burden of collection.\207\ One commenter stated the collected data
should focus only on data that allows for centralized comparisons and
analysis.\208\ This commenter also suggested that only data relevant to
increased liquidity of Pilot Securities should be collected.\209\ Some
commenters believed certain additional data metrics should be included
to better facilitate the assessment of the Tick Size Pilot.\210\
---------------------------------------------------------------------------

    \202\ See CoreOne Letter at 6; STA Letter II at 3 (recommending
a widely used quantitative market metrics to measure improvements
and degradations in overall liquidity available); FIF Letter 3-4;
SIFMA Letter II at 8; STANY Letter at 8-9; Nasdaq Letter at 6-7; and
NYSE Letter at 2-3.
    \203\ Market Information Data and Analytics System (``MIDAS'')
collects and processes data from the consolidated tapes as well as
from separate proprietary feeds made individually available by each
equity exchange. See http://www.sec.gov/marketstructure/midas.html.
    \204\ Rule 605, Disclosure of Order Execution Information
(``Rule 605'') is a trading center monthly reporting requirement
regarding covered orders in NMS stocks. See 17 CFR 242.605.
    \205\ Securities Information Processor (``SIP'') is any person
engaged in the business of collecting, processing, or preparing for
distribution information with respect to transactions or quotations.
See 15 U.S.C. 78c(22).
    \206\ See supra note 145 and accompanying text.
    \207\ See CoreOne Letter at 6; STA Letter II at 4 (advocating
for additional categories of data that can be obtained through
MIDAS); SIFMA Letter II at 8; STANY Letter at 8-9; CHX Letter at 2;
Nasdaq Letter at 6-7; and NYSE Letter at 2-3.
    \208\ See FIF Letter at 3.
    \209\ See FIF Letter at 3-4 (suggesting sixteen specific data
requirements that would be relevant to assessing liquidity).
    \210\ See Bloomberg Letter at 17 (suggesting the NMS plan data
include order type usage statistics, off-exchange trading
information, and research coverage metrics); Weaver Letter at 2
(requiring brokers to report the number of shares internalized). See
also IAC Recommendations.
---------------------------------------------------------------------------

    Several commenters supported the public availability of data for
potential analysis by academics and other interested parties.\211\
---------------------------------------------------------------------------

    \211\ See BIO Letter at 4 (stating an interest in reviewing the
Tick Size Pilot results on an industry-by-industry basis); CFA
Institute Letter at 6 (asserting that ``[p]ublic release ensures
accountability and peer review of the data by enabling independent
researchers to look for unique and potentially valuable bits of
information within the data.''); Bloomberg Letter at 17; and KOR
Letter II at 5-6 (urging the Commission to provide free and open
access to Tick Size Pilot data to ensure broadened analysis from
varied perspectives). Two commenters suggested that the data should
be available in a downloadable format. See CFA Letter at 6; and FIF
Letter at 2.
---------------------------------------------------------------------------

2. Market Maker Profitability Data
    Thirteen commenters discussed whether the Market Maker
Profitability Data should be collected.\212\ Ten commenters opposed
collecting the Market Maker Profitability Data \213\ because they
believe gathering such data would be costly.\214\ One commenter noted
that profitability information is highly confidential and
proprietary.\215\ This commenter stated that profitability information
is not currently disclosed except in a public company context, and
requiring market makers to disclose their profitability to competitors
(i.e., the exchanges) is anti-competitive. This commenter posited that
market makers may opt-out of trading in Pilot Securities rather than
disclose the profitability information.
---------------------------------------------------------------------------

    \212\ See Duffy Letter at 2; CoreOne Letter at 2 (noting that it
is going to be very difficult to measure the impact on research
coverage from market maker profitability); STA Letter II at 10; KCG
Letter at 18; CFA Letter at 7; SIFMA Letter II at 9; Citigroup
Letter at 4-5; FIF Letter at 5-6; STANY Letter at 8; TD Ameritrade
Letter at 5; Angel Letter at 8; CHX Letter at 21-22; and NYSE Letter
at 2.
    \213\ See Duffy Letter at 2; STA Letter II at 10; KCG Letter at
18; SIFMA Letter II at 9; Citigroup Letter at 4-5; FIF Letter at 5-
6; STANY Letter at 8; TD Ameritrade Letter at 5; CHX Letter at 21-
22; and NYSE Letter at 2.
    \214\ See SIFMA Letter II at 8 (arguing the collection of market
maker profitability unnecessarily increases the burden on market
makers) and FIF Letter at 5-6 (asserting that the collection of
market maker profitability would involve significant
implementation). See also STANY Letter at 8 and NYSE Letter at 2
(stating eliminating the collection of market maker profitability
would reduce the cost of the Tick Size Pilot).
    \215\ See STANY Letter at 8.
---------------------------------------------------------------------------

    Additionally, two commenters stated that Market Maker Profitability
Data is difficult to calculate and attribute to a specific
activity.\216\ Other commenters argued that the Market Maker
Profitability Data is not necessary or useful to the goals of the Tick
Size Pilot and therefore should not be collected.\217\ Some commenters
suggested that this data element was unnecessary and would provide the
Participants with a competitive insight and advantage on market maker
operations.\218\
---------------------------------------------------------------------------

    \216\ See Citigroup Letter at 4 (arguing it is not feasible, nor
accurate, to measure market maker profitability on a symbol-by-
symbol basis) and FIF Letter at 6 (calculating profit includes
access fees and rebates that are computed monthly and not on a
trade-by-trade basis at the time of execution).
    \217\ See STA Letter II at 10; KCG Letter at 18; TD Ameritrade
Letter at 5; and CHX Letter at 27. See also CoreOne Letter at 2
(asserting the correlation between market maker profitability and
research would be difficult to determine).
    \218\ See KCG Letter at 18 (stating that ``[e]xchanges compete
directly with market makers for order flow and should not collect,
review and interpret their competitors' profitability data'' and it
would also place market makers at a disadvantage when negotiating
for services provided by exchanges); Citigroup Letter at 5 (arguing
that market maker profitability should not be published to a primary
competitor); and STANY Letter at 8 (asserting that the collection of
market maker profitability is ``anti-competitive and extremely
disadvantageous to market makers'').
---------------------------------------------------------------------------

    Three commenters supported the collection of the Market Maker
Profitability Data.\219\ One commenter stated that the collection of
this data would help to identify the effect of the Tick Size Pilot on
market maker business practices.\220\ Another commenter stated that
Market Maker Profitability Data has analytical value for the Tick Size
Pilot and indicated that the dissemination of the data on an aggregated
basis would alleviate confidentiality concerns.\221\
---------------------------------------------------------------------------

    \219\ See CFA Letter at 6-7; CFA Institute Letter at 6; and
Angel Letter at 8.
    \220\ See CFA Letter at 6-7.
    \221\ See Angel Letter at 8.
---------------------------------------------------------------------------

    One commenter stated the collection of the Market Maker
Profitability Data should only be done if it is absolutely necessary
for the Tick Size Pilot and, if so, then it should also be collected
from ATSs and exchanges.\222\ As a potential alternative to Market
Maker Profitability Data, one commenter suggested the use of a ``Market
Maker/Investment Bank'' scorecard that includes metrics or important
drivers of liquidity.\223\
---------------------------------------------------------------------------

    \222\ See TD Ameritrade at 5.
    \223\ See Fidelity Letter at 8.
---------------------------------------------------------------------------

    Two commenters expressed concerns related to the confidentiality of
Market Maker Profitability Data because of the potential for such data
to be reverse engineered and attributed to specific market participants
after becoming publicly available.\224\
---------------------------------------------------------------------------

    \224\ See FIF Letter at 4 and STANY Letter at 8.
---------------------------------------------------------------------------

3. Assessment of Tick Size Pilot Data
    Many commenters stated that the NMS plan should clearly define what
would constitute a successful Tick Size Pilot and warrant
implementation on a permanent basis.\225\ Some commenters stated that
it is important to quantify, within the metrics, specific data ranges
that would be considered successful.\226\ Another commenter noted that
``liquidity'' should be defined in order to facilitate the assessment
of the Tick Size Pilot's impact on liquidity.\227\
---------------------------------------------------------------------------

    \225\ See ECFTF Letter at 3; CMR Letter II at 2; STA Letter II
at 2; KCG Letter at 7; BATS Letter at 6; BlackRock Letter at 6;
Schwab Letter at 10; STANY Letter at 4-5; Fidelity Letter at 5-6;
and TD Ameritrade Letter at 5.
    \226\ See STA Letter II at 2 (stating the Tick Size Pilot's
goals should be prioritized from the onset in the event a conflict
among the specific goals developed.); KCG Letter at 8 (arguing that
``the 200+ data collection items are susceptible to post-[Tick Size
Pilot] use to build a story of ``success'' based on whatever
criteria a given reviewer decides at that time''); BATS Letter at 6;
BlackRock Letter at 6 (asserting that due to the associated costs of
the Tick Size Pilot ``criteria for success should also be
unambiguous''); Schwab Letter at 10; STANY Letter at 4-5 (stating
that without a clear metrics to determine success ``[e]ach of the
various business models will be able to lay a credible claim to
success.''); and Fidelity Letter at 5 (asserting that success
metrics need to be clearly defined from the onset ``to avoid post
hoc justifications and arguments about success and failure.'').
    \227\ See Warner-Toomey Letter at 2.
---------------------------------------------------------------------------

    Other commenters suggested specific data that would indicate the
Tick Size Pilot's success or failure.\228\ One

commenter, focused on issuers of small capitalization securities,
stated that capital formation criteria should be used to gauge the
success of the Tick Size Pilot.\229\ Another commenter, however, was
concerned that the Tick Size Pilot would be prejudged if success
metrics were defined before empirical data was gathered.\230\
---------------------------------------------------------------------------

    \228\ See ModernNetworks Letter at 2 (stating increasing the
number of committed market-makers, more market participants, larger
trade sizes and deeper displayed buy-sell interest should determine
the success of the Tick Size Pilot); Tabb Letter at 2 (providing six
metrics that indicate success: market efficiency, greater liquidity,
larger transaction size, increased certainty of execution, less off-
exchange activity and greater price discovery, more market-making
firms other than high-frequency firms); ECFTF Letter at 3
(indicating that Tick Size Pilot success should be determined by
increase in relative level of trading liquidity, increase in change
of institutional ownership, higher rate of equity capital issuance);
and STA Letter II at 3-4. See also IAC Recommendations.
    \229\ See ECFTF Letter at 3 (advocating for using higher rate of
equity capital issuance as a metric for success).
    \230\ See Nasdaq Letter at 4.
---------------------------------------------------------------------------

    Three commenters stated that the Tick Size Pilot data should be
analyzed on a more frequent periodic basis until the final assessment
is conducted.\231\
---------------------------------------------------------------------------

    \231\ See FIF Letter at 6; KOR Letter II at 3; and CHX Letter at
6. See also STANY Letter at 9 (requesting the Tick Size Pilot
continue while its final assessment is conducted to avoid
unnecessary costs, potential confusion, and greater risks of system
errors).
---------------------------------------------------------------------------

