----------------------------------------------------------------------------------------------------------------
                                                   Number of
           Exchange               Fee model      revisions (5     Date of fee      Fees (# of     Rebates (# of
                                                    years)         schedule       categories)      categories)
----------------------------------------------------------------------------------------------------------------
Cboe BZX.....................  Maker-Taker....              54       8/16/2018  $0.0000-$0.0033  ($0.0010)-($0.0
                                                                                (29)...........   032)
                                                                                (18)
Cboe BYX.....................  Taker-Maker....              51        8/9/2018  $0.0000-$0.0033  ($0.0005)-($0.0
                                                                                (40)...........   022)
                                                                                (12)
Cboe EDGA....................  Taker-Maker....              41        8/1/2018  $0.0000-$0.0032  ($0.0004)-($0.0
                                                                                (48)...........   027)
                                                                                (14)
Cboe EDGX....................  Maker-Taker....              53       8/16/2018  $0.0000-$0.0032  $0.000-($0.0032
                                                                                (37)...........   )
                                                                                (20)
BX...........................  Taker-Maker....              29       7/20/2018  $0.0005-$0.0030  $0.0000-($0.002
                                                                                (13)...........   1)
                                                                                (12)
Phlx (PSX)...................  Maker-Taker....              24       5/21/2018  $0.0028-$0.0030  $0.00-($0.0030)
                                                                                (3)............  (8)
Nasdaq.......................  Maker-Taker....              54       7/25/2018  $0.0000-$0.0030  $0.0000-($0.003
                                                                                (4)............   25)
                                                                                (36)
NYSE Arca....................  Maker-Taker....              51        8/1/2018  $0.0005-$0.0035  ($0.0002)-($0.0
                                                                                (68)...........   035)
                                                                                (65)
NYSE American................  Flat...........               9       7/26/2018  $0.0002-$0.0030  $0.0000-($0.004
                                                                                (12)...........   5)
                                                                                (4)
NYSE.........................  Maker-Taker....              42       8/10/2018  $0.0003-$0.0030  $0.0000-($0.004
                                                                                (20)...........   5)
                                                                                (41)
NYSE National \672\..........  Taker-Maker....              11       7/26/2018  $0.0003-$0.0025  ($0.0002)-($0.0
                                                                                (16)...........   020)
                                                                                (2)
CHX..........................  Maker-Taker....               8       4/26/2018  $0.0007-$0.0040  ($0.0009)-($0.0
                                                                                (5)............   020)
                                                                                (2)
IEX..........................  Flat...........              10        8/1/2018  $0.0009........  $0.0009
----------------------------------------------------------------------------------------------------------------

    For several of the exchange families, information about revenues
and costs attributed to transaction-based fees and rebates is available
in aggregate from Form 10-K filings. Using the statements of income
from Form 10-K filings for 2017 capturing the net (of rebates)
transactions-based fee revenues, the Nasdaq exchanges (Nasdaq, BX, and
PSX) earned $253 million.\673\ Based on the same measure the NYSE-
affiliated exchanges (NYSE, NYSE Arca, NYSE American, and NYSE
National) earned $196 million in transaction-based fees net of
rebates,\674\ while the BATS Global Markets (now, Cboe BZX, Cboe BYX,
Cboe EDGA, and Cboe EGDX), for the year ended December 31, 2017, earned
$153 million in transaction-based fees net of rebates.\675\ Neither CHX
(which became a NYSE-affiliated exchange in 2018) nor IEX or their
affiliates are publicly traded, meaning that these exchanges do not
file an annual Form 10-K with the Commission. As a result, public
information regarding the revenues or profits associated with
transaction-based fees does not exist for these exchanges.
---------------------------------------------------------------------------

    \672\ NYSE acquired NSX in January 2017, and the exchange is now
known as NYSE National. As of May 2018, the exchange re-opened for
trading and began submitting new fee schedules periodically.
    \673\ See Nasdaq Form 10-K filings (2017), available at https://www.sec.gov/Archives/edgar/data/1120193/000112019318000003/ndaq1231201710-k.htm. Transaction-based revenues for equity
securities accounted for approximately 59% of total operating income
net of rebates and 25% net of rebates and brokerage, clearing, and
exchange fees. The Commission has revised the revenue number for
Nasdaq for 2017 revenue per the correction provided in the Nasdaq
Letter II.
    \674\ See Intercontinental Exchange Form 10-K filings (2017),
available at https://www.sec.gov/Archives/edgar/data/1571949/000157194918000003/ice2017123110k.htm. For the Intercontinental
Exchange, net cash equity transaction-based revenues were
approximately 8.2% of operating income for 2016.
    \675\ See Cboe Form 10-K filings (2017), available at https://www.sec.gov/Archives/edgar/data/1374310/000155837018000953/cboe-20171231x10k.htm. Cboe's acquisition of BATS Global Markets became
effective on March 1, 2017. For the year ending December 31, 2017,
the net transaction-based revenues were 41% of Cboe operating
profits.
---------------------------------------------------------------------------

    Information on the net transactions-based revenues for each
individual exchange, as opposed to the amounts reported for exchange
groups in Form 10-K filings, is not currently publicly available,
making it difficult to analyze the fees and rebates for an individual
exchange. To estimate the net transactions-based revenues for each
individual exchange, Table 3 reports the maximum and median net
transaction-based fees based on each exchange's

most recently reported fee schedule and the share volume of each
exchange for July 25, 2018 through August 24, 2018.\676\ As evidenced
by the significant differences between the sum of net of rebate
revenues for entities reporting to the same exchange group obtained
from Table 3 and the total net of rebate revenues for each exchange
family reported on the Form 10-K or 10-Q filings, this approach does
not yield reliable results, highlighting the limitations on the data
currently available to researchers.
---------------------------------------------------------------------------

    \676\ The share volume is obtained from Cboe, available at
http://markets.cboe.com/us/equities/market_share/ (last visited
September 18, 2018). To compute the maximum profit attainable, staff
took the difference between the highest possible transaction fee and
the lowest possible rebate and multiplied it by the monthly share
volume. For a midpoint profit, the median of the transaction fees
less the median of the rebates is computed and multiplied it by
share volume. In order to make the results comparable to those
reported above from Form 10-K filings, the monthly profits are
annualized by multiplying each monthly profit amount by 12.

Table 3--Estimates of Annualized Per-Exchange Net Transaction-Based Fee Revenues From Transaction-Based Fees and
                                          Monthly Exchange Share Volume
                                       [For July 25, 2018-August 24, 2018]
                                                  [In millions]
----------------------------------------------------------------------------------------------------------------
                                   Share volume     Annualized       Per share      Annualized       Per share
            Exchanges               (millions)       midpoint         profit          maximum         profit
                                       \677\        difference       (median)       difference       (maximum)
----------------------------------------------------------------------------------------------------------------
Cboe BZX........................           9,014       ($486.75)      ($0.00450)         $248.78         $0.0023
Cboe BYX........................           7,136           25.69         0.00030          239.76          0.0028
Cboe EDGA.......................           1,853            1.11         0.00005           62.26          0.0028
Cboe EDGX.......................           8,165          (4.90)       (0.00005)          205.77          0.0021
BX..............................           4,389           36.87         0.00070          158.02          0.0030
Phlx (PSX)......................           1,035           16.15         0.00130           37.27          0.0030
Nasdaq..........................          23,087         (34.63)       (0.00013)          831.14          0.0030
NYSE Arca.......................          13,024           23.44         0.00015          515.75          0.0033
NYSE American...................             473          (3.69)       (0.00065)           17.03          0.0030
NYSE............................          17,823        (128.33)       (0.00060)          641.63          0.0030
NYSE National...................             920            3.31         0.00030           25.40          0.0023
CHX.............................             830            8.96         0.00090           30.87          0.0031
IEX.............................           3,757             N/A         0.00000             N/A          0.0000
----------------------------------------------------------------------------------------------------------------

C. Analysis of Benefits and Costs of Transaction Fee Pilot

1. Benefits of Transaction Fee Pilot
    The Commission expects that the benefits of the Pilot will fall
into two categories: (1) More informed policy decisions, including more
information about the economic impact of transaction-based fees and
rebates, and (2) other benefits that may accrue to market participants
for the duration of the Pilot. In this section we discuss each of the
categories of benefits as well as potential limitations to the
applicability of information to be drawn from the Pilot.
---------------------------------------------------------------------------

    \677\ Monthly share volume obtained from Cboe for July 25, 2017
through August 24, 2017, Cboe, U.S. Equities Market Volume Summary,
available at http://markets.cboe.com/us/equities/market_share/ (last
visited September 18, 2018).
---------------------------------------------------------------------------

a. Benefits of More Informed Policy Decisions
    The Commission expects that the primary benefit of the Pilot will
be to inform the Commission and public of the economic impact of
exchange transaction-based fees and rebates.\678\ As a result, the
Commission will have data to better inform its regulatory consideration
of exchange transaction-based fee-and-rebate pricing models and fee
changes, and the potential effects of changes to its regulatory
approach concerning the same. In general, more informed regulatory
decisions are more likely to result in regulatory approaches that
better balance costs and benefits relative to regulatory decisions
based on less precise information. In other words, many of the economic
benefits derive from subsequent decisions that the Commission can
neither predict nor commit to at this time. Indeed, the Commission
cannot predict at this time whether the results of the Pilot will
suggest any particular policy direction and recognizes that the results
could suggest that existing exchange transaction-based fee caps and
related rebates may be more beneficial to investors than the policy
alternatives examined in the Pilot.
---------------------------------------------------------------------------

    \678\ In contrast, one commenter opined that the primary benefit
of the Pilot would be ``the `better fills' that institutional
investors will get after the pilot is introduced.'' Nasdaq Letter
III, at 9. This commenter asserted that the Commission had not done
a proper cost benefit analysis because its analysis of benefits did
not account for the ``opportunity costs'' inherent in order routing
decisions, or other factors which would impact institutional orders.
See id. Consequently, the commenter asserted that the Commission
overstated the benefit of the Pilot. See id. However, the Commission
does not agree that ``better fills'' will be a certain result of the
Pilot. Furthermore, the Commission disagrees that it has not
adequately analyzed the costs of the Pilot. As noted above, the
Commission has quantified the likely economic effects of the Pilot
where possible; however, the Commission is unable to quantify all of
the economic effects because it lacks the information necessary to
provide reasonable estimates. The Commission agrees with the
commenter that quantifying benefits using existing data is
difficult, thus underscoring the need for a Pilot. A more detailed
analysis of the Pilot's impact on trading costs can be found in
Section IV.C.2.b.
---------------------------------------------------------------------------

i. Expected Analysis From the Pilot
    The Proposing Release discussed the theoretical impact of exchange
transaction-based fees and rebates on several potential effects such as
conflicts of interest, fragmentation, complexity, liquidity, and off-
exchange competition and explained that certain components of the
Proposed Pilot would facilitate the study of these effects.\679\ As
noted above, the Commission believes that little empirical evidence
currently exists regarding these effects.
---------------------------------------------------------------------------

    \679\ See Proposing Release, supra note 2, at Section V.
---------------------------------------------------------------------------

    More specifically, the Pilot will provide information on the direct
effects of exchange transaction fee and rebate levels on execution
quality and market quality and will facilitate studies of the impact of
fees and rebate levels on market participant behavior and competition,
including potential conflicts of interest. Sections IV.C.2 and IV.D.
discuss many potential economic effects for which this economic
analysis

is unable to draw unambiguous conclusions. For example, many commenters
disagreed on how reducing exchange fees and rebates affects the
competitive landscape between exchanges and off-exchange venues in the
market for trading services,\680\ and the analysis here recognizes that
many competitive forces can drive order flow in either direction. The
Pilot will provide insight into the impact of transaction fees and
rebates on this competitive landscape and can perhaps even shed light
into the mechanism behind any observed changes. Further, one commenter
argued that this economic analysis ``does not accurately account for
the actual level of orders impacted by conflicted broker routing.''
\681\ The Commission believes that it cannot establish the actual level
of orders impacted by potentially conflicted broker routing with
current data and has designed the Pilot in part to gather more data on
the extent to which rebates impact order routing decisions, as
explained in the section that follows. The Commission also notes that
the Pilot seeks to study the effects of exchange pricing models on
market quality and execution quality, which could affect all orders.
The Pilot will facilitate the study of order flow among different
venues, which could provide insights into whether changes in exchange
transaction-based fees and rebates affect, for example, the level of
fragmentation. Existing literature suggests that transaction-based
pricing has contributed to an increase in the number of venues
competing for order flow over time.\682\ By offering rebates or Linked
Pricing, start-up maker-taker and taker-maker exchanges have been able
to attract order flow from exchanges such as NYSE and Nasdaq, thereby
reducing liquidity externalities, or concentration of order flow to a
preferred venue, and leading to increased fragmentation of the market
for trading services.\683\ By altering the access fee and rebate
structures for exchanges, researchers may be able to identify whether
these changes lead to more (or less) concentration of liquidity and how
they affect competition for order flow among exchanges, which could
lead to less (or more) market fragmentation.\684\
---------------------------------------------------------------------------

