6 to provide estimates of 
the fees

[[Page 80327]]

and rebates that would have been collected and disbursed in the first 
six months of 2022 if the proposed access fees were implemented.\583\ 
Annualized estimates are simply these estimates multiplied by two. 
Panel A shows that under the current system with a 30 mil access fee 
cap for quotations priced $1.00 or more and a 0.3% access fee cap for 
transactions less than $1.00 the exchanges collected an estimated $2.55 
billion in access fees and distributed $2.31 billion in rebates in the 
first six months of 2022, providing an estimated net capture of $240 
million for the exchanges in that time period.\584\ Under the proposed 
amendment to rule 610 the Commission estimates that the exchanges would 
collect $652 million in access fees and distribute $455 million in 
rebates, providing the exchanges a net capture of $197 million over the 
same time period. Thus total access fees collected would be expected to 
decline by $1.91 billion ($3.82 billion annually) and rebates 
distributed by $1.86 ($3.72 billion annually) billion in the first six 
months of 2022. This amounts to an estimated decline in net capture of 
$44.5 million ($89 million annually) across all exchanges.
---------------------------------------------------------------------------

    \583\ This assumes that exchanges continue the practice of 
funding rebates through access fees, that trading volumes are 
unchanged relative to the first six months of 2022, that the 
distribution of trading volume across exchanges is unchanged, and 
that the distribution of trading volume priced below $1.00 and at or 
above $1.00 remains unchanged.
    \584\ See Table 7 for additional analysis on current estimates 
of exchange net capture.
---------------------------------------------------------------------------

    Panel B provides estimates of the effect of the proposal on access 
fees paid and rebates received by liquidity demanders and providers 
separately under the proposed rule. The Commission estimates that under 
the proposed rule liquidity demanders would pay $1.56 billion ($3.12 
billion annually) less in access fees and liquidity providers would 
receive $1.52 billion ($3.04 billion annually) less in rebates over the 
same time period. Thus, the current estimated $1.9 billion transfer 
facilitated by access fees and rebates from liquidity demanders to 
liquidity providers in the first six months of 2022 would be decreased 
by 80% under the proposal.

        Table 11--Estimated Access Fees and Rebates Collected Current and Proposed Jan. to June 2022 \a\
----------------------------------------------------------------------------------------------------------------
                                                              Current            Proposed          Difference
----------------------------------------------------------------------------------------------------------------
                  Panel A: Estimated Access Fees Collected and Rebates Distributed Jan-Jun 2022
----------------------------------------------------------------------------------------------------------------
Fees Collected.........................................     $2,554,250,000       $652,318,000    -$1,901,932,000
Rebates Distributed....................................      2,312,561,000        455,081,000     -1,857,480,000
Exchange Capture.......................................        241,688,000        197,237,000        -44,451,000
----------------------------------------------------------------------------------------------------------------
                                    Panel B: Estimated Fees by Liquidity Type
----------------------------------------------------------------------------------------------------------------
Liquidity Demander.....................................      2,135,292,000        568,631,616     -1,566,668,000
Liquidity Provider.....................................     -1,893,604,000       -371,394,303      1,522,210,000
Exchange Capture.......................................        241,688,000        197,237,312        -44,451,000
----------------------------------------------------------------------------------------------------------------
\a\ This table takes trading volumes presented in Table 6 to calculate aggregate fee and rebate estimates under
  the proposal. It separately accounts for volume priced less than $1.00 as well as trading that occurred in
  stocks that had time weighted quoted spreads less than or equal to $0.011--i.e., stocks that would likely have
  received a $0.001 tick under the proposed changes to rule 612. These stocks are determined using Dec. 2021
  time weighted quoted spreads for all trading volume in Jan. through Mar. and Mar. 2022 time weighted quoted
  spreads for volume Apr. through June. Current estimates are drawn from Table 7 while proposed estimates are
  computed assuming that non-tick-constrained volume priced equal to or greater than $1.00 on maker-taker or
  inverted exchanges pay a 10 mil access fee and receive an 8 mil rebate. For tick-constrained volume the
  assumption is 5 mil access fee and 3 mil rebate. For IEX we assume a 6 mill access fee for non-tick-
  constrained volume and a 5 mil access fee for tick-constrained volume. For volume priced less than $1.00 we
  assume that no exchange offers a rebate and that all exchanges charge 0.05% to take liquidity except for IEX
  whom we assume charges both sides 0.05%. Computations are made at the exchange and then aggregated as shown
  above.

    Table 11 presents analysis suggesting that the exchanges could lose 
approximately $89 million per year in net capture. This estimated 
decline in transaction revenue comes almost exclusively from the 
reduction in the access fee cap for transactions in securities below 
$1.00. This is because for transactions priced equal to or greater than 
$1.00 the Commission expects that, except for exchanges that choose to 
rely mostly on transaction fee revenue which tend to have a higher net 
capture, the exchanges would largely maintain their current net 
capture.\585\ Thus the decline in exchange net capture would be driven 
almost exclusively by an anticipated decline in the net capture on 
transactions below $1.00. For these transactions most exchanges 
currently charge the maximum 0.3% but offer no rebates.\586\ Because 
very few exchanges offer rebates on stocks priced below $1.00, the 
access fee represents the exchange's net capture. Lowering the access 
fee from 0.3% to 0.05% on these transactions would represent a decrease 
in net capture of 83% for many exchanges. This decline would not be 
expected to be uniform. Some exchanges do not charge any fees for 
trading in sub $1.00 securities while others charge a fee to both sides 
of a sub $1.00 transactions. Additionally, the exchanges differ in the 
fraction of sub $1.00 trading volume that they handle. Table 12 
provides annualized estimates of the effect of lowering the access fee 
on exchange net capture given realized volumes in the first 6 months of 
2022.
---------------------------------------------------------------------------

    \585\ As discussed in section III.C.2, the Commission believes 
that most exchanges have a net capture of approximately 2 mils on 
transactions priced greater than $1.00. For reasons discussed in 
this section the Commission believes that it is reasonable to assume 
that exchanges with a current 2 mil net capture would be able to 
continue to earn a 2 mil net capture. The Commission expects one 
exception to its general belief that all exchanges would likely be 
able to maintain their net capture on transactions priced greater 
than $1. The Commission believes that IEX might receive a lower net 
capture for transactions associated with volume assigned the 5 mil 
access fee cap. The Commission estimates, based on Table 5 that IEX 
has estimated net capture of 6 mils per transaction priced equal to, 
or greater than, $1.00 per share. Under the assumption IEX would not 
begin charging access fees to liquidity providers, its maximum net 
capture per transaction on stocks with a 5 mil access fee cap would 
be 5 mils. Thus our estimates assume that IEX would lose 1 mil of 
net capture on estimated volume that IEX executed that would have 
received the 5 mil access fee cap. The Commission estimates that 
this loss would account to approximately $1.5 million in lost 
transaction fee revenue in the first six months of 2022, or $3 
million annualized.
    \586\ See Table 5.

[[Page 80328]]

Table 12--Estimated Effect of Policy on Exchange Transaction Capture \a\
------------------------------------------------------------------------
                                           Revenues  ($)   Revenues  (%)
------------------------------------------------------------------------
Nasdaq..................................    -$33,527,000             -21
NYSE....................................     -24,676,000             -20
Cboe....................................     -22,356,000             -20
MEMX....................................      -1,960,000              -7
IEX.....................................      -5,378,000             -10
MIAX....................................      -1,005,000             -14
LTSE....................................               0               0
                                         -------------------------------
    Total...............................     -88,902,000             -18
------------------------------------------------------------------------
\a\ To compute the variable Revenue ($) which provides an annualized
  estimate of the effect of the proposed amendment to rule 612 on
  exchange net capture, we assume that IEX loses 1 mil on transactions
  that are priced equal to, or greater than, $1.00 per share and are
  tick-constrained and (and thus may receive the $0.001 tick and 5 mil
  access fee). For all other exchanges the net capture on transaction
  priced equal to, or greater than, $1.00 per share is expected to
  remain unaffected by the proposal. For transaction volume below $1.00
  per share estimates for the decline in transaction revenue is computed
  by assuming that under the proposal all exchanges would charge 0.05%
  to one side of the transaction and nothing to the other side of the
  transaction. Sub $1.00 dollar volume estimates for each exchange are
  taken from Table 6. This revenue is then compared to the estimated
  transaction revenue in the current environment that is estimated using
  the sub $1.00 transaction fees/rebates for each exchange presented in
  Table 5 Panel B and multiplying them by volume estimates for each
  exchange from Table 6. The difference is presented in the table. To
  estimate the impact on total transaction fee revenues the Commission
  assumes that all make-take and inverted exchanges would earn 2 mils on
  all transactions priced equal to or greater than $1.00 per share and
  Flat fee venues earn 6 mils. This revenue is added to the sub $1.00
  transaction revenue estimated as stated earlier in this footnote. The
  variable Revenue (%) is computed as the Revenue ($) divided by the
  revenue total revenue converted to a percent. To annualize, all totals
  are multiplied by 2.

    The estimated $3 billion annual reduction in rebates received by 
liquidity providers under the proposal could impact market 
participants, specifically algorithmic and high-frequency traders, 
which specialize in liquidity provision and rebate capture strategies. 
Holding the spread constant, a rebate of 28 mils provides a significant 
fraction of the total revenue earned by liquidity providers on each 
share transacted.\587\ Even absent a reduction in the tick increment, 
the reduction in rebates from an estimated 28 mils average to either 8 
or 3 mils would significantly decrease the revenue earned per share 
transacted by a liquidity provider.\588\ Any additional reduction in 
the spread due to the reduction in the tick size for tick-constrained 
stocks would further reduce the revenue earned by liquidity providers.
---------------------------------------------------------------------------

    \587\ See supra section V.C.2
    \588\ For example, on a stock with a $0.01 spread the liquidity 
demander would earn half the spread ($0.005) plus the rebate 
($0.0028), or $0.0078 per share in the current market. Under the 
current regime if this stock was assessed a 5 mil access fee cap the 
expected rebate would decline to $0.0003 for a total profit of 
$0.0053, or a 32% reduction in total revenue to the liquidity 
provider on the transaction. This reduction would occur before any 
tick size reduction in the spread is taken into account.
---------------------------------------------------------------------------

    The primary likely effect of the decline in rebates disbursed and 
access fees collected would be to reduce the amount of liquidity 
provision--particularly among stocks with narrow spreads. This 
reduction in liquidity provision may not be harmful to trading quality 
for these stocks, under the reasoning that the reduction in rebates 
would alleviate currently existing distortions that lead to an 
oversupply of liquidity relative to the demand of liquidity, and would 
better allow the forces of supply and demand to determine market prices 
and lower overall transaction costs for liquidity demanders.
    If tick sizes were infinitely small, and absent other distortions, 
then fees and rebates would not affect the cost of trading because 
markets would simply adjust quotes by the amount of the rebate such 
that the spread with rebates included is the same.\589\ However, 
current U.S. equity markets differ from this frictionless construct 
because there is a finite tick. In this environment, and particularly 
for stocks with narrower spreads, high access fees and rebates can 
distort liquidity supply and demand by artificially increasing the cost 
of taking liquidity and the revenue to providing liquidity. This 
dynamic creates an environment with too much liquidity supply relative 
to liquidity demand.
---------------------------------------------------------------------------

    \589\ See, e.g., Colliard and Foucault (2012), supra note 277; 
James Angel, Lawrence Harris, and Chester Spatt, Equity Trading in 
the 21st Century, 1 Q. J. Fin. 1 (2011).
---------------------------------------------------------------------------

    Consider a stock with a $0.01 spread. In this case, a liquidity 
provider offering a protected quote at a maker-taker venue under the 
current system with a 30 mil access fee and a 28 mil rebate will earn 
one half the spread ($0.005) plus the rebate ($0.0028) yielding a 
profit of $0.005+$0.0028=$0.0078 per share traded. In this case a 
rebate of 28 mils increases the liquidity provider's profit on the 
transaction by approximately 50%. For liquidity demanders, the 30 mil 
access fee produces the exact opposite effect, increasing transaction 
costs by approximately 50%. The existence of a $0.01 tick prevents 
spreads from adjusting to levels that can equate liquidity supply and 
demand, leading to an oversupply of liquidity relative to demand.
    Reducing the access fee cap to 10 or 5 mils significantly reduces 
the effect that access fees have on the incentive to demand and provide 
liquidity and would allow markets to realize prices that better reflect 
the underlying economics of liquidity supply and demand. For example, 
consider a stock with a prevailing spread of approximately $0.01, an 
access fee cap of 5 mils, and an average rebate of 3 mils. In this case 
a liquidity provider on a maker-taker exchange will earn half the 
spread plus a 3 mil rebate for a total of ($0.005+$0.0003=) $0.0053. In 
this case the total cost to demanding liquidity falls by approximately 
50% and the access fee is just 5.7% of the total transaction costs. For 
a stock with a $0.03 spread and a $0.005 tick, a 10 mil access fee, and 
an 8 mil rebate the liquidity provider in this case earns half the 
spread plus the rebate for a total of ($0.0150+$0.0008=) $0.0158. In 
this case the rebate is only 5% of the total revenue for providing 
liquidity. The effect of rebates diminishes as an economic incentive as 
spreads widen. For example, consider a stock with a $0.10 spread. Even 
in the baseline case with a 28 mil rebate. A liquidity provider will 
earn half the spread plus a 28 mil rebate for a total revenue of 
($0.0500+$0.0028=) $0.0528 per share. In this case the rebate is 5.6% 
of the total cost, a fraction that drops to 1.5% with an 8 mil rebate 
under the proposal.

[[Page 80329]]

    Standard supply and demand arguments suggest that if the revenue 
earned per share transacted decreases--i.e., the price of liquidity 
decreases--the amount of liquidity supply will also decrease, reducing 
the oversupply of liquidity. This reduction in liquidity provision 
likely means that some proprietary trading desks and firms that 
currently specialize in providing liquidity and capturing rebates would 
cease operation as the market adjusts from one with significant 
liquidity subsidization to one with less subsidization and where the 
ask and bid prices are more reflective of the forces of supply and 
demand for liquidity.\590\
---------------------------------------------------------------------------

    \590\ Market participants sometimes refer to the oversupply of 
liquidity relative to demand as excessive intermediation (see supra 
note 100). Thus reducing the access fee would reduce excessive 
intermediation.
---------------------------------------------------------------------------

    The primary beneficiaries of the reduction in the access fee cap 
would be liquidity demanders. For stocks with narrow spreads such as 
tick-constrained stocks, a 30 mil access fee can increase the cost of 
demanding liquidity by as much as 60%.\591\ Consequently, reducing the 
access fee significantly reduces the cost of demanding liquidity in the 
predominant maker-taker trading environment. This effect coupled with 
the expected decrease of liquidity suppliers can be expected to 
decrease competition to provide liquidity. Less competition to provide 
liquidity means that queue lengths could decrease and fill rates 
increase because it would be easier to get to the front of the order 
book. This effect could allow non high-frequency traders -more 
opportunity to fill orders using liquidity-providing instead of 
liquidity-demanding transactions.
---------------------------------------------------------------------------

    \591\ For a tick-constrained stock, the cost of demanding 
liquidity is one half the spread ($0.005) plus the access fee. An 
increase of $0.005 to $0.008 is a 60% increase.
---------------------------------------------------------------------------

    The Commission expects the decline in the access fee to have 
opposing effects on trading volume. If more investors end up 
interacting with one another without the intermediation of a 
specialized liquidity provider or high frequency market makers the 
total number of transactions and trading volume may decrease. However, 
the basic forces of supply and demand suggest that as the price of a 
good decreases, the demand for that good increases. Thus, if the cost 
of demanding liquidity decreases, more investors will seek to trade 
which would increase trading volume. This could occur as market 
participants take advantage of the lower cost of demanding liquidity to 
more actively manage their portfolios--generating more trading.\592\ 
Taken alone, a reduction in the access fee could lead to wider spreads 
in some cases by reducing the ability to use rebates as a form of 
intra-tick pricing. However, the reduction in tick size also reduces 
the need for intra-tick pricing. For instance if the ask price that 
equates supply and demand is equal to $10.0015 then absent a rebate and 
with a $0.01 tick, the prevailing ask price would be $10.01--the next 
feasible price. This price would indicate a distortion of $0.0085. 
However, with a 28 mil rebate, the prevailing ask price will be $10.00 
because once the rebate is taken into account, the net price including 
the rebate would be $10.0028 which is greater than $10.0015. While 
still a distortion, the distortion in this case would be smaller at 
$0.0015. Thus, in this case the existence of a 28 mil rebate can narrow 
the spread by allowing a form of intra-tick pricing. In this example 
with a rebate of either 3 or 8 mils the prevailing price would still be 
$10.01 because the net price including rebates on a maker-taker venue 
would still be less than $10.0015. However, because the reduction in 
the access fee is also accompanied by a reduction in the tick size, 
markets would be able to more naturally find prices that equate supply 
and demand without needing rebates to minimize the distortion. In the 
example, where the ask price that equates liquidity supply and demand 
is $10.0015, and if the stock were assigned a tick of $0.001 under the 
proposed changes, the prevailing ask price would be $10.002 and the 
distortion would be $0.005. Thus because of the reduced tick, the need 
for intra-tick pricing via rebates is significantly reduced.
---------------------------------------------------------------------------

    \592\ See, e.g., Roni Michaely, Jean-Luc Vila, and Jiang Wang, A 
Model of Trading Volume with Tax-induced Heterogeneous Valuation and 
Transaction Costs, 5 J. Fin. Intermediation 340 (Oct. 1996) for an 
empirical analysis of the relation between trading volume and 
transaction costs.
---------------------------------------------------------------------------

    The reduction of the access fee cap, as well as relaxing of the 
tick constraint, could also simplify markets by reducing the need for 
complex order types that are designed to take advantage of the system 
of fees and rebates. The reduction would also likely simplify the 
overall system of fees by compressing the fees that are possible to 
charge and thereby also constraining the ability for exchanges to offer 
multiple pricing tiers with economically meaningful differences. This 
simpler market structure could reduce the cost associated with 
designing and executing an order routing strategy and could thus 
decrease transaction costs. Simpler fees and rebates could also 
translate into a reduced frequency and complexity of amendments to 
exchange access fees and rebates. If so, the proposal could result in 
cost savings to exchanges associated with fewer Rule 19b-4 filings.
    A lower access fee cap could induce some trading volume that 
currently transacts on ATSs to revert to exchanges. This would occur to 
the extent that traders who may route orders to ATSs in order to avoid 
high access fees instead route orders to exchanges due to lower access 
fees.\593\ More trading volume on exchanges could improve overall price 
efficiency.\594\ However, these effects could be lessened or reversed 
due to the reduction in rebates, since rebates incentivize trading on 
exchanges versus off-exchange.
---------------------------------------------------------------------------

    \593\ See Menkveld, et al. (2017), supra note 275.
    \594\ See Foley, et al. (2016), supra note 465.
---------------------------------------------------------------------------

    Finally, for stocks priced less than $1.00 the effect of lowering 
the access fee will primarily be to lower the transaction costs 
associated with trading in these securities. Most exchanges do not 
offer rebates for stocks priced less than $1.00, or if they do the 
rebates are quite small. Therefore, the effect of the proposal on such 
rebates is likely to be minimal. Lower transaction costs for these 
securities may improve liquidity for stocks with prices less than 
$1.00. However, given the relatively low natural trading interest, the 
Commission does not expect a significant improvement in the trading 
environment for these securities.
4. Exchange Fees and Rebates Determinable at the Time of Execution
    The proposal requires that exchange fees and rebates be 
determinable at the time of execution. In the current environment, the 
prices adjusted for the fees and rebates that investors pay can vary by 
as much as 60 mils (0.6c) per share for orders with the same nominal 
execution price.\595\ Thus, allowing market participants to determine 
the applicable fees and rebates at the time of execution could help 
improve investor execution quality by providing certainty as to the net 
fee and rebate price applicable at a given exchange at the time that an 
order is routed to that exchange.
---------------------------------------------------------------------------

    \595\ If rebates and transaction fees are both approximately 30 
mils on both maker-taker and inverted venues, then the realized 
price difference for an order with the same nominal value can be as 
much as 60 mils depending on where the order is submitted.
---------------------------------------------------------------------------

    Having fees and rebates determinable at the time of execution could 
make it easier for broker-dealers to pass such fees and rebates on to 
the end customer. Currently, it is difficult for a broker-

[[Page 80330]]

dealer to pass on fees and rebates to individual customers because the 
level of fees and rebates is not determinable at the time of execution 
and the tier into which a broker-dealer falls, which determines total 
fees and rebates, is based on total broker-dealer activity and not an 
individual trade.
    Access fees create potential conflicts of interest. Passing on fees 
and rebates to end customers could eliminate such distortions and lead 
to improved overall order execution for end customers. Additionally, 
the ability to pass on the fees and rebates to end customers might also 
make customers more aware of these fees and rebates so that they can 
better inform their broker-dealers how to route with respect to fees 
and rebates which could also lead to better execution for end 
customers.
    While the ability to determine fees and rebates at the time of 
execution would make passing fees and rebates on to the end customer 
more feasible, it is not clear in practice how much this would occur as 
there are significant uncertainties regarding how much demand currently 
exists for rebates to be passed through by end investors. Academic 
research shows that execution skill can have a significant impact on an 
investor's portfolio returns.\596\ It is possible that more 
sophisticated market participants with high trading volumes, and thus 
higher transaction costs, might welcome the opportunity to better 
manage access fees and rebates for their trades. On the other hand, 
less sophisticated traders with low trading volumes might be less 
inclined to request that their broker-dealers pass through access fees 
and rebates.
---------------------------------------------------------------------------

    \596\ See Amber Anand, et al., Performance of Institutional 
Trading Desks: An Analysis of Persistence in Trading Costs, 25 Rev. 
Fin. Stud. 557 (2012).
---------------------------------------------------------------------------

    Making fees and rebates determinable at the time of execution could 
also enable the customers of broker-dealers to better discuss 
transaction fees and rebates with their broker-dealers, and potentially 
request data on such fees. Doing so could improve broker-dealer 
accountability and lead to better outcomes for customers.\597\
---------------------------------------------------------------------------

    \597\ See infra section V.E.2.c.
---------------------------------------------------------------------------

5. Acceleration of the MDI Rules and Addition of Information About Best 
Odd-Lot Orders
    The proposal would result in four changes to NMS data. Two of the 
changes would accelerate the implementation of specific aspects of MDI, 
namely the round lot definition and the inclusion of odd-lot quotations 
priced better than the NBBO in NMS data, and would, therefore, result 
in realizing the economic effects of these MDI Rules sooner. The 
Commission acknowledges that the economic effects of the proposed 
acceleration would be temporary only until the accelerated aspects of 
the MDI Rules would otherwise have been implemented. The proposal would 
impose a new requirement on the exclusive SIPs to disseminate the 
accelerated odd-lot information until the exclusive SIPs are retired, 
the effect of which is to guarantee that the odd-lot information would 
be disseminated.\598\ The proposal does however present the possibility 
that the new requirements on the SIPs could reduce competing 
consolidator competition, which could reduce the expected benefits of 
the MDI Rules.\599\ The proposal would also require the dissemination 
of a standardized best odd-lot order or BOLO. The primary economic 
effect of this would be to provide a standard benchmark that market 
participants could use to gauge execution quality--particularly for 
smaller or odd-lot orders.
---------------------------------------------------------------------------

    \598\ See infra Section V.D.5.c. for additional discussion of 
this effect. While this proposal requires the exclusive SIPs to 
distribute odd-lot data, the MDI Rules do not require the competing 
consolidators to disseminate odd-lot data. However, the MDI Adopting 
Release anticipated that at least one competing consolidator will do 
so because there would be demand for the data. See supra section 
V.C.3.
    \599\ See infra section V.E.2.c for additional discussion of MDI 
acceleration and the potential effect on competitive consolidator 
competition.
---------------------------------------------------------------------------

a. Round Lot Definition
    The round lot definition in the MDI Rules will result in numerous 
economic effects and the proposal would result in realizing these 
effects sooner. The primary effects stem from the MDI Rules round lot 
definition mechanically shrinking the NBBO for stocks priced greater 
than $250.\600\ Other effects of changing the round lot definition 
include increased transparency and better order execution,\601\ as well 
as any effects from potentially having more orders routed to exchanges 
instead of ATSs.\602\ The costs of changing the round lot definition 
derive from upgrading systems to account for additional message traffic 
and modifying and reprogramming systems.\603\ The Commission also 
expects that changing the round lot definition will impact the 
mechanics of other rules and regulations.\604\ These economic effects 
would be realized earlier than is currently estimated under the 
existing MDI timeline because this portion of the MDI Rules is not set 
to be implemented until the end of the implementation timeline. 
Further, because the first steps of the timeline have not been 
accomplished,\605\ and the Commission is uncertain when exactly the 
round lot definition otherwise will be implemented, the degree of the 
effect of the acceleration, is unknown.\606\
---------------------------------------------------------------------------

    \600\ See MDI Adopting Release, supra note 5, section 
V.C.1.(b).(i), for the full discussion of the effect of changing the 
round lot size on the NBBO.
    \601\ See MDI Adopting Release, supra note 5, sections 
V.C.1.b.(ii) and V.C.1.b.(iii), for the full discussion of the 
effect of changing the round lot size on transparency and execution 
quality.
    \602\ See MDI Adopting Release, supra note 5, sections 
V.C.1.b.(iv) for the full discussion of the effect of changing the 
round lot size on exchange competition and order routing.
    \603\ See MDI Adopting Release, supra note 5, section 
V.C.1.b.(vi) for the full discussion of the expected costs of 
changing the round lot size. See also infra section V.D.6. for an 
estimation and discussion of these compliance costs as they pertain 
to the proposed acceleration.
    \604\ See MDI Adopting Release, supra note 5, section 
V.C.1.b.(vii), for the full discussion of the effect of changing the 
round lot size on other rules and regulations.
    \605\ See supra section IV.A.1 for a discussion of the delays.
    \606\ See supra section II.B. for a discussion of the factors 
that affect when MDI will be implemented and a discussion of an 
estimate of the proposed acceleration of at least two years after 
the Commission's approval of the plan amendment(s) required by rule 
614(e).
---------------------------------------------------------------------------

    The Commission recognizes that the earlier implementation of the 
round lot definition could affect the proposed tiered tick structure by 
sooner increasing the number of stocks subject to a minimum pricing 
increment of less than $0.01, but does not expect this effect to be 
substantial. Specifically, a mechanically tighter NBBO would reduce the 
Time-Weighted Average Quoted Spread used to determine the appropriate 
tick increment for stocks priced greater than $250. However, higher-
priced stocks also tend to have higher spreads that are unlikely to 
narrow enough for the proposal to result in a smaller minimum pricing 
increment.\607\
---------------------------------------------------------------------------