F. Use of an NMS Plan

    Fourteen commenters indicated that the Tick Size Pilot should not
be the subject of an NMS plan, but instead should be presented as, and
adhere to the procedural requirements of, a formal Commission
rulemaking that includes additional cost-benefit analysis.\232\ Some
commenters believed that the Tick Size Pilot is a market structure
initiative that is too significant and impactful to be delegated to the
Participants through an NMS plan.\233\ A number of commenters
questioned whether it was appropriate to have Participants formulate an
NMS plan that would affect their competitors.\234\ Commenters were also
concerned that not all affected market participants, such as market
makers, broker-dealers, and institutional investors, were included in
the process of establishing the terms of the Tick Size Pilot and the
NMS plan.\235\ Additionally, some commenters intimated that a conflict
of interest may exist by highlighting that the Participants who devised
the NMS plan are now for-profit entities.\236\
---------------------------------------------------------------------------

    \232\ See Duffy Letter at 2; KCG Letter at 8-9; SIFMA Letter II
at 7; MFA Letter II at 8; Wells Fargo Letter at 3; Citigroup Letter
at 5; Schwab Letter at 8-9; STANY Letter at 9-10; Bloomberg Letter
at 21-22; TD Ameritrade Letter at 4; ITG Letter at 4; Citadel Letter
II at 3-4; Nasdaq Letter at 7; and OTC Markets Letter at 9.
    \233\ See Schwab Letter at Letter 8-9; Bloomberg Letter at 22
(stating the Commission should not defer to Participants for such
major policy decisions); ITG Letter at 4 (opining that the Tick Size
Pilot would modify certain obligations under Regulation NMS, and
that NMS plans should implement the Commission's policy directives
but not amend existing regulations established under federal
securities laws); and Citadel Letter II at 3 (asserting that the
temporary nature of a significant pilot should not exempt it from
traditional rulemaking).
    \234\ See SIFMA Letter II at 2-3 (asserting the NMS plan
benefits Participants more than others); TD Ameritrade Letter at 4
(stating the NMS plan unfairly gives more control of the Tick Size
Pilot to one set of market participants over others); ITG Letter at
4 (stating that the SROs devising the NMS plan have potential
conflicts of interests with ATSs and market makers); and Citadel
Letter II at 4 (claiming that exchanges are able implement an NMS
plan while excluding broker-dealers, issuers, investment funds, and
the general investing public from the process).
    \235\ See Schwab Letter at 7 (asserting that ``it is
unacceptable for exchanges to design the [NMS] [p]lan without any
input from other parts of the industry.''); TD Ameritrade Letter at
4; and Citadel Letter II at 4.
    \236\ See KCG Letter at 8-9; Schwab Letter at 7; TD Ameritrade
Letter 1; and Citadel Letter II at 5.
---------------------------------------------------------------------------

G. Issuer Participation

    A few commenters suggested that Pilot Security issuers should have
discretion to set their own minimum increments.\237\ One commenter
stated that companies should be empowered to determine their increments
by contract with market makers.\238\ Another commenter stated there
should be an ``Issuer Committee'' formed to advocate for the interests
of issuers in the process.\239\ Another commenter suggested the
formation of a ``Tick Size Pilot Advisory Committee'' that would be
able to provide input after the completion of the Tick Size Pilot
comment period.\240\
---------------------------------------------------------------------------

    \237\ See Bloomberg Letter at 16 and Angel Letter at 4.
    \238\ See Bloomberg Letter at 16 (citing certain European
markets that allow for issuers to contract with market makers to
determine the spread).
    \239\ See ModernNetworks Letter at 2.
    \240\ See NYSE Letter at 3.
---------------------------------------------------------------------------

    Three commenters favored allowing issuers of Pilot Securities to
opt-out of participating in the Tick Size Pilot.\241\ One commenter
stated that the decision to participate in the Tick Size Pilot should
be determined by the Board of Directors or current shareholders of the
company.\242\ Three commenters opposed the idea of allowing a Pilot
Security issuer to opt-out of the Tick Size Pilot because it could skew
the data.\243\
---------------------------------------------------------------------------

    \241\ See DFA Letter at 3; Themis Letter at 2; and CCMC Letter
II at 3.
    \242\ See DFA Letter at 3.
    \243\ See STA Letter II at 9; ICI Letter at 4; and CHX Letter at
9 (stating that an opt-out provision should be allowed only if there
is also an opt-in provision; but either would be premature without
data). See also IAC Recommendations.
---------------------------------------------------------------------------

H. Implementation of Tick Size Pilot

    Several commenters offered suggestions on how the Tick Size Pilot
should be implemented. Two commenters suggested that the implementation
period should be at least one-year, but could be reduced if the Tick
Size Pilot was simplified.\244\ One commenter indicated that in order
to adequately assess the burden and time necessary to implement the
Tick Size Pilot, the requirements needed to be finalized prior to
developing an implementation schedule.\245\ Other commenters stated
that either the Commission, or the Participants, should release
detailed frequently-asked-questions to assist implementation of the
Tick Size Pilot to help alleviate confusion.\246\ One commenter
requested that the list of securities be finalized prior to determining
the implementation schedule.\247\
---------------------------------------------------------------------------

    \244\ See SIFMA Letter II at 10 (citing the rollout period
required for other Commission actions and indicating that if the
Trade-At Prohibition is removed a shorter time would be sufficient)
and FIF Letter at 6 (asserting a twenty month implementation would
be necessary for the current NMS plan, but if it was simplified only
a twelve month period would be necessary).
    \245\ See CHX Letter at 1.
    \246\ See KCG Letter at 17; Liquidnet Letter at 2; and Bloomberg
Letter at 20.
    \247\ See Bloomberg Letter at 20.
---------------------------------------------------------------------------

V. Discussion and Commission Findings

    In 1975, Congress directed the Commission, through the enactment of
Section 11A of the Act,\248\ to facilitate the establishment of a
national market system to link together the individual markets that
trade securities. Congress found the development of a national market
system to be in the public interest and appropriate for the protection
of investors and the maintenance of fair and orderly markets to assure
fair competition among brokers and dealers, among exchange markets, and
between exchange markets and markets other than exchange markets.\249\
Section 11A(a)(3)(B) of the Act authorizes the Commission, ``by rule or
order, to authorize or require self-regulatory organizations to act
jointly with respect to matters as to which they share authority under
this title in planning, developing, operating, or regulating a national
market system (or a subsystem thereof) or one or more facilities.''
\250\ Rule 608 under Regulation NMS provides that the Commission's
approval of a NMS plan is required to be based upon a finding that the
plan is ``necessary or appropriate in the public interest, for the
protection of investors and the maintenance of fair and orderly
markets, to remove impediments to, and perfect

the mechanism of, a national market system, or otherwise in furtherance
of the purposes of the Act.'' \251\ Further, Rule 608 provides the
Commission with the authority to approve a NMS plan, ``with such
changes or subject to such conditions as the Commission may deem
necessary or appropriate.'' \252\
---------------------------------------------------------------------------

    \248\ 15 U.S.C. 78k-1.
    \249\ 15 U.S.C. 78k-1(a)(1)(C)(ii).
    \250\ 15 U.S.C. 78k-1(a)(3)(B).
    \251\ 17 CFR 242.608(b)(2). See also 15 U.S.C. 78k-1(a).
    \252\ 17 CFR 242.608(b)(2).
---------------------------------------------------------------------------

    While the Commission has reviewed certain aspects of decimalization
and tick sizes over the years, the Commission has not tested whether a
wider tick size for small capitalization stocks improves the market
quality for these stocks.\253\ As noted above, the JOBS Act directed
the Commission to conduct a study, which resulted in the Decimalization
Report. The Decimalization Report further recommended a public
roundtable, which in turn produced broad support among its panelists
for a pilot program. Since issuing the June 2014 Order, the Commission
has received 77 comment letters that relate to, among other things, the
development, costs, and complexity of the Tick Size Pilot, and the
Commission has carefully considered the comments and the issues raised.
The Commission has conducted significant analysis relating to the
development, costs, and complexity of the Tick Size Pilot. As noted in
the June 2014 Order and reflected in several comment letters,\254\ it
has been suggested that the minimum one penny tick size has had a
detrimental impact on incentives for underwriters to pursue public
offerings of smaller capitalization stocks, the production of sell-side
research, and the incentives for broker-dealers to make markets in the
securities of smaller capitalization companies. The Commission believes
that it is in the public interest to gather objective evidence on the
impact of the minimum tick size, and study a minimum of $0.05 tick
size, on the trading, liquidity and market quality of securities of
smaller capitalization companies.
---------------------------------------------------------------------------

    \253\ See supra note 56 and accompanying text. These commenters
suggested that the Commission had already studied the impact of tick
sizes. While the Commission staff did prepare the Decimalization
Report, which summarized academic literature related to the impact
of decimalization, the Commission has not studied the impact of
wider ticks on small capitalization stocks. See Decimalization
Report, supra note 14.
    \254\ See June 2014 Order, supra note 4. See also IssuWorks
Letter at 2; ECFTF Letter at 1; BIO Letter at 2 (``The one-size-
fits-all tick size imposed by decimalization has hampered small
company growth since it was implemented in 2000.''); BlackRock
Letter at 1; and CCMC Letter II at 2.
---------------------------------------------------------------------------

    The Commission believes that the Tick Size Pilot set forth in the
NMS plan is reasonably designed to provide measurable data that should
facilitate the ability of the Commission, the public, and market
participants to review and analyze the effect of tick size on the
trading, liquidity, and market quality of securities of smaller
capitalization companies. The Tick Size Pilot should provide a data-
driven approach to evaluate whether certain changes to the market
structure for Pilot Securities would be consistent with the
Commission's mission to protect investors, maintain fair, orderly and
efficient markets and facilitate capital formation.
    As described in detail below, the Commission, consistent with Rule
608, is modifying certain aspects of the NMS plan and the Tick Size
Pilot. Specifically, the Commission is making the following changes to
the NMS plan: (1) Extending the Pilot Period to two years; (2) lowering
the market capitalization threshold criteria for identifying Pilot
Securities to $3 billion or less; (3) modifying the Trade-At
Prohibition by: (i) Amending the definition of trade-at to clarify that
the provision would only be operative during Regular Trading Hours;
(ii) removing the Venue Limitation, and (iii) lowering the thresholds
in the Block Size definition; (4) modifying the data elements related
to Market Maker Profitability Data by: (i) Removing the data element
that would have required realized trading profits to be calculated net
of fees and rebates, and (ii) requiring further aggregation of the
Market Maker Profitability Data made publically available; (5)
requiring Participants to provide an assessment on the impact of the
Tick Size Pilot on market maker profitability; and (6) modifying the
time when Participants must submit their assessments to the Commission.
    The Commission received comments on market structure issues other
than the Tick Size Pilot, such as maker-taker fee structures, access
fees, payment for order flow, high frequency trading, and subpenny
quoting.\255\ The Tick Size Pilot is a targeted, limited-term pilot
that is directed at analyzing discrete issues related to a segment of
the equity markets. While the Commission appreciates market
participants' views and opinions on these matters, the Commission
believes that there would be substantial additional costs and
complexity if the Tick Size Pilot were expanded to address these
additional issues, and that they are broader than what the Commission
wants to study in connection with the Tick Size Pilot. Therefore, the
Commission is not expanding the Tick Size Pilot to assess these other
market structure issues.
---------------------------------------------------------------------------

    \255\ See supra notes 67-70 and accompanying text.
---------------------------------------------------------------------------

A. Costs and Complexity of the Tick Size Pilot

    The Commission received numerous comments related to the costs and
complexity of implementing and complying with the Tick Size Pilot in
general, and Test Group Three in particular.\256\ Commenters also
expressed concerns about the potential increased costs that might be
incurred by market participants, investors, and issuers as a result of
the wider minimum tick size mandated by the Tick Size Pilot.\257\
---------------------------------------------------------------------------