    \680\ See e.g., Cboe Letter I, at 12; NYSE Letter I, at 9;
Nasdaq Letter I, at 2, 5 (suggesting that the Pilot may impact
competitive dynamics between exchanges and ATSs).
    \681\ See, e.g., Nasdaq Letter III at 1.
    \682\ As discussed in the baseline, the number of exchanges has
increased since 2005, and market share has become less concentrated
over the same time period. The majority of the U.S. equities
exchanges belong to three exchange groups. The Commission believes
that any analyses of the effects of transaction-based fees on order
routing decisions can appropriately control for exchange groups.
    \683\ See, e.g., ICI Letter II at 2.
    \684\ See, e.g., Fidelity Letter, at 9.
---------------------------------------------------------------------------

    Test Group 2 will provide insight into the natural equilibrium
level of access fees, within the current regulatory structure, in the
absence of rebates and Linked Pricing.\685\ As discussed above,
prohibiting exchanges from offering Linked Pricing in Test Group 2 is
intended to complement and reinforce the prohibition on rebates.\686\
Although Rule 610(c) caps the maximum access fee for exchanges at
$0.0030, in the absence of rebates and Linked Pricing, competition
among exchanges could drive the average access fee to an amount
substantially below $0.0030.\687\ As noted in Section IV.A.2, exchanges
have a reduced competitive incentive to reduce fees because doing so
would require reducing the rebates that attract order flow to the
exchange. Test Group 2 will allow competition among exchanges, in the
absence of pressure to offer high rebates or Linked Pricing, to
determine the level of access fees, which the Commission and others can
observe during the Pilot. Like the other examinations the Pilot can
facilitate, the results of an analysis of the equilibrium access fees
are not currently predictable with much certainty.
---------------------------------------------------------------------------

    \685\ Equilibrium refers to conditions of a system in which all
competing influences are balanced. For instance, with respect to the
Test Group 2, this could be the level of transaction fees charged by
exchanges from which no exchange has any incentive to increase or
decrease that fee outside of a constrained competitive margin. This
will be the equilibrium transaction fee. See also, discussion in
Section II.C.7.e. An important potential benefit of the Pilot could
result if the no rebate Test Group were able to demonstrate a set of
conditions wherein regulatory fee caps might not be necessitated in
an environment in which natural competitive forces could effectively
cap access fees. This would occur if in the no-rebate Test Group the
equilibrium fee charged during the Pilot was lower than the fee
cap--implying that the fee cap was not binding in this situation.
    \686\ If Linked Pricing were not prohibited, market participants
could potentially circumvent the prohibition on rebates through
Linked Pricing mechanisms. Therefore, including prohibitions on
rebates or Linked Pricing could provide information to the
Commission and the public about potential conflicts of interest
associated with rebates or substitutes for rebates, such as Linked
Pricing, as well as the equilibrium fee that emerges in the absence
of rebates or Linked Pricing.
    \687\ See, e.g., Fidelity Letter, at 9; Citadel Letter, at 5. In
addition to removing rebates or Linked Pricing in Test Group 2, the
Commission could also temporarily suspend limitations on access fee
caps imposed by Rule 610(c). Implementing multiple changes within a
single test group, however, could prevent researchers and others
from clearly determining the effect of the prohibition of rebates on
order routing decisions of broker-dealers from the effect resulting
from the removal of access fee caps if Rule 610(c) restricted access
fees during the Pilot.
---------------------------------------------------------------------------

    The Pilot will facilitate studies of the impact of exchange
transaction-based fees and rebates on liquidity by studying metrics
such as the quoted spreads.\688\ The width of the quoted spread is
considered to be an indicator of a stock's liquidity, with narrower
spreads generally indicating more liquid securities. The analysis below
is Section IV.C.2.b.iv identifies several reasons that reducing fees
and rebates could increase or decrease quoted spreads. The Pilot could
provide information on whether exchange fees and rebates affect the
liquidity of securities, as measured by the quoted spreads, across
different test groups.\689\
---------------------------------------------------------------------------

    \688\ See, e.g., ICI Letter II at 3 (noting that the Pilot could
facilitate the study of how access fees and rebates affect
liquidity, including quoted spreads).
    \689\ See. Academic studies suggest that the majority of retail
orders are executed off-exchange at prices based on the NBBO,
thereby providing retail investors with better prices in the
presence of rebates. If, however, large rebates provide incentives
for broker-dealers to route retail orders to these exchanges instead
of to off-exchange venues, retail customers may not be fully aware
of the total cost associated with their orders. See, e.g., Angel,
Harris, & Spatt, supra note 530.
---------------------------------------------------------------------------

    The Commission disagrees with commenters who said that the Pilot
was inappropriate because of a one-size-fits-all approach.\690\ In
selecting the number of securities for each Test Group, the Commission
staff divided NMS securities into three common stock strata and three
ETP strata by liquidity to determine how many stocks each stratum
requires to achieve statistical power.\691\ The staff also separately
examined ETPs to determine how many ETPs would be required to achieve
statistical power. Having statistical power within each Test Group, and
within each Test Group by liquidity strata, helps to ensure that
researchers will be able to use Pilot data to inform the Commission
regarding the issue of whether different securities should have the
same regulatory treatment.
---------------------------------------------------------------------------

    \690\ See, e.g., Nasdaq Letter I at 9.
    \691\ See supra Section II.C.5 (discussing statistical power)
and infra note 695.
---------------------------------------------------------------------------

ii. How the Pilot Facilitates Study
    The Pilot will simultaneously create different fee environments,
each of which restricts transaction-based fees differently to allow for
the comparison of securities that are simultaneously in different
regulatory regimes. The study of these comparisons will inform the
Commission about economic distortions that may arise as a result of
transaction-based fees. Because of the size and length of the Pilot,
the Commission believes that the different fee environments over
representative subsamples of NMS securities, even though implemented
temporarily, will produce effects on market participant behavior that
are identical or similar to

those that would arise under a similar permanent change.
    As explained below, three distinct features of the Pilot's design
will facilitate analyses of the relationship, if any, between fees and
potential economic distortions. Specifically, the Pilot is designed to
provide (1) representative results; (2) more direct access to data that
is currently unavailable or requires lengthy and labor-intensive effort
to compile and process; and (3) sufficient information to determine
causality. The following sections discuss in detail how each of these
aspects of the Pilot could facilitate studies of the issues described
above.
(1) Representative Results
    In the context of the Pilot, representative results mean that the
impact of the Pilot's terms on a Test Group during the Pilot Period is
likely to be consistent with the impact of the results on the Test
Group if the Pilot's terms were permanent (as opposed to temporary).
Representative results are desirable for researchers and policy makers
because it ensures that inferences drawn from the results of analysis
of Pilot data are likely to be similar to those that would emerge if
the terms were permanent. As discussed in the baseline, current
analyses are limited by some combination of the following: Data from a
single broker-dealer, a small sample of securities, a single exchange,
or a short sample period. By contrast, the Commission believes that the
Pilot, as designed, will produce more representative results.
Specifically, as discussed in detail below, the Pilot will cover a
large stratified sample of NMS stocks (including ETPs), both maker-
taker and taker-maker exchanges, and transaction fee caps as well as a
prohibition on rebates and Linked Pricing, and will have a two-year
duration with an automatic sunset at the end of the first year unless
the Commission determines, at its discretion, that the Pilot shall
continue for up to one additional year.\692\
---------------------------------------------------------------------------

    \692\ As designed, the Pilot will exclude NMS securities that
have prices below $2.00 per share as of the date of pilot selection
and NMS securities with average daily volume of less than 30,000
shares. As detailed above, the data will also be produced for a six-
month pre-Pilot Period and a six-month post-Pilot Period.
---------------------------------------------------------------------------

    The Commission believes that the Pilot will produce representative
results, presenting a significant improvement on existing studies,
because the Pilot applies to a large stratified sample of NMS stocks
(including ETPs) with prices of at least $2.00 per share at the date of
the Pilot Securities selection, with average daily volume of 30,000
shares or more, and with no restrictions on market capitalization.\693\
In particular, the Commission recognizes that any possible conflicts of
interest related to transaction-based fees could vary across securities
such that the results of a pilot focused only on large capitalization
stocks may not provide information relevant to small capitalization
stocks or ETPs.\694\ Including a broad sample of NMS stocks allows the
results to inform policy choices across subsets of these securities.
The stratification of the stocks selected for each Test Group is
designed to ensure that each Test Group and the control group have a
similar composition within a given stratum, facilitating a comparison
of Test Groups and the Control Group, which further supports the
representativeness of results. If, for instance, the Test Groups and
Control Group had a different composition within strata, researchers
outside the Commission might not be able to distinguish whether
differences across Test Groups and the Control Group stem from
different fee environments or different sample composition, rendering
the results less representative. In addition, the Commission believes
that the sample sizes in the Test Groups are sufficient to provide the
statistical power necessary to identify differences across the samples,
even within strata.
---------------------------------------------------------------------------

    \693\ See, e.g., Brandes Letter, at 2 (supporting applying the
Pilot to the ``widest range of stocks possible''); Spatt Letter, at
1-2.
    \694\ See, e.g., Battalio Equity Market Study, supra note 5307.
---------------------------------------------------------------------------

    The Commission notes that while the adopted Pilot will be able to
provide representativeness within strata, changes since the Proposal
affect the representativeness of the Test Groups as a whole. In
particular, in response to commenters who called for fewer stocks to be
included in the Pilot, Commission staff conducted a supplemental
analysis of Test Group sizes needed to achieve statistical power.\695\
In contrast to its analysis in the Proposal,\696\ the Commission
analyzed the sample sizes in each stratum rather than using the lowest
power stratum to determine the ratio of test group stocks to control
stocks. As a result, the ratio of test group stocks to control group
stocks is lower for some strata. In other words, the Commission was
able to reduce the number of securities in test groups by weighting the
composition of the test groups relative to the control group more
heavily toward securities in certain strata in which more data would be
needed to achieve statistical power. While analyses of the Pilot that
do not consider the strata may fail to provide representative results,
the addition of the stratum identifier to the Exchange Lists will allow
researchers in and outside the Commission to consider the strata in
their analyses.
---------------------------------------------------------------------------

    \695\ The supplemental analysis made several improvements over
the analysis used to identify the proposed test group sizes in an
attempt to refine the analysis to respond to commenters' desire for
smaller test groups while preserving statistical power. First, the
supplemental analysis used more refined methodology that more
directly controlled for time series and cross-sectional
dependencies. Second, the supplemental analysis considered three
quoted spread strata instead of two market capitalization stratum.
The market capitalization strata was originally necessary to control
for any overlap with the Tick Size Pilot, but quoted spread strata
more directly align with the potential economic significance of fees
and rebates relative to anticipated transaction costs and the Tick
Size Pilot has ended. Third, the supplemental analysis eliminated
stocks that trade below 30,000 shares per day. See also supra
Section II.C.6. See supra note 175 (citing commenters that favored
smaller test groups).
    \696\ See Proposing Release, supra note 2, at 13019.
---------------------------------------------------------------------------

    The Commission believes that the inclusion of a broad sample of NMS
stocks, including small and mid-capitalization stocks, ensures
representative results from the Pilot. Although previous studies, as
discussed above, suggest that any possible conflicts of interest are
likely to be the greatest for small-capitalization securities,\697\ the
Commission believes that it is important to the design of the Pilot to
include these small and mid-capitalization stocks (including ETPs). In
particular, including these securities in the Pilot will allow the
results of the Pilot to inform policy choices across any subset of
these securities.
---------------------------------------------------------------------------

    \697\ See, e.g., Battalio Equity Market Study, supra note 5307;
Harris, supra note 5307; RBC Letter I, at 5-6.
---------------------------------------------------------------------------