    \607\ See supra Table 8 note a, for a discussion of the impact 
of the round lot definition on the estimates of which stocks would 
receive a reduced tick size. In the MDI Rules the Commission 
estimated an average reduction in quoted spreads, conditional on the 
round lot definition resulting in a reduction of roughly 15% for 
stocks priced $250-$1,000 and 28% for stocks priced $1,000-$10,000. 
Given the average quoted spread of $0.35 for stocks priced $250-
1,000 and $2.90 for stocks priced $1,000-$10,000 the expected 
mechanical reductions are likely not sufficient to reduce the 
spreads of many of these stocks to the point where they would 
qualify for a lower tick size in this proposal. See MDI Adopting 
Release, supra note 5, section V.C.1.b.(i).
---------------------------------------------------------------------------

    The Commission also recognizes that both the reduction in tick size 
and accelerating the definition of round lot would reduce the depth of 
liquidity at the NBBO. These effects might amplify each other in a 
small set of stocks. A

[[Page 80331]]

reduction in tick size would spread liquidity across more price levels 
while the implementation of the round lot definition would result in 
displaying smaller quotes at the NBBO. The proposal could result in 
this effect being amplified for stocks that trade above $250 with 
spreads narrower than $0.04 as these stocks would receive both smaller 
tick and smaller round lot sizes, which is likely only a small number 
of stocks. This reduction in depth at the NBBO would temporarily reduce 
the information about liquidity available in the market for market 
participants who do not receive depth of book information from 
proprietary data feeds. However, the eventual implementation of 
including the depth of book information in consolidated market data due 
to the implementation of the MDI rules would render this effect 
temporary. At that point in time, consolidated market data is expected 
to contain depth information at many more price points, which would 
largely counteract the effects of a reduction in displayed depth from 
the implementation of the round lot definition and even from a 
reduction in tick size.
b. Including Odd-Lots in NMS Data
    The proposed acceleration of the implementation of the MDI Rules 
that expands the NMS data to include odd-lot information inside the 
NBBO would result in sooner realizing some, but not all economic 
effects of this aspect of the MDI Rules.\608\ The Commission believes 
that this odd-lot information could be useful to consumers of SIP data 
who could use it to make inferences about market conditions and, thus, 
could lead to better investment decisions and increased market 
efficiency. It could also lessen the effect of a reduction in displayed 
depth at the NBBO resulting from either a smaller tick size or a 
smaller round lot. Specifically, the proposal to expedite 
implementation of inclusion of odd-lot data would sooner allow 
individual investors whose broker-dealers subscribe to the data to 
visually monitor the market environment and determine profitable 
trading opportunities. In addition, the proposal would change the 
timing and magnitude of compliance costs and other costs.\609\ These 
costs would include: the cost for exclusive SIPs to upgrade existing 
infrastructure and software to handle the dissemination of additional 
message traffic, the cost to SROs to implement system changes required 
in order to make the data needed to generate odd-lot information 
available to exclusive SIPs, and the cost of technological investments 
market participants might have to make in order to receive the proposed 
SIP data.\610\
---------------------------------------------------------------------------

    \608\ See MDI Adopting Release, supra note 5, section 
V.C.1.c.(i), for the full discussion of the effects of including 
odd-lot information inside the NBBO in its definition of core data. 
Also, the MDI Rules do not require that the competing consolidators 
to disseminate odd-lot information, but the Commission anticipated 
in the MDI Adopting Release that at least one would do so. The 
proposed requirement that the exclusive SIPs disseminate odd-lot 
information helps ensure that the economic effects of the proposed 
acceleration of the MDI Rules occur. See infra section V.D.6. for a 
discussion of the costs to the exclusive SIPs.
    \609\ See MDI Adopting Release, supra note 5, at section 
V.C.1.c.(iv) for the full discussion of the costs associated with 
expanding core data to include odd-lot information inside the NBBO. 
See also infra section V.D.6 for further discussion of compliance 
costs.
    \610\ Id.
---------------------------------------------------------------------------

    While these economic effects would be realized sooner, the 
Commission does not expect that the proposal would accelerate all the 
effects described in the MDI Rules related to adding to NMS data odd-
lot information inside the NBBO. The proposal would not accelerate the 
benefits from allowing some market participants to reduce data expenses 
required for trading by providing a reasonable alternative to some 
market participants to proprietary data.\611\ As such, the proposal 
would also not accelerate the cost to users of propriety data whose 
information advantage would dissipate somewhat. In particular, the 
Commission does not believe that adding the specified odd-lot 
information to the exclusive SIPs would result in low-latency traders 
substituting the exclusive SIPs for their current proprietary data 
usage. This is because a key component of the MDI Rules for this 
functionality is an expected reduction in latency of NMS data 
anticipated from the competing consolidator model of NMS data 
distribution.\612\ The exclusive SIPs are not expected to be fast 
enough to replace proprietary data because existing SIP latency would 
not be reduced or affected by this proposal. Thus, the proposal would 
not accelerate the benefits anticipated in the MDI Rules that pertain 
to using low-latency odd-lot information. Instead, the Commission 
expects these effects after the implementation of all MDI Rules.
---------------------------------------------------------------------------

    \611\ Id.
    \612\ See MDI Adopting Release, supra note 5, at n.1939.
---------------------------------------------------------------------------

    Market participants who receive and use odd-lot information from 
the exclusive SIPs would also incur costs if the acceleration results 
in additional systems changes. Specifically, if the exclusive SIPs 
changed data specifications to add odd-lot information, market 
participants receiving odd-lot information from exclusive SIPs would 
need to make systems changes upon implementation of the proposal. 
Because the data specifications of the competing consolidators are 
unknown and could differ from the data specification of the exclusive 
SIPs, market participants receiving SIP data could need to make systems 
changes again to receive the additional data from a competing 
consolidator upon full implementation of the MDI Rules. If there are 
significant fixed costs associated with system changes that are 
incurred on each change, then multiple system changes would be 
inefficient and could increase costs. Because market participants who 
receive odd-lot information from the exclusive SIPs would need to make 
an extra systems change stemming from this proposal, they could be 
discouraged from making systems changes to make use of the odd-lot 
information and, instead, wait until MDI implementation. This could 
dampen some of the benefits of the proposal.
    To the extent that some market participants store SIP data for 
various purposes (such as transaction cost analysis) the storage costs 
could increase with the proposal as the amount of SIP data increases 
with the inclusion of odd-lot data. Many factors affect these costs, 
such as the number of market participants storing SIP data, the data 
structures they use to store SIP data, whether these market 
participants would choose to store all or just some of the SIP data 
provided by the proposal, and the period over which the proposal would 
affect these storage costs. Based on the nature of several of these 
factors, the Commission is unable to estimate these costs.

[[Page 80332]]

c. Dissemination of Odd-Lots in SIP Data
    The proposed requirement for the exclusive SIPs to disseminate odd-
lot data would ensure realizing the benefits of accelerating the 
implementation of including odd-lot information in NMS data while 
imposing costs on exclusive SIPs and potentially market 
participants.\613\ The MDI Rules do not require the competing 
consolidators to disseminate odd-lot data. However, the Commission 
estimated that at least one competing consolidator will do so because 
there would be demand for the data.\614\ Unlike competing 
consolidators, each exclusive SIP is the only distributor of the 
entirety of its data and may lack the incentive to disseminate the 
data. As a result, the Commission is not certain whether the exclusive 
SIPs would disseminate odd-lot information absent a requirement to do 
so, the benefits of the acceleration could be at risk without the 
requirement to disseminate.\615\
---------------------------------------------------------------------------

    \613\ See infra section V.D.6 for additional discussion of the 
costs the exclusive SIPs are expected to incur.
    \614\ See supra note 518.
    \615\ The Commission recognizes that the exclusive SIPs have 
some incentive to offer odd-lots as indicated by the exclusive SIPs 
seeking comment on doing so. See, e.g., 2022 SIP Odd-Lot Request for 
Comment, supra note 371.
---------------------------------------------------------------------------

    While the inclusion of the odd-lot data could impose costs on those 
who receive and use exclusive SIP odd-lot data, the requirement that 
exclusive SIPs disseminate the data could impose costs on those who 
receive but do not have an interest in using odd-lot information 
provided in SIP data. In particular, depending on the SIP data 
specifications, such SIP data users might need to alter their systems 
to remove odd-lot information. Further, such SIP data users could incur 
the cost of any SIP data fee increases intended to offset the costs to 
exchanges and exclusive SIPs. However, the Commission notes that SIP 
data fees did not increase when the exclusive SIPs started to include 
odd-lot trades.
d. Best Odd-Lot Order Definition
    The proposal goes beyond the MDI Rules by proposing that NMS data 
also include information on the best priced odd-lot orders across all 
markets. Including the best odd-lot order in a standardized form would 
offer market participants a standard benchmark, like the NBBO, to use 
to measure execution quality. Currently, this information is only 
available to market participants who have proprietary data feeds, and 
even then there could be differences across market participants with 
this data in how exactly market participants calculate the best odd-lot 
order (or how many proprietary feeds they include). The best odd-lot 
information in the NMS data would provide a standardized benchmark. 
This benchmark may allow market participants to better monitor the 
execution quality of their broker-dealers and send more trading volume 
to broker-dealers with better performance.\616\ Thus, including the 
best odd-lot information could enhance competition among broker-dealers 
leading to better trade execution and perhaps a lower cost to customers 
for execution services.
---------------------------------------------------------------------------

    \616\ While the Commission does not expect most retail traders 
would engage in this sort of benchmarking due to a lack of technical 
capacity to do so among most retail traders, institutional traders 
likely have such capacity and so would engage in this type of 
monitoring. Institutional traders have strong incentives to monitor 
all aspects of transaction costs as these costs can significantly 
affect portfolio performance. See Anand, et al. (2012), supra note 
596.
    \617\ This is consistent with the expectations that exclusive 
SIPs would likely become competing consolidators expressed in the 
MDI Adopting Release, supra note 5, at section V.C.2.(a)(ii).
---------------------------------------------------------------------------

6. Compliance Costs
    The Commission believes that various market participants would 
incur implementation and ongoing costs to comply with the proposal. 
These costs are presented in Table 13 and discussed below. Some costs 
presented in Table 13 represent costs that might not be new but rather 
were anticipated in the MDI Rules. Specifically, those costs are 
associated with the acceleration of aspects of the MDI Rules. These 
include an estimated $1.1 million of one-time costs and $340 thousand 
in annual ongoing costs to exclusive SIPs. If we assume that exclusive 
SIPs will become competing consolidators absent this proposal and that 
the cost of estimating and disseminating the best odd-lot order is 
minimal,\617\ the cost of the proposal would be approximately $57.3 
million in one-time costs and $158,000 per year in ongoing costs. 
However, the Commission recognizes some uncertainty in the assumption 
that exclusive SIPs will be competing consolidators and recognizes that 
exclusive SIPs would incur costs to estimate and disseminate the best 
odd-lot order. Therefore, the Commission estimates that total costs of 
the proposal if exclusive SIPs will otherwise not be competing 
consolidators would be approximately $58.4 million in initial one-time 
costs and $500 thousand in annual ongoing costs. Further, the ongoing 
costs for exchanges and exclusive SIPs to comply with proposed rules 
600 and 603 would be incurred only until the exclusive SIPs are 
retired, after which time these costs were previously accounted for in 
the MDI Adopting Release.

[[Page 80333]]

                                       Table 13--Compliance Cost Estimates
----------------------------------------------------------------------------------------------------------------
                                                                     Number of
    Rule #/incurring entities         Initial         Ongoing        entities      Total initial   Total ongoing
----------------------------------------------------------------------------------------------------------------
612/All Trading Venues..........        $140,000  ..............             286     $40,040,000  ..............
612/Listing Exchanges...........          19,000          $9,000               5          95,000         $45,000
612/Order Entry Systems.........          11,000  ..............           1,192      13,112,000  ..............
612/Smart Order Routers.........          11,000  ..............             282       3,102,000  ..............
610/Exchanges...................          57,000  ..............              15         855,000  ..............
603, 600/Exchanges..............           4,000           7,000              16          62,864         112,800
603, 600/SIPs...................         567,000         170,000               2       1,134,000         340,000
                                 -------------------------------------------------------------------------------
    Total.......................  ..............  ..............  ..............      58,401,000         498,000
----------------------------------------------------------------------------------------------------------------

a. Estimates for Proposed Rule 612
    According to Table 13, the primary driver of costs for the proposed 
tiered tick structure would be the costs to all trading venues of $40 
million. The $40 million comes from an estimated $140,000 \618\ in one-
time costs incurred by each trading venue to update systems to comply 
with rule 612 \619\ aggregated across an estimated 286 trading venues. 
The estimate of 286 trading venues comes from the number of entities 
who report rule 605 statistics. Therefore, if additional trading venues 
incur compliance costs, the costs to trading venues of the proposal 
could be greater than $40 million.
---------------------------------------------------------------------------

    \618\ An exchange commenting on the tick size pilot estimated 
$140,000 as its expected expense to comply with the tick size 
pilot's requirement to change the tick size for some stocks. The 
Commission views this estimate as reasonable, but also notes that 
the proposal is simpler in some aspects than the tick size pilot and 
more complex in others. Specifically, although the proposal would 
have more tick levels than the tick size pilot, it would not impose 
any variation in ``trade at'' requirements. Thus, the Commission 
expects the estimate of $140,000 per exchange to be a reasonable 
estimate of the cost associated with the tick size change for 
exchanges and ATSs. See James G. Ongena, Chicago Stock Exchange 
(CHX), Comment Letter Re: File No. 4-657; Notice of Filing of the 
Proposed National Market System Plan to Implement a Tick Size Pilot 
Program On a One-Year Pilot Basis (Dec. 2014), available at https://www.sec.gov/comments/4-657/4657-67.pdf.
    \619\ The technical aspect of a wholesaler updating its system 
to reflect the tiered tick regime is likely similar to that of an 
exchange or an ATS. Thus the Commission is applying the same 
estimate to wholesalers and other to update systems as exchanges and 
ATSs. There were 16 registered exchanges, 32 ATSs, 6 wholesalers, 
and 232 other FINRA members. See ATS Transparency Data Quarterly 
Statistics, 2022 Quarterly Tables, 1st Quarter, NMS Stocks, FINRA 
(2002), available at https://www.finra.org/filing-reporting/otc-transparency/ats-quarterly-statistics for the number of ATSs. In the 
first quarter of 2022, there were 286 total entities affected.
---------------------------------------------------------------------------

    The estimated one-time cost of $19,000 \620\ and $9,000 per year in 
ongoing costs \621\ for listing exchanges is to calculate Time-Weighted 
Average Quoted Spreads and to transmit the associated tick size to the 
exclusive SIPs under the proposal. This estimate is based on the 
Commission's belief that the listing exchanges currently have access to 
the data needed to calculate the Time-Weighted Average Quoted Spreads 
because such data, specifically the NBBO, is needed for the exchanges 
to compile 605 reports. Thus, the Commission does not believe that the 
exchanges would incur additional costs associated with gathering data. 
Additionally, the listing exchanges have experience computing 
statistics conceptually similar to Time-Weighted Average Quoted Spreads 
for their 605 reports.\622\ The listing exchanges also already have 
connections to the exclusive SIPs, and thus the listing exchanges would 
need to modify rather than build new systems to transmit tick sizes to 
the exclusive SIPs. Further, once competing consolidators replace the 
exclusive SIPs, it is the competing consolidators that have the 
responsibility to connect to the exchanges in order to receive data and 
thus, under the MDI Rules the exchanges would not incur additional 
costs in terms of connecting to the competing consolidators.\623\ 
Consequently, the compliance cost estimates provided here represent 
costs associated with modifying existing systems rather than building 
systems from scratch. The Commission does not believe that having the 
listing exchange compute Time-Weighted Average Quoted Spreads and 
transmit the associated tick to the exclusive SIPs currently, or to the 
competing consolidators once the exclusive SIPs are discontinued, would 
require listing exchanges to acquire new hardware or systems.
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    \620\ Salaries are derived from SIFMA's Management & 
Professional Earnings in the Securities Industry 2013, modified to 
account for an 1,800-hour work-year and inflation, and multiplied by 
5.35 to account for bonuses, firm size, employee benefits and 
overhead: [(Sr. Programmer at $368 for 25 hours) + (Sr. Systems 
Analyst at $316 for 10 hours) + (Compliance Manager at $344 for 10 
hours) + (Director of Compliance at $542 for 5 hour)] [ap] $19,000 
per listing exchange).
    \621\ [((Compliance Attorney at $406 for 6 hours) + (Compliance 
Manager at $344 for 2 hours)) x 4 tick size revisions per year] [ap] 
$9,000 per listing exchange for a total annual monetized burden of 
$45,000 ($9,000 x 5 listing exchanges).
    \622\ Current rule 605 reports require trading centers to 
compute and report share-weighted average time to execution 
statistics among others. Additionally, some listing exchanges have 
issued white papers that include statistics based on Time-Weighted 
Average Quoted Spreads. See, e.g., Nasdaq Intelligent Tick, supra 
note 180 at Chart 3 and Cboe Proposal, supra note 104 at Exhibit 1.
    \623\ See MDI Adopting Release, supra note 5, at n.1133 and 
surrounding text. The costs for the competing consolidators to 
connect to the exchanges is accounted for in the MDI Rules and thus 
would not represent costs associated with this proposal.
---------------------------------------------------------------------------

    The estimated $11,000 \624\ in one-time costs to all broker-dealers 
with order entry systems assumes that broker-dealers with order entry 
systems would not need to acquire new hardware or develop new systems 
but rather they would modify existing systems. This assumption is based 
on the fact that broker-dealers with order entry systems must already 
have order entry systems that account for multiple tick sizes that can 
dynamically switch between the $0.01 tick for stocks priced equal to or 
greater than $1.00 and the $0.0001 tick for stocks priced less than 
$1.00. These systems would need to be expanded to incorporate data from 
the exclusive SIPs or the competing consolidators on the tick size and 
to allow for additional tick sizes for stocks priced equal to or 
greater than $1.00. The Commission believes that all broker-dealers 
with order entry systems currently subscribe to SIP data and will 
subscribe to data from competing consolidators and thus, would not 
incur additional data expenses to receive regulatory data as a result 
of the tick size change. The $11,000 cost also depends on an assumption 
that the costs to modify existing systems to accommodate the proposed 
tick size regime would be similar for both larger and smaller

[[Page 80334]]

broker-dealers with order entry systems because the specific code to 
manage existing systems likely does not depend on the size of the 
market participant. The Commission estimates that there are 1,192 
broker-dealers with order entry systems.\625\ Thus, the Commission 
estimates that the proposal would lead to a one-time aggregate cost of 
($11,000*1,192) [ap] $13 million across broker-dealers with order entry 
systems to update their systems to account for the new tick sizes.
---------------------------------------------------------------------------

    \624\ This estimate 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 (20 hours) x $232) + (Senior Business Analyst (5 
hours) x $265)] [ap] $11,000. See also Transaction Fee Pilot 
Adopting Release, supra note 267 at n.770.
    \625\ This estimate is obtained using consolidated audit trail 
data ``CAT'' data from the month of June 2022. The Commission 
calculated the total unique number of Central Registration 
Depository Numeric Identifier ``CRDs'' that originated an order in 
the month of June 2022 as an estimate of the number of entities with 
an order entry system.
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    The $11,000 \626\ estimated one-time cost to broker-dealers 
operating smart order routers assumes that broker-dealers operating 
smart order routers would not need to acquire new hardware or build new 
systems to comply with the proposed tick size changes. These broker-
dealers already have systems that can adjust for tick sizes that change 
around the $1.00 threshold. Thus, the Commission expects that they 
would modify existing systems rather than build new systems. Any 
broker-dealers that would need to build new systems would likely incur 
more than $11,000 to do so. On the other hand, any broker-dealers that 
use vendors for their smart order routers could incur lower costs.
---------------------------------------------------------------------------

    \626\ This estimate 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 (20 hours) x $232) + (Senior Business Analyst (5 
hours) x $265)] [ap] $11,000. See also Transaction Fee Pilot 
Adopting Release, supra note 267 at n.796 where the cost to broker 
dealers to update systems for the TSP was estimated to be $9,000, 
here we are allowing for an additional 10 hours of Programmer 
Analyst time.
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    The Commission estimates an upper bound of 282 broker-dealers 
operating smart order routers.\627\ This number provides an upper bound 
as it assumes that all entities with direct connections to exchanges or 
ATSs use a smart order router, which the Commission believes is an 
over-estimate. Thus, the Commission estimates a one-time upper bound 
cost of ($11,000*282) = $3.1 million for market participants to update 
smart order routers.\628\ If fewer than 282 broker-dealers operate 
their own smart order routers, then the $3.1 million estimate is likely 
higher than the aggregate cost for broker-dealers to adjust their order 
routing systems to comply with the proposal.
---------------------------------------------------------------------------

    \627\ This number is estimated by counting the number of unique 
CRDs that submitted an order directly to an exchange or ATS in the 
month of June 2022.
    \628\ The Commission also expects there may be other costs 
associated with updating systems to account for an increase in 
message traffic resulting from the new tick sizes. However, absent 
an estimate in the change in message traffic or existing bandwidth 
capacities it would be impractical for the Commission to attempt to 
place a reliable estimate on these costs. Estimating the change in 
message traffic would involve predicting how various types market 
participants would change their trading behavior and how those 
changes would interact with each other. Such an estimation would 
depend heavily on tenuous assumptions.
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    Further, the Commission believes that these broker-dealers 
operating smart order routers also already subscribe to SIP data and 
will subscribe to consolidated market data products once the competing 
consolidators become operative and thus would not incur additional data 
expense to receive the regulatory messages necessary to comply with 
rule 612. The Commission also assumes that system updates would impose 
a similar cost on larger and smaller entities given that once code is 
written, scaling it up is relatively inexpensive.
    Lastly, the Commission recognizes that proposed rule 612 could 
increase the overall implementation costs of the MDI Rules. In 
particular, in stocks for which the proposal would result in a smaller 
tick size and that would become less tick-constrained as a result, such 
stocks could have more odd-lot quotes inside the NBBO than anticipated 
when the Commission adopted the MDI Rules. As a result, the costs to 
SROs and competing consolidators of collecting, transmitting, 
consolidating, and disseminating odd-lot information would be greater 
than those described in the MDI rules. The Commission is unable to 
estimate this cost increase with any degree of precision because an 
estimation would require predicting a complex interaction between 
behavior changes from multiple types of market participants and the 
resulting effect on the number of ticks inside the NBBO and the volume 
of odd-lots submitted inside the NBBO. However, any such increase is 
unlikely to be of a greater magnitude than the other compliance costs 
discussed here.
b. Estimates for Proposed Rule 610
    In Table 13, the $57,000 in estimated cost to exchanges to comply 
with proposed changes to rule 610 relate to the cost of preparing a 
rule 19b-4 filing to amend access fees and rebates and to make fees and 
rebates determinable at the time of execution.\629\ This estimate 
assumes that exchanges will combine their proposals to include both 
amendments to fees and rebates and making fees and rebates determinable 
at the time of execution in the same rule 19b-4 filing and that this 
combination would not increase the cost of those filings. The 
Commission recognizes that if these filings would not be efficiently 
combined, the costs to exchanges could be higher than $57,000. The 
Commission estimates assume that LTSE would not file a rule 19b-4 
filing with the Commission because it does not currently charge access 
fees or offer rebates, but that the other 15 exchanges would file rule 
19b-4s. If so, the proposal would lead to an estimated one-time total 
cost of $855,000 for the exchanges to comply with the proposed rule 
610.\630\
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    \629\ The Transaction Fee Pilot was expected to impose a similar 
requirement for exchanges to file rule 19b-4 filings with the 
Commission to bring access fees into compliance with the TFP. The 
Commission estimated in the TFP proposing release that each filing 
would cost the exchanges approximately $48,400 [(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)] = $48,395 [ap] $48,400. See OMB Control No. 3235-
0045 (Aug. 19, 2016), 81 FR 57946 (Aug. 24, 2016) (Request to OMB 
for Extension of rule 19b-4 and Form 19b-4 Filings). See Transaction 
Fee Pilot Adopting Release, supra note 267 at section IV.C.2(a)(v). 
To account for inflation the Commission multiplies this amount by 
18% (derived from BLS inflation estimates from 2018 to 2022) to 
arrive at an estimate of approximately $57,000. See CPI Inflation 
Calculator, U.S. Bureau Lab. Stats., available at https://www.bls.gov/data/inflation_calculator.htm, for BLS inflation 
estimates.
    \630\ The Commission does not expect other market participants 
to incur significant incremental costs associated with the proposed 
change in the access fees and rebates. As shown in Table 5, market 
participants deal with over 100 fee changes per year across all 
exchanges and thus the Commission believes it reasonable to expect 
that one fee change by the exchanges to bring their fees into 
compliance with the proposal would represent an economically trivial 
incremental cost to these market participants.
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c. Estimates for Proposed Rules 600 and 603
    The exclusive SIPs and exchanges would also face compliance costs 
associated with including the odd-lot information in SIP data to 
include the best priced odd-lot order, and to update the round lot 
definitions. The adoption of updated round lot definitions and the 
inclusion of odd-lot data inside the NBBO are both parts of the MDI 
Rules. Thus, the proposal would accelerate the compliance costs 
associated with these aspects of the MDI Rules. One difference is that 
the MDI Adopting Release anticipated that these changes to NMS data 
will occur after the competing consolidator model was up and running. 
Thus, the MDI Adopting Release did not anticipate that the current 
exclusive SIPs would incur such costs unless they chose to become 
competing consolidators. The addition of the best odd-lot order to the 
SIP data was not

[[Page 80335]]

part of the MDI Rules and would thus be a new cost under this proposal. 
The discussion below distinguishes costs to the exclusive SIPs 
accordingly as those included in the MDI Rules and new costs from this 
proposal.
    The estimated initial one-time cost of $4,000 and $7,000 in ongoing 
costs for at least two years for exchanges to comply with the proposed 
amendments to rule 603 and 600 \631\ account for the proposed 
acceleration of the necessary data to generate the odd-lot information, 
including the best odd-lot order, and transmit to the exclusive SIPs. 
The costs reported here account for an increase in the costs associated 
with the MDI Rules that will require the exchanges to transmit all of 
the data necessary to generate consolidated market data to competing 
consolidators.\632\
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    \631\ In the MDI Adopting Release, supra note 5, section 
V.C.2(d)(ii), the Commission estimated costs to the exchanges of 
collecting and transmitting the necessary information to the 
competing consolidators to be approximately $70,000 in one-time 
costs and approximately $130,000 in ongoing costs. The additional 
$4,000 in one-time costs and $7,000 in ongoing costs here represent 
a 5% addition over the costs in the MDI release to account for the 
proposed new requirement to send the necessary data to generate odd-
lot information to the exclusive SIPs ($70,000 x 0.05 = $3,929 [ap] 
$4,000 and $130,000 x 005 = $7,050 [ap] $7,000). See infra note 739 
and accompanying text.
    \632\ Supra note 404 and accompanying text.
---------------------------------------------------------------------------