    \256\ See supra Section IV.A. See also infra Section V.D.4. for
the discussion on Test Group Three and the Trade-At Prohibition.
    \257\ See supra Section IV.A.
---------------------------------------------------------------------------

    With respect to market participants, such as trading centers and
routing brokers, commenters believed that those market participants
would incur substantial costs to reprogram and/or implement and operate
as brand new, their trading, order routing, compliance, and other
systems to implement the Tick Size Pilot. Such reprogramming or new
implementation of systems would also include additional testing and
compliance costs. Concerns were particularly pronounced with respect to
the costs and complexity of implementing Test Group Three and its
Trade-At Prohibition and, as noted above, some commenters believed
market participants might cease trading Test Group Three securities for
the proposed one-year duration of the Tick Size Pilot rather than incur
those implementation costs.\258\ Other commenters expressed concerns
that the complexity of the Tick Size Pilot would lead to increased
operational risks for market participants and the market as a whole.
One commenter believed that the Tick Size Pilot would impede its
ability to trade efficiently in Pilot Securities.
---------------------------------------------------------------------------

    \258\ For a full discussion of the change in the Pilot Period to
two years to address these concerns, see infra Section V.B.
---------------------------------------------------------------------------

    The Tick Size Pilot, by design, is an objective, data-driven test
intended to evaluate how a wider tick size would impact trading,
liquidity, and market quality of securities of smaller capitalization
companies. As noted above, the Commission cannot know in advance the
full effects, whether positive or negative, of a wider tick size on the
behavior of market participants in response to the Tick Size Pilot.
While the effects of wider tick sizes for small capitalization stocks
on trading, liquidity, and market quality are not clear, the Commission
believes that the Tick Size Pilot will generate data to help

inform whether significant benefits, such as improved liquidity and
market quality, could be realized by investors, issuers, and other
market participants. The Tick Size Pilot will provide the Commission
and interested parties with real-world data regarding the effects of
wider tick sizes on trading, liquidity and market quality for small-
capitalization companies, and this empirical data will inform analyses
and may serve as a basis for potential future regulatory actions to,
among other things, capture any benefits from wider tick sizes on a
permanent basis. The Commission, therefore, believes that the potential
magnitude of the benefits that could be revealed by the Tick Size Pilot
justify the costs of the Tick Size Pilot.
    The Commission acknowledges that implementation of the Tick Size
Pilot would create costs for market participants and potential
operational risks. The Commission has taken seriously the concerns
about costs, complexity, and operational risks, and has tried to
carefully balance those concerns with the objectives and goals of the
Tick Size Pilot. As a result, in response to comments, the Commission
has decided to exercise its authority under Rule 608(b)(2) \259\ to
modify the Tick Size Pilot, as described below and elsewhere in this
order. As noted by a one commenter, ``[a]ny systems change, no matter
how thoroughly prepared and tested, creates a risk of error and
negative impact to the market.'' \260\ The Commission acknowledges that
implementation of the Tick Size Pilot may involve operational risks,
but believes that the Tick Size Pilot's design will permit market
participants to leverage the use of existing compliance systems, which
have been tested and currently are in use, and that this should serve
to mitigate operational risks. In addition, certain of the Commission
modifications to the Tick Size Pilot will further align the Tick Size
Pilot requirements with existing systems which should further mitigate
operational risks. The Commission believes that these Tick Size Pilot
modifications should lessen the costs, complexity, and operational
risks of its implementation and compliance without impairing the
quality and relevance of the data to be collected. The Commission also
notes that it is approving a one-year implementation period, which
should provide market participants with adequate time for the careful
development and rigorous testing of their compliance systems for the
Tick Size Pilot.
---------------------------------------------------------------------------

    \259\ 17 CFR 242.608(b)(2).
    \260\ See SIFMA Letter at 6.
---------------------------------------------------------------------------

    Trading centers (i.e., exchanges, alternative trading systems, and
market makers and other internalizing broker-dealers), as well as non-
trading center broker-dealers that route orders for customers or
themselves and certain institutional and other investors, would incur
costs to implement and comply with the Tick Size Pilot. Market
participants would need to modify systems to comply with the minimum
$0.05 quoting and/or trading increment and applicable exceptions for
all three Test Groups. While some systems changes would be required for
the purposes of the Tick Size Pilot, market participants already have
systems in place to comply with the existing minimum $0.01 quoting
increment and applicable exemptions under Rule 612 of Regulation
NMS.\261\ Rule 612 (``Subpenny Rule'') prohibits trading centers, among
other things, from accepting, ranking or displaying an order priced
greater than $1.00 per share in an increment smaller than $0.01, absent
an applicable exemption. Consequently, the Commission believes that
compliance with the quoting restrictions of the Tick Size Pilot would
be implemented in a manner similar to the Subpenny Rule, so that
trading centers and other market participants would be able to leverage
existing Subpenny Rule compliance systems by, for example, adjusting
their parameters from $0.01 to $0.05 as applicable. Nonetheless, the
costs to market centers to implement the Tick Size Pilot could be
substantial.\262\
---------------------------------------------------------------------------

    \261\ 17 CFR 242.612.
    \262\ See CHX Letter at 17 (Estimating that its potential
implementation costs for all three Test Groups would be
approximately $140,000, and suggesting that such costs for
approximately 60 market centers could be in excess of $8.0 million).
See also supra note84.
---------------------------------------------------------------------------

    As noted above, many commenters expressed concerns about the costs
and complexity of implementing and complying with Test Group Three, and
the Commission acknowledges the particular complexity of implementing
and complying with the Trade-At Prohibition.\263\ Among other things,
trading centers would need to monitor protected quotations on other
trading centers and prevent an execution that would match the price of
any such quotation unless the trading center itself was displaying a
protected quotation at that price, and of at least that size, absent an
applicable exception. While compliance with the Trade-At Prohibition
would require systems changes by trading centers, the Commission
believes that, as with the minimum quoting increment, trading centers
should be able to leverage existing compliance systems when
implementing this aspect of the Tick Size Pilot. Trading centers today
already have systems in place to comply with the provisions of Rule 611
under Regulation NMS (``Trade-Through Rule'') \264\ and applicable
exceptions, which operates in a manner similar to the Trade-At
Prohibition. In addition, as discussed below, the Trade-At Prohibition
has been designed to closely parallel the operation of Rule 611 (e.g.,
by using protected quotations as the compliance benchmark rather than
the NBBO, by mirroring most of the Rule 611 exceptions into the Trade-
At Prohibition, and, as modified by the Commission, by eliminating the
Venue Limitation). Accordingly, the Commission believes that trading
centers should be able to efficiently build upon their existing Rule
611 compliance systems, which today monitor protected quotations on
other trading centers and prevent an execution at a price worse than
such quotations absent an applicable exception, to comply with the
Trade-At Prohibition. In addition, the Commission acknowledges that
certain non-trading center broker-dealers that desire to control the
routing of their orders today monitor protected quotations and use
``intermarket sweep orders'' to allow trading centers to rely on an
exception from Rule 611. These broker-dealers also would need to make
adjustments to their compliance systems if they desire to use the
comparable intermarket sweep order exception to the Trade-At
Prohibition but, as with trading centers, the Commission believes they
should be able to efficiently leverage their existing Rule 611
compliance systems to do so. Because compliance with the Trade-At
Prohibition would be implemented in a manner similar to compliance with
Regulation NMS, and by leveraging those longstanding systems, the
Commission does not believe that compliance with the Trade-At
Prohibition would create material additional operational risks or
materially reduce the efficiency of trading in Pilot Securities as
market participants already are complying with Regulation NMS.
---------------------------------------------------------------------------

    \263\ See supra Section IV.A. See also infra Section V.D.4. for
the discussion on Test Group Three and the Trade-At Prohibition.
    \264\ 17 CFR 242.611.
---------------------------------------------------------------------------

    The Commission also acknowledges that trading centers would be
required to produce specified data in connection with the Tick Size
Pilot and there would

be some associated costs and burdens.\265\ Among other things, trading
centers would have to produce certain data on market quality, orders,
and market maker participation, and market makers additionally would be
required to produce certain profitability data. The Commission believes
that trading centers should be able to leverage existing systems for
collecting and reporting execution quality data under Rule 605 of
Regulation NMS for certain of the data relating to market quality and
order information.\266\ With respect to producing Market Maker
Profitability Data, the Commission notes that market makers may capture
trading profit data for internal business purposes. As discussed
further below, the Commission believes that the design of the Trading
Center Data already mitigates concerns about confidentiality and has
further modified the Market Maker Profitability Data requirements to
address concerns regarding the confidentiality of that data.\267\
---------------------------------------------------------------------------

    \265\ See, e.g., FIF Letter at 5-6; SIFMA Letter at 8 (``the
data collections specified in Appendices B and C of the Proposed
Plan are extremely burdensome on broker-dealers and should be
eliminated . . . The proposed collections of order and profitability
data unnecessarily increase the burden on all trading centers,
especially market makers who would be subject to both Appendix B and
C.''); Nasdaq Letter at 6; and Citadel Letter at 8.
    \266\ 17 CFR 242.605.
    \267\ See infra Section V.E.2.
---------------------------------------------------------------------------

    The Commission recognizes that trading centers and market makers
would be required to incur some additional costs to produce the
specific data called for by the Tick Size Pilot. In particular, the
Commission recognizes that trading centers and market makers would need
to make changes to their systems to compile the data and that
transmitting the data would entail costs as well. However, as discussed
below, the Trading Center Data and Market Maker Profitability Data are
necessary to examine specific components of the Tick Size Pilot. As
such, the Tick Size Pilot will provide the Commission and interested
parties with real-world data regarding the effects of wider tick sizes
on trading, liquidity, and market quality for securities of small
capitalization companies, and this empirical data will inform analyses
and potential future regulatory actions to, among other things, capture
any benefits from wider tick sizes on a permanent basis.
    As discussed below in Section V.E.2, the Commission is modifying
certain aspects of the Tick Size Pilot to reduce the data production
burdens and related concerns about the confidentiality thereof (e.g.,
by eliminating the requirement for market makers to report realized
trading profits net of fees and rebates, and by requiring Market Maker
Profitability Data that is made publicly available to be further
aggregated).\268\ The Commission is not modifying the Trading Center
Data to address confidentiality concerns. First, the order data and the
market quality data would be available on a significant lag, mitigating
potential risks about confidentiality. One concern is that order data
and market quality data may reveal the trading intentions of market
participants. However, this concern is mitigated if the data is
disseminated with a significant lag because market participants may
have completed their trades, rendering this information less sensitive.
Second, the Commission does not believe that the order data would be
sufficiently detailed to identify particular investors or their trading
strategies. Further, current market quality data identifies the trading
center producing the data, so any increases in risks regarding
confidentiality are unlikely to be significant. The collection and
analysis of relevant data, however, is the central purpose of the Tick
Size Pilot. The effects of wider tick sizes for small capitalization
stocks on trading, liquidity, and market quality are not clear and the
Tick Size Pilot will provide data to allow the Commission to
effectively test for the potential benefits and costs of permanently
changed tick sizes. The Commission believes that the potential
magnitude of the benefits that could be revealed by the Tick Size Pilot
justify the costs of running the Tick Size Pilot.
---------------------------------------------------------------------------