    Representativeness of results of the Pilot will also be promoted by
the choice of the Pilot Security selection date. Rule 610T(b) and (c)
contemplate that the Commission will select and announce the Pilot
Securities prior to the Pilot start date. As noted in the Proposal, the
Commission anticipates that it will assign and designate by notice each
Pilot Security to one Test Group or the Control Group approximately one
month prior to the start of the Pilot. By assigning securities close to
the start of the Pilot, each Test Group and the Control Group are
likely to be more comparable during the Pilot. Because stratification
criteria (e.g., market capitalization and liquidity) vary naturally
over time, the closer the assignments occurs to the Pilot start date,
the more comparable the Test Groups will be during the Pilot. Selection
of securities close to the start of the Pilot also will be more likely
to

include the intended universe of securities, by avoiding securities
that exit between the adoption of the Rule and the start of the Pilot,
while also capturing new securities that enter the market during this
period. Further, to the extent that market participants would change
their behavior in anticipation of the Pilot, setting the selection
period close to the Pilot effective date could reduce the effect of
such behavior on pre-Pilot data.
    The results of the Pilot will be further representative because the
Pilot applies to all U.S. equities exchanges regardless of fee
structure. Broker-dealers potentially face transaction-fee related
conflicts of interest regardless of whether those fees are on maker-
taker exchanges or taker-maker exchanges, and rebates on either the
make or take side can both impact market quality and execution quality.
Further, a pilot that addresses only a single fee structure would not
produce results relevant for policy choices that also would apply to
another fee structure.
    Applying the Pilot to all exchanges also improves upon the existing
analysis of the limited fee experiment conducted by Nasdaq,\698\ which
only covered a single exchange, as explained in Section IV.B.1.a.ii.
While the results from that study are suggestive that broker-dealers
routed customer orders to other exchanges that did not change their
transaction-based fees and rebates, reasons other than potential
conflicts of interest could have impacted the changes in order routing
decisions. The Commission believes that the Pilot will achieve
representativeness by requiring transaction-fee changes for all U.S.
equities exchanges, which will allow researchers in and outside the
Commission to identify how these revisions affect order routing
decisions across exchanges. As discussed above, excluding non-exchange
trading centers does not forfeit the representativeness of the results
to be obtained from the Pilot, as including them would expand the Pilot
to dissimilarly situated trading centers whose fee models and
regulatory treatment are incomparable to exchanges. Further, the Pilot
will require that changes to fees or rebates are applied at the
security level, which means that for any given security, the limitation
on access fees or rebates is ubiquitous across all exchanges.
---------------------------------------------------------------------------

    \698\ See, e.g., Larry Harris Letter, at 9.
---------------------------------------------------------------------------

    In addition, the Pilot achieves representativeness by imposing a
fee cap and a prohibition on rebates and Linked Pricing. The existing
literature suggests that the potential distortive effects arising from
access fees could induce behavior that would be different from the
distortions arising from rebates or Linked Pricing. Therefore, the
inclusion of caps on both fees and rebates or Linked Pricing allows for
a more comprehensive analysis of any possible conflicts of interest
than could be achieved by focusing solely on fees or rebates.
    The Commission further believes that the duration of the Pilot will
produce sufficiently representative results. If broker-dealers
incorporate transaction fees and rebates into their order routing
decisions, a two-year duration for the Pilot, with an automatic sunset
at the end of the first year, unless the Commission publishes a notice
determining that the Pilot shall continue for up to a second year,
would likely make it economically worthwhile for broker-dealers to
change their routing behavior during the Pilot by making it costly to
avoid the Pilot.\699\ Specifically, as discussed below, the Commission
recognizes that broker-dealers will incur costs to incorporate new fee
schedules that are consistent with the Pilot's requirements into their
order routing decisions.\700\ Broker-dealers could ignore the Pilot to
avoid these costs. If enough broker-dealers ignore the Pilot, the Pilot
might not produce results that provide the Commission a sense of the
likely impact of permanent changes to fee caps or rebates. However, to
the extent that broker-dealers incorporate transaction-based fees and
rebates into their order routing decisions, ignoring the Pilot will
also impose costs on broker-dealers, and these costs increase with the
duration of the Pilot. The Commission believes that the Pilot duration,
even with a one-year sunset, is long enough to produce representative
results because, as discussed below in Section IV.C.2.b.ii, broker-
dealers that incorporate transaction-based fees and rebates into their
routing decisions will find it economically worthwhile to adapt their
behavior in response to the Pilot. Further, the provision to suspend
the automatic sunset facilitates representative results because it
provides the Commission with flexibility as the data from the Pilot
develops. For example, the Commission could suspend the sunset if, for
example, it believed that additional time would help ensure that market
developments are fully reflected in the data with sufficient
statistical power for analysis, recognizing that such market
developments are uncertain. Therefore, the sunset provides flexibility
to the Commission to observe developments during the Pilot to determine
whether to allow the sunset to occur.
---------------------------------------------------------------------------

    \699\ See, e.g., Joint Asset Managers Letter, at 2. Other
commenters agreed that the Pilot duration will be sufficient but for
other reasons. See, e.g., Fidelity Letter at 9 and CFA Letter at 6.
    \700\ See, e.g., Citi Letter, at 5 and Larry Harris Letter, at
11. Also, see infra Section IV.C.2.b.ii for a discussion of the
costs broker-dealers could incur during the Pilot.
---------------------------------------------------------------------------

    Some commenters disagreed that one year will be sufficient to
achieve a representative sample.\701\ One commenter said that ``robust
data . . . should take two years'' and that ``technological changes . .
. to routing and algorithmic logic for some firms are a hurdle that
could require significant time to implement.'' \702\ Another commenter
noted the ``complexities of the pilot and the opportunities for
significant market evolutions.'' \703\ The Commission notes that it
will consider these and other concerns, as noted above, in deciding
whether or not to suspend the automatic sunset.
---------------------------------------------------------------------------

    \701\ See, e.g., Babelfish Letter at 3 and Healthy Markets
Letter at 19.
    \702\ See Babelfish Letter at 3.
    \703\ See Healthy Markets Letter I at 19.
---------------------------------------------------------------------------

    The Commission believes that the Pilot will produce representative
results despite the Pilot's treatment of stocks cross-listed on
Canadian exchanges during the Pilot and the exclusion of stocks with
average daily volume of less than 30,000 shares. A supplemental staff
analysis found that the exclusion of the interlisted Canadian stocks
from the selection of securities for test group inclusion would not
materially impact the representativeness of the remaining sample.\704\
Second, the exclusion of securities with average trading volume of less
than 30,000 shares per day should not materially affect the
representativeness of the results because the trading in these stocks
generates less than $100 per day in fees or rebates. Additionally, low
trading volume stocks tend to have wider spreads rendering a rebate of
$.0030 a significantly smaller incentive relative to the size of the
spread than it would be for higher volume tighter spread securities.
Because of these two factors, the Commission believes fees and rebates
are economically much less meaningful inducements to provide liquidity
for these stocks. Because of the diminished economic significance of
rebates in

these extremely low volume stocks, the Commission believes that there
is a lower risk of applying a suboptimal transaction-based fee
regulatory regime in these stocks. In other words, because rebates are
economically less meaningful for these securities the benefits of the
Pilot in informing policy decisions regarding transaction-based fees in
these securities are likely low. In addition, the supplemental staff
analysis found that excluding these securities increased the potential
statistical power of the Pilot.
---------------------------------------------------------------------------

    \704\ Specifically, the supplemental analysis compared the
distributional characteristics of all US listed stocks (including
Canadian interlisted stocks) to the distributional characteristics
of the subset of US listed stocks that excludes Canadian interlisted
stocks to determine whether distributional characteristics of the
subset differs statistically significantly from the distributional
characteristics of all US listed stocks. The analysis finds that the
distribution of the subset that excludes Canadian interlisted
securities is statistically similar to the distribution of all US
listed stocks.
---------------------------------------------------------------------------

    Some commenters suggested that the exclusion of ATSs from the data
gathering hinders the representativeness of the data obtained from the
Pilot.\705\ The Commission understands that ATSs often negotiate
bespoke agreements with individual subscribers for a bundle of services
for which rebates may or may not play a significant role. Even if the
Commission obtained detailed information on all of these agreements, it
may not be possible to identify the fees or rebates they pay for order
flow from the fees for the other bundled services the ATS offers the
subscriber in a manner sufficient for inclusion in the Exchange
Transaction Fee Data. Also, as discussed in section IV.D.2.a it is
uncertain whether the Pilot will lead to exchanges to be in an improved
or diminished competitive position with ATSs. Further, without
including ATSs in the Pilot, ample public data exists to assess the
market share of ATSs relative to exchange market share to observe and
measure off-exchange order flow changes.
---------------------------------------------------------------------------

    \705\ See, e.g., Nasdaq Letter I, at 2, 5 and RBC Letter I, at
4.
---------------------------------------------------------------------------

(2) Expansion of Readily Available Data
    The Commission also expects the Pilot to provide data that would
otherwise require lengthy and labor-intensive collection. Having a
representative source of data is critical for the production of
research and analyses about the impact of transaction-based fees on
potential distortions. If more data becomes available, that data will
assist the Commission in analyzing potential conflicts of interest.
    The Commission believes that the data produced by the Pilot will
improve upon existing data,\706\ as is discussed in more detail below.
The ready availability of the Exchange Transaction Fee Summaries will
facilitate the study of distortions and the equilibrium level of fees
and rebates by reducing the cumbersome nature of collecting fee data.
Further, the Pilot will make information on order routing decisions
available to the Commission on a more granular level than current
readily available data and will improve the feasibility of Commission
staff analysis of order routing data during the Pilot.\707\
---------------------------------------------------------------------------

    \706\ See Section IV.C.1.a. For commenter statements supporting
the usefulness of the data to be obtained from the Pilot See, e.g.,
Clark-Joseph Letter, at 1, AJO Letter, at 1, CII Letter, at 3,
NYSTRS Letter, at 1, Barnard Letter, at 1; ICI Letter I, at 1-2; MFS
Letter, at 1; Nuveen Letter, at 2; Better Markets Letter, at 2; RBC
Letter I, at 2; Invesco Letter, at 2; CFA Letter, at 1; State Street
Letter, at 2; Wellington Letter, at 1; Joint Pension Plan Letter, at
2; Oppenheimer Letter, at 2; Angel Letter I, at 1. Some commenters
suggest that the data will not be useful because it excludes data
from ATSs and doesn't account for other forms of remuneration that
broker dealers receive which may also impact order routing
decisions. See NYSE Letter 1 at 1,8-10; ProAssurance Letter, at 2;
Cboe Letter I, at 15; Nasdaq Letter I, at 2.
    \707\ The aggregation and availability of the data gathered by
the Pilot is one of the primary benefits of the Pilot and provides
much of the value of the data collected. See, e.g., NYSE Letter II,
at 13; Cboe Letter I, at 3.
---------------------------------------------------------------------------

    The Pilot will enable Commission staff to gain improved access to
order routing data and will provide access to fee data in a simplified
and standardized form, which will improve the quality of the analyses
produced as a result of the Pilot. Although certain order routing data
and exchange fee schedules are publicly available through a combination
of Rule 606 disclosures and exchange websites, respectively, the Pilot
will resolve a number of limitations associated with using currently
available data to study the effect of transaction-based fees on
potential conflicts of interest and their impact on market quality and
execution quality.
    The order routing data that Commission staff will obtain as a
result of the Pilot will provide superior information to that readily
available today. Data will be available for a representative sample of
NMS stocks, across all broker-dealers, and exchanges, at the daily
frequency, which will provide sufficient data for analyses, while
providing more statistical power than the Rule 606(a) public reports
can provide. Relative to the data that some studies have acquired from
broker-dealers and exchanges,\708\ the order routing data will also
allow Commission staff to observe a time series of order routing data
across broker-dealers and exchanges. Further, more granular order
routing data (e.g., daily order routing statistics that separate
principal and agency trading as well as auction, post only, and other
orders) than that available publicly will facilitate more targeted
analysis. Together, these characteristics of the data will facilitate
Commission staff research on issues such as potential conflicts of
interest, which will improve the quality of the information available
to the Commission for policy decisions.
---------------------------------------------------------------------------

    \708\ See, e.g., Battalio Equity Market Study, supra note 530.
---------------------------------------------------------------------------