    Consequently, for the exchanges, the costs associated with 
providing the exclusive SIPs with odd-lot information would represent 
an acceleration of costs anticipated in the MDI release rather than new 
costs--with a few differences. First, the odd-lot information would be 
transmitted to the exclusive SIPs as opposed to the competing 
consolidators. Second, the ongoing costs of the proposal would be 
incurred only until the exclusive SIPs are retired, which the 
Commission estimates will be at least two years after the Commission's 
approval of the plan amendment(s) required by rule 614(e).
    The estimated one-time cost of $567,000 and ongoing costs of 
$170,000 imposed on the exclusive SIPs to comply with the proposed 
amendments to Rules 603 and 600 relate to the requirement for the 
exclusive SIPs to develop, operate, and maintain systems to collect and 
disseminate the odd-lot information inside the NBBO as required by the 
proposal.\633\ The exclusive SIPs would incur these costs to receive 
and disseminate odd-lot information inside the NBBO and to estimate and 
disseminate the best odd-lot order. The Commission expects these costs 
are primarily made up of costs an exclusive SIP would incur to convert 
to become a competing consolidator. Thus, for exclusive SIPs that will 
become competing consolidators in the absence of the proposal, the 
initial costs represent an acceleration of costs articulated from the 
MDI Rules more than they do new costs. Further, the ongoing costs for 
exclusive SIPs to comply with proposed rules 600 and 603 would be 
incurred only until the exclusive SIPs are retired, after which time 
these costs were previously accounted for in the MDI Adopting Release.
---------------------------------------------------------------------------

    \633\ See infra notes 728, 730, 732, and 733 and accompanying 
text for a breakdown of these cost estimates.
---------------------------------------------------------------------------

    If one or both exclusive SIPs will not become competing 
consolidators in the absence of the proposal, the initial and ongoing 
costs in Table 13 would represent new costs associated with the 
proposal. However, the MDI Adopting Release expressed an expectation 
that exclusive SIPs would likely become competing consolidators.
    Likewise, the Commission recognizes that requiring the exclusive 
SIPs to build out the capacity to disseminate aspects of the data 
required by the MDI Rules increases the likelihood that the exclusive 
SIPs would choose to become competing consolidators because they would 
already have even more of the technology implemented in order to comply 
with the requirements of a competing consolidator--lowering the 
relative cost of becoming a competing consolidator.\634\ The Commission 
recognizes that if the proposal results in one or both exclusive SIPs 
becoming competing consolidators, the costs in Table 13 could 
underestimate the full costs of exclusive SIPs because it does not 
account for the full costs of becoming a competing consolidator. 
However, as expressed in the MDI Adopting Release, the Commission 
expects that exclusive SIPs would likely become competing consolidators 
and therefore, believes that the costs in Table 13 are not 
underestimated.
---------------------------------------------------------------------------

    \634\ In the MDI Adopting Release, the Commission anticipated 
that both exchanges operating exclusive SIPs would have strong 
incentives to enter the competing consolidator market. See MDI 
Adopting Release, supra note 5, at V.C.2.(a).(ii).
---------------------------------------------------------------------------

    The Commission recognizes that proposed rule 600 could increase the 
initial costs of becoming a competing consolidator and would increase 
the ongoing costs of competing consolidators, but believes that such 
costs are already accounted for in the MDI Adopting Release.\635\ In 
particular, competing consolidators could incur additional compliance 
costs to estimate and disseminate the best odd-lot order. To the extent 
such costs are not accounted for in the MDI Adopting Release, they 
would likely be a small fraction of the compliance costs of including 
odd-lot information in SIP data noted above because the competing 
consolidators would already have the information necessary to calculate 
the BOLO, so most of the cost would be the initial cost of coding the 
information and the cost of processing that code in real time.
---------------------------------------------------------------------------

    \635\ See supra section V.D.6 for further discussion of how or 
whether this requirement would alter the compliance costs of 
competing consolidators.
---------------------------------------------------------------------------

E. Effect on Efficiency, Competition, and Capital Formation

1. Efficiency
    The Commission believes that the proposals would improve price 
efficiency relative to the baseline. The improvement in price 
efficiency is expected largely to come through the reduction in the 
tick size and the reduction of the access fee cap. The acceleration of 
portions of the MDI Rules could also increase price efficiency, but 
those effects are largely to accelerate the economic impact already 
anticipated in the MDI Rules.
    The Commission expects that lowering the tick size for some NMS 
stocks with prices equal to or greater than $1.00, as well as lowering 
the access fee cap for all stocks to either 5 or 10 mils for stocks 
with prices equal to or greater than $1.00, or to 0.05% for stocks with 
prices lower than $1.00, would increase price efficiency. The 
Commission expects the reduction in the tick size for some stocks along 
with the reduction of the access fee cap for all stocks would improve 
liquidity for many stocks while causing little to no harm. This 
reduction is expected because research suggests that when trading 
becomes less costly, market participants have an increased incentive to 
gather more information because doing so is more profitable.\636\ 
Gathering more information and trading on that information means that 
prices are more reflective of the fundamental value of the firm. 
Consequently, for stocks that receive an improvement in liquidity due 
to the lower tick size or the reduction in the access fee the 
Commission expects an improvement in price efficiency.\637\
---------------------------------------------------------------------------

    \636\ See, e.g., Dixon, supra note 556 for a discussion of this 
concept in the context of short selling.
    \637\ Id.
---------------------------------------------------------------------------

    Making fees and rebates determinable at the time of execution, 
along with the reduction of the access fee cap could also increase 
price efficiency by helping minimize potential conflicts of interest. 
The inability for broker-dealers to determine access fees and rebates 
at the

[[Page 80336]]

time of execution makes it difficult to effectively pass them on to 
their customers.\638\ To the extent that order routing decisions are 
affected by potential conflicts of interest, these potentially 
conflicted decisions could harm efficiency by leading to inefficient 
trading decisions and thus an inefficient incorporation of information 
into stock prices.\639\ Lowering the access fee and decreasing the tick 
size will, for tick-constrained stocks at least, lower overall 
transaction costs for demanding liquidity and diminish the role that 
access fees and rebates might play in order routing decisions. Further, 
making access fees determinable at the time of execution would further 
enhance efficiency by allowing market participants certainty concerning 
the fees that they will be charged per transaction. This certainty 
could also allow broker-dealers to more efficiently examine their own 
best-execution performance. Additionally, to the extent that this 
feature allows broker-dealers to pass fees on to end customers they 
could help eliminate entirely distortions that might occur due to 
potential conflicts of interest. Greater certainty about fees and 
rebates in advance of routing an order could also increase the 
efficiency of the broker-dealers' best execution assessments by 
providing them with greater certainty about the full cost of a 
transaction prior to placing the order.
---------------------------------------------------------------------------

    \638\ See section V.C.2 describing how transaction fees and 
rebates are currently determined.
    \639\ If order routing decisions are not significantly affected 
by access fees then the effect on efficiency would be negligible.
---------------------------------------------------------------------------

    The acceleration of adding odd-lot information to NMS data and the 
inclusion of information relating to the best odd-lot quote would 
realize many of the price efficiency benefits to this data articulated 
in the MDI Rules at a sooner date, providing improved price efficiency 
earlier than anticipated in the MDI Rules. Not all efficiency-related 
benefits articulated in the MDI Rules associated with the inclusion of 
odd-lot information will be realized sooner because the Commission 
acknowledges that the proposal would not reduce the latency of SIP 
data.\640\ Specifically, research suggests that adding information on 
the shares available at price levels inside the NBBO may improve price 
efficiency.\641\ Currently only market participants who subscribe to 
proprietary data feeds can view the odd-lot information and thus can 
adjust trading strategies and decisions based on the information 
contained therein. Expanding the exclusive SIP feeds to include odd-lot 
information will sooner provide new information to those investors who 
subscribe to the SIP data but do not subscribe to proprietary data 
feeds. The extent to which investors can quickly incorporate this 
information into stock prices before the full implementation of the MDI 
Rules and increase efficiency is limited.\642\
---------------------------------------------------------------------------

    \640\ See supra section V.D.5.b for additional discussion.
    \641\ See Bartlett, et al. (2022), supra note 365.
    \642\ The MDI Rules do not require the competing consolidators 
to distribute odd-lot information. Thus, it is possible that 
competing consolidators may not choose to distribute odd-lot 
information, in which case the positive effect on price efficiency 
will be lost. The Commission believes that this outcome is unlikely 
because the odd-lot information appears to be valuable in terms of 
having information relevant to stock prices (see Bartlett, et al. 
(2022), supra note 365), and the alternative to odd-lot information 
from the competing consolidators would be to subscribe to all of the 
proprietary data feeds, which is expensive. Thus, the Commission 
believes that there will be significant demand for the odd-lot 
information and that the competing consolidators will therefore 
offer the data.
---------------------------------------------------------------------------

2. Competition
a. Trading
i. Modification of Rule 612 To Create a Tiered Tick Structure
    A smaller tick could lead to greater competition on pricing, which 
more effectively balances liquidity supply and demand. This greater 
competition on pricing comes with a reduced importance on time priority 
and discourages liquidity oversupply thereby allowing slower traders to 
better compete with faster traders to provide liquidity and earn the 
spread.
    Reducing the tick size for tick-constrained stocks could induce 
some order flow onto the exchanges. Academic and industry research 
suggests that tick size constraints create a competitive disadvantage 
for exchanges because they create long queues for limit order execution 
and increase the incentives to internalize, leading to more off-
exchange trading.\643\ The disadvantage comes because in stocks that 
are tick-constrained, queues are longer, fill rates lower, and the 
relative cost of crossing the spread higher. If a narrower tick 
alleviates these disadvantages, then more order flow in these 
securities could be routed to the exchanges.
---------------------------------------------------------------------------

    \643\ See Kwan, Masulis, and McInish (2015), supra note 99, see 
also MEMX Report, supra note 105.
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ii. Minimum Pricing Increment for Trading
    Applying a minimum pricing increment to trading, coupled with 
reducing the minimum pricing increment for quoting, could affect 
measures of the frequency and magnitude of price improvement, as 
previously explained in Section V.D.2. The Commission recognizes that 
changes to these measures could affect transaction costs paid by 
investors as well as where broker-dealers route customer order flow. 
For example, the less price improvement that OTC market makers offer to 
retail traders, the less attractive they might be to broker-dealers who 
handle retail traders. This coupled with the fact that OTC market 
makers would be restricted to the same minimum trading increment as 
exchanges and ATSs would help level the competitive playing field 
between exchanges/ATSs and off-exchange dealers when it comes to 
attracting retail order flow. Such a development would put competitive 
pressure on OTC market makers to price improve trades because exchanges 
and other ATSs would have an increased ability to potentially innovate 
and compete for retail orders with wholesalers. Accordingly, the 
Commission expects that trading venues would further compete on 
providing price improvement and that the harmonization of trading and 
quoting increments would not mitigate the execution quality 
improvements from a reduction in the minimum pricing increment.\644\
---------------------------------------------------------------------------

    \644\ One industry study suggests that it is not the presence of 
on-exchange quoting restrictions that drives off-exchange price 
improvement. This study shows, using Rule 605 data, that stocks with 
very wide spreads have more price improvement than otherwise. See 
Market Lens: Unlevel Playing Field? What 605s Can Tell Us About Tick 
Sizes, Citadel Sec. (Sept. 8, 2022), available at https://www.citadelsecurities.com/news/market-lens-unlevel-playing-field-what-605s-can-tell-us-about-tick-sizes/ (``Citadel Paper'').
---------------------------------------------------------------------------

    In the longer term, the proposed modification of rule 612 to 
require the tick size to apply to trading could make exchanges and ATSs 
more competitive in terms of their ability to attract retail order 
flow. This stems from the fact that currently one reason retail broker-
dealers route orders to wholesalers is to take advantage of sub-penny 
price improvement that exchanges and ATSs do not offer. By harmonizing 
the trading increment the proposal would create a more level playing 
field for exchanges and ATSs to innovate to attract retail order flow. 
Certainly, the exchanges and ATSs face obstacles to more effectively 
compete for order flow, but requiring all trade to occur in units of 
the tick size makes it more likely that the exchanges and ATSs could 
find a way to innovate. While the Commission cannot predict the type of 
innovation that that exchanges and ATSs may design to attract retail 
order flow, a more level playing field increases the likelihood that 
such innovation could occur.

[[Page 80337]]

However, if such innovation by exchanges were to occur, it could 
increase the fraction of retail trading volume on the exchanges.
iii. Access fees
    The lower access fees under this proposal could affect certain 
exchanges' business models. For instance, as discussed in Section 
V.D.3, lowering the access fee cap is expected to lower the total 
amount of access fees collected and rebates distributed by certain 
exchanges, and the Commission estimates that exchanges could lose 
approximately $89 million per year in net capture under their current 
business models. Exchanges might respond, in part, by adjusting the 
rebates they offer, which could affect order routing. For instance, 
exchanges for which high rebates are currently the means of attracting 
certain flows could have to adjust their business model or find 
revenues sources, other than access fees collected, to fund rebates.
    These effects could impact competition between trading venues. 
First, since the proposal would make the exchanges more similar in 
terms of fee structures (i.e., fee/rebate levels and tiers),\645\ 
competition in other key dimensions of trading--such as execution 
quality like fill rates, transaction costs, and speed of execution--
could increase and spur innovations, ultimately to the benefit of 
investors. Second, some exchanges' profitability, and accordingly their 
operations, could be impacted, especially in the short run as these 
exchanges adapt their business models. In an extreme case, some 
existing exchanges could ultimately shut down, though the Commission 
notes that exchanges derive revenues from other sources, such as data 
and connectivity fees, which also impact their viability.\646\ Third, 
certain exchanges' competitiveness could be affected relative to other 
exchanges as well as relative to other trading venues.
---------------------------------------------------------------------------

    \645\ Currently, as explained in Section V.C.2, exchanges can 
differentiate themselves by offering different fee schedules--e.g., 
inverted, flat fee, or maker-taker with numerous price strata and 
volume based pricing tiers. That said, the Commission also noted 
(Table 5 in SectionV.C.2) that the data do not show a high variation 
in the highest fees charged, which would suggest that the reduction 
in variation of fee and rebate levels under this proposal would 
primarily make different exchange fee models more similar.
    \646\ This effect considers the impact of MDI implementation on 
proprietary data feed revenues. Exchanges are expected to collect 
these data and connectivity fees from competing consolidators and 
self-aggregators in addition to revenue from proprietary feeds, 
which may supply information beyond the core data that would be 
distributed. The MDI Adopting Release anticipated that data revenue 
for the exchanges is likely to diminish after the full 
implementation of the MDI Rules. This effect will decrease the 
likelihood that a new exchange or a low volume exchange could gather 
sufficient revenue from market data to become or remain viable. See 
MDI Adopting Release, supra note 5, section V.C.2.(ii).(d), for the 
full discussion of the effect of the competing consolidator model on 
exchange data fees.
---------------------------------------------------------------------------

iv. Acceleration of the MDI Rules and Addition of Information About 
Best Odd-Lot Orders
    The acceleration of the inclusion of odd-lot information in the NMS 
data along with the implementation of the MDI Rules round lot 
definition might lead to increased competition between exchanges and 
ATSs and OTC market makers, including wholesalers. NMS stocks priced 
greater than $250.00 would be expected to benefit sooner from a tighter 
NBBO, thereby increasing the competiveness of the best displayed 
protected quotes, following the proposed accelerated implementation of 
the round lot definition. A greater visibility of more competitively 
priced odd-lot orders with the NBBO could increase the competitive 
position of exchanges and ATSs and attract greater order-flow. This 
effect would be temporary, only lasting until the full implementation 
of the MDI Rules. After the full implementation of the MDI Rules the 
effect on competition is accounted for by the MDI Rules.
b. Broker-Dealer Services
    The Commission believes that the proposal could affect certain 
broker-dealers' current business model to the extent that they rely on 
rebates for revenues. This could affect these broker-dealers' 
operations as they adjust to the new competitive environment. Making 
fees and rebates determinable at the time of execution could enable the 
customers of broker-dealers to better discuss transaction fees and 
rebates with their broker-dealers, and potentially request data on such 
fees, which could increase competition between broker-dealers along 
this dimension, leading to better order execution and lower costs. In 
particular, while there is currently no requirement to either pass on 
the fees and rebates, or account for them when assessing execution 
quality, the Commission believes that there could be competitive 
pressure to do so as it would be straightforward for a competing 
broker-dealer to include fees and rebates in its transaction cost 
analysis, or to simply pass them through to the customer.
    The Commission also believes that including odd-lot information in 
the exclusive SIPs and providing the best odd-lot order information, as 
well as making fees and rebates determinable at the time of execution, 
would enhance competition for broker-dealer services. First, making the 
best odd-lot order information accessible through the exclusive SIPs 
would facilitate better analysis of a broker-dealer's execution quality 
than is currently available with just NBBO data.\647\ Thus, it could be 
easier for some customers to monitor the performance of their broker-
dealers.\648\ Additionally, making the fees and rebates determinable at 
the time of execution would further allow customers to monitor the 
performance of their broker-dealers as it would increase the ability 
for a customer to request more detailed information on the fees and 
rebates that the broker-dealer pays and to have them either passed on 
to the customer or to have them accounted for when evaluating execution 
costs.\649\
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    \647\ While the Commission does not expect most retail traders 
would engage in this sort of benchmarking due to most retail traders 
lacking the technical capacity to do so, some institutional traders 
likely have this capacity and so would likely engage in such 
benchmarking. Institutional traders have strong incentives to 
monitor all aspects of transaction costs as these costs can 
significantly affect portfolio performance. See Anand, et al. 
(2012), supra note 596.
    \648\ It is possible that some institutional traders have access 
to proprietary data feeds that provide the ability to benchmark 
trades against odd-lot orders. Or they could contract with 
specialized firms that have access to the data and provide 
transaction cost analysis.
    \649\ Under the baseline it would be difficult in many cases for 
a broker-dealer to allocate specific rebates received or fees paid 
to one customer's trade because the fees or rebates in a given month 
are based, in many instances, on that broker-dealer's total trading 
volume across all customer accounts (see section V.C.2.b.iv). 
However, if the fees and rebates are determinable at the time of 
execution the broker-dealer could feasibly track a specific fee or 
rebate to a specific trade making it possible for a customer to 
request such information.
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    Additionally, the Commission does not believe that the proposal 
initially would alter the competition to provide market access to 
retail brokers. Many retail broker-dealers find it economically 
beneficial to rely on OTC market makers, including wholesalers, who 
maintain access to multiple trading venues, to facilitate market access 
rather than becoming a member or subscriber to an exchange or ATS 
themselves and directly route orders to the venues.\650\ The benefits 
from being able to selectively choose what order-flow to internalize 
helps OTC market makers support payment for order flow to retail 
broker-dealers, which further incentivizes broker-dealers to continue

[[Page 80338]]

to route order-flow to OTC market makers such as wholesalers. Thus, 
lower access fees or harmonized trading increments might not materially 
affect a retail broker-dealer's decision to route to an OTC market 
maker instead of an exchange. Second, while the proposal does not allow 
OTC market makers to price improve at any level that they wish, the 
proposal is designed to ensure that there are usually at least 4 ticks 
within the spread for nearly all stocks.\651\ Thus, the Commission 
believes it is reasonable to expect that the OTC market makers, 
including wholesalers, would still be able to provide meaningful price 
improvement at the designated tick sizes. Because the Commission 
expects that OTC market makers would still be able to provide price 
improvement to retail orders, broker-dealers handling retail trades 
would still have an incentive to route to wholesalers.\652\ Thus, it 
would still likely be cost effective for retail broker-dealers to 
continue to route to wholesalers. For these reasons, the Commission 
does not expect the proposal to lead to a significant reduction in 
retail orders routed to wholesalers.
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    \650\ Retail-broker-dealers may also route to wholesalers to 
avoid the expenses associated with establishing connections to some 
the exchanges. Wholesalers also frequently offer other services such 
as free routing on orders that they do not internalize.
    \651\ The exceptions would be if a stock with a price greater 
than $1.00 has a quoted spared less than $0.004. In this case, the 
stock would be assigned a tick of $0.001 and there would be less 
than 4 ticks within the spread. The other case would be if a stock 
had a wide spread during an evaluation period and was thus assigned 
a wide tick and then subsequently the tick size shrank such that 
there were fewer than 3 ticks intra-spread. In this case the stock 
would have fewer than 4 ticks intra spread until after the next 
evaluation period.
    \652\ The effect of the proposal on retail price improvement is 
discussed in greater detail in section V.D.2.
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c. Market Data
    Expediting the inclusion of odd-lot data into the exclusive SIPs 
could increase competition among data providers of odd-lot information 
prior to the full implementation of the MDI Rules though it would do so 
less than envisioned in the MDI release, for the period until the MDI 
Rules are fully implemented. Specifically, under the implementation 
schedule in the MDI Rules, adding odd-lot information to core data 
would occur during the parallel operation period. Adding odd-lot 
information to the current exclusive SIPs would enable the exclusive 
SIPs to compete directly with the exchange's proprietary data products 
for use in visual display settings. Currently, the only means to get 
odd-lot information is to subscribe to multiple proprietary data feeds. 
This would change if odd-lots are a part of SIP data. Unlike the data 
provided by the competing consolidators, the Commission does not 
believe that the current exclusive SIPs are fast enough for use in 
certain trading. Thus, the competition for odd-lot data would be 
limited to odd-lot information used in visual display settings. To the 
extent that some market participants subscribe to proprietary data for 
use in visual display settings, the introduction of odd-lot information 
to the exclusive SIPs can provide competition to this segment of the 
market and could reduce the prices of odd-lot information provided by 
the proprietary data feeds. However, the Commission does not believe 
that this market is very large. Currently, for most display settings 
market participants use SIP data or one of the top of book data 
products offered by one of the three highest volume exchange groups and 
it is unclear to what extent market participants subscribe to 
proprietary data with odd-lot information for use in visual display 
settings. However, if the exclusive SIPs choose to charge more for 
data, then this price increase could provide a competitive advantage to 
the providers of top of book data as it would become relatively less 
expensive.
    The proposed requirement on the exclusive SIPs to disseminate the 
accelerated odd-lot information until the exclusive SIPs are retired, 
would guarantee that the odd-lot information would be 
disseminated.\653\ This aspect of the proposal presents the possibility 
that the new requirements on the SIPs could reduce competing 
consolidator competition, which could reduce the expected benefits of 
the MDI Rules. However, this effect could be small because non-SIP 
competing consolidators would still have an opportunity to compete for 
a significant market share. The proposed requirement could increase the 
competitive advantage of exclusive SIP competing consolidators relative 
to non-SIP competing consolidators \654\ because they would have 
established a market for odd-lot information before having to face 
competition. Because data users could increase the costs to switch to 
another competing consolidator, they could stay with a SIP competing 
consolidator to avoid incurring those costs. The proposal could also 
reduce the costs for exclusive SIPs to become competing consolidators 
by accelerating those costs before they transition, increasing the 
likelihood that they would do so.\655\ The Commission recognizes that 
this additional competitive advantage could dissuade some potential 
competing consolidators from entering the market but believes it is 
reasonable to expect this to have a limited effect on competition. In 
particular, if competing consolidators can offer a lower latency 
product, they can capture a part of the market that the proposal would 
not affect--those who would use the odd-lot information in ways other 
than visual display.\656\ If this market is significantly bigger than 
the visual display market, the competitive advantage of the exclusive 
SIPs would be less likely to dissuade entry and competing consolidators 
could have sufficient incentive to enter the market, thus limiting the 
effect on competition from the proposal.
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    \653\ See infra section V.D.5.c for additional discussion of the 
effects of this requirement, such as to guarantee that the odd-lot 
information would be disseminated. While this proposal requires the 
exclusive SIPs to distribute odd-lot data, the MDI Rules do not 
require the competing consolidators to disseminate odd-lot data. 
However, the MDI Adopting Release anticipated that at least one 
competing consolidator will do so because there would be demand for 
the data. See supra section V.C.3.
    \654\ See MDI Adopting Release, supra note 5, for a discussion 
of how competing consolidators have higher barriers to entry than 
exclusive SIPs, such as in the form of compliance costs associated 
with Reg SCI.
    \655\ In the MDI Adopting Release, the Commission anticipated 
that both exchanges operating exclusive SIPs would have strong 
incentives to enter the competing consolidator market. See MDI 
Adopting Release, supra note 5, at V.C.2.(a).(ii).
    \656\ See discussion in section V.D.5.b.
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3. Capital Formation
    The Commission expects that the proposal could enhance capital 
formation through two channels. First, the proposed reduction in the 
access fee cap would reduce the amount of access fees paid by liquidity 
demanders, who are more likely to be non-high-frequency traders.\657\ 
Analysis presented above in Table 11 estimates that, if the proposal 
had been in place in the first six months of 2022, then it would have 
saved liquidity demanders approximately $1.56 billion in access fees 
not paid in that period. Similarly, the Commission expects that the 
proposal would likely lead to an overall reduction in transaction costs 
due to the reduction in the tick size.\658\ Table 4 indicates that 
approximately 56% of trading volume occurs in stocks that are tick-
constrained and this volume can be expected to experience a decrease in 
transaction costs due to a lower tick size facilitating bid and ask 
prices that better equate liquidity supply and demand. Lower 
transaction costs caused by the lower tick size for some stocks and the 
lower access fee mean more capital available to investors to fund 
investment.
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    \657\ See discussion in section V.C.1 and V.C.2.
    \658\ See supra section V.D.1.