    \268\ The Commission also notes that data production costs
should also be reduced as a result of the modification of the market
capitalization threshold which will reduce the universe of potential
Pilot Securities. See infra Table 1 in Section V.C.1.
---------------------------------------------------------------------------

    Finally, the Commission acknowledges the concerns expressed by
commenters about the potential increased costs that might be incurred
by investors and issuers as a result of the wider minimum tick size
mandated by the Tick Size Pilot.\269\ As noted above, several
commenters expressed concern that the Tick Size Pilot would help market
professionals at the expense of investors. In fact, two commenters
believed that the increased costs to investors could exceed $200
million per year. Other commenters expressed the view that the Tick
Size Pilot could raise the cost of capital for issuers.\270\ Other
commenters suggested that an assessment of investor costs should be
completed prior to the implementation of the Tick Size Pilot.
---------------------------------------------------------------------------

    \269\ See supra note 59 and accompanying text. See also IAC
Recommendations (expressing concern that a pilot would
disproportionately harm retail investors because their trading costs
would rise). The Commission has carefully considered the IAC
Recommendations from January 2014. After careful deliberation and
considering the IAC Recommendations, the Commission is approving the
NMS plan, as modified.
    \270\ See supra note 78 and accompanying text.
---------------------------------------------------------------------------

    The Commission notes that the central purpose of the Tick Size
Pilot is to assess the market quality impact of an increase in the tick
size for the securities of smaller capitalization companies, which is
comparable to assessing the impact of the Tick Size Pilot on investors.
Notwithstanding the opinions of the commenters, whether an increased
tick size would improve market quality, or increase or reduce execution
costs for some or all investors, in some or all Pilot Securities, is
not known at this time. As further discussed in Section V.C.1, the
number of potential Pilot Securities that currently trade with a spread
of greater than $0.05, and less than $0.05, is approximately equal. For
Pilot Securities that currently trade with less than $0.05 spread, the
costs for investors to trade smaller orders, typically placed by retail
investors, at the quote may increase while the costs for investors to
trade small orders in general may or may not increase, depending on the
degree to which trades execute between the bid and the offer. The
impact on larger orders, typically placed by institutional investors,
however, is not clear. The impact on Pilot Securities that currently
trade with a spread of greater than $0.05 similarly is not clear, as
spreads in these securities may change as well depending on the impact
of an increase in the tick size on market making incentives. The
Commission notes that the exception for Retail Investor Orders was
proposed by the Participants as a means to reduce the risk of the Tick
Size Pilot having a detrimental impact on retail investor execution
quality, and further, the Commission has made modifications to the
proposal submitted by the Participants (e.g., lowering the market
capitalization threshold to exclude securities that tend to have
narrower spreads and, with respect to the Trade-At Prohibition,
removing the Venue Limitation \271\ and liberalizing the Block Size
definition).\272\
---------------------------------------------------------------------------

    \271\ The removal of the Venue Limitation should reduce the
potential costs and complexity associated with the proposed Tick
Size Pilot by not requiring liquidity that would have been affected
by the Trade-At Prohibition to be routed from off exchange venues to
lit venues. See infra Section V.D.4.d.
    \272\ The modification to liberalize the Block Size definition
should serve to mitigate disruptions to the institutional trading of
securities with smaller market capitalization. See infra Section
V.D.4.e.

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

    With respect to the specific cost estimates, the Commission
appreciates the efforts of commenters to quantify costs and has
carefully assessed the estimates. These estimates rely on historical
trading data and reasonable assumptions on how retail execution quality
may change with wider tick sizes. The Commission cannot know, however,
the full impact of wider tick sizes on investors, before the Tick Size
Pilot is underway. With the exception of the modifications and
consideration for retail investors in the original design of the Tick
Size Pilot, the Commission does not believe it can further reduce these
costs without sacrificing the utility of the Tick Size Pilot.
Specifically, the Commission would need to focus the Tick Size Pilot
exclusively on stocks with higher transaction costs, which are
determined by spreads. As noted in Section V.C.3. below, if the tick
size mechanically affects a criterion for inclusion, then the Tick Size
Pilot would be severely limited in its ability to inform any future
rulemaking by the Commission. While the effects of wider tick sizes for
small capitalization stocks on trading, liquidity, and market quality
are not clear, the Commission believes that the Tick Size Pilot will
generate data to help inform whether the significant benefits, such as
improved liquidity and market quality, could be realized by investors,
issuers, and other market participants. The Tick Size Pilot will
provide the Commission and interested parties with real-world data
regarding the effect of wider tick sizes on trading, liquidity, and
market quality for small-capitalization companies and this empirical
data will inform analyses and potential future regulatory actions to,
among other things, capture any benefits from wider tick sizes on a
permanent basis. The Commission, therefore, believes that the potential
magnitude of the benefits that would be revealed by the Tick Size Pilot
justify the costs of the Tick Size Pilot.
    Similarly, while the Commission recognizes the potential connection
between tick size, liquidity, and cost of capital, the impact of an
increased tick size on the costs and ability of issuers to raise
capital, if any, is not known at this time. As noted above, the
Commission believes that altering tick sizes could result in
significant market-wide benefits and improvements to capital formation.
In particular, if a wider tick size leads to more active market making
and attracts more investors to small capitalization stocks, positive
effects on trading, liquidity, and market quality as measured by
metrics such as trading volume, displayed depth, effective spreads, or
execution costs for small and large trades could be observed. Indeed,
some advocates for a tick size pilot argue that a wider tick size would
benefit issuer's capital formation and cost of capital.\273\
Nonetheless, the Commission recognizes that these benefits may not
manifest in the manner or to the extent anticipated. Further, the
Commission believes that the design of the Tick Size Pilot and the data
in the Appendices will facilitate robust analyses to help assess the
benefits and costs of wider tick sizes. Nevertheless, the Commission
intends to carefully monitor implementation of the Tick Size Pilot and,
should it appear that the protection of investors is compromised, the
Tick Size Pilot can be modified or terminated early to protect them and
integrity of the market.
---------------------------------------------------------------------------

    \273\ See, e.g., BIO Letter at 5.
---------------------------------------------------------------------------

    Some commenters expressed the view that the Tick Size Pilot should
have been implemented through Commission rulemaking that includes a
cost-benefit analysis or that the Commission should have conducted a
cost-benefit analysis as part of the NMS plan process. The Commission
reasonably concluded that proceeding with the Tick Size Pilot through
an NMS plan was an appropriate way to gather information necessary to
assess whether changes should ultimately be made through rulemaking or
otherwise. As discussed in detail in the June 2014 Order, and noted
above, consideration of issues related to minimum tick sizes has been
ongoing for years.\274\ That history of study led the Commission to
conclude that it could not adequately evaluate the need for additional
regulatory action without empirical data that would be generated from a
pilot implemented through an NMS plan. The Commission is modifying the
NMS plan in response to comments, including comments with respect to
the costs and benefits. Consideration of the potential costs and
benefits of the Tick Size Pilot is reflected in the June 2014 Order,
the Notice and this order which also addresses comments about the
potential competitive impact and other economic consequences of the NMS
plan.
---------------------------------------------------------------------------

    \274\ See supra Section II. See also June 2014 Order, supra note
4 for a further discussion on the history of decimalization and tick
sizes.
---------------------------------------------------------------------------

    The Commission's approval of the NMS plan is designed and intended
to produce measurable data to study the impact of a wider tick size on
the liquidity and trading in the securities of smaller capitalization
companies, which should support an objective data-driven review of this
important policy issue. Legitimate questions have been raised about the
impact of decimalization on the market for small capitalization
securities.\275\ The Tick Size Pilot, as modified, should produce
valuable data to allow the Commission, the public, and market
participants to assess the impact of a wider tick size on the trading,
liquidity, and market quality of smaller company stocks.
Notwithstanding, the Commission would, and expects the Participants to,
actively monitor the operation of the Tick Size Pilot \276\ and, if
necessary, the Tick Size Pilot can be modified or terminated early to
ensure the protection of investors and integrity of the market.
---------------------------------------------------------------------------

    \275\ See supra note 9 and accompanying text.
    \276\ See June 2014 Order, 79 FR at note 50, supra note 4. As
noted in the June 2014 Order, during the Pilot Period, the
Commission believes that Participants should notify the Commission
if they detect any broadly negative impact of the Tick Size Pilot on
market quality.
---------------------------------------------------------------------------

    In addition, the Commission emphasizes that it welcomes the
submission of additional comments and empirical evidence during the
Pilot Period with respect to, among other things, the operation of the
Tick Size Pilot, in particular the three Test Groups, and the costs
associated therewith. The Commission would take such comments into
account in its consideration of related future regulatory actions.

B. Tick Size Pilot Duration

    As proposed, consistent with the June 2014 Order, the Pilot Period
would be for one year. In the June 2014 Order, the Commission noted
that it preliminarily believed that a one-year Pilot Period would be
sufficient to generate data to reliably analyze the effects and impact
of wider tick sizes. Several commenters argued that the Pilot Period
should be longer than one-year.\277\ Commenters suggested that the Tick
Size Pilot would be too complex and costly to implement for a one-year
Pilot Period, which could lead market participants to opt-out of
quoting and trading in the Pilot Securities, especially in Test Group
Three Pilot Securities.\278\ As noted by several commenters, the one-
year Pilot Period could lead some market participants to decide not to
participate in the Tick Size Pilot.\279\ For example, one commenter
suggested that a one-year Pilot Period would not be ``enough time to
warrant start-up costs and other

investments to participate.'' \280\ Another commenter suggested that a
longer Pilot Period would ``provide a better incentive for investments
that market participants will need to make in order to increase their
exposure to the small cap[italization] market.'' \281\ Some commenters
suggested that a longer Pilot Period could also help justify its up-
front implementation costs. Commenters noted that if market
participants did not participate in the Tick Size Pilot, the
reliability of the data could be compromised.
---------------------------------------------------------------------------

    \277\ See supra note 89 and accompanying text.
    \278\ See supra note 90 and accompanying text.
    \279\ See supra notes 95-96 and accompanying text.
    \280\ See Duffy Letter at 1. See also ABC letter at 3.
    \281\ See ABC Letter at 3.
---------------------------------------------------------------------------

    The Commission recognizes that there would be start-up costs and
other investments associated with participating in the Tick Size Pilot,
and does not want the Pilot Period to be a disincentive to participate.
The Commission believes that extending the Pilot Period to two years
would help address some of those concerns in part by having those costs
spread out over a longer period. The Commission expects that a longer
Pilot Period should encourage wider participation (or remove incentives
to opt-out of participation) and therefore help make the data more
reliable, richer, and useful. \282\ Accordingly, after carefully
considering the comments, the Commission is modifying the NMS plan by
lengthening the Pilot Period from one-year to two-years.
---------------------------------------------------------------------------

    \282\ The Commission notes that market makers not trading in
Pilot Securities would forgo the profits they could earn from
trading in those securities. Those foregone potential profits would
be larger over a longer time period. In addition, the larger
potential profits that could be earned by market makers over the
longer time period should help to offset any implementation and
compliance costs associated with trading in the Pilot Securities.
---------------------------------------------------------------------------