    The following discussion illustrates how the data obtained from the
Pilot could be used to study the Commission's objectives.\709\ The key
components in the order routing data that facilitate studies of the
impact of transaction-based fees and rebates on order routing and
execution quality are daily volume information at the exchange, stock,
and broker-dealer level, the separation of liquidity taking and
liquidity making orders, the Order Capacity, the Order Designation, the
time to execution for liquidity-providing orders, and the ability to
estimate fill rates. The routing volume allows Commission researchers
to measure how much volume each broker-dealer sends to each exchange
each day in individual securities, which can be combined with the Pilot
Securities Exchange List and the Exchange Transaction Fee Summary to
observe patterns in routing and correlate those patterns with fees and
Test or Control Group membership. The exchange level is required to
match the order routing data with the fee data; the broker level is
required to allow for different routing strategies across broker-
dealers; and the daily level in the data facilitates statistical power.
The separation of liquidity taking and liquidity making orders allows
researchers to match the order routing volume to the potential fee or
rebates in the Exchange Transaction Fee Summary. Order Capacity allows
Commission researchers to compare order routing and execution quality
statistics for Agency Orders to Principal Orders, which are less
subject to conflicts of interest concerns than Agency Orders and, thus,
provides an added means of obtaining causal identification. Order
Designation allows researchers to exclude auction orders and to
separately analyze Post Only orders because these orders types are
subject to different fee structures (auction orders do not get rebates)
or exist for the purpose of capturing rebates (Post Only). Excluding or
separately analyzing these orders types provides for cleaner tests that
are better able to measure the impacts consistent with the objectives
of the Pilot. Finally, the time to execution and ability to estimate
fill rates (using orders received, executed, canceled or rerouted)

provides Commission researchers with execution quality information not
readily available for liquidity providing or liquidity taking
orders.\710\
---------------------------------------------------------------------------

    \709\ See NYSE Letter II, at 13 suggesting that the proposing
release did not provide an illustration for how the data could be
used to study the Commission's objectives.
    \710\ The Commission recognizes that many trade-based execution
quality statistics are readily estimated from publicly available
data. See Section IV.E.5.g infra for a discussion of an alternative
to require order-based execution quality statistics during the
Pilot.
---------------------------------------------------------------------------

    An additional requirement of the Pilot is that the exchanges will
be required to provide a standardized dataset of fees, the Exchange
Transaction Fee Summary, to the public. In particular, this information
will allow researchers in and outside the Commission to create proxies
for which exchanges are likely to be more or less expensive and which
offer the highest rebates. For instance, within Test Group 1, the
maximum allowable access fee is $0.0010; however, each exchange may
have different base and top-tier fees. Thus, only knowing that a
security is in Test Group 1 will be incomplete information about the
impact of transaction-based fees and rebates. Moreover, the Exchange
Transaction Fee Summary will provide researchers in and outside the
Commission with historical (realized) average and median per share fees
and rebates to enable an ex post analysis of how actual fees affected
past order routing decisions, which is not available from any data
source today.
    Exchanges will construct Exchange Transaction Fee Summaries
according to an XML schema to be published on the Commission's website,
and exchanges will update this information monthly.\711\ These data
will be standardized and consistently formatted, which will ease the
use of these data for researchers in and outside the Commission, as
each exchange will have to report the Base, Top Tier, average and
median fees, as detailed above in Section III.E. Each month, exchanges
will be required to report realized average and median per share fees,
as well as any ``spot'' revisions to fees associated with Form 19b-4
fee filings to the Commission. These fee data will be publicly posted
on each exchange's website.\712\
---------------------------------------------------------------------------

    \711\ The standardized fee data, as would be required by the
proposed Pilot, is discussed supra Section III.E.2.
    \712\ Rule 610(T) requires each exchange to publicly post on its
website downloadable files containing the Exchange Transaction Fee
Summary and update them on a monthly basis. Similarly, each exchange
will be required to publicly post on its website downloadable files
containing daily aggregated and anonymized order routing statistics,
updated monthly. Each exchange will also be required to provide
daily on its website downloadable files containing the List of Pilot
Securities and the Pilot Securities Change List.
---------------------------------------------------------------------------

    The Exchange Transaction Fee Summary released during the Pilot
will: (1) Ease aggregation across exchanges, which affords researchers
in and outside the Commission an opportunity to obtain representative
results; (2) replicate across studies, which will provide validation of
findings; and (3) reduce burdens associated with fee data collection,
which could encourage more research on the impact of fees and rebates
on routing behavior. Thus, the Commission believes that a standardized
reporting of summary data on fees by the exchanges will facilitate
analysis of the effect of transaction-based fees.
    The rule will require that the Exchange Transaction Fee Summary be
structured using an XML schema to be published on the Commission's
website.\713\ Data that are structured in a standard format can result
in lower costs to analysts and higher quality data. An additional key
benefit of structured data is increased usability. If, for instance,
the Exchange Transaction Fee Summary were not standardized across the
exchanges, researchers would have to manually rekey the data, a time-
consuming process which has the potential to introduce a variety of
errors, such as inadvertently keying in the wrong data or interpreting
the filings inconsistently, thereby reducing comparability. With the
data in the reports structured in XML, researchers in and outside the
Commission could immediately download the information directly into
databases and use various software packages for viewing, manipulation,
aggregation, comparison, and analysis. This will enhance their ability
to conduct large-scale analysis and immediate comparison of the fee
structures of exchanges. The Commission believes that requiring these
reports to be made available in an XML format will provide flexibility
to researchers in and outside the Commission and will facilitate
statistical and comparative analyses across exchanges, test groups, and
date ranges.
---------------------------------------------------------------------------

    \713\ As an open standard, XML is widely available to the public
at no cost. As an open standard, XML is maintained by an industry
consensus-based organization, rather than the Commission, and
undergoes constant review. As updates to XML or industry practice
develop, the Commission's XML schema may also have to be updated to
reflect the updates in technology. In those cases, the supported
version of the XML schema will be published on the Commission's
website and the outdated version of the schema will be removed in
order to maintain data quality and consistency with the XML
standard. The Commission's XML schema will also incorporate certain
validations to help ensure data quality.
---------------------------------------------------------------------------

(3) Causality
    In addition to providing representative results, the Commission
expects the Pilot to achieve the benefits identified above because it
will, among other things, provide insight into the degree to which
exchange transaction-based fees and rebates cause economic distortions
that either harm or benefit investors. Such causal information is
especially useful when considering policy choices aimed at reducing any
possible harmful distortions. As detailed in the baseline, exogenous
shocks are a means by which researchers may analyze a causal
relationship between changes to transaction-based fees and rebates and
changes to order routing decisions of broker-dealers.\714\ This Pilot
facilitates the analysis of causality through an exogenous shock that
simultaneously creates several distinct fee environments, each of which
restricts transaction-based fees or rebates differently, enabling
synchronized comparisons to the current environment.
---------------------------------------------------------------------------

    \714\ As discussed in the baseline, analysis of causality can be
accomplished through either exogenous shocks or econometric methods,
such as instrumental variable analysis.
---------------------------------------------------------------------------

    The Commission believes that the Pilot is able to facilitate the
examination of causality because the Pilot will produce a single
exogenous shock that differentially impacts either fees or rebates on
both maker-taker and taker-maker exchanges. Exogenous shocks, such as
those in the Pilot provide researchers with data to analyze the
direction of causality.\715\ For example, a researcher seeking to study
the impact of the rebates on transaction costs could estimate a
difference-in-differences test that compares transaction costs during
the Pilot to the transaction costs before the Pilot and then compare
the changes in Test Group securities to the changes in Control Group
securities. It also will allow investors who receive 606(b)(3) data
from their broker-dealers to directly test with their own 606(b)(3)
data whether, in the absence of rebates in the most actively traded
stocks, they are better able to compete for queue priority and thereby
capture the quoted spread when posting liquidity. More generally, the
Pilot will allow researchers, including Commission staff and others, to
run difference-in-difference tests on many measures of execution
quality and market quality based on publicly available data to examine
the causal impact of transaction-based fees and rebates on execution
and market quality.
---------------------------------------------------------------------------

    \715\ Other econometric techniques, such as instrumental
variables methodology, are used when an exogenous shock (or other
controlled experiment) cannot be established.
---------------------------------------------------------------------------

    As discussed above, the Pilot will produce a single exogenous shock
that

differentially affects multiple Test Groups at the same time. The
simultaneity of the exogenous shock across Test Groups facilitates
examinations of causality, particularly in the presence of any
confounding effects. For instance, if some market-wide event were to
result in deviations in order routing behavior during the Pilot, the
event would likely affect stocks in each Test Group as well as the
Control Group. The simultaneity allows researchers in and outside the
Commission to control for the impact of the market-wide event, because
the impact would likely affect the Test Groups and the Control Group
similarly. For example, in the difference-in-differences test of
transaction costs mentioned above, any market-wide effect would result
in changes to fill rates in both the Control Group and Test Group 2.
Therefore, the comparison of the changes in Test Group 2 to the changes
in the Control Group subtracts the market-wide effect from the total
effect, thus isolating the effect of the Pilot.
    In addition, to facilitate causal analysis of data during the Pilot
Period, the Commission believes that it is important to collect
sufficient data during a pre-Pilot Period.\716\ The pre-Pilot data can
then be compared with the data that will be produced during the Pilot
Period, which will permit analysis of any changes to order routing
behavior, execution quality, and market quality between the two for the
Pilot Securities in each of the Test Groups. To make this comparison
informative, the length of the pre-Pilot Period needs to be long enough
to obtain sufficient statistical power to permit analysis of the stocks
and ETP Pilot Securities. In turn, sufficient statistical power in
tests that compare the pre-Pilot data to the Pilot data would allow all
researchers to more easily use the information obtained from the Pilot
to inform future regulatory consideration of exchange transaction fees
and rebates and their impact on the markets. The Commission believes
that at least six months of pre-Pilot data may be required to obtain
the necessary statistical power to permit analysis of the Pilot
Securities during the Pilot, particularly ETPs.\717\
---------------------------------------------------------------------------

    \716\ See Healthy Markets Letter I, at 19.
    \717\ See supra. Section II.D.3.
---------------------------------------------------------------------------

    The Commission further believes that the combination of the
representative sample, data from the Pilot, and the exogenous shock
will facilitate analysis by Commission staff (or institutions who
receive 606(b)(3) reports from their broker-dealers) of the degree to
which transaction-based fee- and rebate-motivated order routing harms
order execution quality. In particular, with the exogenous shock, the
Order Routing Data, the Exchange Transaction Fee Summaries, and
publicly available data, researchers at the Commission can identify
both the degree to which transaction fees and rebates impact order
routing and, the impact of transaction fee- and rebate-motivated order
routing impacts execution quality.
    Several commenters seemed to state that the Pilot would produce
flawed causal results because the Pilot does not include all forms of
remuneration.\718\ While the Commission acknowledges that other forms
of remuneration may impact routing decisions, the results will still be
informative. Even if some order flow migrates between exchanges and
off-exchange venues, Commission staff should still be able to identify
the impact of exchange fees and rebates on exchange routing.
---------------------------------------------------------------------------

    \718\ See, e.g., Cboe 15-16; NYSE at 9-10; Nasdaq I at 7; RBC
Letter I, at 4; ProAssurance at 2.
---------------------------------------------------------------------------

    The Pilot Securities Exchange List and the Pilot Securities Change
List further enhance the ability for researchers both inside and
outside of the Commission to analyze the effects of transaction-based
fees on order routing decisions. By requiring daily updates to the
Pilot Securities Change List, the Pilot will provide broker-dealers
with the information they need to track the exact securities in each
Test Group in real-time and when securities exit the Pilot. This
information will be crucial for broker-dealers that choose to adjust
their routing behavior during the Pilot. If broker-dealers are unable
to track which securities are in which Test Groups, the Pilot results
could provide misleading causal information.
iii. Potential Limitations on the Benefits
    The Commission recognizes that pilots are unpredictable and as such
considered whether possible limitations associated with pilots
generally, as well as certain issues presented by the design of this
Pilot in particular, would limit the benefits of the Pilot. This
section discusses, in greater detail below, issues associated with
pilots in general and the potential concerns with resultant research
and analyses.
    Pilots may face limitations related to the unpredictable nature of
market conditions and confounding events. Even if a pilot lasted
several years, not all of the market conditions of interest could be
experienced. Depending on the requirements of pilots, such limitations
might reduce the usefulness of the information obtained.\719\ The
Commission believes, however, that the value of the information
obtained from the Pilot is not dependent upon having variation in
market conditions over time, and that the duration of the Pilot will
provide sufficient information to inform policy decisions.
---------------------------------------------------------------------------