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[[Page 80339]]

F. Reasonable Alternatives

    This section considers alternatives to the proposal. These 
alternatives would have different costs and benefits than the proposal 
and these relative costs and benefits are discussed in this section. 
The alternatives are organized around three key elements of the 
proposal: the extension of rule 612 to apply to trading increments; 
alternative tick sizes; and alternative access fee regimes. These 
alternatives could be used together or in combination with each other 
and could also be paired with other elements of the proposal. Where 
applicable the Commission, when considering the economic impact of an 
alternative, has specified which alternatives would likely be paired 
together.
1. Alternative Trading Increment
    A primary motivation for extending rule 612 to apply to minimum 
pricing increments for trading (or ``trading increments'') is to 
provide exchanges and ATSs an improved opportunity to potentially 
innovate in ways that would allow them to be more competitive in terms 
of attracting retail order flow, which could in turn increase overall 
competition for retail trades and lead to higher quality order 
executions for retail trades.\659\ This section discusses two 
alternative methodologies that the Commission could pursue to level the 
playing field in this regard between exchanges and ATSs on the one hand 
and OTC market makers on the other in terms of competing for retail 
order flow. It also discusses the economic effects of choosing not to 
extend rule 612 to apply to trades.
---------------------------------------------------------------------------

    \659\ See text surrounding supra note 239.
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a. $0.001 Trading Increment
    Instead of modifying rule 612 to apply to trades, the Commission 
could instead modify rule 612 to require trading of all stocks priced 
equal to or greater than $1.00 to occur in increments of $0.001 
regardless of the tick size applicable to quotes. For stocks with 
prices less than $1.00 the Commission would propose no change relative 
to the proposal: stocks priced less than $1.00 would be allowed to 
trade in increments of $0.0001. This alternative would also preserve an 
exception for midpoint or benchmark trades, such as VWAP trades, to 
execute at finer price increments.
    This alternative would preserve the ability for exchanges and ATSs 
to potentially innovate in order to try and attract retail order flow, 
though to a lesser extent than would be expected of the proposal by 
creating a level playing field with respect to the trading increment 
between exchanges and ATSs on the one hand and OTC market makers on the 
other.\660\ Under this alternative suppliers of liquidity would, in 
many instances, be restricted to post their quotes at price increments 
larger than the trading increment. Relative to the proposal, this could 
be expected to lower the amount of order flow executed at exchanges 
that rely on posted liquidity to attract trading interest. This 
alternative would also allow OTC market makers such as wholesalers to 
offer price improvement on a price lattice that is at least as fine and 
in some cases finer than what is included in the proposal.\661\ The net 
effect of this alternative on retail price improvement is uncertain. As 
with the proposal it is not clear whether constraining retail price 
improvement to a finer price lattice would on average improve or harm 
the total amount of price improvement received by retail traders 
relative to what they currently receive.\662\ In some cases 
constraining the lattice upon which price improvement can be offered 
could improve price improvement relative to the baseline by inducing 
OTC market makers to round up price improvement. In other cases they 
may round down. The net effect is uncertain.
---------------------------------------------------------------------------

    \660\ See supra section V.E.2.a.ii.
    \661\ For stocks with a $0.001 tick, this alternative would 
offer the same price lattice for price improvement as the proposal. 
For stocks with a wider tick, this alternative would offer a finer 
pricing lattice for wholesalers to offer price improvement relative 
to the proposal.
    \662\ See supra section V.D.5.
---------------------------------------------------------------------------

    While the net effect of this alternative on retail price 
improvement is uncertain relative to the baseline, the proposal's net 
effects are more uncertain. This is because allowing retail price 
improvement to always occur in increments of $0.001 is a smaller 
deviation from the baseline than what is considered in the proposal.
    This alternative would have somewhat lower implementation costs 
relative to the proposal. This is because market participants would not 
have to develop trading systems that have to account for four tick 
sizes for stocks priced equal to or greater than $1.00 and where the 
trading increment can change periodically. Instead, they would have to 
design systems with only one trading increment that applies to all 
stocks with prices equal to or greater than $1.00 which would be 
consistent through time. Consequently, the Commission estimates that 
this alternative would decrease one-time implementation costs by $1.1 
million relative to the proposal.\663\
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    \663\ A uniform trading increment would primarily affect trading 
centers as opposed to other market participants. To reflect the 
simplicity of this alternative relative to the proposal, the 
Commission is revising down the implementation cost for trading 
centers by $20,000: from $140,000 per trading center to $120,000, 
for a total reduction in cost of approximately [$20,000*54 [ap]] 
$1.1 million.
---------------------------------------------------------------------------

b. Do Not Apply Rule 612 to Trading
    The Commission could amend rule 612 to apply only to accepting, 
ranking, and quoting but not to trading--reflecting the current 
baseline application of rule 612. The advantage to this alternative 
would be that broker-dealers, including wholesalers, could still offer 
price improvement relative to exchanges in whatever increments they 
choose--leaving unchanged a wholesaler's ability to offer price 
improvement relative to the baseline. This alternative would eliminate 
the uncertainty in the proposal regarding how applying the tick 
increment to trading could affect retail price improvement.\664\
---------------------------------------------------------------------------

    \664\ Id.
---------------------------------------------------------------------------

    Not applying the tick increment to trading would reduce the ability 
of exchanges and ATSs to potentially innovate in ways that could make 
them more competitive at some point when competing for retail order 
flow. This would occur because the OTC market makers would retain their 
advantages in terms of sub-penny pricing that exchanges and ATSs do not 
have.\665\
---------------------------------------------------------------------------

    \665\ See supra section V.C.1. for a discussion on why the 
application of the tick size to only quoting provides an advantage 
to wholesalers competing for order flow.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the compliance costs 
associated with this alternative would be less than those discussed for 
the proposal.\666\ The proposal would require market participants to 
update systems to account for rule 612 being applied to trading 
systems. This alternative would remove that proposed expansion of rule 
612 and would thus lower the associated compliance costs. The 
Commission estimates that this alternative would reduce the one-time 
implementation costs of the proposal by an estimated $3.8 million.\667\
---------------------------------------------------------------------------

    \666\ See supra section V.D.6.
    \667\ Not applying rule 612 to trading increments would 
primarily affect the implementation costs associated with trading 
venues as opposed to other market participants. For this alternative 
the Commission estimates that this alternative would lower 
compliance costs for trading centers by half because that the 
alternative would only require modifications to one aspect of the 
systems of market participants (quoting) as opposed to both quoting 
and trading. Thus, this alternative would lower the initial $140,000 
compliance cost estimate for trading centers by $70,000, to $70,000, 
for a total reduction in cost of approximately [$70,000*54 [ap]] 
$3.8 million.

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[[Page 80340]]

c. Segmented Trade Exemption
    Similarly, the Commission could also apply the tick increment to 
trading and quoting, but exempt segmented trades, such as most retail 
trades, from the trading requirements of rule 612 in one of two ways as 
follows. First, to conform with current retail liquidity programs, the 
Commission could allow a lower uniform trading and quoting increment of 
$0.001 for segmented orders such as those executed off-exchange (such 
as by a wholesaler) or on-exchange Retail Liquidity Program in stocks 
priced equal to or greater than $1.00. This alternative would allow for 
qualifying segmented orders in an exchange retail liquidity program or 
an off-exchange trading center such as a wholesaler to receive price 
improvement on qualifying orders in increments of $0.001. Second, the 
Commission could exempt segmented trades from the trading requirements 
of rule 612 altogether, thus not placing any restrictions on the 
trading increment of segmented trades.
    Either of these alternatives would produce the same net effect on 
retail price improvement as those discussed earlier in this section. 
Specifically, applying a $0.001 increment to retail trades would lead 
to a net uncertain effect on overall retail price improvement, while 
exempting retail trades from the trading requirements of proposed rule 
612 would leave retail price improvement unchanged relative to the 
baseline.
    Additionally, the effect on ATSs' and exchanges' abilities to 
potentially innovate to attract retail order flow would likewise be 
unchanged. In the case of a $0.001 segmented trading tick, the ability 
for exchanges and ATSs to potentially innovate in ways that could 
increase their ability to compete for retail order flow would be 
increased relative to the baseline and would be similar to the 
proposal. In the case where retail trades are exempt from the trading 
requirements of proposed rule 612 the competitive position of exchanges 
and ATSs relative to OTC market makers would be unchanged relative to 
the baseline.
    The originating broker would need to identify qualifying segmented 
orders \668\ with the addition of a segmented order identifier affixed 
to the order. This alternative would use a two-part definition of the 
term ``segmented order.'' First, the order must be for an account of a 
natural person, or an account held in legal form on behalf of a natural 
person or group of related family members. Second, for such an account, 
the average daily number of trades executed in NMS stocks must be less 
than 40 in each of the preceding six calendar months. Defining 
``segmented order'' this way would encompass the marketable orders of 
individual investors with expected low adverse selection costs that 
retail brokers currently route to wholesalers for handling and 
execution. These orders already are segmented in practice.
---------------------------------------------------------------------------

    \668\ For this alternative the Commission would define an 
originating broker as any broker with responsibility for handling a 
customer account, including, but not limited to, opening and 
monitoring the customer account and accepting and transmitting 
orders for the customer account.
---------------------------------------------------------------------------

    Limiting qualifying segmented orders to ``natural persons'' for 
purposes of this alternative would draw on existing rules designed to 
identify the orders of individual investors. For example, the 
definition of ``retail customer'' in the Commission's Regulation Best 
Interest (``Regulation BI'') is limited to a ``natural person.'' \669\ 
Moreover, several national securities exchanges operate programs for 
trading ``retail'' orders that are limited to accounts of natural 
persons or certain accounts on behalf of natural persons. This 
definition of segmented order would be closely related to these 
rules,\670\ as well as to FINRA's fee schedule for Nasdaq's Trade 
Repository Facility.\671\ Patterning the definition of segmented order 
on existing SRO rules would leverage market knowledge. This would help 
minimize the costs of compliance because broker-dealers would already 
be familiar with identifying orders as for the accounts of natural 
persons, or for related accounts, in these other contexts. In addition 
to the accounts of natural persons themselves, the definition would, 
consistent with SRO rules, cover accounts held in legal form on behalf 
of natural persons or groups of related family members. Including 
related family members in this alternative is designed to not restrict 
the types of arrangements that may be set up to benefit family groups, 
including individual retirement accounts, corporations, and limited 
liability companies for the benefit of related family members.
---------------------------------------------------------------------------

    \669\ 17 CFR 240.15l-1(b)(1) (defining ``retail customer'' as, 
among other things, a natural person who receives a recommendation 
of any securities transaction from a broker-dealer and uses the 
recommendation primarily for personal, family, or household 
purposes).
    \670\ E.g., IEX Rule 11.190(b)(15) (providing, among other 
things, that ``[a] Retail order must reflect trading interest of a 
natural person'' and that ``[a]n order from a retail customer can 
include orders submitted on behalf of accounts that are held in a 
corporate legal form--such as an Individual Retirement Account, 
Corporation, or a Limited Liability Company--that have been 
established for the benefit of an individual or group of related 
family members, provided that the order is submitted by an 
individual.''); and Nasdaq, Equity 7, section 118 (defining a 
``Designated Retail Order'' as originating from a ``natural person'' 
and explaining that ``[a]n order from a `natural person' can include 
orders on behalf of accounts that are held in a corporate legal 
form--such as an Individual Retirement Account, Corporation, or a 
Limited Liability Company--that has been established for the benefit 
of an individual or group of related family members, provided that 
the order is submitted by an individual'').
    \671\ FINRA Rule 7620A (defining a ``Retail Order'' as 
originating from a ``natural person'' and explaining that ``[a]n 
order from a `natural person' can include orders on behalf of 
accounts that are held in a corporate legal form, such as an 
Individual Retirement Account, Corporation, or a Limited Liability 
Corporation that has been established for the benefit of an 
individual or group of related family members, provided that the 
order is submitted by an individual'').
---------------------------------------------------------------------------

    The second part of such a definition of segmented orders would 
focus on the frequency of trading in an account. It would limit the 
average daily number of trades executed in NMS stocks in an account to 
less than 40 for each of the six preceding calendar months. This would 
exclude very active traders whose orders are likely to impose a much 
higher level of adverse selection costs on liquidity providers than the 
less-active accounts that are more typical of individual investors. For 
example, very active traders may use sophisticated trading tools, such 
as application programming interfaces (APIs) and computer algorithms, 
to submit their orders. These tools can enable highly active trading 
strategies that impose much higher adverse selection costs on liquidity 
providers than the manual placement of orders by a natural person. 
Rather than prohibiting any opportunity for investors to use 
potentially beneficial trading tools,\672\ however, the proposed 
definition specifies a maximum level of trading activity as a means to 
limit the level of adverse selection costs.
---------------------------------------------------------------------------

    \672\ Some SRO rules, for example, prohibit the use of any 
computerized methodology for submitting retail orders. See, e.g., 
NYSE Rule 7.44(a)(3) (defining ``retail order'' in the context of 
NYSE's RLP to require that ``the order does not originate from a 
trading algorithm or any other computerized methodology'').
---------------------------------------------------------------------------

    The level is supported by an analysis of the distribution of order 
activity across accounts reported to the Consolidated Audit Trail as 
being held for the benefit of an ``Individual Customer'' for the first 
six months of 2022.\673\ Across this period, slightly

[[Page 80341]]

more than 99.9% of Individual Customer accounts originated, on an 
average daily basis, 40 or fewer orders associated with a trade. The 
median number of daily-average orders associated with a trade from 
accounts at or below this threshold was less than one.\674\ The median 
number of daily-average orders associated with a trade from accounts 
above this threshold was approximately 68.\675\ Accordingly, the 
threshold in the proposed rule is designed to capture the overwhelming 
majority of individual investor accounts while excluding accounts that 
might impose a higher level of adverse selection costs on liquidity 
providers.\676\
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    \673\ Analysis of Consolidated Audit Trail data for all orders 
originated from an account marked as held for the benefit of an 
Individual Customer, Jan. 1, 2022, through June 30, 2022. This 
analysis counted any order associated with one or more trades or 
fills in an order lifecycle. For the Consolidated Audit Trail, 
account type definitions are available in Appendix G to the CAT 
Reporting Technical Specifications for Industry Members (https://catnmsplan.com/), for the field name ``accountHolderType.'' Account 
types represent the beneficial owner of the account for which an 
order was received or originated, or to which the shares or 
contracts are allocated. Possible types are: Institutional Customer, 
Employee, Foreign, Individual Customer, Market Making, Firm Agency 
Average Price, Other Proprietary, and Error. An Institutional 
Customer account is defined by FINRA Rule 4512(c) as a bank, 
investment adviser, or any other person with total assets of at 
least $50 million. An Individual Customer account means an account 
that does not meet the definition of an ``institution'' and is also 
not a proprietary account. Therefore, the CAT account type 
``Individual Customer'' includes natural persons as well as 
corporate entities that do not meet the definitions for other 
account types.
    \674\ Id.
    \675\ Id.
    \676\ In other contexts, national securities exchanges currently 
characterize certain types of orders according to the level of 
activity associated with a market participant's account. With 
respect to trading in listed options, several exchanges include the 
concept of ``Professional'' order, and these orders, which must be 
identified as such, are distinguished from other customer orders. 
For example, pursuant to Cboe Exchange, Inc. (``CBOE'') Rule 1.1, 
``Professional'' means any person or entity that is not a broker or 
dealer in securities and places more than 390 orders in listed 
options per day on average during a calendar month for its own 
beneficial account(s). Under CBOE's rules, all Professional orders 
are distinguished from other public customer orders (i.e., orders 
for persons other than broker-dealers), must be marked as such, and 
are handled by CBOE's trading platform in the same manner as broker-
dealer orders unless otherwise specified. See CBOE Rule 1.1. See 
also NYSE Arca Rule 1.1; Nasdaq, Options 1, section 1(a)(47); and 
BOX Rule 100(a)(52).
---------------------------------------------------------------------------

    The Commission expects that this alternative would result in 
additional costs beyond those of the proposal. The Commission believes 
it reasonable to expect that the definition of a qualifying segmented 
retail order used for purposes of this alternative would result in 
direct initial and ongoing costs to broker-dealers associated with the 
monitoring of retail accounts and the affixation of an identifier to 
segmented retail orders. The Commission estimates that a total of 157 
originating brokers and routing brokers would incur a one-time 
implementation costs of $170,000 to add a segmented order marker to 
existing systems.\677\ The 157 originating brokers would incur an 
estimated additional initial cost of $33,760 per broker related to 
hiring in-house and outside counsel to review and update existing 
policies and procedures to identify segmented retail orders along with 
$3,472 per year for ongoing review.\678\ The Commission would not 
expect the collection of data on account trading frequency to introduce 
new costs as brokers are already required to maintain customer trading 
information.\679\ However the Commission estimates that originating 
brokers would have to modify existing technology to explicitly monitor 
customer trade frequency for an estimated one-time cost per broker-
dealer of $95,480.\680\ Market centers where segmented retail orders 
would be transacted are estimated to have to incur similar initial one-
time costs of $170,000 to update their systems to receive and manage 
orders marked as a segmented retail order.
---------------------------------------------------------------------------

    \677\ This estimate is based on industry sources of the cost to 
program systems to add a new marking classification and adjusted for 
inflation. See, e.g., Securities Exchange Act Release No. 94313 
(Feb. 25, 2022), 87 FR 14950, 14976 (Mar. 16, 2022) (proposing 
amendments to Regulation SHO) (``Regulation SHO Amendment 
Proposal'').
    \678\ The Commission estimates the initial costs related to 
employing legal counsel to review and update policies to be: 
(Attorney at $462 for 40 hours) + (Compliance Counsel at $406 for 10 
hours) + (Deputy General Counsel at $663 for 5 hours) + (Chief 
Compliance Officer at $589 for 5 hours) + (10 hours of review x 
($496/hour for outside counsel service) = $33,760. With ongoing 
annual costs to be: (Attorney at $462 for 4 hours) + (Compliance 
Counsel at $406 for 4 hours) = 8 ongoing burden hours and $3,472.
    \679\ See 17 CFR 240.17a-3(a) (requiring broker-dealers to make 
and keep, among other things, current blotters containing an 
itemized daily record of all purchases and sales of securities and 
the account for which each such purchase and sale was effected).
    \680\ The Commission estimates this cost to be: (Sr. Programmer 
at $368 for 160 hours) + (Sr. Database Administrator at $379 for 40 
hours) + (Sr. Business Analyst at $305 for 40 hours) + (Attorney at 
$462 for 20 hours) = 260 initial burden hours and a monetized cost 
of $95,480.
---------------------------------------------------------------------------

    Alternatively, the Commission could use a definition of retail 
order that is qualitative in nature, for example as originating from a 
natural person and not using an application-program interface. Relative 
to the alternative outlined above, this alternative might be less 
costly because there would not be the need to monitor trading activity. 
However, it would still be necessary to adopt systems to identify 
retail customers. Moreover, this alternative might achieve less of the 
benefit of harmonization across trading and quoting, as off-exchange 
venues have greater ability to segment and therefore to attract the 
retail order flow.
2. Alternative Tick Sizes
    One reason why the Commission chose the particular tick size 
cutoffs in this proposal was to have sufficient ticks intra-spread to 
preserve meaningful price improvement.\681\ Most current price 
improvement would be unaffected by the proposal because it occurs as a 
result of a midpoint trade, or it occurs in increments that currently 
align with the baseline tick of $0.01.\682\ However, for the minority 
of price improvement that could potentially be affected by the tick 
size change and the application of the tick size to trading 
applications, 4-8 ticks intra-spread can help preserve meaningful price 
improvement opportunities--though the net effect is uncertain.\683\ The 
range of 4-8 ticks intra-spread comes at the cost of increasing the 
likelihood that, due to natural variation in spreads, a stock could 
trade with a smaller tick when a wider tick might provide a better 
trading environment.\684\ If the Commission were to adopt one of the 
alternatives in section V.F.1 then the Commission could utilize 
alternative tick regimes that do not consider the need to provide price 
improvement only in units of the tick size. This section discusses 
alternative tick size regimes that the Commission could implement in 
this case.
---------------------------------------------------------------------------

    \681\ See supra section II.F.2 for additional discussion. 
Specifically, see text surrounding supra note 210 where the 
Commission states, ``[t]he Commission believes that proposing to 
vary the minimum pricing increments . . . represents a balancing of 
pricing, liquidity, complexity, and price improvement 
opportunities.'' See also text surrounding supra note 221 where the 
Commission states ``The Commission also selected these particular 
pricing increments because, as described above, the proposed 
amendments to rule 612 are designed to (1) correlate the Time 
Weighted Average Quoted Spread to the minimum pricing increments by 
limiting the number of potential price points within the spread 
which in turn should mitigate the loss of liquidity that can occur 
when the minimum tick size is reduced, and (2) preserve meaningful 
price improvement for the majority of NMS stocks that would trade at 
minimum pricing increments that are $0.005 or less.''
    \682\ See Table 3 and surrounding analysis finding that only 18% 
of current price improvement occurs in sub-penny increments and not 
as a result of a midpoint trade.
    \683\ See supra section V.D.5 for additional analysis on this 
topic.
    \684\ See Table 10 and surrounding analysis.
---------------------------------------------------------------------------

    To clarify the discussion, for all alternatives discussed in this 
section the following conditions apply. First, the Commission would not 
amend rule 612 to apply to trading situations. Thus, all alternatives 
here apply tick sizes only to quoting.\685\ This allows the Commission

[[Page 80342]]

to consider tick size regimes without having to balance the need for 
OTC market makers to have sufficient ticks intra-spread in order to 
offer price improvement, though these alternatives would not offer the 
benefit of leveling the playing field across execution venues with 
respect to price improvement. Second, the tick sizes discussed refer 
explicitly to stocks priced equal to or greater than $1.00. For stocks 
with a share price of less than $1.00 in every case there would be no 
change in rule 612 relative to the baseline--i.e., a tick of $0.0001 
that does not apply to trading.\686\ This reflects the fact that in the 
proposal the only change to rule 612 for stocks priced less than $1.00 
was that the tick size of $0.0001 would also apply to trading. Given 
the fact that all alternatives in this section are predicated on rule 
612 not being expanded to trading, the trading environment for stocks 
priced less than $1.00 would not change relative to the baseline, and 
so the analysis in this section focuses exclusively on tick sizes for 
stocks priced equal to or greater than $1.00. These first two 
conditions would lower implementation costs. Third, the access fee cap 
would not deviate from the proposal. Specifically, for stocks priced 
equal to or greater than $1.00 the access fee cap would be 10 mils 
whenever the tick size is greater than or equal to $0.002 and 5 mils 
for stocks with tick sizes less than $0.002 and prices greater than or 
equal to $1.00. For stocks priced less than $1.00 the access fee cap 
would be 0.05% of the value.\687\ This condition acknowledges that the 
alternative tick sizes discussed in this section do not affect the 
economics of access fees or the reasons why the Commission is seeking 
to reduce the access fee.\688\ Consequently, for all alternatives 
discussed in this section the Commission would retain the tick size 
regime in the proposal. This condition would lead to the same 
implementation costs associated with access fee caps that is presented 
in the proposal.\689\ Fourth, all proposals in this section would 
provide a tick size exception for midpoint trades and benchmark trades 
such as VWAP or TWAP trades--reflecting the value that such trades 
offer to investors.\690\ This condition likewise does not deviate from 
the proposal, and thus the compliance costs associated with this 
condition are accounted for in Section V.D.6. Fifth, for the quoted 
spread based tick size regimes the Commission would use the same 
process described in the proposal to determine a stock's Time-Weighted 
Average Quoted Spread: Evaluation Periods that last one month and occur 
four times per year where Time-Weighted Average Quoted Spread is the 
time weighted quoted spread during normal trading hours.\691\ Because 
this condition does not represent a change relative to the proposal, 
the implementation costs would be as discussed in the proposal.\692\
---------------------------------------------------------------------------

    \685\ The economic effects of not applying rule 612 to trading 
are discussed in section V.F.1. Alternatively, the Commission could 
adopt any of the other alternatives presented in section V.F.1, the 
effect of which would be to combine the economic effects discussed 
in this section with those of the specific alternative in V.F.1 
adopted.
    \686\ This stems from the first assumption which is that rule 
612 is not amended in this alternative to apply to trading 
situations. For stocks with prices less than $1.00, this was the 
only proposed change to rule 612 relative to the baseline. 
Consequently, the economic effects of this aspect of the 
alternatives discussed in this section are not discussed here. See 
section V.C.1 for a discussion of the tick size baseline for stocks 
with prices less than $1.00.
    \687\ The economic effects of this aspect of the alternatives 
discussed in this section are not discussed here, but are discussed 
in the discussion of the proposal. See, e.g., sections V.D.2 and 
V.E.
    \688\ See supra sections III.C, V.C.2, and V.D.2.
    \689\ See supra section V.D.6 for a discussion of these 
implementation costs.
    \690\ See text surrounding supra note 247 for a discussion of 
the role that midpoint and benchmark trades play.
    \691\ See supra section II.F.2.a for additional details on this 
process.
    \692\ See supra section V.D.6 of a discussion of the costs of 
implementing this aspect of the proposal.
---------------------------------------------------------------------------

a. Quoted Spread Based Approaches
    Without the need to balance the ability of OTC market makers such 
as wholesalers to offer retail price improvement when determining the 
tick size thresholds, the Commission could shrink the bands where the 
given tick sizes apply or consider different tick size structures. 
Shrinking the bands limits the risk that stocks may trade with too many 
ticks intra-spread due to time series variation in quoted spreads by 
both limiting the total number of stocks that receive a tick size 
reduction and also limiting the size of the tick size reduction for 
stocks that do qualify for a tick size reduction relative to the 
proposal.
    In Table 10, the Commission estimated that if the proposal had been 
implemented in the first six months of 2022, approximately 3.4% of 
share volume and 7.4% of dollar volume would have received a lower tick 
size and then transacted when spreads were wider than 10 ticks intra 
spread--the point at which analysis suggested TSP stocks would have 
traded better with a wider tick.\693\ By shrinking the bands where the 
tick sizes apply the Commission could mitigate the risk of shrinking 
the tick too much and harming market quality for some trading volume 
while still providing relief to stocks that are currently tick or near-
tick-constrained in the current $0.01 tick regime.
---------------------------------------------------------------------------

    \693\ See supra section V.D.1.
---------------------------------------------------------------------------