    The Commission does not think it is necessary to extend the Tick
Size Pilot beyond two years. As noted above, several commenters
suggested a Pilot Period longer than two years.\283\ In the Order, the
Commission noted its preliminary belief that a one-year period would
generate sufficient data to reliably analyze the effects and impact of
the wider tick size. The Commission continues to believe that
meaningful data could be generated in a relatively short time period
but believes that extending the Pilot Period for one additional year
could encourage participation in the Tick Size Pilot, which further
supports the goal of generating sufficient data. If a number of market
participants decided to refrain from participating in the Tick Size
Pilot, the ability to generate and collect data sufficient to study the
impact of wider tick sizes would be frustrated. The Commission also
notes that a longer Pilot Period should help to mitigate concerns that
the data generated from the Tick Size Pilot could be susceptible to
short term fluctuations as suggested by commenters. Therefore, the
longer Pilot Period should also support representational
faithfulness.\284\ The Commission understands that some commenters
supported the one-year Pilot Period.\285\ However, the Commission
believes that the longer Pilot Period is necessary for the reasons
discussed above.
---------------------------------------------------------------------------

    \283\ See supra Section IV.B.
    \284\ In this respect, the Commission notes that the costs of
implementing the Tick Size Pilot should be justified not by a longer
duration per se, but by the benefits that a longer Tick Size Pilot
would bring in generating useful data that could guide potential
future tick size rulemaking. The Commission notes that one commenter
suggested that the proposed one-year time period would make the data
easy to manipulate. See Duffy Letter at 1. As noted, the Commission
believes that the longer Pilot Period should support data integrity.
    \285\ See supra Section IV.B.
---------------------------------------------------------------------------

    The Commission received comments on whether the Tick Size Pilot
should cease at the end of the Pilot Period or continue to operate
while the data are assessed.\286\ As described below, the Participants
will be required to submit their assessment 18 months after the start
of the Tick Size Pilot, based on data generated during the first 12
months.\287\ This timing is consistent with the timing set forth in the
June 2014 Order,\288\ but would provide the Commission and the public
with valuable information about the Tick Size Pilot's impact during the
Pilot Period. In addition, the Trading Center Data and Market Maker
Profitability Data would be publically available during the Pilot
Period, which would allow market participants and the public to conduct
analysis during the Pilot Period.
---------------------------------------------------------------------------

    \286\ See supra notes 105-108.
    \287\ Therefore, the modification to the Pilot Period will not
delay assessment of the Tick Size Pilot.
    \288\ The June 2014 Order and proposed NMS plan provided that
Participants should submit their assessment six months after the end
of the Tick Size Pilot, which would have been 18-months after the
start of the Tick Size Pilot.
---------------------------------------------------------------------------

    The Commission, however, is only approving a Pilot Period of two
years in this order. Any proposal to extend the Tick Size Pilot beyond
the two-year term would be considered and evaluated at a later date.
Therefore, the modification to the Pilot Period of the Tick Size Pilot,
extending its duration to two-years, is appropriate.

C. Criteria for Pilot Securities

    The Tick Size Pilot sets forth five criteria for determining which
NMS common stocks would be included: (1) Market capitalization of $5
billion or less; (2) Closing Price of at least $2.00 on the last day of
the Measurement Period; (3) Closing Price of at least $1.50 on every
trading day during the Measurement Period; (4) CADV of one million
shares or less; and (5) VWAP of at least $2.00.
1. Market Capitalization for Pilot Securities
    Many commenters noted that the market capitalization threshold was
too high and recommended that the threshold be lowered.\289\ Commenters
expressed views that the $5 billion market capitalization threshold
would include many securities not considered as small capitalization
stocks. Certain comments recommended that the market capitalization
threshold be as low as $250 million to $2 billion. After carefully
considering the comments and reviewing prior staff analysis,\290\ the
Commission deems it appropriate to change the NMS plan by lowering the
market capitalization threshold for Pilot Securities from $5 billion or
less to $3 billion or less. In the June 2014 Order, the Commission
preliminary believed that a market capitalization of $5 billion or less
would capture the securities of smaller and middle capitalization
companies with low liquidity and trading activity, and would provide
the Tick Size Pilot with a broad sample. However, in response to the
comments received, the Commission staff reviewed its analysis of stocks
from a period of July 1, 2013 to August 31, 2013,\291\ and found that
lowering the market capitalization threshold from $5 billion or less to
$3 billion or less should ensure that there would be a sufficient
sampling of stocks to support the analysis of the Tick Size Pilot,
including as it relates to a variability in effective spreads,
particularly effective spreads greater than 5 cents per share for Pilot
Securities. Table 1 reflects staff's analysis.
---------------------------------------------------------------------------

    \289\ See supra Section IV.C.1.
    \290\ See June 2014 Order, supra note 4.
    \291\ See June 2014 Order, supra note 4.

                                  Table 1--Effective Spread Distribution \292\
----------------------------------------------------------------------------------------------------------------
                                                                   Effective spreads (in cents)     Percent of
                                                     Number of   --------------------------------   stocks with
        Market capitalization categories              stocks           90th            10th          effective
                                                                    percentile      percentile     spread >$0.05
----------------------------------------------------------------------------------------------------------------
Less than $1 billion............................           1,979           25.33            1.42           53.97
Less than $2 billion............................           2,376           23.10            1.43           50.04
Less than $3 billion............................           2,574           22.31            1.43           48.10
Less than $5 billion............................           2,758           21.93            1.43           46.63
----------------------------------------------------------------------------------------------------------------

    Overall, Table 1 provides evidence that the selection of a market
capitalization threshold involves trading-off potential sample size,
which affects statistical power,\293\ and the potential negative impact
of the Tick Size Pilot on stocks with low current effective spreads.
The analysis in Table 1 shows that no single threshold can produce a
clear-cut sample of securities for the Tick Size Pilot. In particular,
for each potential market capitalization threshold in the table,
approximately 10% of stocks have effective spreads of 1.43[cent] or
less. Further, for stocks in the lower thresholds, more stocks have
higher effective spreads. This shows that the range of effective
spreads is greater for lower market capitalization stocks. However, the
number of stocks in the potential sample declines with market
capitalization as well. Table 1 also shows that lowering the market
capitalization threshold from $5 billion or less to $3 billion or less
would reduce the universe of potential Pilot Securities by only 184
stocks, which suggests that the threshold of $3 billion or less would
restrict the Tick Size Pilot to smaller stocks while still assuring a
sufficiently large sample.
---------------------------------------------------------------------------

    \292\ Data in this table covers common stocks with average price
greater than $2 per share and average daily trading volume smaller
or equal than one million shares during the period of July 1, 2013-
August 31, 2013. Data comes from the NYSE's Trade and Quote Data.
    \293\ Statistical power is the ability to detect an effect, if
the effect actually exists.
---------------------------------------------------------------------------

    Therefore, the Commission believes that it is necessary and
appropriate to change the NMS plan by lowering the market
capitalization threshold to $3 billion or less. The Commission notes
that this change would result in fewer securities eligible to be
included in the Tick Size Pilot, but this reduction should not
materially impact the Tick Size Pilot's goal of generating useful data.
Further, the lowered threshold should lessen the impact of the Tick
Size Pilot on the overall market, in that stocks included in the Test
Groups would be smaller and less liquid; and their combined trading
volume as a proportion of the overall market volume would also be
lowered.
    Many commenters recommended lowering the market capitalization
threshold to $1 billion or less (or to an even lower threshold).\294\
However, Table 1 shows that further reducing the market capitalization
threshold from $3 billion or less to $1 billion or less would reduce
the number of Pilot Securities by additional 595 stocks. The Commission
believes that such a reduction in market capitalization would result in
a sample size that is too small (1,979 stocks, including the Control
Group), significantly reducing the power of a statistical analysis of
the Tick Size Pilot. Moreover, the threshold of $1 billion or less
would limit the ability to assess the impact of the widened ticks on
stocks with different market capitalizations and hence the utility of
the Tick Size Pilot in assessing possible market capitalization
thresholds for a potential future tick size rulemaking.\295\
---------------------------------------------------------------------------

    \294\ See supra note 115 and accompanying text.
    \295\ Two commenters recommended lowering the market
capitalization threshold to $2 billion or less see supra note 115
and accompanying text. That threshold would suffer from the same
disadvantages as the threshold of $1 billion or less, although to a
lesser extent. In particular, Table 1 shows that reducing the market
capitalization threshold from $3 billion or less to $2 billion or
less would reduce the number of Pilot Securities by additional 198
stocks. See supra Table 1 in Section V.C.1. The threshold of $2
billion or less would also limit the ability to assess the impact of
the widened ticks on stocks with different market capitalizations.
---------------------------------------------------------------------------

2. Other Proposed Selection Criteria for Pilot Securities
    The Commission received a few comments on the other proposed
selection criteria.\296\ For example, one commenter suggested that the
volume threshold should range from 300,000 to 500,000 for illiquid
shares. The Commission has considered these comments but does not
believe it is necessary to modify the Tick Size Pilot any further in
response. First, by having a floor of 300,000 shares, many small
capitalization firms would be excluded from the Tick Size Pilot.
Second, the upper threshold of 500,000 would reduce the sample size and
limit the variation in stock characteristics in the Tick Size Pilot.
The goal of the Tick Size Pilot is to study the effect of tick size on
the liquidity and trading of small capitalization stocks. Therefore,
the Commission believes that the universe of Pilot Securities should
include a variety of stock characteristics in the sample to facilitate
the ability to conduct fulsome assessments.
---------------------------------------------------------------------------

    \296\ See supra Section IV.C.2.
---------------------------------------------------------------------------

    Other commenters suggested that the CADV be lowered or that it
should be based on the dollar trading value or that it should be based
relative to public float. The Commission has considered these comments
but does not believe it is necessary to modify the Tick Size Pilot any
further in response. In particular, it is widely known that these
volume measures are highly correlated with each other and therefore
would most likely produce similar samples of Pilot Securities. Further,
share volume is less correlated with market capitalization than other
volume measures, so it would add the most as a separate criterion.
3. Additional Criteria for Pilot Securities
    Commenters also suggested additional criteria for selecting the
Pilot Securities.\297\ For example, several commenters suggested that
the average weighted daily spread of five cents or greater should be a
criterion because some securities with spreads less than five cents
would not benefit from the Tick Size Pilot. After careful review, the
Commission believes that the selection criteria as proposed in the NMS
plan, and modified by the Commission, are appropriate. In particular,
the Commission believes that the selection criteria should provide an
appropriate number of securities to test while also minimizing
potential concerns about costs to investors and issuers. Further, tick
size does not mechanically affect the approved criteria set forth in
the Tick Size Pilot, making it more informative for any potential
future tick size rulemaking.
---------------------------------------------------------------------------

    \297\ See supra Section IV.C.3.
---------------------------------------------------------------------------