    \719\ For instance, a pilot could be designed where the
information obtained from the Pilot would only be valuable if
certain market conditions, such as high market volatility or a
recessionary period occurred. If, however, markets experience low
volatility or are in an expansionary period, the Pilot may either
not be sufficiently long enough to capture the events that it
requires to be useful or would have to be extended to ensure that
those market conditions could occur.
---------------------------------------------------------------------------

    In addition, pilots also face the limitation that market
participants, knowing that a pilot is underway, may not act as they
would in a permanent regime.\720\ In the context of this pilot, broker-
dealers could choose to retain their current order-routing decisions
for the duration of the Pilot, which could be costly to such broker-
dealers.\721\ Broker-dealers, when deciding whether to adjust any order
routing behavior that currently depends on fees and rebates, would
likely trade off the costs of retaining strategies that are no longer
profitable because of the restrictions imposed by the Pilot against the
costs of adjusting the algorithms for their smart order routing
systems. Alternatively, broker-dealers could substantially change their
business model in order to

avoid the Pilot.\722\ In addition, the Commission recognizes that the
anticipated analysis of order routing data from the Pilot could cause
broker-dealers to improve execution quality. This could reflect the
``Hawthorne effect,'' which refers to the idea that people will often
improve their behavior if they believe that they are observed. These
outcomes could lead to results that would not represent the effects of
a permanent rule change. If that were to occur, a few commenters
suggested that this could lead the potential benefits of the Pilot to
not justify the costs or risks that the pilot imposes.\723\
---------------------------------------------------------------------------

    \720\ For example, one study provided evidence suggesting that
trading behavior may not have completely adjusted to the Regulation
SHO pilot. See Ekkehart Boehmer, Charles Jones, & Xiaoyun Zhang,
Unshackling Short Sellers: The Repeal of the Uptick Rule, Colum. U.
(2008), https://www0.gsb.columbia.edu/mygsb/faculty/research/pubfiles/3231/UptickRepealDec11.pdf. Despite this effect, the study
found evidence consistent with the evidence gathered from the
Regulation SHO pilot. See Securities Exchange Act Release No. 50103
(July 28, 2004), 69 FR 48008 (Aug. 6, 2004) (hereinafter
``Regulation SHO'').
    \721\ If broker-dealers have smart order routing systems that
use algorithms that maximize rebate capture, as suggested in the
Battalio Equity Market Study, supra note 530, then for at least some
subset of securities, broker-dealers would not be able to pursue
rebates from those exchanges, so it would be suboptimal for broker-
dealers to not reconsider their order routing choices. If broker-
dealers, however, already have order routing decisions that are
optimal from a customer's perspective (e.g., based on execution
quality) and are not driven by potential conflicts of interest
(e.g., maximizing rebates), then for at least some broker-dealers,
their order routing decision process may be unchanged. It is also
possible that for broker-dealers with algorithms that dynamically
route based upon real-time market metrics, including liquidity
metrics, expected fill rates, and current queue length, routing
logic may not change, however, routing choices may dynamically
adjust based upon changes in those variables that result from
altered fee schedules that broker-dealers may implement in
conjunction with the Pilot.
    \722\ It could be costly for broker-dealers to completely alter
their business models because they may not find it worthwhile to do
so for a temporary pilot.
    \723\ See, e.g., FIA Letter, at 3; Citadel Letter, at 4.
---------------------------------------------------------------------------

    The Commission believes that the Pilot is designed to obtain
empirical information about how fees and rebates affect order routing
decisions because the size and length of the Pilot render it unlikely
that broker-dealers that currently focus their routing on rebates would
maintain existing order routing decisions or alter their business
models to avoid the Pilot as suggested by some commenters. In
particular, the Commission believes that the Pilot duration is likely
to make it economically worthwhile for broker-dealers to adjust their
order routing behavior. The costs of ``waiting out'' the Pilot increase
with the duration of the pilot, whereas the costs of adjusting the
algorithms of the smart order routers, discussed below in Section
IV.C.2.b.ii do not.
    In addition, the potential compromise of the data due to the
Hawthorne effect is limited by at least two factors. First, this is not
the Commission's first pilot study. Market participants are relatively
accustomed to the Commission collecting data for analysis. Second, the
analysis of pre-Pilot data will allow for a baseline observation of
unaffected broker-dealer order routing activity. If broker-dealers do
not act on conflicts of interest during the baseline period, the
Hawthorne effect is irrelevant unless it causes that good baseline
behavior.\724\ If, on the other hand, broker-dealers do act on
conflicts of interest during the baseline and the Hawthorne effect
results in good behavior during the Pilot, the Pilot should facilitate
the measurement of the conflicts. As a result, the Commission believes
that the Pilot will produce useful data despite the possible influence
of the Hawthorne effect.
---------------------------------------------------------------------------

    \724\ The Commission does not believe that the Hawthorne effect
will cause ``good'' behavior in the baseline because broker-dealers
would need to implement system changes similar to those described in
Section IV.B.2.c prior to the pre-Pilot.
---------------------------------------------------------------------------

    The Commission recognizes that not all objectives of the Pilot
would be straightforward to study. For example, the changes in fees or
rebates imposed by the Pilot may change transaction costs in a way that
results in changes to order routing decisions by broker-dealers, even
absent potential conflicts of interest. Studying how order routing
changes during the Pilot, without jointly studying why it changes,
would not be sufficient to understand any possible conflicts of
interest. Researchers can carefully study the data to distinguish the
proportion of changes in order routing decisions resulting from
execution quality considerations from those resulting from potential
conflicts of interest. Nonetheless, this complication could reduce the
number and/or quality of studies of the Pilot.
    Another limitation on the benefits from the Pilot is that the Pilot
will not require that the order routing data be released to the public.
As a result, fewer independent analyses of the Pilot's order routing
datasets are likely to be performed, compared to the analysis that
might have been obtained if the data were publicly released. However,
the Commission believes that sufficient analysis will be produced to
yield credible and reliable results without public dissemination of the
order routing data. In addition, institutions, including broker
dealers, asset managers, and transaction cost analysis (TCA) providers,
may produce their own analyses using proprietary data and information.
To the extent that interested parties prepare their own analyses, they
may submit them to<EMAIL_ADDRESS>with the words
``Transaction Fee Pilot Analysis'' in the subject line, and the
Commission will post those reports on its public website.\725\
---------------------------------------------------------------------------

    \725\ As noted above, the Commission encourages market
participants to disclose what sources of data they used for their
analyses and describe the methodology they used, and to make those
reports publicly and freely available.
---------------------------------------------------------------------------

    Additionally, only NMS stocks with prices of at least $2 prior to
the start of the Pilot are eligible for inclusion in the Pilot. One
commenter suggested that NMS stocks with prices between $1 and $2 also
be included in the Pilot, as the commenter believed that the impact of
fees and rebates are likely to be greatest for these securities.\726\
The Commission agrees with the commenter who stated that the initial
Test and Control Groups in the Pilot would be more representative if
they contained securities with prices below $2. However, excluding
securities with prices below $2 helps to keep the sample of stocks more
stable across the Pilot. This occurs because if a stock's price falls
below $1 it is subject to different regulations, such as a different
tick size, and thus would be excluded from the Pilot. By excluding
stocks below $2 the Pilot mitigates the risk that the
representativeness of the sample may diminish over time as Pilot stocks
are removed due to their stock prices falling below $1. The Commission
believes that the data obtained from the Pilot will be sufficient to
obtain data on the effects to changes in fees and rebates on small,
low-priced securities (those with prices close to $2, or any Pilot
security that drops below $2 per share, but exceeds $1 per share, after
the start of the Pilot).
---------------------------------------------------------------------------

    \726\ See James Angel Letter I, at 2.
---------------------------------------------------------------------------

b. Other Benefits of the Transaction Fee Pilot
    Other benefits may emerge that could affect markets and market
participants for the duration of the Pilot, such as potentially reduced
conflicts of interest for some Test Groups, lower all-in costs of
trading, or improved market quality. The Commission believes that many
of the benefits discussed below will be temporary in nature and affect
markets and market participants only for the duration of the Pilot.
Because the Commission lacks information on the extent to which the
impact of exchange fee-and-rebate pricing models affect investors,\727\
the Commission is unable to quantify many of the temporary benefits of
the Pilot discussed below.
---------------------------------------------------------------------------

    \727\ See supra Section IV.A.1 (Market Failure at the Broker
Dealer Level) and Section IV.A.2 (Market Failure at the Exchange
Level).
---------------------------------------------------------------------------

    Some commenters stated their belief that the Pilot would not help
investors and issuers.\728\ As discussed in Sections IV.C.2.b and
IV.D.1 the Commission acknowledges that the Pilot could harm execution
quality and/or market quality, but the impacts of the Pilot are
uncertain. The Pilot could also improve execution quality and/or market
quality for the reasons explained in those same sections. For example,
as discussed in detail below,\729\ the Commission is uncertain about
whether, or among which securities, the Pilot will result in increases
or decreases in quoted spreads and investor transaction costs. A
decrease in quoted spreads and/or investor transaction costs during the
Pilot in some or all stocks in test groups would benefit investors.
Likewise, the Commission is uncertain about how the Pilot will affect
price efficiency--the

Pilot could plausibly improve or degrade price efficiency in certain
test group stocks.\730\ Any improvements would benefit issuers and
investors.
---------------------------------------------------------------------------

    \728\ See, e.g., Nasdaq I, at 1.
    \729\ See infra Section IV.C.2.b.iv
    \730\ See infra Section IV.D.1.
---------------------------------------------------------------------------

    The Commission believes that another temporary benefit of the rule
will be that the Pilot could prevent some traders from indirectly
quoting in sub-pennies.\731\ Rebates have the practical effect of
reducing the minimum tick size by the size of the rebate, and in effect
allow trading centers to offer quotations superior to the existing
quote. Several studies suggested that the use of exchange fees and
rebates to effectively undercut quotations by sub-pennies is
particularly severe in taker-maker markets.\732\ The Pilot would, in
some test groups, reduce or eliminate rebates, which could stem this
indirect reduction of tick sizes, and could provide the Commission and
the public with information currently unavailable about this issue.
---------------------------------------------------------------------------

    \731\ 17 CFR 242.612 (Rule 612 of Regulation NMS) prohibits
traders from submitting sub-penny quotations on securities trading
at prices over $1.00. The purpose of the sub-penny quotation
prohibition was two-fold: (1) To prevent high frequency traders from
front-running standing non-marketable limit orders and (2) to reduce
the complexity of trading systems. See NMS Adopting Release, supra
note 10, at 37550-57.
    \732\ See, e.g., Angel, Harris, & Spatt, supra note 530; Harris,
supra note 530. One study noted that as a result of the Tick Size
Pilot test group with the trade-at provision, taker-maker markets
have seen a significant increase in market share, in part due to
this quotation issue. See Carole Comerton-Forde, Vincent Gregoire, &
Zhuo Zhong, Inverted Fee Venues and Market Quality 1 (August 10,
2018) (unpublished manuscript) (forthcoming J. Fin. Econ.) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2939012&download=yes.
---------------------------------------------------------------------------

2. Costs of the Pilot
    This section describes the compliance costs associated with the
Pilot, followed by the additional costs, some of which are temporary,
that could affect issuers, investors, broker-dealers, exchanges, and
other market participants resulting from the Pilot.
a. Exchange Compliance Costs of the Pilot
    The Pilot will impose costs on exchanges to comply with the Pilot's
requirements to collect, calculate, and publicly post data certain
required by the Pilot on their websites, transmit the order routing
datasets to the Commission, as well as to implement fee changes, if
required in order to comply with the Pilot's restrictions. Table 4
provides a summary of the costs discussed in this section.