    In addition to narrowing Time-Weighted Average Quoted Spread bands 
at which the proposed tick sizes apply, the Commission could also 
revise the total number of tick sizes. The proposal has 4 tick sizes 
for stocks priced equal to or greater than $1.00. The Commission could 
adjust this number down to increase simplicity but at the cost of 
potentially assigning a stock to a tick regime that may not be optimal, 
or up to expand the tick size regime to stocks with wider spreads--
increasing complexity but ensuring that all stocks have a tick size 
that is tailored to their Time-Weighted Average Quoted Spread.
i. Alternative Tick Threshold
    The proposal contains a total of 4 tiers for stocks equal to or 
above $1, and targets between 4 and 8 ticks intra-spread. 
Alternatively, the Commission could reduce the number of tiers from 4 
to 3, with similar ticks but with tighter criteria for reducing the 
tick size, as follows:
    i. No smaller than $0.0025, if the Time-Weighted Average Quoted 
Spread for the NMS stock during the Evaluation Period was less than 
$0.01.
    ii. No smaller than $0.0050, if the Time-Weighted Average Quoted 
Spread for the NMS stock during the Evaluation Period was greater than 
$0.01 but less than or equal to $0.02;
    iii. No smaller than $0.01, if the Time-Weighted Average Quoted 
Spread for the NMS stock during the Evaluation Period was greater than 
$0.02.
    This alternative would target 2-4 ticks intra-spread. The empirical 
analysis presented in Section V.D.1 suggested that stocks with less 
than 2 ticks intra-spread generally benefited from the reduction in the 
tick size that accompanied the end of the TSP while stocks with more 
than 15 ticks may have been harmed. By targeting 2-4 ticks intra-spread 
this alternative would provide relief to stocks that are currently tick 
or near-tick-constrained while also reducing the risk that a stock is 
harmed by trading with too many ticks intra-spread.
    A key difference of this alternative relative to the proposal is 
that a smaller fraction of overall trading volume would be assigned a 
smaller tick size: only those stocks with Time-Weighted Average Quoted 
Spreads less than $0.02. Thus a higher fraction of overall trading 
volume would remain at the $0.01 tick size.
    The Commission estimates that the costs to implement this 
alternative

[[Page 80343]]

would be similar or slightly lower as compared to the proposal because 
there would be three rather than four tick sizes that market 
participants would be required to adapt to, and the process for 
determining which stock received which tick size would be the same as 
the proposal.
    Relative to the proposal, this alternative would more specifically 
target trading volume that is tick or near-tick-constrained as a stock 
would be required to have a Time-Weighted Average Quoted Spread less 
than $0.02 to qualify for any reduction in the tick size. Additionally, 
by targeting 2-4 ticks intra-spread instead of 4-8, this alternative 
would lower the risk that normal variation in quoted spreads through 
time could lead trading in some stocks some of the time to be worse off 
relative to the proposal.
    Another difference between this alternative and the proposal 
pertains to what would occur should a reduction in the tick size result 
in a widening of spreads. Consider, for example, a stock that trades at 
a Time-Weighted Average Quoted Spread of $0.013. If the proposal were 
adopted, and after the implementation period, such a stock could go 
from a tick size of $0.01 to $0.001. One possible scenario is that 
spreads might widen (though the analysis suggests this is not the most 
likely scenario). Should spreads widen to, say $0.03, the tick would 
revert to $0.005; however spreads would be wider than they had been. In 
contrast, under this alternative, the stock would be assigned to the 
$0.005 bucket, rather than the $0.002 bucket. Spreads would be less 
likely to widen, but should they do so (consider $0.03), the tick would 
revert to $0.01. Under the proposal, spreads would have to undergo a 3-
fold increase, to $0.04, to once again qualify for $0.01. Under this 
alternative, due to the less severe reduction in the tick size relative 
to the proposal, the spread would be less likely to widen due to a 
smaller tick, and were it to widen, it would need a less severe 
increase in the spread to revert to a tick of $0.01.
    This alternative would also result in a smaller financial impact on 
any exchange relying on access fee revenue because none of the buckets 
would qualify for the 5 mil access fee. Additionally, because the 
smallest tick size would be assigned an access fee cap of 10 mils, the 
access fee cap for stocks trading beneath $1.00 would be 0.10% rather 
than 0.05% in the proposal--resulting in a smaller reduction in 
exchange transaction revenue for this trading volume.
ii. Two-Tiered Alternative
    Alternatively, the Commission could simplify the tick size proposal 
and consider a two-tiered tick alternative for stocks priced equal to 
or greater than $1.00 where only tick-constrained stocks, i.e., those 
with Time-Weighted Average Quoted Spreads less than or equal to $0.011 
during an evaluation month, receive a tick of $0.005 while all other 
stocks retain a tick of $0.01.\694\
---------------------------------------------------------------------------

    \694\ For stocks with prices equal to, or greater than, $1.00 
per share, a $0.01 tick would provide a floor on the feasible quoted 
spread (see supra note 448). See supra note 448 for a discussion of 
using a $0.011 threshold for the spread of tick-constrained stocks.
---------------------------------------------------------------------------

    One advantage of this alternative relative to the proposal is that 
it would be simpler than the proposal as it would eliminate two of the 
tick sizes. Market participants, but retail investors in particular, 
might find it less confusing if the only two tick sizes were one penny 
and half a penny.
    Also, to the extent that the proposal raises the concern that tick 
sizes would be too small for some stocks, this alternative would have 
the benefit that fewer stocks would be trading at a smaller tick, and 
the minimum tick itself would be substantially wider.
    However, the analysis in Section V.D.1 suggests that this 
alternative could leave some stocks with a spread that is artificially 
wide, specifically near-tick-constrained stocks which could trade at 
spreads that are wider than they would be with a smaller tick. For 
example, a stock with average spread of $0.013 would be frequently 
trading with just one tick in between the best bid and best offer. 
Empirical analysis from section V.D.1 suggests that reducing the tick 
for this stock would, on average, reduce costs for investors. Moreover, 
if a stock priced equal to or greater than $1.00 has a Time-Weighted 
Average Quoted Spread of $0.005 then under the proposed changes to rule 
612 that stock would receive a tick size of $0.001 providing 5 ticks 
intra-spread. Under this alternative that same stock would receive a 
$0.005 tick and would be tick-constrained with only one tick intra-
spread. Albeit with the smaller tick relative to the current 
environment the distortive effects of the tick size would be smaller 
than what they currently are.
    This alternative would have somewhat lower implementation costs 
relative to the proposal due to the fact that market participants would 
only be required to program systems to account for two tick sizes 
instead of four tick sizes. However, the reduction in cost relative to 
the proposal would be relatively small because market participants 
would still be required to build systems to adapt to multiple tick 
sizes that could periodically change. Once this functionality is built 
out, the Commission preliminarily believes that the cost of two tick 
size tiers would not be significantly larger than the cost of four tick 
size tiers. Thus, while acknowledging that the implementation costs of 
this proposal would likely be somewhat lower than those of the 
proposal, the Commission believes that the estimates for the proposal 
would be reasonable and seeks comment on this belief.
    Because no stock would be assigned a tick size of $0.001 in this 
alternative, the access fee cap for all transactions priced greater 
than $1.00 would be 10 mils. At this level the Commission expects that 
IEX could maintain its current net capture on all transactions priced 
greater than $1.00 and thus a cost of the proposal to IEX would be 
eliminated. Additionally to harmonize the access fee cap for trading 
above and below $1.00 the Commission would enact a transaction fee cap 
of 0.1% (instead of 0.05%) for transactions priced less than $1.00. 
This higher transaction fee cap would effectively double, relative to 
the proposal, the revenue that the exchanges could earn from 
transactions priced less than $1.00 which would cut in half the 
expected lost revenue associated with the proposal articulated in Table 
12. Specifically, this alternative would reduce the estimated lost 
revenue to exchanges by approximately $45 million per year.\695\
---------------------------------------------------------------------------

    \695\ In Table 12, the Commission estimated that the reduction 
in the access fee cap for transactions priced less than $1.00 from 
the baseline 0.3% to 0.05% in the proposal would lead to 
approximately $89 million per year reduction in exchange transaction 
revenue. Half of $89 million is approximately $45 million.
---------------------------------------------------------------------------

iii. Include Wider Ticks Than $0.01
    The Commission could expand the proposal to include ticks wider 
than $0.01 for stocks with spreads wider than $0.04. In doing so the 
Commission could seek to target 4-8 ticks intra-spread for all wider-
spread stocks. This alternative would apply the results from the 
empirical analysis suggesting that stocks with two or fewer ticks 
intra-spread would benefit from a reduction in the tick size while 
stocks with 10-15+ ticks intra spread would not.\696\ Consequently, the 
Commission could extend the 4-8 tick intra-spread target in the 
proposal to all stocks. For example stocks with spreads greater than 
$0.08 and less than $0.16 could have a tick of

[[Page 80344]]

$0.02. Stocks with spreads greater than $0.16 but less than $0.32 could 
have a tick size of $0.04 and so on.
---------------------------------------------------------------------------

    \696\ See analysis in supra section V.D.1, Table 9.
---------------------------------------------------------------------------

    This alternative could potentially improve the trading environment 
for stocks with wider spreads by minimizing the costs associated with 
having too many ticks intra-spread.\697\ It would also increase 
complexity relative to the proposal because market participants would 
need to adapt to an environment with a larger number of tick sizes.
---------------------------------------------------------------------------

    \697\ See Barardehi, et al. (2022), supra note 85.
---------------------------------------------------------------------------

iv. Alternative Proposed in NASDAQ White Paper
    Nasdaq has offered an alternative in a white paper.\698\ This 
alternative would have stocks trading with spreads below 0.011 receive 
a tick size of $0.005. Stocks with spreads between $0.01 and $0.02 
would continue to trade at an increment of $0.01, stocks with spreads 
between $0.02 and $0.05 would trade at an increment of $0.02, between 
$0.05 and $0.1 at $0.05, $0.1 to $0.25 to $0.10 and those above $0.25 
to $0.25. Spreads would be determined every six-months based on the 
Time-Weighted Average Quoted Spread over the prior six months. The 
Commission believes that the compliance costs of this alternative would 
be similar to the proposal due to the similar nature of the 
alternative.
---------------------------------------------------------------------------

    \698\ See Nasdaq Intelligent Tick, supra note 180. See also 
supra section II.E.2.
---------------------------------------------------------------------------

    This alternative has two distinct disadvantages relative to the 
proposal. First, a stated assumption underlying this proposal is that 
``stocks should trade at or near their Time-Weighted Average Quoted 
Spread.'' \699\ Consequently, the proposal targets at most 2.5 ticks 
intra spread for most stocks.\700\ The empirical analysis provided in 
Section V.D.1 indicated that TSP stocks that had fewer than two ticks 
intra-spread prior to the conclusion of the TSP benefited from the 
reduction in the tick size when the stock's tick size reverted from 
$0.05 to $0.01. Thus, our analysis indicates that fewer than 2 ticks 
intra-spread is on average too few and that stocks would trade better 
with more ticks intra spread. Thus this alternative might harm market 
quality relative to the proposal for many stocks. Additionally, this 
alternative does not provide a mechanism for most stocks to receive a 
lower tick size. For example if a stock is trading with a Time-Weighted 
Average Quoted Spread of $0.025, under this alternative it would 
receive a tick size of $0.02. However, since the tick size also defines 
the minimum tick possible this stock could never trade at less than 
$0.02 and thus would never qualify for a smaller tick. This 
disadvantage could be solved by multiplying all of the tick size 
thresholds by some multiple such as 1.1 to allow stocks that become 
tick-constrained by the assigned tick to receive a smaller tick size.
---------------------------------------------------------------------------

    \699\ See Nasdaq Intelligent Tick, supra note 180, at 16.
    \700\ The proposal would limit increases in the tick size to 
$0.25, and so to the extent that a stock's prevailing spread 
surpasses this amount, it could trade at more than 2.5 ticks intra 
spread. However, as indicated in Table 4, transactions in stocks 
with quoted spreads greater than $0.25 represent less than 4% (20%) 
of share (dollar) volume thus the intelligent tick proposal would 
target the majority of trading volume with less than 2.5 ticks 
intra-spread.
---------------------------------------------------------------------------

    This alternative shares some of the benefits with the proposal. In 
both cases the proposal would reduce the risk of pennying by ensuring 
that for most stocks there would be relatively few ticks intra-spread. 
It reduces the risk that that the proposal could narrow spreads too 
much for some stocks. It also provides some relief to tick-constrained 
stocks by allowing them to trade at a $0.005 tick.
v. Step-Down/Step-Up Mechanism
    The Commission could alternatively add a ``step-up/step-down'' 
mechanism to the proposal or to any of the alternatives above to 
prevent stocks from transitioning more than one tick size tier at a 
time. For example, under the proposal, a stock trading with a $0.005 
tick that ends the quarter with a time-weighted average spread of 
$0.006 would switch to a minimum increment of $0.001, skipping over the 
minimum increment of $0.002. With a step-up/step-down mechanism, this 
stock would ``step-down'' to rather than skip the minimum of $0.002; 
only stocks with a minimum increment of $0002 and a Time-Weighted 
Average Quoted Spread of less than $0.008 would be eligible to move to 
a minimum increment of $0.001. Likewise, a stock would be assigned the 
next larger tick in the tick size schedule if it traded with a wider 
spread than prescribed by its tick size tier, regardless of whether the 
spread was large enough to be assigned to a tier with an even larger 
tick size.
    A step-up/step-down mechanism would help avoid any potentially 
large shifts in tick size under the proposal. This alternative, 
however, could prolong the costs associated with being tick-constrained 
or near-tick-constrained and tick assignment. Further, this alternative 
would be more complex as the resulting tick size would not only depend 
on the stock's time-weighted average spread but would also depend on 
the stock's prevailing minimum increment. This additional complexity 
may lead to confusion amongst market participants who would not 
actively track tick size assignments, though in terms of implementation 
the Commission does not expect that the additional requirement of 
tracking a stock's previous tick size would lead to higher 
implementation costs than those in the proposal.
b. Other Approaches
i. Uniform $0.005 Tick for All Stocks Priced Equal to or Greater Than 
$1.00
    The Commission could reduce the minimum tick size to a half a cent 
($0.005) for the quoting and trading of all NMS stocks that are priced 
at or above $1.00. A primary advantage of this alternative is that it 
would reduce complexity relative to the proposal as there would be a 
uniform tick size for all stocks trading equal to or greater than $1.00 
while also allowing tick-constrained stocks a smaller tick. 
Additionally, there is a risk that, for unknown reasons, some stocks 
that would qualify for a smaller tick under the proposal would trade 
better with a wider tick. For these stocks this alternative would be 
better than the proposal both because the tick size reduction is not as 
severe as the proposal. The disadvantage to this proposal is that, as 
shown in section V.D.1, a smaller tick for wide spread stocks can harm 
liquidity, thus applying a smaller tick to all securities would likely 
harm execution quality for some stocks with wide spreads.
    This alternative would also have lower initial one-time compliance 
costs and no ongoing costs relative to the proposal because this 
alternative provides just one modification to the current tick size 
regime: a reduction in the tick from $0.01 to $0.005 for all stocks 
priced greater than $1.00. Thus it would be cheaper to implement. The 
Commission estimates that this alternative would lower implementation 
costs relative to the proposal by approximately $14 million.\701\
---------------------------------------------------------------------------

    \701\ See Table 13 for enumerated cost estimates of the 
proposal. For trading centers, the Commission estimates that this 
alternative would lower compliance costs by $90,000 from $140,000 to 
$50,000 to reflect the fact that the rule would only apply to 
quoting and not to trading, thus only one part of the trading 
center's systems would need to be modified and that the 
modifications to the quoting systems would be simpler than the 
proposal. There would be no one-time or ongoing costs associated 
with monitoring Time-Weighted Average Quoted Spreads. Additionally, 
entities adjusting order entry systems for the new tick would not 
need to adjust their systems to add any tick size dynamism beyond 
what exists in the baseline. Thus, the Commission estimates that 
entities with order entry systems would see their implementation 
costs decline by $7,000 from $11,000 to $5,000 per order entry 
system. For the same reasons, the Commission estimates that 
operators of smart order routers would see their compliance costs 
decrease from $11,000 to $5,000. [$90,000*54 (trading centers) + 
$7,000*1,192 (order entry systems) + $7,000*282 (smart order 
routers) [ap] $14 million].

---------------------------------------------------------------------------

[[Page 80345]]

    Additionally, because no stock would be assigned a tick size of 
$0.001 in this alternative, the access fee cap for all transactions 
priced greater than $1.00 would be 10 mils if kept proportional to the 
tick size. At this level the Commission expects that IEX could maintain 
its current net capture on all transactions priced greater than $1.00 
and thus a cost of the proposal to IEX would be eliminated. 
Additionally to harmonize the access fee cap for trading above and 
below $1.00 the Commission would enact a transaction fee cap of 0.1% 
(instead of 0.05%) for transactions priced less than $1.00. This higher 
transaction fee cap would effectively double, relative to the proposal, 
the revenue that the exchanges could earn from transactions priced less 
than $1.00 which would cut in half the expected lost revenue associated 
with the proposal articulated in Table 12. Specifically, this 
alternative would reduce the estimated lost revenue to exchanges by 
approximately $45 million per year.\702\
---------------------------------------------------------------------------

    \702\ In Table 12, the Commission estimated that the reduction 
in the access fee cap for transactions priced less than $1.00 from 
the baseline 0.3% to 0.05% in the proposal would lead to 
approximately $89 million per year reduction in exchange transaction 
revenue. Half of $89 million is approximately $45 million.
---------------------------------------------------------------------------

ii. Variable Tick Size Based on Price
    The Commission could also implement a tick regime that is based 
solely on the share price of the securities. This alternative 
effectively would expand the current regime where quotes for NMS stocks 
priced less than $1.00 have a tick of one hundredth of a penny while 
quotes for NMS stocks priced at or greater than $1.00 have a tick of 
$0.01. The advantage to this approach relative to the quoted spread 
tick alternative discussed in the previous section is that it is 
simpler to implement as it would be a static rule that requires no 
computations by the listing exchange. The primary disadvantage to this 
alternative relative to using the quoted spread based measures is that 
price, while a useful benchmark because it is correlated with quoted 
spreads, is not perfectly correlated with the quoted spread--the key 
economic variable of interest when determining tick sizes--and stocks 
with similar prices can have spreads that vary significantly.\703\ Thus 
it is likely that under a price based regime some stocks would have a 
tick size that is too wide relative to their quoted spread and others 
too small.
---------------------------------------------------------------------------

    \703\ See Mackintosh, supra note 475, for evidence that stock 
prices and quoted spreads are correlated but not perfectly so.
---------------------------------------------------------------------------

    The Commission could implement a price based tick schedule as 
follows.

------------------------------------------------------------------------
                            Price                                 Tick
------------------------------------------------------------------------
Less than $1.................................................    $0.0001
$1 to $10....................................................      0.001
$10 to $50...................................................      0.005
Greater than $50.............................................       0.01
------------------------------------------------------------------------

    This tick schedule effectively would add two intermediate tick 
levels to the current regime. For stocks with prices below $1.00 and 
above $50.00, there would be no change relative to the existing tick 
regime. However, for stocks with prices between $1.00 and $10.00 the 
tick would be $0.001, and for stocks between $10.00 and $50.00 the tick 
would be $0.005.
    Table 14 provides descriptive statistics based on data from March 
2022 for the various price levels.\704\ The first price group of stocks 
is those with prices less than $1.00. Trading in these stocks accounted 
for approximately 8% of share trading volume in March 2022. For these 
stocks, there would be no change in the trading environment relative to 
what is currently in place. Stocks in price group two with prices 
between $1.00 and $10.00, i.e., stocks that would be assigned a tick 
size of $0.001 under this alternative accounted for a total of 28% of 
all share trading volume. Of this trading volume, the majority (78%) 
occurred in tick-constrained stocks, while 21% of volume in this price 
group occurred in stocks with a spread between $0.01 and $0.10. In this 
group of stocks very little trading volume occurred in stocks with a 
spread greater than $0.10. Thus, the effect of lowering the tick to a 
tenth of a cent for stocks in this price group would likely improve the 
trading environment for the 78% of trading that is currently tick-
constrained in this price range. For the remaining 22% of trading 
volume in this price category, the trading in stocks that are not 
currently tick-constrained, the effect of reducing the tick to a tenth 
of a cent could be negative based on the analysis in section V.D.1.
---------------------------------------------------------------------------

    \704\ Each day, total trading volume for a stock would be 
allocated into one of the four price groups based on that stock's 
VWAP on that day. Then, the total trading volume in each of the 
price groups, as well as average number of stocks that fall into 
each price group each day is computed for the month of Mar. 2022 
(the hypothetical first evaluation month in the examples presented 
in section V.G.1.b.). This methodology is an estimate of the amount 
of trading volume that would have been allocated to each of the 
price groups. For example, in this methodology, a stock with a VWAP 
of just below $1.00 on a trading day would have all of its trading 
volume allocated to the $1.00 trading bin even though some fraction 
of its trading volume may have occurred intra-day at prices at or 
above $1.00. However, this bias will be minor because there will 
also be some stocks with prices just above the relevant thresholds 
and the incorrect trades will likely mostly cancel out. 
Additionally, the overwhelming majority of trading volume does not 
occur right on the thresholds, so the noise created by using a VWAP 
based methodology instead of a trade by trade methodology is likely 
to be minor.

                                               Table 14--Share Volume by Price Group and Quoted Spread \a\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Average      % Total      % Group      % Total      % Group
             Price group                    Spread group        number of      share        share        dollar       dollar    % of stocks   % of group
                                                                  stocks       volume       volume       volume       volume                    stocks
--------------------------------------------------------------------------------------------------------------------------------------------------------
Less than $1........................  Tick-Constrained.......          259            7           93            0           91            2           25
                                      $0.011 < Spread < $0.10          651            1            7            0            9            6           64
                                      Spread > $0.10.........          112            0            0            0            0            1           11
$1 < Price < $10....................  Tick-Constrained.......          540           22           78            2           74            5           18
                                      $0.011 < Spread < $0.10        1,994            6           21            1           24           17           67
                                      Spread > $0.10.........          454            0            2            0            2            4           15
$10 < Price < $50...................  Tick-Constrained.......          397           23           59           12           57            3            7
                                      $0.011 < Spread < $0.10        2,982           14           37            8           39           26           55
                                      Spread > $0.10.........        2,017            1            4            1            4           18           37
Price > $50.........................  Tick-Constrained.......           97            6           24           10           13            1            5

[[Page 80346]]

 
                                      $0.011 < Spread < $0.10          715           14           55           41           54            6           34
                                      Spread > $0.10.........        1,264            5           21           25           33           11          61
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ This table provides estimates of the distribution of trading volume that occurs in stocks with various price and quoted spread levels. Each day in
  Mar. 2022 stocks are divided into four price groups (less than $1.00, $1.00 < Price < $10, $10 < Price < $50, and Price > $50) and three quoted spread
  groups (Spread < $0.011 i.e., tick-constrained, $0.011 < Spread < $0.10, and Spread > $0.10). Price is determined using that day's VWAP, and quoted
  spreads are computed using the time weighted quoted spread during regular trading hours. Both statistics are obtained from the WRDS intra-day
  indicators. Once a stock is assigned to a particular quoted spread and price group all of that stock's trading volume across all venues for that day
  is determined. This table computes the average number of stocks in each of the 12 unique price/spread groups during our sample. It also presents the
  total share and dollar volume falling into each of the 12 groups. The table also provides percentage summations for each price group that illustrate
  what fraction of trading volume in each price group falls into each quoted spread category. These computations are presented in columns with titles
  beginning with % Group.

    Stocks with a price range of between $10.00 and $50.00, i.e., 
stocks that would be assigned a half cent tick, represent about 38% of 
share trading volume. Of this 38% of trading volume, approximately 59% 
occurs in stocks that are currently tick-constrained, 37% occurs in 
stocks that are not tick-constrained but have an average spread of less 
than $0.10. The remaining 4% occurs among stock with spreads wider than 
$0.10. For tick-constrained stocks, a reduction in the tick size to a 
half a penny from the current one cent would likely improve market 
quality for these stocks. For the 37% of trading volume in this price 
range that occurs in stocks with spreads less than $0.10 but that are 
not tick-constrained, the average quoted spread is approximately $0.05. 
For these stocks, a half cent tick represents 10 ticks within the 
quoted spread. Ten ticks intra-spread is in line with the maximum 
number of intra-spread ticks allowable for stocks receiving a tick size 
reduction under the proposal, and the empirical analysis in Section 
V.D.1 suggests that stocks trading at approximately 10 ticks or less 
intra-spread do not need a reduction in the spread to improve market 
quality. For the 4% of trading volume in this group with average quoted 
spreads above $0.10, the average quoted spread is approximately $0.27, 
and a half cent tick would introduce over 50 price levels within the 
spread. At this level, the half cent tick could be too small and could 
harm market quality by increasing complexity and the risk of pennying.
    The last category of stocks, those with prices greater than $50, 
account for approximately 28% of share trading volume. For these 
stocks, the tick would not change relative to the baseline environment.
    This alternative would have implementation costs similar to those 
discussed section V.D.6 with the exception that the 5 listing exchanges 
would not be required to monitor quoted spreads and to send tick size 
information to the SIPs, reducing one-time costs by $95,000 and ongoing 
costs by $45,000 per year.\705\
---------------------------------------------------------------------------

    \705\ See Table 13 for enumerated cost estimates of the 
proposal.
---------------------------------------------------------------------------

    This alternative would also reduce the effect relative to the 
proposal on IEX's net capture. Specifically, in the proposal the 
Commission estimated that approximately half of trading volume is in 
tick-constrained stocks that would receive a tick size of $0.001 and an 
associated access fee cap of 5 mils. This is the volume that IEX would 
be estimated to receive a reduced net capture of 1 mil. However, as 
shown in Table 14, stocks priced between $1.00 and $10.00 only account 
for an estimated 28% of total share volume. Consequently, this 
alternative would reduce by approximately half the estimated fraction 
of trading volume that would receive the 5 mil access fee cap and thus 
would reduce IEX's lost net capture on trades priced greater than $1.00 
relative to the proposal by about half.
iii. Cboe Proposal
    Cboe has also put forth an alternative methodology for determining 
the tick size.\706\ This alternative would apply three layers of 
filtering to stocks to determine if the stock qualified for a $0.005 
tick. First, the stock would need to be consistently trading with a 
Time-Weighted Average Quoted Spread of $0.011. Then among those stocks, 
only those with high quote-size-to-trade-size-ratios would be further 
considered for a tick size reduction. Cboe argues that a high quote-
size-to-trade-size-ratio is indicative of there being ample liquidity 
but investors being discouraged from crossing the spread due to the 
high tick. If a stock's quote-size-to-trade-size-ratio is greater than 
the 75th percentile among stocks that are trading with quoted spreads 
less than $0.011 then it would qualify for consideration as a candidate 
for a tick size reduction. The last criterion relates to the notional-
turnover-ratio. This criterion is designed to eliminate stocks that are 
relatively thinly traded from consideration for a tick size reduction. 
To be a candidate for a tick reduction a stock must also be above the 
top 75th percentile among stocks with a Time-Weighted Average Quoted 
Spread less than $0.011. Thus, the three criteria to receive a tick 
size reduction would be a Time-Weighted Average Quoted Spread less than 
$0.011, and the stock must be above the 75th percentile among stocks 
with a Time-Weighted Average Quoted Spread less than $0.011 in both its 
quote-size-to-trade-size-ratio and its notional-turnover-ratio. This 
plan would re-evaluate stocks on a quarterly or bi-annual basis.
---------------------------------------------------------------------------

    \706\ See Cboe Proposal, supra note 104.
---------------------------------------------------------------------------

    Relative to the proposal, this alternative would limit the tick 
size reduction to an estimated 4% of dollar trading volume. This 
proposal would also limit the tick size reduction for these stocks to 
$0.005. Thus to the extent that some stocks that would receive a lower 
tick size in the proposal but would not benefit from a lower tick size 
for unknown reasons, these stocks would be better off under this 
alternative due to its limited scope.
    This alternative would be considerably more complex than the 
proposal and it is unclear which entity would have responsibility for 
computing the quote-size-to-trade-size-ratio and the notional-turnover-
ratio 75th percentile thresholds as these thresholds require a 
standardized methodology to be applied to all stocks regardless of 
listing exchange. This alternative could also leave some stocks that 
could perhaps benefit from a smaller tick size with a wider one, thus 
the problem of tick-constrained stocks might persist to a greater 
extent in this alternative than in the proposal.