    The Commission does not believe that a spread criterion should be
included. Tick size mechanically affects alternative criteria such as
bid-ask spreads and effective spreads, such that

using such criteria to determine Pilot Securities would make the Tick
Size Pilot less informative on when the tick size in a stock should be
smaller. In addition, researchers should be better positioned, without
spread criteria that is set forth by the NMS plan, to use Tick Size
Pilot data to independently suggest tick size criteria for securities
with smaller capitalization.
4. Securities Excluded From the Tick Size Pilot
    The Tick Size Pilot, as proposed, excludes securities that have had
an IPO within six months of the start of the Pilot Period. Commenters
expressed views on other securities that should be excluded from the
Tick Size Pilot, including securities that are cross-listed in Canada
and securities that trade below $1.00 per share during the Pilot
Period. The Commission notes that securities that are cross-listed in
Canada are included in other NMS provisions and plans; accordingly the
Commission believes that such securities should also be included in the
Tick Size Pilot. The Commission also notes that researchers may choose
not to include all securities in the Test Groups when they undertake
their analyses. In particular, researchers may choose not to include
securities that are cross-listed with Canada if they think the results
of their analyses may be significantly affected.
    The Commission believes that the exclusion of securities that have
participated in a recent IPO is necessary because such stocks would not
have a full data set prior the start of the Tick Size Pilot, which
would limit the ability of the Commission and the public to analyze the
effects of the Tick Size Pilot against a sufficient baseline.
    One commenter suggested that the NMS plan specifically eliminate
Pilot Securities that trade at $1.00 or less during the Pilot Period.
The Commission notes that the Participants proposed additional
selection criteria to minimize the likelihood that securities that
trade with a share price of $1.00 or less would be included in the Tick
Size Pilot. Specifically, there are three criteria that seek to
evaluate the share price of potential Pilot Securities: (1) a closing
price of at least $2.00 on the last day of the Measurement Period; (2)
a closing price on every U.S. trading day during the Measurement Period
that is not less than $1.50; and (3) a Measurement Period VWAP of at
least $2.00 per share. The Participants stated that these criteria were
designed to avoid having securities priced $1.00 or less selected as
Pilot Securities but the Participants state that Pilot Securities would
not be excluded from the Tick Size Pilot if their share price falls to
$1.00 or less during the Pilot Period. The commenter has not suggested
that these criteria are not sufficient for this purpose but states that
it is ``reasonable to expect a small number of Pilot Securities to
trade below $1.00 during the Pilot.'' The Commission believes that once
established, the universe of Pilot Securities should stay as consistent
as possible so that the analysis and data can be accurate throughout
the Pilot Period.
    Finally, the Commission received a few comments supporting the
exclusion of ETFs from the Tick Size Pilot. The Commission agrees that
these securities should be excluded because their pricing is derivative
of the value of their component securities.
5. Assignment of Pilot Securities
    The NMS plan contains procedures for stratified random sampling in
which the Participants would assign the Pilot Securities into 27
categories, and then randomly assign Pilot Securities into the Tick
Size Pilot groups (Control Group and three Test Groups), based on the
percentages of Pilot Securities in each category. The Commission did
not receive comments with respect to this aspect of the NMS plan.
    In the June 2014 Order, the Commission stated that the assignment
of Pilot Securities into each test group should involve stratified
sampling by market capitalization and price. The Participants proposed
to add the CADV to the market capitalization and price. The Commission
believes that the addition of CADV should ensure that each test group
contains a representative of the total universe of Pilot Securities.
Specifically, this should help ensure that the four groups of
securities are comparable to each other in terms of stock
characteristics and therefore should provide an ideal experimental
setting for robust analysis of the Tick Size Pilot.\298\
---------------------------------------------------------------------------

    \298\ Ideally, researchers would want to have identical stocks
in each group to isolate the effects of the different treatments in
the four groups. However, because this is not possible, researchers
employ techniques to make the stocks in the four groups as similar
as possible. The SROs have proposed such a technique.
---------------------------------------------------------------------------

D. Control Group and Test Groups

    The Tick Size Pilot would have a Control Group and three Test
Groups, comprised of 400 Pilot Securities per test group. Test Group
One Pilot Securities would quote in $0.05 per share increments and
would trade at any currently permitted increments. Test Group Two Pilot
Securities would quote in $0.05 per share increments like those in Test
Group One, but would only be permitted to trade in $0.05 per share
increments, subject to three exceptions. Finally, Test Group Three
Pilot Securities would quote in $0.05 per share increments and trade at
$0.05 per share increments consistent with Test Group Two, and be
subject to the Trade-At Prohibition. Pilot Securities in the Control
Group would continue to quote and trade at the pricing increments that
are currently permitted.
    Several commenters opined about the design of the Tick Size Pilot.
For example, some commenters suggested that the Tick Size Pilot should
be narrower, with only one or two test groups which would lessen the
cost and complexity of the Tick Size Pilot.\299\ Other commenters
supported the incremental design of the Tick Size Pilot.
---------------------------------------------------------------------------

    \299\ See supra note 126 and accompanying text.
---------------------------------------------------------------------------

    The Commission notes that the NMS plan has been designed to
incrementally assess potential changes to the Tick Size Pilot, such
that Test Group One would only add a wider quoting increment, while
Test Group Two would also add a wider trading increment, and finally
Test Group Three would add the Trade-At Prohibition. The Commission
believes that constructing the Tick Size Pilot in this manner should
generate the most meaningful and measurable data that should allow the
Commission and other interested parties to conduct studies.
    Commenters also expressed their views that other tick sizes, both
larger and smaller than the proposed $0.05 tick size increment, should
be included and tested concurrently within the Tick Size Pilot.\300\ In
the June 2014 Order, the Commission stated its preliminary belief that
$0.05 is an appropriate minimum increment, due to the significant
percentage of Pilot Securities with a bid-ask spread of greater than
$0.05. As noted above, the Commission modified and analyzed potential
Pilot Securities based on the $3 billion market capitalization
threshold, for a period of July 1, 2013 to August 31, 2013 and found
that 48.1 percent of these securities had effective spreads greater
than $0.05.\301\ For these securities, the impact on costs to investors
of an increase of the minimum price increment to $0.05 is not clear, as
effective spreads in these securities may change as well depending on
the impact of an increase in the tick size on market making incentives.
For securities with effective spreads smaller than $0.05, the

effective spread may or may not rise due to the increase in the minimum
increment, depending on the degree to which trades execute between the
bid and the offer. Increased effective spreads, holding everything else
equal, would represent increased costs to investors. However, the Tick
Size Pilot will be able to address whether the increased minimum
increment will lead to more market maker participation and ultimately,
to more liquidity in small capitalization stocks, which may counteract
increased costs due to higher effective spreads. The Commission
believes that the data supports the conclusion that, on balance, the
$0.05 increment is appropriate for the Tick Size Pilot because it
should mitigate cost increases to investors while supporting a robust
test. While commenters suggested additional increments to test along
with the $0.05 increment, the Commission believes that additional
increments could increase the Tick Size Pilot's complexity by, for
example, increasing the number of test groups in the Tick Size Pilot,
which in turn would require more programming development and system
changes by market participants.\302\
---------------------------------------------------------------------------

    \300\ See supra notes 129-131 and accompanying text.
    \301\ See supra Table 1 in Section V.C.1.
    \302\ While additional increments would provide additional data
and would allow for additional tests, the Commission believes that
the Tick Size Pilot with one increment will allow for a
comprehensive analysis of the effects of an increased tick size and
the added complexity would not be justified. In addition, the added
complexity of additional increments may not only make analyses more
complicated, but rather may even reduce the statistical power of
such analyses and increase the operational risk of implementing the
Tick Size Pilot.
---------------------------------------------------------------------------

    In the NMS plan, the Participants proposed 400 Pilot Securities per
Test Group positing that the increased size of each Test Group would
help to ensure a sufficient data yield for the completion of required
assessments even in the event of the removal or exclusion of Pilot
Securities. The Commission received three comments on this aspect of
the Tick Size Pilot, two of which said the Test Groups should be
smaller and one who thought 400 was appropriate.\303\ The Commission
believes 400 Pilot Securities per Test Group should be large enough to
generate data to reliably test for the effects of larger tick size, and
should make the Tick Size Pilot more resilient in the event of the
unforeseen removal or exclusion of Pilot Securities. Therefore, the
Commission believes that assigning 400 Pilot Securities to each Test
Group is appropriate.
---------------------------------------------------------------------------

    \303\ See supra note 125 and accompanying text.
---------------------------------------------------------------------------

    The Commission received a few other comments related to the
operation of the Tick Size Pilot. Specifically, two commenters offered
differing opinions with respect to whether the Tick Size Pilot should
operate during opening and closing auctions.\304\ The Commission notes
that the NMS plan provides that the Tick Size Pilot would be
operational during and outside of Regular Trading Hours, which is
defined in the NMS plan as consistent with Rule 600(b)(64) of
Regulation NMS.\305\ If the Participants find that further
clarification or modification is needed to address the opening and
closing auctions, they may utilize the procedures set forth in Rule 608
to amend the NMS plan. However, the Commission notes that switching to
penny increments during these auctions may cause additional complexity
and would be different than how these auctions are currently run.
Specifically, opening and closing auctions typically do not operate
with increments different than the increments used during Regular
Trading Hours.
---------------------------------------------------------------------------

    \304\ See supra notes 132-133 and accompanying text.
    \305\ See NMS plan Section I(CC) and 17 CFR 242.600(b)(64)
defines Regular Trading Hours as the time between 9:30 a.m. and 4:00
p.m. Eastern Time.
---------------------------------------------------------------------------

    In addition, two commenters requested clarification on how to
handle orders that do not conform to the quoting increments.\306\ The
Commission notes that the Participants, as required under the NMS plan,
would be required to adopt rules that are needed for compliance by the
Participants and their members with the provisions of the Tick Size
Pilot.\307\ In addition, the Participants, as required under the NMS
plan would be required to develop written policies and procedures that
are reasonably designed to comply with the quoting and trading
requirements of the Tick Size Pilot. Therefore, the Participants should
ensure that they address issues and questions related to the operation
of the Tick Size Pilot during the implementation period.
---------------------------------------------------------------------------

    \306\ See supra notes 134-135 and accompanying text.
    \307\ Any new rules or changes to existing rules of the
Participants would be subject to Section 19 of the Act. See 15
U.S.C. 78s.
---------------------------------------------------------------------------

1. Control Group
    The Pilot Securities in the Control Group would be quoted and
traded in any increment currently permitted. Any Pilot Securities that
are not selected to be included in a test group would be placed in the
Control Group. The Commission believes that the Control Group should
provide a baseline for the analysis of the effect of the Tick Size
Pilot on liquidity and market quality data.
2. Test Group One: Widened Quote Increment
    As discussed above, Pilot Securities in Test Group One would have a
quoting increment restriction of $0.05 but could continue to trade at
any currently permitted price increment. The Participants would be
required to adopt rules that would prohibit the Participants or any
member of a Participant from displaying, ranking, or accepting from any
person any displayable or non-displayable bids or offers, orders, or
indications of interest in increments other than $0.05. Orders priced
to execute pegged to the midpoint of the NBBO and orders entered in a
Participant's retail liquidity program could be quoted at less than the
$0.05 increment. The Commission notes that Test Group One would be
different from the Control Group in only one manner--the quoting
increment would be widened.
    Several commenters argued that Test Group One should be eliminated
because trading for Test Group One Pilot Securities would migrate to
non-displaying trading centers.\308\ One commenter also suggested
eliminating Test Group One to reduce the complexity of the Tick Size
Pilot.\309\ This commenter believed that eliminating Test Group One
would reduce the costs of implementing the Tick Size Pilot and posited
that ``there is little disagreement'' that Test Group One would divert
order flow to unlit markets.\310\
---------------------------------------------------------------------------

    \308\ See supra Section IV.D.1.
    \309\ See supra note 136 and accompanying text.
    \310\ The Commenter did however acknowledge that removing Test
Group One from the Tick Size Pilot would be a significant change.
See KOR Letter II at 3.
---------------------------------------------------------------------------