                                                   Table 4--Summary of Compliance Costs for Exchanges
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               Pilot         Exchange      Order routing    Fee filings                Total
---------------------------------------------------------   securities      transaction     data \735\         \736\     -------------------------------
                                                           exchange list    fee summary  --------------------------------
                                                               \733\           \734\
                      Exchange type                      --------------------------------       All             All           Listing       Non-listing
                                                              Listing           All
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      Per exchange
--------------------------------------------------------------------------------------------------------------------------------------------------------
Implementation..........................................          15,400          26,100          24,000          96,800         162,000         147,000
Periodic:
    --2-yr Pilot........................................          83,500          55,000         103,800         148,400         391,000         307,000
    --1-yr Pilot........................................          50,100          36,600          69,200          74,200         230,000         180,000
Total (implementation + periodic):
    --2-yr Pilot........................................          98,900          81,000         127,800         245,200         553,000         454,000
    --1-yr Pilot........................................          65,500          62,700          93,200         171,000         392,000         327,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Total across exchanges
--------------------------------------------------------------------------------------------------------------------------------------------------------
Implementation..........................................          92,000         339,000         311,000       1,258,000       2,001,000
Periodic:
    --2-yr Pilot........................................         501,000         714,000       1,350,000       1,929,000       4,494,000
    --1-yr Pilot........................................         301,000         476,000         900,000         964,000       2,641,000
Total (implementation + periodic):
    --2-yr Pilot........................................         593,000       1,054,000       1,661,000       3,187,000       6,495,000
    --1-yr Pilot........................................         393,000         815,000       1,211,000       2,223,000       4,642,000
--------------------------------------------------------------------------------------------------------------------------------------------------------

i. Updating the Pilot Securities Exchange List and Pilot Securities
Change List
---------------------------------------------------------------------------

    \733\ See infra Section IV.C.2.a i.
    \734\ See infra Section IV.C.2.a ii.
    \735\ See infra Section IV.C.2.a iii.
    \736\ See infra Section IV.C.2.a iv.
---------------------------------------------------------------------------

    During the Pilot, the primary listing exchanges will maintain and
make public prior to the start of each trading day the Pilot Securities
Exchange List of the securities included in each test or control group
on its website. Further, each primary listing exchange will publicly
post on its website the updated Pilot Securities Change List prior to
the start of each trading day, which will list, separately, changes to
applicable Pilot Securities. Additional details of what will be
included in each list are provided in Section II.E.1.
    Upon the initial publication of the List of Pilot Securities by
notice by the Commission, the primary listing exchanges \737\ will need
to determine which of those securities are listed on their market, and
then compile a list of those securities and publicly post on their
websites that list as a downloadable file in pipe-delimited ASCII
format. The Commission initially estimated that the costs associated
with the initial compilation of the Pilot Securities Exchange List
would cost $2,060 per exchange based on an estimated burden of 8 hours.
However, one commenter stated that it ``anticipates it could take as
many as 44 hours'' to compile the initial Pilot Securities Exchange
List.\738\ The commenter stated that its estimates of the costs
associated with the Pilot are based on its ``prior experience
implementing the Tick Size Pilot.'' \739\ In light of this comment, the
Commission is increasing its estimate.\740\ Accordingly, the Commission
estimates that each primary listing exchange would incur, on average, a
one-time

burden of approximately 44 burden hours per primary listing exchange to
compile and publicly post their initial Pilot Securities Exchange List.
Consequently, the Commission now estimates a cost of approximately
$11,700 per listing exchange to compile the initial list of
securities.\741\ The Commission understands that each primary listing
exchange has existing systems to monitor and maintain the Pilot
Securities Exchange List and the Pilot Securities Change List as a
result of certain corporate actions.\742\ While these systems can be
used to collect the data required to be made public for the Pilot
Securities Exchange List and the Pilot Securities Change List, these
systems would have to be adapted to conform to the requirements of the
Pilot. The Commission estimates that it would cost each primary listing
exchange approximately $3,720 to develop appropriate systems for the
Pilot, or about $22,300 in aggregate across the six U.S. primary
listing exchanges.\743\ Once these systems are established, the
Commission estimates that it would cost each listing exchange
approximately $83,500 for the entire duration of the Pilot, or
approximately $501,000 across the six primarily listing exchanges,\744\
to publicly post on each exchange's website the Pilot Securities
Exchange List and Pilot Securities Change List prior to the start of
each trading day in pipe-delimited ASCII format. If the Commission
determined that the Pilot shall automatically sunset at the end of the
first year, the Commission estimates that the costs to each exchange
would be $50,100 for a one-year Pilot duration and the six-month post-
Pilot Period, or approximately $301,000 across the six primarily
listing exchanges.\745\
---------------------------------------------------------------------------

    \737\ The primary listing exchanges are NYSE, Nasdaq, NYSE
American, NYSE ARCA, BATS and IEX.
    \738\ See NYSE Letter I, at 15.
    \739\ See id.
    \740\ The Commission notes that the Tick Size Pilot required the
exchanges and FINRA to also select the Pilot securities whereas the
Transaction Fee Pilot does not. Therefore, the Transaction Fee Pilot
could result in lower costs than the Tick Size Pilot. Nonetheless,
the Commission believes it is reasonable to rely on this commenter's
estimate because this commenter has expertise on these costs likely
to result in incorporating relatively precise information into the
cost estimates.
    \741\ This estimate is based on the following: [(Compliance
Manager (22 hours) x $298) + (Programmer Analyst (22 hours) x $232)]
= $11,660 [ap]11,700 per exchange, or $11,660 x 6 primary listing
exchanges = $69,960 [ap] 70,000 in aggregate. The burden hours are
obtained from supra Section III.D.1. The Commission estimates the
wage rate associated with these burden hours based on salary
information for the securities industry compiled by the Securities
Industry and Financial Markets Association (SIFMA). The estimated
wage figure for attorneys, for example, is based on published rates
for attorneys, modified to account for a 1,800- hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits, and overhead, yielding an effective hourly rate for 2013
of $380 for attorneys. See Securities Industry and Financial Markets
Association [SIFMA], Management & Professional Earnings in the
Securities Industry--2013 (October 7, 2013), available at https://www.sifma.org/resources/research/management-and-professional-earnings-in-the-securities-industry-2013/. These estimates are
adjusted for inflation based on Bureau of Labor Statistics data on
CPI-U between January 2013 (230.280) and January 2017 (242.839).
Therefore, the 2017 inflation-adjusted effective hourly wage rates
for attorneys are estimated at $401 ($380 x 242.839/230.280). The
Commission discusses other costs of compliance with the rule below.
    \742\ The Commission notes that the primary listing exchanges
maintained public web pages containing similar lists with respect to
the recently concluded Tick Size Pilot. The systems to produce lists
for the Tick Size pilot should be adaptable to meet the requirements
of the Transaction Fee Pilot.
    \743\ This estimate is based on the following: [(Attorney (4
hours) x $401) + (Compliance Manager (4 hours) x $298) + (Programmer
Analyst (4 hours) x $232)] = $3,724 per exchange, or $3,724 x 6
exchanges = $22,344 [ap] 22,300 in aggregate. The burden hours are
obtained from supra Section III.D.1.
    \744\ If the Pilot were to automatically sunset at the end of
the first year, the total number of days that the exchanges would
need to provide the Pilot Securities Exchange List and the Pilot
Securities Change Lists would be up to 630 business days (504
business days for the two-year Pilot horizon (252 business days per
year x 2 years), and up to 126 business days for the six-month post-
Pilot Period). The cost estimate for providing these lists for the
entire period is based on the following: [(Compliance Manager (0.25
hour x 630 trading days) x $298) + (Programmer Analyst (0.25 hour x
630 trading days) x $232)] = $83,475 [ap] 83,500, or $83,475 x 6
exchanges = $500,850 [ap] 501,000, in aggregate. The burden hours
are obtained from supra Section III.D.1. One commenter provided an
estimate of 300.5 burden hours for providing these lists, but the
Commission continues to believe its own higher burden estimates are
reasonable. See Section III.D.6, supra.
    \745\ If the Pilot were to automatically sunset at the end of
the first year, the total number of days that the exchanges would
need to provide the Pilot Securities Exchange List and the Pilot
Securities Change Lists would be up to 378 business days (252
business days for the one-year Pilot horizon, and 126 business days
for the six-month post-Pilot Period). The cost estimate for
providing these Lists for the entire period is based on the
following: [(Compliance Manager (0.25 hour x 378 trading days) x
$298) + (Programmer Analyst (0.25 hour x 378 trading days) x $232)]
= $50,085 [ap] $50,100, or $50,085 x 6 exchanges = $300,510 [ap]
$301,000, in aggregate. The burden hours are obtained from supra
Section III.D.1.
---------------------------------------------------------------------------

    In sum, the Commission estimates a total cost for each listing
exchange of approximately $98,900, or $593,000 in aggregate across
exchanges, to comply with the requirement to update and post on its
website at the beginning of each trading day the list of its listed
securities in each of the Test Groups. This includes an estimated
$15,400 in one-time implementation costs and $83,500 in ongoing costs.
This estimate is based on one provided by a commenter who, based on
their experience with the Tick Size Pilot, estimated that it would take
up to 44 hours to compile. \746\ Accordingly, the Commission continues
to believe its burden estimates are reasonable.
---------------------------------------------------------------------------

    \746\ See, e.g., NYSE Letter I, at 15.
---------------------------------------------------------------------------

iii. Producing the Exchange Transaction Fee Summary in XML Format
    In addition to the Pilot Securities Exchange List provided by the
primarily listing exchanges, all U.S. equities exchanges would also
need to publicly post on their websites the Exchange Transaction Fee
Summary, which are downloadable files containing the initial set of
fees at the outset of the Transaction Fee Pilot as well as monthly
updates to include both changes to fees and rebates reported in Form
19b-4 fee filings and realized average and median per share fees and
rebates, as discussed in Section II.E.2. The Exchange Transaction Fee
Summary would need to be updated in response to any changes to its fee
schedule following the beginning of each calendar month from the pre-
Pilot Period through the post-Pilot Period. The exchanges would be
required to provide information on any transaction-based fee and rebate
changes, according to Rule 610T(e), that they make during the Pilot,
including the effective dates of fee revisions. The rule also requires
that each exchange calculate numerous statistics relating to their fees
as discussed in more detail in Section II.E.2.
    A requirement at the outset of the Pilot is that exchanges would
need to report their base and top-tier fees and rebates, which the
Commission estimates would cost each exchange $1,130, or about $14,700,
in aggregate across the 13 U.S. equities exchanges.\747\ The reported
base and top-tier fees and rebates would be mandatory elements of the
Exchange Transaction Fee Summary. Concurrent with the submission of the
Form 19b-4 fee filings to the Commission at the outset of the
Transaction Fee Pilot, the exchanges also would be required to publicly
post on their websites downloadable files containing the initial
Exchange Transaction Fee Summary, using an XML schema to be published
on the Commission's website. The Commission estimates that it will cost
exchanges $530 each to post this summary dataset to their
websites.\748\
---------------------------------------------------------------------------

    \747\ The estimate is based on the following: (Compliance
Manager (2 hours) x $298) + (Senior Business Analyst (2 hours) x
$265) = 1,126 [ap] $1,130, or $1,126 x 13 equities exchanges =
$14,638 [ap] 14,600 in aggregate. The burden hours are obtained from
Section III.D.2, supra.
    \748\ This estimate is based on the following: (Compliance
Manager (1 hours) x $298) + (Programmer Analyst (1 hours) x $232) =
$530 per exchange, or $530 x 13 U.S. equities exchanges = $6,890
[ap] 7,000 in aggregate. The burden hours are obtained from supra
Section III.D.2.
---------------------------------------------------------------------------

    The rule would also require that exchanges compute the monthly
average and median realized per share fees and rebates, as detailed in
Section II.E.2. These data will provide the Commission and the public
with aggregated data on the actual per share levels of fees and rebates
assessed in the prior month, which the Commission believes is critical
for estimating the effects of fees and rebates on order routing
decisions. The Commission believes that the costs

associated with computing these summary data on fees and rebates are
likely to be larger than the costs associated with updating the
Exchange Transaction Fee Summary, discussed in detail below, and would
likely require new systems by the exchanges to track the average and
median fees.
    The Commission estimates that each exchange would have a one-time
cost of about $24,000, or approximately $311,000 in aggregate across
the 13 U.S. equities exchanges, associated with the development and
implementation of systems tracking realized monthly average and median
share fees pursuant to the rule.\749\ The Commission further
anticipates that it would cost an additional $12,000 annually, or
$155,000, in aggregate, per year, to ensure that the system technology
is up to date and remains in compliance with the rule.\750\
---------------------------------------------------------------------------