[[Page 80347]]

3. Alternative Access Fee
    The Commission could also consider alternative access fee caps that 
are higher or lower than those in the proposal. These alternative 
access fee caps could be paired with either the tick sizes in the 
proposal or the alternatives considered in Section V.F.2. To the extent 
that a given alternative access fee cap interacts with tick sizes, the 
Commission addresses that in the discussion below.
a. Higher or Lower Access Fees
    For stocks priced below $1.00 the Commission could consider access 
fees that are higher than 0.05% of the share price. Doing so would 
increase the amount of net revenue that the exchanges could earn on 
transactions in stocks priced less than $1.00 which would limit the 
costs of the proposal for the exchanges. However, doing so comes with 
the tradeoff that it risks creating an access pricing discontinuity at 
$1.00 whereby it becomes more expensive at $1.00 to transact. Since 
stocks priced less than $1.00 tend to be smaller market cap stocks, 
this discontinuity could make it relatively more expensive to trade 
these smaller stocks.\707\
---------------------------------------------------------------------------

    \707\ See Qianqiu Liu, S. Ghon Rhee, and Liang Zhang, On the 
Trading Profitability of Penny Stocks, (working paper Aug. 26, 
2011), available at https://ssrn.com/abstract=1917300 (retrieved 
from SSRN Elsevier database) for a description of the 
characteristics of low priced stocks.
---------------------------------------------------------------------------

    The baseline access fee cap of 0.3% is equivalent to 30 mils if the 
share price is exactly $1.00. Thus at $1.00 the access fee cap of 0.3% 
is equivalent to 30 mils and begins to decline from there as the price 
declines. Thus there is a smooth transition in terms of the access fee 
cap between stocks priced equal to or greater than $1.00 to those 
priced less than $1.00. The proposal is similarly designed to create a 
smooth transition between the per share access fee cap of 5 mils for 
stocks priced equal to or greater than $1.00 and the proportional 
access fee cap of 0.05% for stocks priced less than $1.00.
    Choosing an access fee greater than 0.05% would create a 
discontinuity where at $1.00 it becomes relatively more expensive on a 
per share level to transact. For example a stock priced at $1.00 would 
have either a 5 or 10 mil access fee cap under the proposal. If the 
Commission retained the current baseline 0.3% access fee cap for stocks 
priced less than $1.00 then as soon as the stock price dropped below 
$1.00 the access fee cap would jump to the equivalent of approximately 
30 mils at the $1.00 threshold.\708\ As the share price continued to 
decline below $1.00 the access fee cap would also decline, but would 
not be lower than the equivalent of 10 mils on a per share basis until 
the stock price crossed below $0.30 per share and would not be lower 
than 5 mils until the stock price dropped below $0.15. Thus raising the 
access fee cap for stocks priced less than $1.00 higher than the 
proposed level of 0.05% would create a discontinuity at $1.00 where it 
becomes more expensive to transact.
---------------------------------------------------------------------------

    \708\ $1.00*0.3% = $0.0030 or 30 mils.
---------------------------------------------------------------------------

    Making it relatively more expensive to transact shares priced less 
than $1.00 risks, the alternative would create a discontinuity, which 
could potentially harm liquidity for smaller cap stocks. Despite such a 
discontinuity, this alternative would still lower trading costs 
relative to the baseline so long as the proportion chosen for the 
access fee cap for sub $1.00 transactions was below the baseline level 
of 0.3%. Thus, relative to the baseline, it would likely become less 
expensive to trade sub $1.00 stocks on most exchanges--potentially 
improving their liquidity relative to the baseline, but not relative to 
the proposal.\709\
---------------------------------------------------------------------------

    \709\ This statement presumes prevailing market practice 
continues whereby exchanges charge one side of the transaction the 
full access fee for sub $1.00 transactions and offer no rebates. In 
this case, the Commission believes it reasonable to expect that 
following the reduction of the transaction fee cap for stocks priced 
less than $1.00, the average access fee charged would go down to the 
new and lower access fee cap for these transactions.
---------------------------------------------------------------------------

    For stocks priced greater than $1.00 the Commission could likewise 
raise or lower the access fees from those in the proposal. The primary 
advantage to lowering the access fee cap would be that it could help 
reduce supply and demand distortions caused by access fees and their 
associated rebates. However, if the access fee cap is lowered beneath 
approximately 3 mils, then the exchanges could struggle to maintain 
their net capture and their estimated financial losses due to a lower 
net capture would increase. If the access fee cap is lowered beneath 6 
mils, then, while most exchanges would be able to maintain their net 
capture, IEX would likely not, placing it at a disadvantage relative to 
other exchanges because IEX primarily funds itself through access fees. 
The Commission estimates that this alternative would carry the same 
compliance costs as the proposal because it is structurally the same as 
the proposal.\710\
---------------------------------------------------------------------------

    \710\ See supra section V.D.6 for an estimate of the compliance 
costs associated with the proposal.
---------------------------------------------------------------------------

    Under the assumption that exchanges maintain the 2 mil net capture 
rate, rebates would rise or fall with access fees. To the extent that 
lower rebates aid market quality, this benefit would be differentially 
realized relative to the proposal.
b. Tie Access Fee to the Tick Size With Current Proportion of 30%
    The current access fee cap for quotations $1.00 or more of 0.3 
cents per share on a one cent tick size is 30% of the tick size. The 
proposal would lower access fee caps within set parameters of the stock 
price and minimum pricing increment. As an alternative to the proposal, 
the Commission could implement an access fee cap that applies 
proportionally at any tick size. This alternative would carry the same 
implementation costs as the proposal. It would also allow fees and 
rebates to facilitate similar intra-tick pricing as the current system 
of fees and rebates, which can narrow spreads in certain 
instances.\711\ It would also allow for greater rebates to be paid in 
stocks with wider ticks, which under the proposal are those with wider 
spreads, which could lead to a more efficient manner of rewarding 
liquidity provision.
---------------------------------------------------------------------------

    \711\ See supra section V.D.3.
---------------------------------------------------------------------------

    The proposal considers a schedule with ticks of $0.001, $0.002, 
$0.005, and $0.01 for different stocks. Under this alternative, for 
stocks with a $0.01 tick size, the proportional access fee cap would 
remain 30 mils per share. For stocks with a tick size of $0.005, the 
access fee cap would be 15 mils. For stocks with a tick size $0.002, 
the access fee cap would be 6 mils. Lastly, for stocks with a tick size 
of $0.001, the access fee cap would be 3 mils. Thus this alternative 
would reduce fees on stocks with ticks of $0.001 and $0.002 relative to 
the proposal but would otherwise raise fees. Under the assumption that 
exchanges set their access fee at the cap and their rebate 
approximately 2 mils lower to maintain their estimated 2 mil net 
capture, the prevailing access fee would equal 3 mils and rebates 1 mil 
for stocks with a $0.001 tick. For stocks with a $0.002 tick size the 
access fee would be 6 mils and rebates 4 mils. Given the low level of 
these rebates, it is possible that exchanges might cease offering 
rebates because they are too low to play a role in routing decisions. 
On the other hand, under the same net capture assumption that places 
the rebate 2 mils lower than the cap, rebates may be more significant 
than under the proposal for stocks with a $0.005 tick. For stocks with 
a $0.01 tick and a 30 mil access fee the market could operate the same 
as it currently does; thus, the Commission expects the

[[Page 80348]]

trading environment to be as described in the baseline section V.C.2.
    As with the proposal, reducing the profit that can be earned by 
providing liquidity could induce some market participants that 
specialize in liquidity provision to reduce participation in such 
stocks. For stocks that are currently tick-constrained, this would 
likely improve market quality as it would reduce fill times, fill 
rates, and queue lengths on maker-taker exchanges due to less 
competition to provide liquidity. For stocks with wider spreads, the 
effect of lowering the access fee cap to 15 mils might not play a 
significant role in the participation rate of market makers given that 
the access fee and rebate for these stocks is such a small fraction of 
the spread.
    Relative to the proposal, the Commission does not expect there 
would be significant operational costs added to exchanges or broker-
dealers to implement a variable access fee regime. The Commission 
expects that each of the 15 exchanges that charge access fees for 
trading would be required to prepare and submit a Rule 19b-4 filing 
with the Commission at a cost of $48,400 per exchange for a total one-
time cost of $726,000 across all exchanges. Although the anticipated 
cost of adding a variable access fee regime likely would not differ 
from the proposal, adding four access fee caps would increase the 
complexity of exchange fee and rebate structures because the exchanges 
would need to add at least four fee/rebate levels to reflect the four 
new access fee caps.
    Relative to the proposal, and under the assumption that most 
exchanges maintain a net capture of 2 mils, this alternative is not 
likely to affect net capture for any exchange except potentially IEX. 
Because IEX is funded primarily through net capture, it appears to have 
a higher capture rate than other exchanges and, under this alternative, 
that would be bounded from above by 3 mils on stocks with tick sizes 
less than $0.001. Assuming a net capture of 6 mils, the proposed 
changes to rule 612, with a 5 mil access fee cap, would represent a 
reduction in the net capture on volume with a $0.001 tick of 1 mil. In 
section V.D.3 the Commission estimates that IEX would lose an estimated 
$3 million annually in revenue due to the 5 mil access fee cap reducing 
by 1 mil its net capture on volume that would be assigned a $0.001 
tick. Using the same methodology, this alternative would increase the 
estimated decline in net transaction fee revenue to $9 million, or 
combining with a decrease in net transaction revenue among sub $1.00 
stocks, a decline of 22% in total net transaction fee revenue. Thus, 
this alternative would disadvantage IEX more than the proposal.
    Alternatively, the Commission could have proposed this alternative 
in combination with alternatives on the tick sizes that do not have a 
minimum increment as low as $0.001. In these cases, this alternative 
would not have this disadvantage. As a variation on this alternative, 
the Commission could tie access fees to exchanges at a level other than 
30%. A fixed percentage rather than level would preserve the ability to 
reward liquidity providers when spreads are higher. However, relative 
to the proposal, access fees would remain high, or, depending on the 
level chosen, be higher.
c. Uniform 10 Mil Access Fees Regardless of Tick Size
    The Commission could impose a uniform access fee cap of $0.0010, or 
10 mils, across all NMS stocks for quotes equal to or greater than 
$1.00. A uniform 10 mil access fee cap would help to preserve the 
structure of the current transaction based business model for exchanges 
while still mitigating many of the distorting effects of rebates for 
stocks with tighter spreads. An additional benefit from having a 
uniform access fee cap would be to avoid any additional market 
complexity associated with a variable access fee cap. The Commission 
recognizes that an access fee cap of 10 mils for stocks that would 
otherwise have a 5 mil access fee cap under the proposal, would provide 
exchanges with enough pricing freedom to continue to offer economically 
meaningful rebate-tiering.
    Implementing a uniform 10 mil access fee cap would necessitate an 
alternative tick size schedule as the access fee cap should not be 
greater than \1/2\ of the tick size in order to preserve coherence 
between net and nominal price rankings of trading venues.\712\ This 
would not be possible with an access fee cap of $0.001 and a lowest 
possible proposed tick size of the same amount, as would be the case 
for the smallest tick size tier from the proposal. For example, suppose 
that the quoted price on an inverted venue is one tick less competitive 
than that displayed on a maker-taker venue. If the access fee on the 
maker-taker venue and the rebate on the inverted venue are together 
greater than one tick (the difference in the nominal quoted prices), a 
marketable order would receive a better net execution on the inverted 
venue despite the maker-taker venue having a more competitive quoted 
price.\713\ If the Commission were to adopt this alternative, the 
combination of tick size and access fee cap would allow for incoherent 
venue rankings, and there would be instances where some trades would 
have to execute at suboptimal net prices because current Regulation NMS 
rules dictate that marketable orders be routed to venues with the best 
nominal quoted prices without regard to what the net proceeds may 
be.\714\ In order to accommodate a uniform access fee cap of $0.001, 
the Commission might also consider modifying the proposal to eliminate 
the $0.001 tick. In short, the Commission could impose a minimum tick 
of $0.002 on all transactions with Time-Weighted Average Quoted Spreads 
less than $0.02. The Commission does not expect that the adoption of 
this alternative tick size regime to introduce any differential 
implementation costs compared to those presented under the proposal.
---------------------------------------------------------------------------

    \712\ Net and nominal price rankings are coherent if sorting 
trading venues on the competiveness of their nominal quoted prices 
yields the same ordering as sorting on prices net of fees and 
rebates.
    \713\ To illustrate, with a $0.001 tick size: Exchange A has a 
top bid quote of $10.011 and charges a taker fee of $0.0007, over 
half the tick size, so the net price to sell is $10.0103. Exchange 
B, an inverted venue, has a top bid of $10.010 with a taker rebate 
of $0.0006 so the net price to sell is $10.0106. On net, executing a 
sale on exchange B would result in a better execution than on 
exchange A even though exchange A is posting a better nominal price.
    \714\ See CFR 242.611.

------------------------------------------------------------------------
            Avg quoted spread                  Tick       Access fee cap
------------------------------------------------------------------------
$0.02 or less...........................         $0.0020         $0.0010
$0.02-$0.05.............................          0.0050          0.0010
Greater than $0.05......................          0.0100          0.0010
------------------------------------------------------------------------

[[Page 80349]]

    Eliminating the $0.001 tick could mean that stocks that are 
currently tick-constrained would receive a $0.002 tick instead of a 
$0.001 tick. Thus, these stocks would have at most 5 ticks intra 
spread. To the extent that these stocks would further benefit from a 
smaller tick, as envisioned under the proposal, those benefits would be 
limited. However, based on the empirical analysis in section V.D.1 the 
Commission does not expect this change to significantly harm market 
quality for these stocks. However, for stocks with spreads that would 
have qualified them for a $0.001 tick under the proposal, the amount of 
price improvement that retail investors could receive from wholesalers 
or retail liquidity programs could be limited. The wider tick would 
make it more likely that a wholesaler would find it unprofitable to 
offer price improvement to a retail trade and could reduce the total 
price improvement offered to retail traders in these stocks.
d. Lower Uniform Access Fee
    The Commission could require a uniform access fee cap for all 
transactions priced equal to or greater than $1.00 regardless of the 
tick size that is imposed for that given stock transaction to reflect 
the uniform nature of the variable costs incurred by the exchanges to 
facilitate transactions and that is as low as possible to allow most 
exchanges to maintain their estimated 2 mil net capture on protected 
transactions.\715\ Consequently the Commission could impose a uniform 
access fee cap of 3 mils on all transactions priced equal to or greater 
than $1.00 regardless of the tick. This alternative is structurally 
similar to the proposal and thus the Commission believes that this 
alternative would carry with it the same implementation costs as the 
proposal.\716\
---------------------------------------------------------------------------

    \715\ For transactions below $1.00, the Commission could 
implement an access fee that harmonizes the access fee for greater 
than $1.00 transactions with those less than $1.00--e.g., an access 
fee cap of 10 mils on transactions greater than $1 would be 
accompanied by an access fee cap of 0.10% for transactions below 
$1.00 and an access fee cap of 5 mils on transactions priced equal 
to or greater than $1.00 would be accompanied by an access fee cap 
of 0.05% for transactions less than $1.00. In this case, the access 
fee cap of 3 mils for transactions greater than $1.00 would coincide 
with an access fee cap of 0.03% on transactions less than $1.00.
    \716\ See supra section V.D.6. for a discussion of 
implementation costs related to the change in the access fee cap.
---------------------------------------------------------------------------

    At this level most exchanges could maintain their estimated net 
capture of approximately 2 mils per transaction without leaving much, 
if any, excess revenue for the exchanges to fund rebates or volume 
based tiering. Thus, the economic effect of this alternative would be 
to effectively eliminate rebates and volume based tiering.
    For an exchange, managing the system of fees and rebates along with 
associated volume based tiering is not costless. Thus, if the exchanges 
believe that the incentives offered through tiered pricing and rebates 
would not be meaningful enough to affect behavior sufficiently to 
justify the costs then it may cease to offer them opting instead for a 
simpler fee structure that might or might not include rebates. The 
Commission views this outcome as possible and even probable, however 
there would be significant uncertainty regarding how likely this 
outcome is because the Commission lacks data on how expensive these 
programs are to administer. What is certain is that the dramatic 
reduction in the range of fees and rebates that the exchanges could 
offer under a 3 mil fee cap would mean that even if the exchanges 
continue offering rebates or volume based tiering, the economic impact 
of these programs would be significantly diminished.\717\
---------------------------------------------------------------------------

    \717\ The economic effects of rebates are discussed in supra 
section V.D.3 including liquidity provision effects, intra-tick 
pricing, and order routing. Each of these effects would be greatly 
mitigated with a lower access fee cap. Volume based tiering creates 
an incentive for broker-dealers to concentrate orders on one 
exchange to qualify for higher rebates or lower access fees. 
Reducing the access fee cap to 3 mils would significantly reduce 
this incentive by reducing the total amount of discount that an 
exchange could offer.
---------------------------------------------------------------------------

    The reduction or elimination of rebates that is expected to 
accompany the reduction in the access fee cap would significantly 
reduce the total revenue per share traded that liquidity providers earn 
on maker-taker exchanges relative to either the baseline or the 
proposal. Thus, this alternative would likely decrease the profits 
earned by liquidity providers specifically algorithmic and high-
frequency traders that specialize in liquidity provision and rebate 
capture strategies. These traders would likely see their trading 
profits decrease more under this alternative than the proposal.
    Another key difference with a 10 mil access fee cap is more 
apparent at larger tick levels, such as at a full cent tick, a 3 mil 
access fee would provide very little in the way of intra-tick pricing 
given that the access fee and associated rebate would be such a small 
fraction of the tick size. Thus, for stocks with larger ticks this 
alternative would be more restrictive than the proposal in terms of 
pricing levels that could be realized once fees and rebates are 
included in the price.
    A significant disadvantage of this alternative relative to the 
proposal is that it would severely constrain exchanges like IEX that 
choose to fund themselves primarily through access fees. IEX has an 
estimated 6 mil net capture, and reducing the access fee cap to 3 mils 
would cut by around half IEX's net revenue from transactions. This 
reduction in revenue could require IEX to change its business model. 
The Commission estimates that if nothing else were to change concerning 
trading volume relative to the first six months of 2022, then this 
alternative could cost IEX as much as 40% of its transaction fee 
revenue (approximately $20 million per year).\718\
---------------------------------------------------------------------------

    \718\ This estimate uses the same methodology as is used to 
produce the estimates in Table 12 but applies a 3 mil net capture on 
trading volume at or above $1.00.
---------------------------------------------------------------------------

e. Ban on Rebates
    The Commission could also ban rebates but leave the access fee cap 
unchanged, or lowered to 10 mils for transactions priced equal to or 
greater than $1.00. For stocks priced lower than $1.00 the Commission 
could either leave the access fee cap unchanged at 0.3% or lowered to 
0.1% to match any reduction in the access fee cap for stock priced 
equal to or greater than $1.00 to 10 mils. This alternative would 
eliminate the liquidity provision distortions associated with rebates, 
to the extent these continue to exist under the proposal.\719\ Also, 
because high access fees would not be needed to fund rebates, the 
Commission expects that this alternative would lead to access fees that 
are less than 5 mils on most exchanges. It would also provide an 
advantage relative to the proposal in that it would leave exchanges 
that use access fees as their primary source of revenue the opportunity 
to continue doing so without restriction. Consequently, if the 
Commission chose to ban rebates but leave the access fee cap unchanged 
relative to the baseline, then this alternative would have the 
advantage relative to the proposal in that it would not affect the 
exchange's net capture and thus the exchanges would not be financially 
worse off under this alternative. If the Commission chose to lower the 
access fee cap to 10 mils for stocks priced equal to or greater than 
$1.00 and to 0.1% for stocks priced less than $1.00, then the exchanges 
would still lose money on transactions priced below $1, but could still 
earn their full estimated net capture on transactions equal to or 
greater than $1.00. A disadvantage of this alternative relative to the 
proposal is that it restricts the ability for the exchanges to innovate 
with respect to

[[Page 80350]]

rebates. While rebates could be an inefficient and distortive form of 
liquidity subsidization, exchanges potentially could innovate with 
rebates to increase their efficiency and decrease their distortive 
effects. Banning rebates would foreclose such an outcome. Banning 
rebates could potentially result in exchanges using other means to 
attract liquidity which might have other drawbacks such as offering 
beneficial pricing for other products or special privileges to large 
liquidity providers.\720\
---------------------------------------------------------------------------

    \719\ See supra section V.D.3 for additional discussion of these 
distortions.
    \720\ Proposed rule changes cannot take effect unless approved 
by the Commission or otherwise permitted by subsection 19(b) of the 
Exchange Act. 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

4. Do Not Accelerate Odd-Lot Information or Create BOLO
    The Commission could alternatively accelerate the definition of 
round lot but not accelerate the odd-lot information from the MDI Rules 
or the requirement to establish a BOLO.\721\ Doing so would help 
mitigate any potential deleterious effects that MDI acceleration would 
have on future competing consolidator (CC) competition as well as lower 
the implementation costs of the proposal for exchanges and SIPs. It 
could also reduce the costs on data users. However, the alternative 
would result in a stronger economic effect from the decline in depth 
expected from the reduction in tick size and the definition of round 
lot.\722\
---------------------------------------------------------------------------

    \721\ See section IV.B. regarding the acceleration of including 
odd lot information as a part of core data and implementing the 
round lot definition from the MDI Rules. See section IV.D. with 
regards to the proposed establishment of specifying the best odd lot 
orders to buy and sell (BOLO).
    \722\ See sections V.D.1. and V.D.5 for discussions of these 
effects.
---------------------------------------------------------------------------

    This alternative would avoid harming the competition in the 
competing consolidator market that would result from the competitive 
advantage afforded to SIPs by the proposal. Requiring the exclusive 
SIPs to invest in the needed infrastructure necessitated by the 
proposed acceleration of the odd-lot information from the MDI Rules may 
increase the SIPs competitive advantage by reducing their costs to 
become competing consolidators.\723\ The alternative would not provide 
this competitive advantage because the odd-lot information from the MDI 
Rules would be implemented during the transition period, allowing non-
SIP competing consolidators the same opportunity as SIP competing 
consolidators to capture this market share.
---------------------------------------------------------------------------

    \723\ See section V.E.2.c. in relation to MDI acceleration and 
CC competition.
---------------------------------------------------------------------------

    This alternative would have lower implementation costs relative to 
the proposal as forgoing the proposed MDI acceleration would reduce 
many of the compliance costs necessitated by the proposal. The SIPs 
would not have to incur the costs associated with collecting and 
disseminating any additional information that would result from the 
inclusion of odd lot information in NMS data until the full 
implementation of the MDI Rules. The SIPs would avoid any redundant 
costs from having to update their systems twice. Similarly, the 
exchanges would not incur costs associated with reporting odd-lot 
information until the full implementation of the MDI Rules.\724\
---------------------------------------------------------------------------

    \724\ See supra sections V.D.5 and V.D.6 for a discussion of the 
estimated costs of accelerating the MDI Rules.
---------------------------------------------------------------------------

    This alternative would reduce the benefits of the MDI acceleration. 
In particular, this alternative would not result in the benefits 
associated with allowing individual investors whose broker-dealers 
subscribe to the data to visually monitor the market environment and 
determine profitable trading opportunities as early as they would be 
able to under the proposal. It would also not result in the benefits of 
offering market participants a standard benchmark that reflects 
available odd-lot liquidity.
    The alternative would also increase the effects of a reduction in 
displayed depth at the NBBO resulting from either a smaller tick size 
or a smaller round lot. If the odd lot information is not included in 
the SIP data feed, the proposal could result in market participants who 
rely on the SIPs receiving less information regarding the liquidity 
available in the market. This is because the reduction in tick size is 
expected to distribute liquidity across more price levels, reducing the 
depth reported at the NBBO.\725\ This loss of information could be 
further exacerbated with the implementation of the round lot 
definition, which will lower the depth of liquidity reported at the 
NBBO. Market participants who do not receive odd lot and depth of book 
information from proprietary data feeds would incur a loss of 
information content for stocks priced greater than $250. Avoiding such 
loss would entail incurring fees to subscribe to such data.
---------------------------------------------------------------------------

    \725\ See supra section V.D.1.
---------------------------------------------------------------------------

