(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

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

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

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

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

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

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

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

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

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

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

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

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.
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    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\
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    \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'').
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    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\
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    \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'').
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    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

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

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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