    \749\ This estimate is based on the following, which reflects
the Commission's experience with and burden estimates for SRO
systems changes: [(Attorney (20 hours) x $401) + (Compliance Manager
(20 hours) x $298) + (Programmer Analyst (20 hours) x $232) +
(Senior Business Analyst (20 hours) x $265] = 23,920 [ap] $24,000
per exchange, or $23,920 x 13 exchanges = $310,960 [ap] 311,000 in
aggregate. The burden hours are obtained from supra Section III.
D.2.
    \750\ This estimate is based on the following, which reflects
the Commission's experience with and burden estimates for SRO
systems changes: [(Attorney (10 hours) x $401) + (Compliance Manager
(10 hours) x $298) + (Programmer Analyst (10 hours) x $232) +
(Senior Business Analyst (10 hours) x $265] = $11,960 [ap] $12,000
per exchange, or $11,960 x 13 exchanges = $155,480 [ap] $155,000 in
aggregate. The burden hours are obtained from supra Section III.D.2.
---------------------------------------------------------------------------

    Moreover, as discussed above, exchanges would be required to
produce monthly updates to the Exchange Transaction Fee Summary to
capture realized average and median per share fees as well as any
revisions to fee schedules made by the exchanges, which would be
reflected in changes to Base or Top-Tier fees and rebates, detailed in
Section II.E.2. The Commission estimates that each month it would cost
each exchange $530 to update the dataset of summary fees to reflect the
updates to historical realized average and median per share fees and
changes to the Base and Top-Tier fees. This would require each exchange
to make a total of 36 updates to the Exchange Transaction Fee Summary
from the pre-Pilot Period through the post-Pilot Period, if the
Commission determined that the Pilot should continue for up to a second
year and not automatically sunset at the end of the first year.\751\
Each exchange would have total costs of updates to the Exchange
Transaction Fee Summary of approximately $19,000 per exchange, or
$248,000 among the 13 exchanges over the pilot duration, including pre-
and post-periods.\752\ If the Pilot were to automatically sunset at the
end of the first year, without the Commission determining that an
extension for up to an additional year was needed, this would decrease
the total number of updates to the Exchange Transaction Fee Summary to
24.\753\ Under an automatic sunset at the end of the first year, each
exchange would have total costs of updates to the Exchange Transaction
Fee Summary of approximately $12,700 per exchange, or $169,000 among
the 13 exchanges over the pilot duration, including pre- and post-
periods.\754\ As detailed above, the Commission estimates that the
costs associated with the monthly updates to the Exchange Transaction
Fee Summary would be a small fraction of the costs associated with the
initial allocation of fees required at the outset of the Pilot.
---------------------------------------------------------------------------

    \751\ This estimate of updates to the Exchange Transaction Fee
Summary is the aggregation of updates from the pre-Pilot Period (6),
the two-year pilot period if the Commission determines that an
extension of up to an additional year was needed (24), and the post-
pilot period (6), for a total number of 36 updates.
    \752\ This estimate is based on the following: [(Compliance
Manager (1 hours) x $298) + (Programmer Analyst (1 hours) x $232)] =
$530 per exchange, or $530 x 36 fee changes per exchange = $19,080
[ap] $19,000. The 36 fee changes for the exchange encompass six
updates during the six-month pre-Pilot Period, 24 updates during the
two-year Pilot Period, assuming that the Commission determines that
the additional year is required, and six updates during the six-
month post-Pilot Period. In aggregate, updates to the Exchange
Transaction Fee Summary are estimated to cost $19,080 x 13 U.S.
equities exchanges = $248,040 [ap] $247,000. The burden hours are
obtained from supra Section III. D.2.
    \753\ This estimate of updates to the Exchange Transaction Fee
Summary is the aggregation of updates from the pre-Pilot Period (6),
the one-year pilot period with an automatic sunset at the end of the
first year (12), and the post-pilot period (6), for a total number
of 24 updates.
    \754\ This estimate is based on the following: [(Compliance
Manager (1 hours) x $298) + (Programmer Analyst (1 hours) x $232)] =
$530 per exchange, or $530 x 24 fee changes per exchange = $12,720
[ap] $12,700. The 24 fee changes for the exchange encompass six
updates during the six-month pre-Pilot Period, 12 updates during the
one-year Pilot Period, assuming that the Commission determines that
the additional year is not required and the Pilot is automatically
sunset at the end of the first year, and six updates during the six-
month post-Pilot Period. In aggregate, updates to the Exchange
Transaction Fee Summary are estimated to cost $12,720 x 13 U.S.
equities exchanges = $165,360 [ap] $165,000. The burden hours are
obtained from supra Section III.D.2.
---------------------------------------------------------------------------

    As discussed in Section II, the rule will require that the Exchange
Transaction Fee Summary be published on the exchanges' websites using
an XML schema to be published on the Commission's website. The
Commission understands that there are varying costs associated with
varying degrees of structuring. The Commission believes that most of
the exchanges already have experience applying the XML format to market
data. For example, the exchanges and market participants regularly use
the FIX protocol \755\ and FpML \756\ to exchange information on highly
structured financial instruments and related market data.\757\
---------------------------------------------------------------------------

    \755\ The Financial Information eXchange (FIX) protocol is an
electronic communications protocol that provides a non-proprietary,
free and open XML standard for international real-time exchange of
information related to the securities transactions and markets. See
Fix Trading Community, available at https://www.fixtrading.org/.
    \756\ FpML (Financial products Markup Language) is an open
source XML standard for electronic dealing and processing of OTC
derivatives. It establishes the industry protocol for sharing
information on, and dealing in, financial derivatives and structured
products. See Financial products Markup Language [FpML], available
at http://www.fpml.org/.
    \757\ Most of the exchanges have at least some portion of their
data available through XML formats. For instance, the NYSE Group of
exchanges provides daily closing prices, among other data, in XML,
Excel, and pipe-delimited ASCII, while the Nasdaq exchanges (Nasdaq,
BX, and PHLX) and Cboe exchanges (Cboe BZX, Cboe BYX, Cboe EDGA, and
Cboe EDGX), provide daily share volume data, among other data, in
XML. Information on the use of XML by exchanges is available for the
NYSE, www.nyse.com, Nasdaq, www.nasdaqomx.com, and Cboe,
www.cboe.com, exchange groups, respectively, and was obtained from a
staff review of information on publicly available exchange websites.
The Commission was unable to obtain information from CHX or IEX on
their use of XML from information available on their publicly
available websites.
---------------------------------------------------------------------------

    The Commission anticipates that implementation of the Pilot's XML
schema would draw upon exchange resources and experiences previously
used to implement other supply chain information standards, like those
discussed above, that were developed by industry consensus-based
organizations. Costs generally associated with the implementation may
include those for: Identifying the data required by the Pilot within
the exchange source systems; mapping the relevant fields in the
exchanges' data source systems to the Commission's XML schema;
implementing, testing and executing the validation rules; and
developing the website posting processes as required by the rule. The
initial costs to exchanges of complying with the Commission's XML
schema in order to publicly post the Exchange Transaction Fee Summary
in this format would be $500 per exchange, or $6,500 in aggregate
across the 13 exchanges.\758\ For all updates to

the Exchange Transaction Fee Summary, the Commission estimates that any
burden associated with making those available using the XML schema is
included in the costs of the updates discussed above.
---------------------------------------------------------------------------

    \758\ This estimate is based on the following, which reflects
the Commission's experience with and burden estimates for systems
changes to map to an XML schema: [(Programmer Analyst (1 hours) x
$232) + (Senior Business Analyst (1 hours) x $265] = $497 [ap] $500
per exchange, or $500 x 13 exchanges = $6,461 [ap] $6,500 in
aggregate. See Securities Exchange Act Release No. 78309 (July 13,
2016), 81 FR 49431, 49475 (July 27, 2016) (``Disclosure of Order
Handling Information''). The estimate is lower than that for
proposed Rule 606 disclosures because the costs for those
disclosures encompassed many additional requirements beyond the
mapping to an XML schema.
---------------------------------------------------------------------------

    In sum, the Commission estimates the total cost of the pilot
associated with producing the exchange transaction fee summary in XML
format to be approximately $81,000 per exchange if the Pilot runs for 2
years and $62,700 per exchange if the Pilot sunsets at the end of the
first year. These costs comprise of approximately $26,100 in one time
implementation costs and $55,000 in ongoing costs if the Pilot runs for
two years, or $36,600 if the Pilot sunsets at the end of the first
year. These costs aggregate to approximately $1,054,000 in total costs
across all exchanges if the Pilot runs for the entire two years, and
$815,000 if the Pilot sunsets at the conclusion of the first year.
iv. Producing the Order Routing Data
    The rule also will require as part of the Pilot that exchanges
prepare, in pipe-delimited ASCII format, and transmit to the
Commission, order routing data, updated monthly, containing aggregated
broker-dealer order routing information. As discussed in Rule 610T(d)
and in Section II.E.3, the datasets would contain separate order
routing data for liquidity-providing and liquidity-taking orders
aggregated by day, by security, by broker-dealer, and by exchange.
    The Commission believes that as long as the CAT Phase 1 data are
available at the implementation of the Pilot, the exchanges would be
able to use that data to construct the order routing data required by
the rule. In particular, the CAT data will include records for every
order received by an exchange that indicate the member routing the
order to the exchange and details regarding the type of security. The
CAT data will also include other information necessary to create the
order routing data such as order type information, special handling
instructions, and execution information. In the event that the CAT
Phase 1 data were not available, the exchanges would have to use
existing systems to collect the required order routing data. Regardless
of which system exchanges use for the order routing data, the
Commission anticipates they would incur costs in producing the
downloadable files containing aggregated monthly order routing data to
be transmitted to the Commission.
    The Commission estimates that each exchange would have a one-time
cost of approximately $23,900, or approximately $311,000 in aggregate
across the 13 exchanges, associated with the development and
implementation of systems needed to aggregate the order routing
information, as well as store the data, in the pipe-delimited ASCII
format specified by the rule and as detailed in Rule 610T(d).\759\ The
Commission anticipates that it will cost each exchange an additional
$12,000 per year, or approximately $156,000 in aggregate per year, to
ensure that the system and storage technology is up to date and remains
in compliance with the rule.\760\
---------------------------------------------------------------------------

    \759\ This estimate is based on the following, which reflects
the Commission's experience with and burden estimates for SRO
systems changes: [(Attorney (20 hours) x $401) + (Compliance Manager
(20 hours) x $298) + (Programmer Analyst (20 hours) x $232) +
(Senior Business Analyst (20 hours) x $265] = $23,920 [ap] $23,900
per exchange, or $23,920 x 13 exchanges = $310,960 [ap] $311,000 in
aggregate. The burden hours are obtained from supra Section III.D.3.
    \760\ This estimate is based on the following, which reflects
the Commission's experience with and burden estimates for SRO
systems changes: [(Attorney (10 hours) x $401) + (Compliance Manager
(10 hours) x $298) + (Programmer Analyst (10 hours) x $232) +
(Senior Business Analyst (10 hours) x $265] = $11,960 [ap] $12,000
per exchange, or $11,960 x 13 exchanges = $155,480 [ap] $156,000 in
aggregate. The burden hours are obtained from supra Section III.D.3.
---------------------------------------------------------------------------