G. Request for Comment

    The Commission is sensitive to the potential economic effects, 
including costs and benefits, of the proposed Rule. The Commission has 
identified certain costs and benefits associated with the proposal and 
requests comment on all aspects of its preliminary economic analysis, 
including with respect to the specific questions below. The Commission 
encourages commenters to identify, discuss, analyze, and supply 
relevant data, information, or statistics regarding any such costs or 
benefits.
    58. Has the Commission accurately described the market failures in 
this release? Why or why not? Are there additional market failures or 
other economic justifications related to these issues that are not 
described in this release?
    59. Has the Commission sufficiently described the baseline for its 
economic analysis concerning tick sizes, access fees, and round lot 
data, its characteristics and structure? Are there additional relevant 
market features or participants that are not discussed in the baseline 
which relate to this release? If so, please describe.
    60. Has the Commission accurately assessed the baseline of the use 
and prevalence of subpennies and subpenny price improvement? Why or why 
not? Are there any additional statistics or analysis that the 
Commission should consider in the baseline? If so, please provide that 
analysis.
    61. Has the Commission accurately assessed the degree of tick-
constraints in current markets? Why or why not? Is the Commission using 
appropriate conceptual and empirical definitions of tick-constrained 
and new tick-constrained? If not, what would be more appropriate 
definitions and what difference would those alternative definitions 
have on the baseline analysis, costs, and benefits? Are there 
additional statistics or analysis that the Commission should consider 
in the baseline? If so, please provide that analysis.
    62. The tick size baseline incorporates the implementation of the 
MDI Rules. Has the Commission accurately assessed how the baseline for 
the proposal differs from the status quo, including in the data 
analyses presented? Why or why not?
    63. Has the Commission accurately assessed the impact of access 
fees and rebates, and the inability to determine access fees at the 
time of trade, on potential conflicts of interest? Why or why not? Are 
there other sources of data or other analysis that the Commission could 
use to assess the impact of access fees and rebates and the inability 
to determine access fees at the time of trade on potential conflicts of 
interest? If so please provide such data and analysis.
    64. Has the Commission accurately assessed the net capture of the 
exchanges between access fees and rebates on non-auction trading in 
shares

[[Page 80351]]

priced greater than $1.00 as approximately 2 mils? Why or why not? If 
not please provide analysis supporting a different net capture level.
    65. Has the Commission accurately assessed the net capture of the 
exchanges on non-auction trading in shares priced less than $1.00 as 
approximately 0.28% of value? Why or why not? If not please provide 
analysis supporting a different net capture level.
    66. Has the Commission accurately described current market practice 
where fees and rebates are generally not passed through from broker-
dealers to their customers? Why or why not? If not please provide 
analysis describing how and when fees and rebates are passed through to 
end customers.
    67. Has the Commission accurately described the baseline of the MDI 
implementation? Why or why not? Is two years a reasonable estimate of 
when the round lot definition and the odd lot information will be 
implemented in the absence of this proposal? If not, what is a 
reasonable estimate?
    68. Has the Commission accurately assessed the economic effects of 
lowering the tick size for some stocks? Why or why not? Are there 
significant economic effects that are not discussed? If so please 
explain and describe these effects.
    69. The proposal would allow for stocks to potentially transition 
across multiple tick sizes, skipping one or more tick size tiers, in 
one evaluation period. Are there economic effects associated with 
transitioning across multiple tick sizes that are not discussed? If so, 
what are they? Please provide quantitative estimates of the effects and 
how frequently stocks might transition across multiple tick size tiers.
    70. Has the Commission accurately assessed the economic effects of 
increased market complexity caused by the dynamic tiered structure of 
the proposed changes to rule 612? Why or why not? Are there significant 
economic effects that are not discussed? If so, please explain and 
describe these effects.
    71. Has the Commission accurately assessed the economic effect of 
having an evaluation month for the tick size be once every three months 
with the associated tick size applying for the next three months? Why 
or why not? Are there other evaluation periods that may be more 
appropriate? If so please provide analysis supporting an alternative 
evaluation period.
    72. Has the Commission accurately assessed the effect of the 
proposal to harmonize quoting and trading increments? Specifically, has 
the Commission correctly assessed the effect the proposed harmonization 
on retail price improvement and the resulting impact on execution 
quality? If not, then please provide a detailed explanation along with 
quantitative estimates, if possible. How would harmonization affect 
execution quality through it effect on competition for order flow 
between exchanges/ATSs and off-exchange dealers? Please explain.
    73. Has the Commission accurately assessed the economic effects of 
lowering the access fee cap? Why or why not? Are there significant 
economic effects that are not discussed? If so please explain and 
describe these effects.
    74. Based on the baseline, the Commission assumes that the 
prevailing maker-taker structure of fees and rebates has average 
rebates approximately 2 mils lower than average access fees on most 
exchanges. Is this assumption reasonable? Please explain. If not 
reasonable, how would a different assumed net capture affect the 
conclusions of the analysis? Please provide additional analysis and 
describe the market environment likely to result from the reduction in 
the access fee cap.
    75. Has the Commission accurately assessed the economic effects of 
requiring access fees and rebates to be determinable at the time of 
execution? Why or why not? Are there significant economic effects that 
are not discussed? If so, please explain and describe these effects.
    76. Has the Commission accurately assessed the economic effects of 
accelerating the implementation of the MDI round lot definitions? Why 
or why not? Is there a cost to accelerating the redefinition of a round 
lot, in the absence of depth of book data, resulting from a loss of 
information about liquidity? Are there significant economic effects 
that are not discussed? If so please explain and describe these 
effects.
    77. Has the Commission accurately assessed the economic effects of 
accelerating the MDI implementation with respect to adding odd-lot 
information in NMS data? Why or why not? Are there significant economic 
effects that are not discussed? If so please explain and describe these 
effects.
    78. Has the Commission accurately described the uncertainties 
associated with costs of data users making system changes at two times 
rather than once? Why or why not? Are there other sources of 
uncertainty? If so please provide such data and analysis with 
quantitative estimates of the costs if possible.
    79. Has the Commission accurately described the uncertainties 
associated with potential costs for data users moving from two data 
providers (the exclusive SIPs) to one competing consolidator? Why or 
why not? Is there data or analysis that could help mitigate any of the 
cost uncertainties? If so please provide such data and analysis with 
quantitative estimates of the costs if possible.
    80. Has the Commission accurately assessed the economic effects of 
requiring SIPs to disseminate odd lot information in NMS data? Why or 
why not? Are there significant economic effects that are not discussed? 
If so please explain and describe these effects.
    81. Has the Commission accurately described the uncertainties 
associated with determining whether or not the exclusive SIPs would 
charge more for the data including odd-lot data? Why or why not? Is 
there data or analysis that could help mitigate any of the cost 
uncertainties? If so please provide such data and analysis with 
quantitative estimates of the costs if possible.
    82. Has the Commission accurately assessed the economic effects of 
providing the best odd-lot order in NMS data? Why or why not? Are there 
significant economic effects that are not discussed? If so, please 
explain and describe these effects.
    83. Has the Commission accurately quantified the compliance costs 
that the proposed Rule imposes on various market participants? If not, 
please provide alternative estimates. Are there any sources of 
compliance costs not included in the Commission's estimates? If so, 
please describe the activity that generates the cost and provide 
estimates.
    84. Has the Commission accurately quantified the compliance costs 
associated with the proposal in terms of updating systems to adapt to 
the change in the tick size, specifically that compliance costs would 
likely be similar for large and small market-participants? Why or why 
not? Please provide a quantitative discussion if possible.
    85. Has the Commission accurately described the uncertainties 
associated with the compliance costs of the proposal? Why or why not? 
Are there other sources of uncertainty? Is there data or analysis that 
could help mitigate any of the cost uncertainties? If so, please 
provide such data and analysis with quantitative estimates of the costs 
if possible.
    86. How does the assumption on whether the SIPs will otherwise 
become competing consolidators affect SIP

[[Page 80352]]

compliance costs? How accurate are the Commission's estimates of 
compliance costs assuming the SIPs will become competing consolidators 
and how accurate are the costs assuming instead that SIPs will 
otherwise not become competing consolidators? Please explain and 
provide alternative estimates, if available.
    87. Has the Commission accurately described the uncertainties 
associated with costs of SIPs who become competing consolidators and 
exchanges making system changes at two times rather than once? Why or 
why not? Are there other sources of uncertainty? If so, please provide 
such data and analysis with quantitative estimates of the costs if 
possible.
    88. Has the Commission accurately described the uncertainties 
associated with the implementation date for the MDI Rules? Why or why 
not? Is there data or analysis that could help mitigate any of the cost 
uncertainties? If so, please provide such data and analysis with 
quantitative estimates of the costs if possible.
    89. Do you believe that the proposal would significantly increase 
the amount of message data? In particular would an increase in the 
amount of odd-lot quotes resulting from the smaller tick size increase 
the anticipated implementation costs under the MDI Rules? Please 
explain.
    90. Has the Commission accurately assessed the likely impacts of 
the proposal on efficiency, competition and capital formation? Why or 
why not?
    91. Has the Commission accurately assessed the likely effects of 
the reduction in tick size for some NMS stocks and the reduction in the 
access fee cap for all NMS stocks on price efficiency through impacts 
on liquidity? Has the Commission accurately assessed the likely effects 
of the reduction in the access fee cap for all NMS stocks and on making 
fees and rebates determinable at the time of execution on price 
efficiency through impacts on conflicts of interest? Has the Commission 
accurately assessed the likely effects of the proposal on the 
efficiency of broker-dealers' best-execution assessment? Has the 
Commission accurately assessed the likely effects of the acceleration 
of the round lot definition and the inclusion of odd lot information 
proposal on efficiency? Please explain.
    92. Has the Commission accurately assessed the likely effects of 
the proposal on the competitive landscape in trading services? Please 
explain. Would the proposal likely change the number of competitors in 
trading services and, if so, how would the change in the number of 
competitors affect the level competition? Please explain.
    93. Has the Commission accurately assessed the likely effects of 
the proposal on the competitive landscape in liquidity provision? 
Please explain. Would the proposal change the playing field among 
different types of competitors? If so, how would this affect the level 
of competition? Please explain.
    94. Has the Commission accurately assessed the likely effects of 
the proposal on the competitive landscape in broker-dealer services? 
Please explain.
    95. Has the Commission accurately assessed the likely effects of 
the proposal on the competitive landscape in market data? Please 
explain. Would the proposal affect the number of eventual competing 
consolidators? If so, would this affect the level of competition among 
competing consolidators? Why or why not? What would be the resulting 
economic effects of any changes in competing consolidator competition?
    96. Has the Commission accurately assessed the likely impact of the 
proposal on capital formation? Please explain.
    97. Has the Commission accurately assessed the economic tradeoffs 
associated with reasonable alternatives contained in this economic 
analysis? Please explain. Has the Commission accurately assessed the 
compliance costs associated with the various alternatives? Why or why 
not? If not, please provide as much analysis as possible. Are there 
other costs associated with any of the alternatives which are not 
discussed? If so please provide a detailed analysis including 
quantitative estimates if possible. Should the Commission implement any 
other reasonable alternatives? If so, please describe such alternatives 
and how the potential costs and benefits of the alternative would 
compare to the proposal? Please provide quantification, if possible.
    98. The Commission has discussed an alternative whereby trading 
would be required to occur on an increment no less than a minimum 
increment of $0.001 regardless of the tick size assigned. Has the 
Commission adequately described the economic effects of this 
alternative? Why or why not? Please explain and provide as much 
analysis and discussion as possible.
    99. The Commission has discussed an alternative whereby rule 612 is 
not extended to apply to trades. Has the Commission adequately 
described the economic effects of this alternative? Why or why not? 
Please explain and provide as much analysis and discussion as possible.
    100. The Commission has discussed alternatives whereby the tick 
size would not apply to segmented trades or that segmented trades would 
be subject to a tick size of $0.001. Has the Commission adequately 
described the economic effects of these alternatives? Why or why not? 
Please explain and provide as much analysis and discussion as possible.
    101. The Commission has discussed a number of alternative quoted 
spread-based tick size structures. Has the Commission adequately 
described the economic effects of these alternatives? Why or why not? 
Please explain and provide as much analysis and discussion as possible.
    102. Has the Commission accurately assessed the effect on 
compliance costs of alternatives that keep the overall structure of the 
proposal but change the number of tick sizes? Specifically, is the 
Commission's assumption that adding or removing additional tiers is 
likely to have a small effect on overall compliance costs reasonable? 
Why or why not? If not, please provide additional analysis with 
detailed costs estimates if possible.
    103. The Commission has discussed alternative quoted-spread based 
tick size structures with different thresholds for tick levels and 
fewer tiers of tick sizes. Has the Commission adequately described the 
economic effects of these alternatives? Why or why not? Please explain 
and provide as much analysis and discussion as possible.
    104. The Commission has discussed an alternative quoted spread-
based tick size structure that would result in an increased tick size 
for some stocks. Has the Commission adequately described the economic 
effects of this alternative? Why or why not? Please explain and provide 
as much analysis and discussion as possible.
    105. The Commission has discussed an alternative quoted spread-
based tick size structure that mirror a structure from a NASDAQ white 
paper. Has the Commission adequately described the economic effects of 
this alternative? Why or why not? Please explain and provide as much 
analysis and discussion as possible.
    106. The Commission has discussed an alternative that would add 
``step-up/step-down'' mechanism to the proposal or to any of the quoted 
spread-based alternatives. Has the Commission adequately described the 
economic effects of this alternative? Why or why not? Please explain 
and provide as much analysis and discussion as possible.

[[Page 80353]]

    107. The Commission discussed an alternative that would reduce the 
minimum tick size to $0.005 for all NMS stocks. Has the Commission 
adequately described the economic effects of this alternative? Why or 
why not? Please explain and provide as much analysis and discussion as 
possible.
    108. The Commission discussed an alternative that would set tick 
sizes based on share price. Has the Commission adequately described the 
economic effects of this alternative? Why or why not? Please explain 
and provide as much analysis and discussion as possible.
    109. The Commission has discussed an alternative put forth by Cboe 
for determining the tick size. Has the Commission adequately described 
the economic effects of this alternative? Why or why not? Please 
explain and provide as much analysis and discussion as possible.
    110. The Commission has discussed a number of alternative access 
fee regimes to the proposal. Has the Commission adequately described 
the economic effects of this alternative? Why or why not? Please 
explain and provide as much analysis and discussion as possible.
    111. Has the Commission accurately assessed the effect of 
alternatives that raise the access fee cap for stocks prices less than 
$1.00? Why or why not? If not please provide detailed additional 
analysis.
    112. The Commission has discussed various tick size and access fee 
alternatives. These alternatives could be adopted separately or in 
combination. Has the Commission adequately described the economic 
effects of combining various alternatives? Why or why not? Please 
explain and provide as much analysis and discussion as possible.
    113. The Commission has discussed an alternative that would 
accelerate the implementation of the round lot definition from the MDI 
Rules but would not accelerate the inclusion of odd lot information in 
NMS data and would not require a BOLO. Has the Commission adequately 
described the economic effects of this alternative? Why or why not? 
Please explain and provide as much analysis and discussion as possible.
    114. In addition to the proposal, should the Commission also 
accelerate the inclusion of depth of book information in NMS data from 
the MDI Rules? What would be the costs and benefits or other economic 
effects of accelerating the inclusion of depth information in NMS data? 
How would such an acceleration impact eventual competition among 
competing consolidators or the realization of the anticipated costs and 
benefits of the MDI Rules? Please explain.

VI. Paperwork Reduction Act

    Certain provisions of the proposed rules and proposed rule 
amendments contain ``collection of information requirements'' within 
the meaning of the Paperwork Reduction Act of 1995 (``PRA''). 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. The title of the new collection of 
information is ``Odd-Lot Information Acceleration.'' 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.
    The Commission does not believe that the proposed amendments to 
rules 610 and 612 contain any collection of information requirements as 
defined by the PRA, but the Commission encourages comments on this 
point.\726\
---------------------------------------------------------------------------

    \726\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

A. Summary of Collection of Information

    The proposed rules and rule amendments would include a collection 
of information within the meaning of the PRA. Specifically, the 
proposed amendments to rule 603(b) would require the exclusive SIPs to 
collect, consolidate, and disseminate odd-lot information, including 
the best odd-lot orders to buy and sell. The exclusive SIPs would also 
be required to disseminate indicators of the applicable round lot size 
and minimum pricing increment for each NMS stock, both of which would 
be provided to the exclusive SIPs by the primary listing exchange.

B. Proposed Use of Information

    The information collected under the proposed amendments to rule 
603(b) would be consolidated and disseminated by the exclusive SIPs to 
market participants who would use this odd-lot information for trading. 
Widespread availability of odd-lot information promotes fair and 
efficient markets and facilitates the ability of brokers and dealers to 
trade more effectively and to provide best execution to their 
customers. The round lot and minimum pricing increment indicators that 
would be disseminated by the exclusive SIPs would provide market 
participants with information about the parameters for trading in a 
particular NMS stock.

C. Respondents

    The collection of information in the proposed changes to rule 
603(b) would apply to the two exclusive SIPs.

D. Total Annual Reporting and Recordkeeping Burden

1. Initial Burden Hours and Costs
    The Commission preliminarily believes that the two exclusive SIPs 
would have to modify their systems to collect, consolidate, and 
disseminate the odd-lot information, including the best odd-lot orders 
to buy and sell, that they do not currently collect, consolidate, and 
disseminate \727\ and to disseminate the round-lot and minimum pricing 
increment indicators provided by the primary listing exchange. These 
modifications would involve the addition of new hardware, network 
infrastructure, and bandwidth, as well as programming and development 
costs, to take in additional inbound odd-lot quotation messages from 
SROs, to calculate odd-lot information, and to consolidate and 
disseminate odd-lot information and the round lot and minimum pricing 
increment indicators to subscribers.
---------------------------------------------------------------------------

    \727\ The exclusive SIPs currently disseminate odd-lot 
transaction data.
---------------------------------------------------------------------------

    The Commission estimates that each exclusive SIP would incur 440 
initial burden hours to modify its systems to collect, calculate, 
consolidate and disseminate odd-lot information and to disseminate the 
round-lot and minimum pricing increment indicators \728\ and initial 
external costs of $412,500 to purchase the necessary technology to 
effect such modifications.\729\ Thus, the

[[Page 80354]]

Commission estimates that the total initial burden hours for two 
exclusive SIPs would be 880 burden hours \730\ and that total initial 
external costs would be $825,000.\731\ The Commission solicits comment 
on the accuracy of these estimates.
---------------------------------------------------------------------------

    \728\ The Commission estimates the monetized initial burden for 
this requirement to be $154,580, broken down as follows: [(Sr. 
Programmer at $368/hour for 210 hours) + (Sr. Systems Analyst at 
$316/hour for 180 hours) + (Compliance Manager at $344/hour for 20 
hours) + (Director of Compliance at $542/hour for 10 hours) + 
(Compliance Attorney at $406/hour for 20 hours)] = 440 initial 
burden hours to modify its systems to comply with the requirement to 
collect, calculate, and disseminate odd-lot information. The 
Commission based these estimates on 10% of the initial burden hour 
estimates for each exclusive SIP to become a competing consolidator 
provided in the MDI Rules to account for the fact that this proposal 
does not require the exclusive SIPs to calculate and disseminate 
full consolidated market data (e.g., depth of book data or auction 
information) as defined in the MDI Rules. See MDI Adopting Release, 
supra note 5, at 18712-13. The Commission derived the hourly rate 
figures from SIFMA's Management & Professional Earnings in the 
Securities Industry 2013, modified to account for an 1,800-hour 
work-year and inflation, and multiplied by 5.35 to account for 
bonuses, firm size, employee benefits, and overhead.
    \729\ The Commission arrived at this estimate by dividing the 
initial external cost estimate provided in the MDI Rules for each 
exclusive SIP to become a competing consolidator by three to account 
for the fact that the exclusive SIPs would not need to build 
aggregation systems in three separate data centers to collect, 
calculate, and disseminate odd-lot information. See MDI Adopting 
Release, supra note 5, at 18712-13.
    \730\ The Commission estimates the monetized initial burden for 
this requirement to be $309,160, broken down as follows: [(Sr. 
Programmer at $368/hour for 210 hours) + (Sr. Systems Analyst at 
$316/hour for 180 hours) + (Compliance Manager at $344/hour for 20 
hours) + (Director of Compliance at $542/hour for 10 hours) + 
(Compliance Attorney at $406/hour for 20 hours)] x [(2 exclusive 
SIPs)] = 880 total initial burden hours across the exclusive SIPs.
    \731\ The Commission estimates total initial external costs as 
follows: initial external costs of $412,500 per exclusive SIP x (2 
exclusive SIPs) = $825,000.
---------------------------------------------------------------------------

2. Ongoing Burden Hours and Costs
    The Commission preliminarily believes that the two exclusive SIPs 
would incur annual ongoing burden hours and external costs to operate 
and maintain their modified systems to collect, calculate, and 
disseminate odd-lot information and to disseminate the round-lot and 
minimum pricing increment indicators. The Commission estimates that 
each exclusive SIP would incur 132 ongoing, annual burden hours \732\ 
and ongoing, annual external costs of $123,725 to operate and maintain 
its systems to collect, calculate, and disseminate odd-lot information 
and to disseminate the round-lot and minimum pricing increment 
indicators.\733\ Thus, the Commission estimates that the total ongoing, 
annual burden hours for two exclusive SIPs would be 264 burden hours 
\734\ and that total ongoing, annual external costs would be 
$247,450.\735\ The Commission solicits comment on the accuracy of these 
estimates.
---------------------------------------------------------------------------

    \732\ The Commission estimates the monetized annual ongoing 
burden for this requirement to be $46,374, broken down as follows: 
[(Sr. Programmer at $368/hour for 63 hours) + (Sr. Systems Analyst 
at $316/hour for 54 hours) + (Compliance Manager at $344/hour for 6 
hours) + (Director of Compliance at $542/hour for 3 hours) + 
(Compliance Attorney at $406/hour for 6 hours)] = 132 ongoing, 
annual burden hours to operate and maintain its systems to comply 
with the requirement to collect, calculate, and disseminate odd-lot 
information. The Commission based these estimates on 10% of the 
ongoing, annual burden hour estimates provided in the MDI Rules for 
each exclusive SIP competing consolidator to operate and maintain 
its systems to comply with Rules 614(d)(1) through (4) to account 
for the fact that this proposal does not require the exclusive SIPs 
to calculate and disseminate full consolidated market data (e.g., 
depth of book data or auction information) as defined in the MDI 
Rules. See MDI Adopting Release, supra note 5, at 18712-13. The 
Commission derived the hourly rate figures from SIFMA's Management & 
Professional Earnings in the Securities Industry 2013, modified to 
account for an 1,800-hour work-year and inflation, and multiplied by 
5.35 to account for bonuses, firm size, employee benefits, and 
overhead.
    \733\ The Commission arrived at this estimate by dividing by 
three the ongoing, annual external cost estimate provided in the MDI 
Rules for each exclusive SIP competing consolidator to operate and 
maintain its systems to comply with rules 614(d)(1) through (4) to 
account for the fact that the exclusive SIPs will not need to build 
aggregation systems in three separate data centers to collect, 
calculate, and disseminate odd-lot information. See MDI Adopting 
Release, supra note 5, at 18712-13.
    \734\ The Commission estimates the monetized annual ongoing 
burden for this requirement to be $92,748, broken down as follows: 
[(Sr. Programmer at $368/hour for 63 hours) + (Sr. Systems Analyst 
at $316/hour for 54 hours) + (Compliance Manager at $344/hour for 6 
hours) + (Director of Compliance at $542/hour for 3 hours) + 
(Compliance Attorney at $406/hour for 6 hours)] x [(2 exclusive 
SIPs)] = 264 total ongoing, annual burden hours across the exclusive 
SIPs.
    \735\ The Commission estimates total annual ongoing external 
costs as follows: annual ongoing external costs of $123,725 per 
exclusive SIP x (2 exclusive SIPs) = $247,450.
---------------------------------------------------------------------------

E. Collection of Information Is Mandatory

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

F. Confidentiality

    This information collection would be public.