    The Commission, however, believes, as noted above, that Test Group
One is necessary as an initial incremental change to test the impact of
the Tick Size Pilot on market quality and liquidity of this market
segment. The Commission believes that Test Group One is reasonably
designed to generate data on how trading characteristics and liquidity
would change if the quoting increment alone is widened. One commenter
suggested that exchanges and agency ATSs would be at a competitive
disadvantage vis-[agrave]-vis broker-owned proprietary execution
systems which can execute orders at any increment without accepting or
ranking an order at an impermissible increment. This commenter
recommended that market participants be permitted to accept and rank,
but not display, orders in one penny increments for Test Group

One.\311\ The Commission notes the quoting restrictions of Test Group
One would be implemented in a manner similar to Rule 612, the Subpenny
Rule.\312\ Further, the Commission notes that the issue raised by the
commenter is present in the current trading environment with Rule 612,
where brokers may execute trades in increments finer than $0.01 so long
as they do not accept, rank, or display orders in such increments. The
Commission believes it is important to test and evaluate Test Group One
with a design that is similar to the current trading environment and
within the context of the Tick Size Pilot's incremental design that
should permit qualitative comparison with Test Group Two and Test Group
Three. Accordingly, the Commission does not believe it is necessary to
modify the Tick Plan to address the distinction raised by the
commenter.
---------------------------------------------------------------------------

    \311\ See BATS Letter at 3.
    \312\ 17 CFR 242.612.
---------------------------------------------------------------------------

    While commenters have raised counterpoints, the Commission believes
that it is necessary to initially test this incremental change to
generate data to analyze the impact, if any, on market quality for the
Pilot Securities in Test Group One. The Commission notes that Test
Group One would only test how a wider quoting increment implemented
using the current regulatory framework, reflected in Rule 612, could
impact the liquidity and trading of smaller capitalization securities.
Test Group One is not designed to favor one group of market
participants over other groups of market participants any more than the
existing regulatory framework. In particular, including Test Group One
would allow the Tick Size Pilot to examine each change incrementally to
identify the changes that are economically most important. Further, the
Commission recognizes that the design of the Test Groups create
differing incentives for the display and execution of orders which may
result in the migration of order flow,\313\ which is why the inclusion
of Test Group One is vital. This Test Group could potentially generate
data on the degree to which widening the quoting increment alone
results in a migration to non-displaying trading centers.
---------------------------------------------------------------------------

    \313\ For example, if a larger minimum quoting increment leads
to wider bid-ask spreads, but the trading increment remains
unchanged, it would produce an incentive to internalize order flow
and execute off-exchange because price improvement would be
relatively cheaper to provide.
---------------------------------------------------------------------------

    Specifically, Test Group One should enhance the ability of the Tick
Size Pilot to generate data on the effects of wider ticks and any
resulting order flow migration on liquidity, execution quality,
volatility, market maker profitability, competition, and transparency.
3. Test Group Two: Widened Quote and Trade Increment
    Pilot Securities in Test Group Two would be required to be quoted
in a $0.05 increment, like Test Group One, but trading would be limited
to the $0.05 increment subject to three exceptions. Specifically,
executions could occur at a price other than a $0.05 increment in the
following circumstances: (1) midpoint executions at the NBBO or best
protected bid and best protected offer; (2) retail price improvement of
at least $0.005 better than the best protected bid or offer; and (3)
Negotiated Trades.
    After carefully weighing comments, the Commission believes that
Test Group Two and the exceptions, including the exception for retail
price improvement, are reasonably designed to generate data on how
trading characteristics and liquidity would incrementally change
relative to Test Group One if the trading increment is widened. The
Commission believes it is important to measure the incremental impact
of a trading increment on market quality for small capitalization
stocks and it would be useful to compare the data generated by this
Test Group against the data in Test Group One. As the Commission noted
in the June 2014 Order, if the minimum quoting increment is changed
without corresponding changes to the minimum trading increment, market
participants may be hesitant to display liquidity in larger $0.05
increments if other market participants could easily trade ahead of
them in smaller increments.
    As noted above, commenters raised concerns with respect to the
retail price improvement exception.\314\ Some commenters argued that
the exception should be broadened to include all orders as a means to
alleviate implementation burdens. Some commenters argued that the level
of price improvement should be increased to more than the proposed
$0.005. Another commenter expressed its opposition to the retail
exception because it believes that the exception would undermine the
Tick Size Pilot.\315\
---------------------------------------------------------------------------

    \314\ See supra Section IV.D.2.
    \315\ See supra notes 155-156 and accompanying text.
---------------------------------------------------------------------------

    By allowing Retail Investor Orders to trade at certain prices other
than the $0.05 trading increment and receive price improvement, the
Commission believes that some of concerns related to costs for retail
investors could be minimized. As noted earlier in Section V.A., retail
investors may incur costs due to the Tick Size Pilot in the form of
wider bid-ask spreads, which imply less favorable prices and high
transaction costs if retail investors were required to trade only at
the displayed quotation. As noted above, many potential Pilot
Securities would have bid-ask spreads of greater than $0.05, although
an equal number may have spreads less than $0.05. Therefore, the Tick
Size Pilot could potentially widen bid-ask spreads of some Pilot
Securities, which could increase costs for retail investors. The
ability to receive price improvement, therefore, should reduce some
retail investor costs. Further, the Commission does not believe that
the exception for Retail Investor Orders would undermine the Tick Size
Pilot and believes it is appropriate to provide this exception for
retail investors.
    The Commission, however, does not believe that it is necessary or
appropriate to expand the price improvement exception to all orders.
The Commission believes that such a modification could undermine the
purpose of Test Group Two, which is to assess the impact of a trading
increment on trading and liquidity. As noted above, this exception was
designed to mitigate cost concerns for retail investors that typically
receive price improvement under current trading conditions.\316\
---------------------------------------------------------------------------

    \316\ See June 2014 Order supra note 4.
---------------------------------------------------------------------------

    Commenters stated that the attestation should not be required
because it would be unwieldy for trading centers to conduct
surveillance to ensure that only bona fide retail orders qualify.\317\
The Commission notes that certain Participants have approved retail
liquidity programs that require market participants to submit an
attestation. Thus, many market participants must currently comply with
an attestation requirement, and should already have the appropriate
policies and procedures in place. While it should not be unwieldy for
these trading centers to conduct surveillance for the attestation
requirement, the Commission acknowledges that there would be additional
costs for trading centers and their market participants that are not

currently required to comply with the attestation requirements.
However, the Commission believes that the attestation requirement is
necessary to promote the integrity and goals of the Tick Size Pilot by
helping to ensure that only bona fide retail orders entered by market
participants are eligible for the retail price improvement exception.
---------------------------------------------------------------------------

    \317\ See supra Section IV.D.2. See also Tabb Letter at 5; Two
Sigma Letter at 2 (``It is unclear how a trading center receiving
order flow from large numbers of natural persons can design
surveillance programs that would allow them to confidently make this
attestation.''); KCG Letter at 9 (noting that the definition of
Retail Investor Order was too complex and ambiguous and would lead
to many of the largest retail firms to not sign the required
attestations); STANY Letter at 6; and TD Ameritrade at 5.
---------------------------------------------------------------------------

    The Commission acknowledges that there are potential downsides to
widening the quoting and trade increment to $0.05 but believes that the
Tick Size Pilot is designed to reasonably balance the need to generate
data and the potential higher costs for investors. The Commission also
recognizes that the $0.05 quoting and trading increment for Test Group
Two could have an effect on competition between exchanges and non-
exchange trading centers, including the potential migration of order
flow. The extent of any such potential order flow migration or other
competitive impact is not known at this time. The Commission believes
that the data analysis from the results of Test Group Two should
provide information on the potential competitive impact and the
incremental economic effects of a wider trading increment, including
any incremental effects on the incentives for the display and execution
of orders that may result in the migration of order flow relative to
the other Test Groups and the Control Group. This should better inform
the Commission and interested parties of the impact of a wider tick
increment.
4. Test Group Three: Widened Quote and Trade Increment With a Trade-At
Prohibition
    Pilot Securities in Test Group Three would be quoted and traded in
$0.05 increment like Test Group Two and provided with the same trading
exceptions. In addition, Test Group Three would introduce another
incremental change--the Trade-At Prohibition. In the June 2014 Order,
the Commission described a trade-at prohibition as requiring a trading
center that was not displaying at the NBBO at the time the trading
center received an incoming marketable order to either: (1) execute the
order with significant price improvement ($0.05 or the midpoint of the
NBBO); (2) execute the order at the NBBO if the size of the incoming
order is of block size; or (3) route intermarket sweep orders to
execute against the full displayed size of the protected quotations at
the NBBO and the execute the balance of the order at the NBBO price. In
the Notice, the Commission noted that, in the context of the Tick Size
Pilot, an important purpose of a trade-at requirement would be to test
whether, in a wider tick environment, the ability of market
participants to match displayed quotes, without quoting, would
negatively affect market makers' quoting practices. The Commission
further noted that if quoting practices were affected negatively, then
it could undermine one of the central purposes of the Tick Size Pilot,
namely to determine whether wider tick sizes positively affect market
maker participation and pre-trade transparency. For example, if the
results of Test Groups One and Two were to show an improvement in
liquidity with wider tick increments but a loss to transparency because
of an order flow migration to the OTC market, perhaps Test Group Three
would show similar improvements to liquidity but without the loss to
transparency.
    The Participants proposed to define ``trade-at'' in the NMS plan as
``the execution by a trading center of a sell order for a Pilot
Security at the price of a protected bid or the execution of a buy
order for a Pilot Security at the price of a protected offer.'' \318\
The Commission notes that the proposed definition of trade-at set forth
in the NMS plan would require compliance with the Trade-At Prohibition
outside of Regular Trading Hours. In particular, the NMS plan states
that the Tick Size Pilot would be applicable during and outside of
Regular Trading Hours.\319\ The application of the Trade-At Prohibition
outside of Regular Trading Hours would extend its application beyond
what is currently required for the Trade-Through Rule under Regulation
NMS.\320\ As noted above, the Commission expects that market
participants would be able to leverage existing Rule 611 systems for
implementing and complying with the Tick Size Pilot, which currently do
not apply outside of Regular Trading Hours. The application of the
Trade-At Prohibition outside of Regular Trading Hours would be broader
than what the Commission envisioned for trade-at and could increase
implementation and compliance burdens for market participants.
Therefore, the Commission has deemed it necessary to modify the
definition of trade-at under the NMS plan to provide that it is only
applicable during Regular Trading Hours.
---------------------------------------------------------------------------

    \318\ See NMS plan Section (I)(LL).
    \319\ See NMS plan Section (IX).
    \320\ The definition of ``trade-through'' in Rule 600(b)(77) of
Regulation NMS provides that it is applicable during Regular Trading
Hours. See 17 CFR 242.600(b)(77).
---------------------------------------------------------------------------

    Under the proposed Trade-At Prohibition, trading centers that are
not quoting cannot match protected quotations and a trading center
quoting at the protected quotation can execute orders but only up to
the size of its displayed quotation. The Tick Size Pilot included
thirteen exceptions to the Trade-At Prohibition, when trading centers
may trade at a protected quotation or price match.
    The Commission received several comments that opposed the inclusion
of the Trade-At Prohibition.\321\ Commenters raised concerns about the
complexity and costs of implementing Test Group Three which they
concluded could lead market participants to forego participation in
Test Group Three and distort the resulting data. Other commenters
suggested that the Trade-At Prohibition would increase operational
risks. Several commenters suggested that Test Group Three should be
eliminated to reduce the complexity related to the Tick Size Pilot.
Other commenters suggested that the Trade-At Prohibition would increase
investor costs if off-exchange venues are restricted in their ability
to compete for executions. One commenter pointed to Australian and
Canadian rules as evidence that market quality would be adversely
affected and as a justification to not implement trade-at domestically.
---------------------------------------------------------------------------