    The rule will require that exchanges produce monthly updates of the
order routing data, and transmit them to the Commission in pipe-
delimited ASCII format by the end of the month, as detailed in Section
II.E.3 and Rule 610T(d). The Commission estimates that the transmittal
and updates of the order routing datasets would cost $1,888 each month.
This will require each exchange to make a total of 36 updates to the
order routing data from the pre-Pilot Period through the post-Pilot
Period (if the core Pilot lasts for a full two years). Each exchange
would have recurring costs of updates to the order routing data of
approximately $68,000 per exchange, or $884,000 among the 13 exchanges
over the entire duration of the Pilot, and the pre-Pilot and post-Pilot
periods.\761\ If the Commission were to allow the Pilot to
automatically sunset at the end of the first year, this would decrease
the total number of monthly updates to the order routing data by 12 to
24.\762\ Under the automatic sunset, each exchange would have recurring
costs of updates to the order routing data of approximately $45,300 per
exchange, or $589,000 among the 13 exchanges over a one-year Pilot, and
the pre-Pilot and post-Pilot periods.\763\
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    \761\ This estimate is based on the following: [(Compliance
Manager (4 hours) x $298) + (Programmer Analyst (3 hours) x $232)] =
$1,888 per exchange, or $1,888 x 36 fee changes per exchange =
$67,968 [ap] $68,000. The burden hours are obtained from supra
Section III.D.3. The 36 updates to the order routing data for each
exchange encompass six updates during the six-month pre-Pilot
Period, 24 updates during the two-year Pilot Period, assuming that
the Commission determines at the end of the first year that it shall
continue the proposed Pilot for up to an additional year, and six
updates during the six-month post-pilot period. In aggregate,
updates to the order routing data are estimated to cost $67,968 x 13
U.S. equities exchanges = $883,584 [ap] $884,000.
    \762\ This estimate of updates to the order routing data is the
aggregation of updates from the pre-Pilot Period (6), the one-year
Pilot Period assuming that the Commission allows the Pilot to
automatically sunset at the end of the first year (12), and the
post-Pilot Period (6), for a total number of 24 updates.
    \763\ This estimate is based on the following: [(Compliance
Manager (4 hours) x $298) + (Programmer Analyst (3 hours) x $232)]
[ap] $1,888 per exchange, or $1,888 x 24 fee changes per exchange =
$45,312 [ap] $45,300. The burden hours are obtained from supra
Section III.D.3. The 24 updates to the order routing data for each
exchange encompass six updates during the six-month pre-Pilot
Period, 12 updates during the first year of the Pilot Period,
assuming that the Commission determines at the end of the first year
that it shall automatically sunset the proposed Pilot, and six
updates during the six-month post-pilot period. In aggregate,
updates to the order routing data are estimated to cost $45,312 x 13
U.S. equities exchanges = $589,056 [ap] $589,000.
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    One commenter stated that the Commission underestimated the number
of burden hours required to produce the order routing data required by
the Pilot.\764\ This commenter indicated that the Commission allocated
160 burden hours to compile and produce the order routing data, while
the commenter estimates that it would take approximately 400 burden
hours.\765\ Over the entire Pilot duration, including the six-month pre
and post-Pilot periods, the Commission estimates that exchanges would
have initial systems burden hours of 80 hours, an additional annual
burden of 40 hours to update and maintain those systems, plus 84 burden
hours per year to produce and publicly post order routing data
monthly.\766\
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    \764\ See NYSE Letter I, at 15.
    \765\ However, it is unclear exactly how the commenter
aggregated the data in the Proposing Release to arrive at 160 hours
because they did not provide details of their calculation.
    \766\ See Proposing Release, supra note 2, at 13061. Discussion
of comments on these estimates is presented in Section III.D.3
supra.
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    In sum the Commission estimates the costs of producing the order
routing data to include a one-time cost of approximately $23,900 per
exchange to set up the data gathering process, $12,000 per year to
maintain the data gathering systems, and $1,888 per

month to publish the data. Specifically, the Commission estimates
initial one-time implementation costs of approximately $23,900 and
ongoing costs of approximately $103,800 per exchange if the Pilot lasts
two years or $69,200 if the Pilot lasts one year. These costs total
approximately $127,800 per exchange if the Pilot lasts two years--or
approximately $1,661,000 in aggregate. These costs decline to
approximately $93,200 per exchange--or $1,211,000 in aggregate--if the
Pilot sunsets after one year.
v. Fee-Related Costs to Exchanges
    When exchanges alter their fees they are required to submit a Form
19b-4 filing with the Commission. Consequently, the Commission expects
most exchanges to file two 19b-4 Forms that they would not have
otherwise done. Additionally, the Commission expects that the pilot may
increase the complexity of these filings. This section provides
estimates for the costs associated with the submission of 19b-4 Forms
by the exchanges during the Pilot.
    At the outset of the Pilot, each equities exchange if their fees do
not at that time comply with the Pilot's pricing restrictions, would
need to file with the Commission a comprehensive Form 19b-4 fee filing
reflecting all of the applicable fees and rebates applicable to each of
the Pilot Groups, as well as the Control Group--to reflect the
temporary changes to transaction-based fees and rebates as a result of
the Pilot. The Commission anticipates that exchanges will incur costs
associated with and devote time to optimally assign fees and rebates
across Test Groups, within the parameters allowed by the Pilot,
including any incentives, tiers, caps, and discounts available. The
Commission estimates that it would cost $48,400 per-exchange for the
initial Form 19b-4 fee filing or $629,100 in aggregate.\767\ The
Commission further anticipates that exchanges would bear similar costs
upon the completion of the Pilot to prepare Form 19b-4 fee filings for
filing with the Commission to reflect changes in fees at the conclusion
of the Pilot, should they wish to change their fees or revert to their
former pricing models after the Pilot concludes.
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    \767\ The estimate is based on the following: [(Attorney (40
hours) x $401) + (Compliance Attorney (40 hours) x $352) +
(Assistant General Counsel (25 hours) x $449) + (Director of
Compliance (15 hours) x $470)] = $48,395 [ap] $48,400, or $48,395 x
13 equities exchanges = $629,135 [ap] $629,100 in aggregate. See OMB
Control No. 3235-0045 (August 19, 2016), 81 FR 57946 (August 24,
2016) (Request to OMB for Extension of Rule 19b-4 and Form 19b-4
Filings).
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    In addition to the initial production of the Form 19b-4 fee filing
at the outset of the Pilot, exchanges may also choose to make periodic
updates to their fee and rebate schedules, and file Form 19b-4 fee
filings to effectuate those changes and thereby notify the Commission
and the public of those updates. As noted in the baseline, the average
exchange makes approximately seven changes to its fee schedules per
year. While recognizing the possibility that as a result of the Pilot,
exchanges may revise their fee schedules more or less often during the
Pilot, the Commission has no basis to expect an increase in the number
of Form 19b-4 fee filings other than at the beginning or end of the
Pilot and has no basis to expect a decrease.
    The Commission also recognizes that as an outcome of the Pilot, the
complexity of the Form 19b-4 fee filings could increase if exchanges
seek to impose different fees within Test Groups 1, Test Group 2, and
the Control Group, thereby increasing the overall costs for exchanges
to revise their fee and rebate schedules.\768\ As discussed above, the
Pilot may require exchanges to design new fee structures to comply with
the Pilot's Test Groups, which would then translate into additional
information in each Form 19b-4 fee filing submitted during the Pilot.
These costs are likely to increase because the exchanges could take
more time to design and describe fee structures in each filing than
they do designing fee structures today. As discussed above in the
baseline, the average fee schedules of exchanges are complex, with many
different categories of fees or rebates assessed to NMS stocks.
Assuming the frequency remains constant, then the Pilot could increase
the incremental costs incurred by exchanges to file the expected Form
19b-4 fee filings during the Pilot.\769\ The additional costs would
only be relevant for Form 19b-4 fee filings that occur during the Pilot
Period, and would not apply to Form 19b-4 fee filings in the pre-Pilot
or post-Pilot Periods, as the Commission does not believe that there
will be any incremental costs associated with increased complexity of
these filings during these periods. The Commission estimates that each
exchange would bear an incremental cost of $10,600 per Form 19b-4 fee
filing to account for the increased complexity associated with the
requirements of the Pilot, or approximately $1,929,000 for the
anticipated 182 Form 19b-4 fee filings for fee and rebate revisions
across the 13 U.S. equities exchanges during the two-year pilot
duration.\770\ If the Pilot were to automatically sunset at the end of
the first year, the Commission estimates that exchanges would bear
costs of approximately $964,000 for the anticipated 91 Form 19b-4
filings for fee and rebate revisions across the 13 U.S. equities
exchanges during the first year of the Pilot duration.
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    \768\ The Commission believes that the inclusion of Linked
Pricing prohibitions for Test Group 2 should not increase the
complexity of Form 19b-4 filings for exchanges because many
exchanges already report non-cash incentives, such as tiered pricing
or volume discounts, as part of their standard filings. Further, the
Commission does not believe that many exchanges currently use Linked
Pricing mechanisms and instead most rely on rebates.
    \769\ Maintaining the current average frequency of 7 19b-4
filings per year would mean that the average exchange would file a
total of 14 19b-4 filings during the two-year pilot (7 filings x 2
year duration). If the Commission were to allow the Pilot to
automatically sunset at the end of the first year, then the total
number of 19b-4 filings could decrease by 7 filings. Annually,
across all 13 exchanges, the Commission estimates that there will be
91 19b-4 filings (7 filings x 13 exchanges). If the Commission
determines that the Pilot shall continue for a second year, in
aggregate, the 13 exchanges could file a total of 182 19b-4 filings
(91 x two-year Pilot duration).
    \770\ The estimate is based on the following: [(Attorney (8
hours) x $401) + (Compliance Attorney (8 hours) x $352) + (Assistant
General Counsel (6 hours) x $449) + (Director of Compliance (4
hours) x $470)] =$10,598 [ap] $10,600, or $10,598 x 182 fee changes
in aggregate across 13 exchanges over the two-year pilot duration =
$1,928,836 [ap] $1,929,000 in aggregate, assuming that the
Commission determines that the Pilot shall continue for up to an
additional year. If the Pilot were to automatically sunset after the
first year, the Commission believes that the costs associated with
91 19b-4 filings (13 exchanges x 7 filings) would be approximately
$964,000 ( ~$10,598 x 91 filings). See Request to OMB for Extension
of Rule 19b-4 and Form 19b-4 Filings, supra note 767.
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    In sum, the Commission expects the pilot to impose on each exchange
a one-time cost of $48,400 at the beginning and end of the pilot for
the additional 19b-4 filings required by the pilot, as well as an
ongoing cost of approximately $10,600 per additional 19b-4 filing to
account for increased complexity in 19b-4 filings caused by the Pilot.
If we assume that exchanges continue to file 19b-4 filings at an
average rate of 7 per year and if the pilot lasts for 2 years, these
incremental costs sum to approximately $148,400 per exchange--which
declines to $74,200 if the pilot ends after the first year. Combining
the cost of the two additional 19b-4 filings with the cost of potential
increased complexity provides an estimated cost of the pilot associated
with 19b-4 filings of approximately $245,200 per exchange--or
$3,187,000 in aggregate--if the pilot lasts two years, or $171,000 per
exchange--or $2,223,000 in aggregate--if the pilot expires after the
first year.

vi. Other Costs to Exchanges
    The Pilot may result in more complicated fee structures that could
also increase an exchange's processing costs of tracking and
calculating monthly invoices for its members during the Pilot; however,
the Commission does not have any information on the costs to exchanges
for tracking and calculating monthly member invoices and therefore
cannot provide estimates of quantified costs and no commenters provided
such information.
b. Other Costs Associated With the Pilot
    This section considers additional costs that may occur as a result
of the Pilot. Specifically, this section discusses how the Pilot may
impact exchanges' fee revenue, broker-dealer compliance costs,
brokerage commissions, liquidity, and issuers.
i. Loss of Exchanges' Fee Revenue
    The Commission analyzed whether exchanges could experience a change
to their fee revenues associated with transaction-based fees and
rebates for either of two reasons: A decline in the margin between fees
and rebates,\771\ or a decline in overall trading volume on an exchange
as a result of the Pilot.\772\ In the Proposing Release the Commission
stated its belief that only stocks in the test group with a cap of
$0.0005 (former Test Group 2) would experience narrower margins and
estimated that these narrower margins could result in exchanges
incurring revenue losses of up to $7,650,000 per month.\773\ With the
removal of the former Test Group 2 the Commission now believes that the
Pilot may not have a significant effect on Exchange revenue, at least
not because of narrower margins between fees and rebates.
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    \771\ On a given trade, an exchange earns the margin between
fees and rebates. For example, if an exchange charges a take fee of
$.0030 per share and offers a make rebate of $.0025 per share then
the margin captured by the exchange is $.0005 per share traded.
    \772\ A number of commenters expressed concern that the Pilot
would lead to decreased exchange revenue largely through decreased
trading volume. See, e.g., Cboe Letter I, at 7; NYSE Letter I, at 3
and 15-16.
    \773\ See Proposing Release, supra note 2, at 13063.
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    For stocks in Test Group 1 (the Test Group with a fee cap of
$0.0010) the Commission does not believe that the Pilot will result in
narrower margins earned by the exchanges because the fee cap in this
group is double the current typical average net capture (i.e., margin)
that exchanges earn which is approximately $0.0005.\774\ Consequently,
the exchanges can maintain current margins by reducing the rebate
offered at the same level as fees charged are reduced.\775\ For stocks