G. Revisions to Current MDI Rules Burden Estimates

    Currently, the MDI Rules impose ``collection of information'' 
requirements within the meaning of the PRA. Specifically, pursuant to 
rule 603(b), SROs are required to make available all data necessary to 
generate consolidated market data to competing consolidators and self-
aggregators. As explained in more detail below, the Commission is 
proposing to revise the burden estimates associated with this 
requirement in light of the amendments the Commission is proposing. In 
the MDI Rules, the Commission estimated that each SRO will require an 
average of 220 initial burden hours of legal, compliance, information 
technology, and business operations personnel time to prepare and 
implement a system to collect the information necessary to generate 
consolidated market data (for a total cost per SRO of $70,865).\736\ 
The Commission estimated that each SRO would incur an annual average 
burden on an ongoing basis of 396 hours to collect the information 
necessary to generate consolidated market data required by Rule 603(b) 
(for a total cost per SRO of $128,064).\737\
---------------------------------------------------------------------------

    \736\ The Commission estimated the monetized initial burden for 
this requirement to be $70,865. The Commission derived this estimate 
based on per hour figures from SIFMA's Management & Professional 
Earnings in the Securities Industry 2013, modified to account for an 
1,800-hour work-year and inflation, and multiplied by 5.35 to 
account for bonuses, firm size, employee benefits, and overhead: 
[(Compliance Manager at $310 for 105 hours) + (Attorney at $417 for 
70 hours) + (Sr. Systems Analyst at $285 for 20 hours) + (Operations 
Specialist at $137 for 25 hours)] = 220 initial burden hours and 
$70,865.
    \737\ The Commission estimated the monetized ongoing, annual 
burden for this requirement to be $128,064. The Commission derived 
this estimate based on per hour figures from SIFMA's Management & 
Professional Earnings in the Securities Industry 2013, modified to 
account for an 1,800-hour work-year and inflation, and multiplied by 
5.35 to account for bonuses, firm size, employee benefits, and 
overhead: [(Compliance Manager at $310 for 192 hours) + (Attorney at 
$417 for 48 hours) + (Sr. Systems Analyst at $285 for 96 hours)] = 
336 initial burden hours and $128,064.
---------------------------------------------------------------------------

    As described above, the Commission is proposing to amend rule 
603(b) to require SROs to make available all data necessary to generate 
odd-lot information to the exclusive SIPs. The SROs already provide 
certain quotation information to the exclusive SIPs, and many SROs 
already provide odd-lot quotation information to customers through 
their proprietary data feeds.\738\ Nevertheless, providing the 
exclusive SIPs with the data necessary to generate odd-lot information 
may entail additional burdens. Specifically, technical development work 
may be needed to direct odd-lot quotations to the exclusive SIPs and to 
expand the capacity of the existing connections through which the SROs 
provide data to the exclusive SIPs to support the additional message 
traffic associated with odd-lot quotations. Therefore, the Commission 
is proposing to revise its burden estimates for rule 603(b) upwards by 
5% to account for the provision of the data necessary to generate odd-
lot information to the exclusive SIPs.\739\ Specifically, the 
Commission is proposing to add 11 initial burden hours \740\ and 19.8 
annual

[[Page 80355]]

burden hours \741\ to its previous estimates.
---------------------------------------------------------------------------

    \738\ See MDI Proposing Release, supra note 39, at 16738; MDI 
Adopting Release, supra note 5, at 18599.
    \739\ The Commission believes that 5% of the initial and 
ongoing, annual burden hour estimates provided in the MDI Rules for 
each SRO to make the data necessary to generate consolidated market 
data available to competing consolidators and self-aggregators is 
appropriate because the SROs already collect the data necessary to 
generate odd-lot information and this information is a subset of 
consolidated market data as defined in the MDI Rules.
    \740\ The Commission estimates the monetized initial burden for 
this requirement to be $3,929. The Commission derived this estimate 
based on per hour figures from SIFMA's Management & Professional 
Earnings in the Securities Industry 2013, modified to account for an 
1,800-hour work-year and inflation, and multiplied by 5.35 to 
account for bonuses, firm size, employee benefits, and overhead: 
[(Compliance Manager at $344 for 5.25 hours) + (Attorney at $462 for 
3.5 hours) + (Sr. Systems Analyst at $316 for 1 hour) + (Operations 
Specialist at $152 for 1.25 hours)] = 11 initial burden hours and 
$3,929.
    \741\ The Commission estimates the monetized ongoing, annual 
burden for this requirement to be $7,050. The Commission derived 
this estimate based on per hour figures from SIFMA's Management & 
Professional Earnings in the Securities Industry 2013, modified to 
account for an 1,800-hour work-year and inflation, and multiplied by 
5.35 to account for bonuses, firm size, employee benefits, and 
overhead: [(Compliance Manager at $344 for 10.6 hours) + (Attorney 
at $462 for 3.4 hours) + (Sr. Systems Analyst at $316 for 5.8 
hours)] = 19.8 annual burden hours and $7,050.
---------------------------------------------------------------------------

    In addition, the Commission is proposing to require the primary 
listing exchange for each NMS stock to provide an indicator of the 
round lot size to the applicable exclusive SIP for dissemination and to 
calculate and provide to competing consolidators, self-aggregators, and 
the applicable exclusive SIP an indicator of the applicable minimum 
pricing increment for dissemination. The primary listing exchange is 
already required to calculate the applicable round lot size and provide 
it to competing consolidators and self-aggregators under the MDI Rules, 
and the incremental burden of providing this indicator to the two 
exclusive SIPs is likely to be minimal. However, calculating the 
applicable minimum pricing increment and providing it to competing 
consolidators, self-aggregators, and the exclusive SIPs would entail 
additional burdens. Specifically, primary listing exchanges would need 
to program systems to calculate the applicable minimum pricing 
increment for each NMS stock that they list each quarter based on its 
Time Weighted Average Quoted Spread and to include this information in 
the data that they provide to competing consolidators, self-
aggregators, and the exclusive SIPs. Therefore, the Commission is 
proposing to revise its burden estimates for rule 603(b) upwards to 
account for the calculation of the applicable minimum pricing increment 
and the provision of this information to competing consolidators, self-
aggregators, and the exclusive SIPs. Specifically, the Commission is 
proposing to add 50 initial burden hours \742\ and 32 annual burden 
hours \743\ for each primary listing exchange to its previous estimates 
and 250 total initial burden hours \744\ and 160 total annual burden 
hours \745\ for five primary listing exchanges. The Commission solicits 
comment on the accuracy of these revised estimates.
---------------------------------------------------------------------------

    \742\ The Commission estimates the monetized initial burden for 
this requirement to be $19,000 per primary listing exchange. See 
supra notes 620-623 and accompanying text.
    \743\ The Commission estimates the monetized ongoing, annual 
burden for this requirement to be $9,000 per primary listing 
exchange. Id.
    \744\ 50 initial burden hours per primary listing exchange x 5 
primary listing exchanges = 250 total initial burden hours. The 
Commission estimates the total monetized initial burden of this 
requirement to be $95,000 ($19,000 per primary listing exchange x 5 
primary listing exchanges = $95,000). Id.
    \745\ 32 annual burden hours per primary listing exchange x 5 
primary listing exchanges = 160 total annual burden hours. The 
Commission estimates the total monetized annual burden of this 
requirement to be $45,000 ($9,000 per primary listing exchange x 5 
primary listing exchanges = $45,000. Id.
---------------------------------------------------------------------------

    In addition, the MDI Rules include a collection of information 
requirement under rules 614(d)(1) through (3), which require competing 
consolidators to collect from the SROs quotation and transaction 
information for NMS stocks, calculate and generate a consolidated 
market data product, and make the consolidated market data product 
available to subscribers.\746\ As discussed above, the Commission is 
proposing to amend the definition of odd-lot information to include a 
specified best odd-lot order to buy and best odd-lot order to sell. 
Since the odd-lot quotes that a competing consolidator would use to 
identify and disseminate the best odd-lot orders--if the competing 
consolidator offers a consolidated market data product that includes 
this information--are already included in the data necessary to 
generate odd-lot information, the Commission believes that the existing 
burden estimates for rules 614(d)(1) through (3) account for the 
identification and dissemination of the best odd-lot orders. The 
Commission solicits comment on whether, and the extent to which, 
amending the definition of odd-lot information to include the best odd-
lot orders would affect the burden estimates for rules 614(d)(1) 
through (3).
---------------------------------------------------------------------------

    \746\ MDI Adopting Release, supra note 5, at 18703.
---------------------------------------------------------------------------

H. Request for Comments

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comments to:
    115. 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;
    116. Evaluate the accuracy of our estimates of the burden of the 
proposed collection of information;
    117. Determine whether there are ways to enhance the quality, 
utility, and clarity of the information to be collected;
    118. 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; and
    119. Evaluate whether the proposed amendments would have any 
effects on any other collection of information not previously 
identified in this section.
    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 S7-30-22. 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 S7-30-22 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.

VII. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (``SBREFA''),\747\ 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.
---------------------------------------------------------------------------

    \747\ 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).
---------------------------------------------------------------------------

VIII. Regulatory Flexibility Act Certification and Initial Regulatory 
Flexibility Act Analysis

    The Regulatory Flexibility Act (``RFA'') \748\ requires Federal 
agencies, in promulgating rules, to consider the impact of those rules 
on small entities. Section 603(a) \749\ of the Administrative Procedure 
Act,\750\ as amended by the

[[Page 80356]]

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.'' \751\ Section 605(b) of the RFA states that this 
requirement shall not apply to any proposed rule or proposed rule 
amendment, which if adopted, would not have a significant economic 
impact on a substantial number of small entities'' \752\
---------------------------------------------------------------------------

    \748\ 5 U.S.C. 601 et seq.
    \749\ 5 U.S.C. 603(a).
    \750\ 5 U.S.C. 551 et seq.
    \751\ 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 17 CFR 240.0-10 (Rule 0-10). See 
Securities Exchange Act Release No. 18451 (Jan. 28, 1982), 47 FR 
5215 (Feb. 4, 1982) (File No. AS-305).
    \752\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

A. Proposed Amendments to Rule 612--Initial Regulatory Flexibility 
Analysis

    The Commission has prepared an Initial Regulatory Flexibility 
Analysis (IRFA), in accordance with the provisions of the RFA \753\ 
regarding the proposed amendments to rule 612 of Regulation NMS.
---------------------------------------------------------------------------

    \753\ 5 U.S.C. 603.
---------------------------------------------------------------------------

1. Reasons for the Proposed Action
    As discussed in section II.F., the Commission believes that rule 
612 should be amended to update and modernize the rule for the current 
trading environment. Rule 612 establishes the minimum pricing 
increments for NMS stocks and these increments have not been adjusted 
since they were adopted in 2005. Today, several NMS stocks experience 
tick-constraint, in that they are unable to be priced in an amount that 
would be determined by competitive market forces and supply and demand. 
Further, while rule 612 does not restrict trading outside of the 
minimum pricing increments required by the rule, the structure of the 
market impedes the ability of certain trading centers to trade in sub-
penny increments and allows others to readily trade in such increments. 
The proposed amendments to rule 612 would harmonize the trading in NMS 
stocks in the minimum pricing increments set forth in rule 612.
2. Legal Basis
    Pursuant to the Exchange Act and, particularly, sections 3(b), 5, 
6, 11A, 15, 15A, 17(a) and (b), 23(a), and 36 thereof, 15 U.S.C. 
78c(b), 78e, 78f, 78k-1, 78o, 78o-3, 78mm, 78q(a) and (b), and 78w(a), 
the Commission proposes to amend rule 612.
3. Small Entities Subject to the Rule
    Proposed rule 612 would apply to national securities exchanges, 
national securities associations, ATSs, vendors, and broker or dealers.
a. National Securities Exchanges and National Securities Associations
    None of the national securities exchanges is a small entity as 
defined by Commission rules. Exchange Act Rule 0-10(e) \754\ states 
that the term ``small business'' when referring to an exchange means 
any exchange that has been exempted from the reporting requirements of 
Exchange Act rule 601 and is not affiliated with any person that is not 
a small business or small organization. There is only one national 
securities association, and the Commission has previously stated that 
it is not a small entity as defined by 13 CFR 121.201.\755\
---------------------------------------------------------------------------

    \754\ 17 CFR 240.0-10(e).
    \755\ See, e.g., Securities Exchange Act Release No. 62174 (May 
26, 2010), 75 FR 32556, 32605 n. 416 (June 8, 2010) (``FINRA is not 
a small entity as defined by 13 CFR 121.201.''); MDI Adopting 
Release, supra note 5, at 18808.
---------------------------------------------------------------------------

b. Broker-Dealers
    Commission rule 0-10(c) defines a broker-dealer as a small entity 
for the purpose of this section if the broker-dealer had a total 
capital (net worth plus subordinated liabilities) of less than $500,000 
on the date in the prior fiscal year as of which its audited financial 
statements were prepared, had less than $200 million of funds and 
securities in its custody of control at all times during the preceding 
fiscal year, and the broker-dealer is not affiliated with any person 
(other than a natural person) that is not a small entity.\756\ The 
Commission estimates that as of June 30, 2022 there were approximately 
761 Commission registered broker-dealers that would be small entities 
for purposes of the statute that would be required to comply with the 
proposed amendments to rule 612 regarding quotation and trading in the 
proposed minimum pricing increments.
---------------------------------------------------------------------------

    \756\ 17 CFR 240.0-10(c).
---------------------------------------------------------------------------

    Rule 612 apples to NMS stocks and therefore, the rule would apply 
to NMS Stock ATSs. NMS Stock ATSs that are not registered as exchanges 
are required to register as broker-dealers.\757\ Accordingly, NMS Stock 
ATSs would be considered small entities if they fall within the 
standard for small entities that would apply to broker-dealers. The 
Commission examined recent FOCUS data for the 33 broker-dealers that 
currently operate NMS Stock ATSs and, applying the test for broker-
dealers described above, believes that none of the NMS Stock ATSs 
currently trading NMS stocks were operated by a broker-dealer that is a 
``small entity.''
---------------------------------------------------------------------------

    \757\ Rule 301(b)(1) of Regulation ATS.
---------------------------------------------------------------------------

c. Vendors
    A vendor is defined in rule 600(b)(100) of Regulation NMS as any 
SIP engaged in the business of disseminating transaction reports, last 
sale data, or quotations with respect to NMS securities to brokers, 
dealers, or investors on a real-time or other current and continuing 
basis, whether through an electronic communications network, moving 
ticker, or interrogation device.\758\ Commission rule 0-10(g) states 
that the term small business when referring to a SIP, means any SIP 
that had gross revenues of less than $10 million during the preceding 
year, provided service to fewer than 100 interrogation devices or 
moving tickers at all times during the preceding year, and is not 
affiliated with any person that is not a small business or small 
organization.\759\ The Commission estimates that there are 
approximately 80 vendors, 13 of which would be small entities.
---------------------------------------------------------------------------

    \758\ 17 CFR 242.600(b)(100).
    \759\ 17 CFR 240.0-10(g).
---------------------------------------------------------------------------

4. Reporting, Recordkeeping, and Other Compliance Requirements
    Rule 612 as proposed to be amended would not impose any new 
reporting, recordkeeping, or other compliance requirements on market 
participants that are small entities.
5. Duplicative, Overlapping, or Conflicting Federal Rules
    The Commission believes that there are no federal rules that 
duplicate, overlap, or conflict with the proposed rule.
6. Significant Alternatives
    Pursuant to section 3(a) of the RFA, the Commission must consider 
the following types of alternatives: (a) the establishment of differing 
compliance or reporting requirements or timetables that take into 
account the resources available to small entities; (b) the 
clarification, consolidation, or simplification of compliance and 
reporting requirements under the proposed rule for small entities; (c) 
the use of performance rather than design standards; and (d) an 
exemption from coverage of the proposed rule, or any part thereof, for 
small entities.
    The primary goal of rule 612 is to provide uniform minimum pricing 
increments for NMS stocks. This primary goal continues with the 
proposed amendments to rule 612. As

[[Page 80357]]

such, the Commission believes that imposing different compliance or 
reporting requirements or possibly a different timetable for 
implementing compliance or reporting requirements, for small entities 
could undermine the goal of uniformity. In addition, the Commission has 
concluded similarly that it would not be consistent with the primary 
goal to further clarify, consolidate or simplify the proposed 
amendments to rule 612 for small entities. The proposed amendments to 
rule 612 are performance standards and do not dictate for entities of 
any size any particular design standards (e.g., technology) that must 
be employed to achieve the objectives of the proposed rule. The 
Commission also preliminarily believes that it would be inconsistent 
with the purposes of the Exchange Act to specify different requirements 
for small entities or to exempt broker-dealers from the proposed 
amendments to rule 612.
7. Request for Comments
    The Commission encourages written comments on matters discussed in 
the IRFA. In particular, the Commission requests comments on (i) the 
number of small entities that would be affected by the proposed 
amendments to rule 612; (ii) the nature of any impact that the proposed 
amendments to rule 612 would have on small entities and empirical data 
supporting the extent of the impact; and (iii) how to quantify the 
number of small entities that would be affected by and/or how to 
quantify the impact of the proposed amendments to rule 612. Such 
comments will be considered in the preparation of the Final Regulatory 
Flexibility Analysis, if the proposed amendments to rule 612 are 
adopted, and will be placed in the same public comment file as comments 
on the proposed amendments to rule 612 itself.

B. Proposed Amendments to Rule 610

    The proposed changes to rule 610(c) would apply to trading centers 
as defined in Rule 600(b)(95) that impose fees for access against a 
protected quotation or any other quotation of the trading center that 
is the best bid or best offer of a national securities exchange or 
national securities association. As discussed above, currently national 
securities exchanges are the only trading centers that publish 
protected quotations. Pursuant to Rule 0-10(e), none of the national 
securities exchanges are a small entities for the purposes of the 
RFA.\760\
---------------------------------------------------------------------------

    \760\ 17 CFR 240.0-10(e).
---------------------------------------------------------------------------

    Proposed rule 610(d) would apply to national securities exchanges 
registered with the Commission under section 6 of the Exchange Act. 
Pursuant to rule 0-10(e), none of the national securities exchanges are 
a small entities for the purposes of the RFA.\761\
---------------------------------------------------------------------------

    \761\ 17 CFR 240.0-10(e).
---------------------------------------------------------------------------

    Therefore, for the purposes of the RFA, the Commission certifies 
that the proposed amendments to rule 610(c) and proposed rule 610(d) 
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:
    1. 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.

C. Proposed Amendments to Rule 603 and Definitions Odd-Lot Information 
and Regulatory Data Under Rule 600

    The proposed amendments to rule 603(b) and to the definitions of 
odd-lot information and regulatory data in rule 600(b) would apply to 
national securities exchanges registered with the Commission under 
section 6 of the Exchange Act, national securities associations 
registered with the Commission under section 15A of the Exchange Act, 
and the exclusive SIPs. Pursuant to rule 0-10(e), none of the national 
securities exchanges are small entities for the purposes of the 
RFA.\762\ There is only one national securities association, and the 
Commission has previously stated that it is not a small entity as 
defined by 13 CFR 121.201.\763\ With respect to the exclusive SIPs, 
neither SIAC nor Nasdaq \764\ meet the criteria for a ``small 
business'' or ``small organization'' when used with reference to a 
securities information processor.\765\ Thus, the proposed amendments to 
Rules 600(b) and 603(b) would not affect any small entities.
---------------------------------------------------------------------------

    \762\ See 17 CFR 240.0-10(e). Paragraph (e) of rule 0-10 states 
that the term ``small business,'' when referring to an exchange, 
means any exchange that has been exempted from the reporting 
requirements of rule 601 of Regulation NMS, 17 CFR 242.601, and is 
not affiliated with any person (other than a natural person) that is 
not a small business or small organization as defined in rule 0-10. 
Under this standard, none of the exchanges subject to the amendments 
to rules 600(b) or 603(b) are ``small entities'' for the purposes of 
the RFA. See MDI Adopting Release, supra note 5, at 18808.
    \763\ See supra note 755.
    \764\ See supra note 326.
    \765\ See 17 CFR 240.0-10(g). See also Securities Exchange Act 
Release No. 61595 (Feb. 26, 2010), 75 FR 11232, 11320 (Mar. 10, 
2010) (determining that SIAC and Nasdaq are not small entities for 
purposes of the RFA).
---------------------------------------------------------------------------

    As discussed above, the proposed amendments to rule 603(b) and the 
definitions of odd-lot information and regulatory data under rule 600 
would not apply to any ``small entities.'' Therefore, for the purposes 
of the RFA, the Commission certifies that the proposed amendments to 
rule 603(b) and rule 600(b) 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:
    1. 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.

Statutory Authority and Text of the Proposed Rule Amendments

    Pursuant to the Exchange Act, and particularly sections 2, 3(b), 5, 
6, 11, 11A, 15, 15A, 17, 19, 23(a), and 36 thereof, 15 U.S.C. 78b, 78c, 
78e, 78f, 78k, 78k-1, 78o, 78o-3, 78q, 78s, 78w(a), and 78mm the 
Commission proposes to amend Sections 242.600, 242.603, 242.610, and 
242.612 of chapter II of title 17 of the Code of Federal Regulations.

List of Subjects in 17 CFR Part 242

    Regulations M, SHO, ATS, AC, NMS, and SBSR and Customer Margin 
Requirements for Security Futures.

    For the reasons stated in the preamble, the Commission is proposing 
to amend title 17, chapter II of the Code of Federal Regulations as 
follows:

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

0
1. 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
2. Amend Sec.  242.600 paragraph (b) by:
0
a. Removing in paragraph (59)(i) the text ``and'' from the end of the 
paragraph;
0
b. Adding in paragraph (59)(ii) the text ``and'' to the end of the 
paragraph;
0
c. Adding paragraph (59)(iii);
0
d. Removing in paragraph (78)(i)(D) the text ``and'' from the end of 
the paragraph;

[[Page 80358]]

0
e. Removing in paragraph (78)(i)(E) the period from the end of the 
paragraph and adding the text ``; and'' in its place;
0
f. Adding paragraphs (78)(i)(F) and (iv).
    The additions and revisions read as follows:

Sec.  242.600  NMS security designation and definitions.

* * * * *
    (b) * * *
    (59) * * *
    (iii) Best odd-lot order to buy and best odd-lot order to sell. The 
best odd-lot order to buy means the highest priced odd-lot order to buy 
that is priced higher than the national best bid, and the best odd-lot 
order to sell means the lowest priced odd-lot order to sell that is 
priced lower than the national best offer, for an NMS stock that are 
calculated and disseminated on a current and continuing basis by a 
competing consolidator or plan processor or calculated by a self-
aggregator; provided, that in the event two or more market centers 
transmit to a competing consolidator, plan processor, or a self-
aggregator identical odd-lot buy orders or odd-lot sell orders for an 
NMS stock, the highest priced odd-lot buy order or lowest priced odd-
lot sell order (as the case may be) shall be determined by ranking all 
such identical odd-lot buy orders or odd-lot sell orders (as the case 
may be) first by size (giving the highest ranking to the odd-lot buy 
order or odd-lot sell order associated with the largest size), and then 
by time (giving the highest ranking to the odd-lot buy order or odd-lot 
sell order received first in time).
* * * * *
    (78) * * *
    (i) * * *
    (F) An indicator of the applicable minimum pricing increment 
required under Sec.  242.612.
* * * * *
    (iv) The primary listing exchange shall also provide the 
information required under paragraphs (b)(78)(i)(E) and (F) of this 
section to the applicable plan processor for dissemination.
* * * * *
0
3. Amend Sec.  242.603 by revising the section heading and paragraph 
(b) to read as follows:

Sec.  242.603  Distribution, consolidation, dissemination, and display 
of information with respect to quotations for and transactions in NMS 
stocks.

* * * * *
    (b) Consolidation and dissemination of information.
    (1) Application of paragraphs (b)(2) and (3) of this section:
    (i) Compliance with paragraph (b)(3) of this section is required 
until the date indicated by the Commission in any order approving 
amendments to the effective national market system plan(s) to 
effectuate a cessation of the operations of the plan processors that 
disseminate consolidated information regarding NMS stocks.
    (ii) Compliance with paragraph (b)(2) of this section is required 
180 calendar days from the date of the Commission's approval of the 
amendments, filed as required under Sec.  242.614(e), to the effective 
national market system plan(s).
    (2) Every national securities exchange on which an NMS stock is 
traded and national securities association shall act jointly pursuant 
to one or more effective national market system plans for the 
dissemination of consolidated market data. Every national securities 
exchange on which an NMS stock is traded and national securities 
association shall make available to all competing consolidators and 
self-aggregators its information with respect to quotations for and 
transactions in NMS stocks, including all data necessary to generate 
consolidated market data, in the same manner and using the same 
methods, including all methods of access and the same format, as such 
national securities exchange or national securities association makes 
available any information with respect to quotations for and 
transactions in NMS stocks to any person.
    (3) Every national securities exchange on which an NMS stock is 
traded and national securities association shall act jointly pursuant 
to one or more effective national market system plans to disseminate 
consolidated information, including a national best bid and national 
best offer and odd-lot information, on quotations for and transactions 
in NMS stocks. Such plan or plans shall provide for the dissemination 
of all consolidated information for an individual NMS stock through a 
single plan processor and such single plan processor must represent 
quotation sizes in such consolidated information in terms of the number 
of shares, rounded down to the nearest multiple of a round lot. Every 
national securities exchange on which an NMS stock is traded and 
national securities association shall make available to a plan 
processor all data necessary to generate odd-lot information.
* * * * *
0
4. Amend Sec.  242.610 by:
0
a. Revising paragraph (c);
0
b. Redesignating paragraphs (d) and (e) as (e) and (f); and
0
c. Adding new paragraph (d).
    The revisions and additions read as follows:

Sec.  242.610  Access to quotations.

* * * * *
    (c) Fees for access to quotations. A trading center shall not 
impose, nor permit to be imposed, any fee or fees for the execution of 
an order against a protected quotation of the trading center or against 
any other quotation of the trading center that is the best bid or best 
offer of a national securities exchange or the best bid or best offer 
of a national securities association in an NMS stock that exceed or 
accumulate to more than the following limits:
    (1) If the price of a protected quotation or other quotation is 
$1.00 or more, the fee or fees cannot exceed or accumulate to more 
than:
    (i) $0.0005 per share for an NMS stock that has a minimum pricing 
increment of $0.001 and
    (ii) $0.001 per share for an NMS stock that has a minimum pricing 
increment greater than $0.001; or
    (2) If the price of a protected quotation or other quotation is 
less than $1.00, the fee or fees cannot exceed or accumulate to more 
than 0.05% of the quotation price per share.
    (d) Transparency of fees. A national securities exchange shall not 
impose, nor permit to be imposed, any fee or fees, or provide, or 
permit to be provided, any rebate or other remuneration, for the 
execution of an order in an NMS stock that cannot be determined at the 
time of execution.
* * * * *
0
5. Revise Sec.  242.612 to read as follows:

Sec.  242.612  Minimum pricing increment.

    (a) Definitions. For purposes of this rule only, the following 
terms shall have the meanings set forth in this rule.
    Evaluation Period means the last month of a calendar quarter (March 
in the first quarter, June in the second quarter, September in the 
third quarter and December in the fourth quarter) of a calendar year 
during which the primary listing exchange shall measure the Time 
Weighted Average Quoted Spread of an NMS stock that is priced equal to 
or greater than $1.00 per share to determine the minimum pricing 
increment to be in effect for an NMS stock for the next calendar 
quarter, as set forth by paragraph (c) of this section.
    Time Weighted Average Quoted Spread means the average dollar value 
difference between the NBB and NBO during regular trading hours where 
each instance of a unique NBB and NBO is weighted by the length of time 
that the quote prevailed as the NBB or NBO.

[[Page 80359]]

    (b) Minimum pricing increments (MPIs). No national securities 
exchange, national securities association, alternative trading system, 
vendor, or broker or dealer shall display, rank, accept from any 
person, or execute a bid or offer, an order, or an indication of 
interest in any NMS stock priced in an increment smaller than the 
applicable increment required by paragraph (c) or (d) of this section.
    (c) MPIs for orders priced equal to or greater than $1.00. Except 
as provided in paragraph (e) of this section, the minimum increment for 
any bid or offer, order, or indication of interest or trade in any NMS 
stock priced equal to or greater than $1.00 shall be:
    (1) No smaller than $0.001, if the time weighted average quoted 
spread for the NMS stock during the Evaluation Period was equal to, or 
less than, $0.008;
    (2) No smaller than $0.002, if the time weighted average quoted 
spread for the NMS stock during the Evaluation Period was greater than 
$0.008 but less than, or equal to, $0.016;
    (3) No smaller than $0.005, if the time weighted average quoted 
spread for the NMS stock during the Evaluation Period was greater than 
$0.016 but less than, or equal to, $0.04;
    (4) No smaller than $0.01, if the time weighted average quoted 
spread for the NMS stock during the Evaluation Period was greater than 
$0.04.
    (d) MPIs for orders priced less than $1.00. Except as provided in 
paragraph (e) of this section, the minimum increment for any bid or 
offer, order, or indication of interest for an NMS stock that is priced 
less than $1.00 per share shall be no smaller than $0.0001.
    (e) Exceptions. (1) Orders that execute at, but are not explicitly 
priced at, the midpoint between the national best bid and the national 
best offer or the midpoint between the best protected bid and the best 
protected offer; and
    (2) Orders that execute at a price that was not based, directly or 
indirectly, on the quoted price of an NMS stock at the time of 
execution and for which the material terms were not reasonably 
determinable at the time the commitment to execute the order was made.
    (f) Exemptions. The Commission, by order, may exempt from the 
provisions of this section, either unconditionally or on specified 
terms and conditions, any person, security, quotation, or order, or any 
class or classes of persons, securities, quotations, or orders, if the 
Commission determines that such exemption is necessary or appropriate 
in the public interest, and is consistent with the protection of 
investors.

    By the Commission.

    Dated: December 14, 2022.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-27616 Filed 12-28-22; 8:45 am]
BILLING CODE 8011-01-P