    \321\ See supra note 157 and accompanying text. See also Section
IV.A.
---------------------------------------------------------------------------

    Several commenters, however, supported the inclusion of the Trade-
At Prohibition.\322\ Commenters raised concerns that Test Group One and
Test Group Two could provide less incentive for market participants to
display liquidity and result in trades migrating to dark venues. As
noted by several commenters, wider spreads, and the potential increased
profits derived therefrom, could incentivize market participants to
execute more transactions in Pilot Securities on dark venues.\323\ Some
commenters, therefore, supported including the Trade-At Prohibition to
test its impact on displayed liquidity and market quality.
---------------------------------------------------------------------------

    \322\ See supra note 169 and accompanying text.
    \323\ See supra note 176 and accompanying text.
---------------------------------------------------------------------------

    The data generated by this test group should inform the Commission,
the public, and market participants on the incremental impact of the
Trade-At Prohibition on trading characteristics and liquidity of Pilot
Securities when the quoting and trading increments are widened. The
Trade-At Prohibition should test whether market participants are
incentivized to display more liquidity in a wider tick environment.
Therefore, the Commission believes that the inclusion of the Trade-At
Prohibition should enhance the utility of the Tick Size Pilot. Further,
the data generated by Test Group Three would

allow the Commission and the public to test the incremental impact on
displayed liquidity and market quality in a wider tick environment when
compared to Test Group One and Test Group Two. As noted, several
commenters stated that trading in Test Groups One and Two could migrate
to non-displayed venues. As a control measure, the Commission believes
that it is important to test whether given larger quoting and trading
increments, market quality could be enhanced by an incentive to display
liquidity such as the Trade-At Prohibition.\324\
---------------------------------------------------------------------------

    \324\ The Commission notes that the inclusion of Test Group
Three would not necessarily provide data that could examine whether
a broader trade-at prohibition, applied to all securities with all
tick sizes and fewer exceptions, would benefit investors.
---------------------------------------------------------------------------

    However, the Commission acknowledges commenters' concerns about the
cost and complexity of the Trade-At Prohibition. The Commission is
therefore modifying the Trade-At Prohibition, as described below, to
mitigate and address some of these concerns. The Commission believes
that the modifications to the Trade-At Prohibition should reduce the
complexity of the provision while maintaining its utility in the Tick
Size Pilot. The modified Trade-At Prohibition, as well as the
modification to extend the Tick Size Pilot's duration, should work in
tandem to ensure that there is wider participation in the Tick Size
Pilot.
    The Commission recognizes that the Trade-At Prohibition may have
some effect on competition between exchanges and non-exchange trading
centers. However, the Commission does not believe that this modified
Trade-At Prohibition should have significant effects on this
competition. Non-exchange trading centers should continue to be able to
compete with exchanges for order flow, albeit either in a displayed
manner or by providing price improvement. Further, the Commission
believes that the exceptions to the modified Trade-At Prohibition, such
as the exception for Retail Investor Orders and Block Size orders,
should exclude the types of transactions that occur primarily off-
exchange.\325\ As a result, the Trade-At Prohibition should not result
in a migration to exchanges of transactions not likely to occur on
exchanges in the Control Group. In addition, the Tick Size Pilot data
should facilitate tests on the effect of a conditional Trade-At
Prohibition on investors and the effect on competition of any resulting
migration to exchanges. Finally, the Commission notes that the market
structure and regulatory framework in Australia and Canada are very
different from the U.S. market structure and regulatory framework. For
example, the U.S. equity market structure includes higher levels of
off-exchange trading and trading is dispersed among a large number of
market centers.\326\ Accordingly, the Commission believes the
experiences of those jurisdictions with a trade-at prohibition are not
clearly relevant when considering a trade-at prohibition in the context
of the Tick Size Pilot. As discussed above, the Commission believes
that the Trade-At Prohibition is necessary to fully study the impact on
the liquidity and trading of smaller capitalization securities.
---------------------------------------------------------------------------

    \325\ See Laura Tuttle, SEC Staff Paper, OTC Trading:
Description of Non-ATS Trading in National Market System Stocks,
(March 2014) available at http://www.sec.gov/marketstructure/research/otc_trading_march_2014.pdf.
    \326\ See Securities Exchange Act Release No. 61358 (January 14,
2010), 75 FR 3593 (January 21, 2010) (``Concept Release on Equity
Market Structure'').
---------------------------------------------------------------------------

    The Participants proposed deviations from, or additions to, the
trade-at prohibition set forth in the June 2014 Order, as follows: (1)
the proposed Trade-At Prohibition would apply to any protected bid or
protected offer, rather than just the NBBO; (2) trading centers
displaying a quote at the price of a protected quote on an SRO
proprietary quote feed could execute an incoming order at that
displayed price; (3) a trading center could only execute up to its
displayed size (i.e., Size Limitation); (4) a trading center must
execute where the protected quotation is displayed (i.e., Venue
Limitation); (5) nine exceptions to the Trade-at Prohibition modeled
after the exceptions found in Rule 611 of Regulation NMS; and (6) an
exception for fractional shares.
a. Protected Quotations Standard
    The Participants proposed to use a protected quotation standard
rather than the NBBO for the Trade-At Prohibition. As described in the
Notice, the protected quotation standard would give broader protection
to aggressively displayed quotes because the protected quotation
standard encompasses the aggregate of the most aggressively priced
displayed liquidity on all trading centers, while the NBBO standard is
limited to the single best order in the market.\327\
---------------------------------------------------------------------------

    \327\ See 17 CFR. 242.600(b)(42). When two or more market
centers transmit to the plan processor identical bids or offers for
an NMS security, the best bid or best offer is determined by ranking
the identical bids or offers by size and then time. As a result,
while two market centers may display identical prices, only one
market center will display the national best bid or national best
offer. Moreover, the Commission notes that the NBBO could contain
manual quotations.
---------------------------------------------------------------------------

    A few commenters opposed expanding the Trade-At Prohibition to
protected quotations. One commenter suggested that protecting less
competitive prices than the NBBO would undermine price competition and
increase complexity,\328\ while other commenters supported the
protected quotation standard because it would encourage more aggressive
quoting on multiple trading centers.\329\
---------------------------------------------------------------------------

    \328\ See supra Section IV.D.3.a.
    \329\ Two other commenters requested clarification related to
the protected quotation standard. The Commission notes that specific
clarification questions should be addressed by the Participants
during the implementation period. See supra note 181 and
accompanying text.
---------------------------------------------------------------------------

    After careful consideration, the Commission believes that using
protected quotations as the basis for the Trade-At Prohibition is
appropriate. The protected quotations standard should further enhance
displayed liquidity by providing incentives for market participants and
trading centers to display additional liquidity. The Commission does
not believe that using protected quotations for the Trade-At
Prohibition would necessarily result in less price competition. The
Commission expects that market participants would continue to compete
to provide liquidity via the best priced orders under the Tick Size
Pilot.\330\ Further, the Commission believes that using the protected
quotations standard should help to alleviate concerns that the Tick
Size Pilot is complex and costly to implement, as it would allow more
displaying trading centers to execute orders at their displayed price
and because market participants currently use the same standard to
comply with Rule 611 of Regulation NMS.
---------------------------------------------------------------------------

    \330\ The Commission notes that Rule 611 of Regulation NMS would
apply to transactions executed under the Tick Size Pilot.
---------------------------------------------------------------------------

b. SRO Quotation Feed
    The Participants proposed to allow price matching by trading
centers that have displayed a quote at the price of a protected quote
through an SRO proprietary data feed. One commenter stated this feature
would assist a trading center that cannot publish its own protected
quotation.\331\ The Commission believes that the use of an SRO
proprietary data feed is appropriate. Trading centers displaying a
quote on an SRO proprietary data feed have contributed to displayed
liquidity, and therefore should be able to trade at these displayed
prices, subject to the Size Limitation.
---------------------------------------------------------------------------

    \331\ See supra Section IV.D.3.b.

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

c. Size Limitation
    The Participants proposed to limit the price matching by trading
centers that have displayed a protected quote with the Size Limitation.
Under the Size Limitation, displaying trading centers would only be
permitted to execute an incoming order up to the size of its protected
quotation, and executions against undisplayed interest at that price
level could not occur unless other protected quotations at that price
are satisfied. Several commenters opposed the Size Limitation.\332\
Commenters suggested that hidden reserve orders at the protected
quotation price level should be allowed to execute without satisfying
the other protected quotations. A few commenters believed that the Size
Limitation would reduce execution certainty or cause delays in
executions. Other commenters stated that the Size Limitation would lead
to information leakage for larger sized orders because of the need to
route to multiple venues to execute against protected quotes. Further,
commenters stated that undisplayed liquidity, both on- and off-
exchange, is important to retail and institutional investors.
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    \332\ See supra Section IV.D.3.c.
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    While the June 2014 Order did not specify the Size Limitation, the
Commission believes that it supports one of the reasons for testing
trade-at in the Tick Size Pilot--to determine its impact on displayed
liquidity and market quality in a wider tick environment. As one
commenter noted, the Size Limitation should create a strong incentive
to display liquidity.\333\ The Commission notes that some commenters
suggested that allowing hidden reserve orders to execute before same-
priced protected quotations could incentivize market participants to
display a quote for a nominal size. The Trade-At Prohibition is
intended to test whether a trade-at is needed to encourage the display
of limit orders with depth greater than a nominal size in a wider tick
environment. During the Tick Size Pilot, Test Group Three should allow
researchers to measure whether this structure results in increases in
displayed liquidity, and if so, whether it has a positive impact on
market quality. The Commission believes that without the Size
Limitation, the incentive to display liquidity could be reduced, which
in turn would undermine a primary rationale for testing trade-at in a
wider tick environment. Commenters also raised concerns with respect to
execution certainty and execution delay. The Commission believes that
the Size Limitation could potentially increase execution certainty by
providing incentives to display additional liquidity. The Commission
believes that the Size Limitation's effect on execution delay is
uncertain due to the potential increase in routing to execute against
protected quotations, and would monitor results of the Tick Size Pilot
to determine if there is significant execution delay.
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    \333\ See CHX Letter at 19. See also supra note 187 and
accompanying text.
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    The Commission also notes that the modification to the Block Size
definition should mitigate and address some commenter concerns related
to execution certainty and information leakage that some commenters
believe could occur as a result of the Size Limitation. The reduced
threshold for Block Size orders should lower the risk of market
exposure for investors trading with size. The liberalized Block Size
definition should permit more orders to trade without being restricted
by the Trade-At Prohibition.
d. Venue Limitation
    The Participants proposed the Venue Limitation that would restrict
where a trading center that is displaying a quotation at the price of a
protected quotation could execute incoming orders. Commenters stated
that the inclusion of the Venue Limitation would protect displayed
quotations, strengthen incentives for market making and gauge the
impact of tick size increments.\334\ Several other commenters, however,
expressed concern that the Venue Limitation would increase the
implementation costs and burdens for Test Group Three.\335\ For
example, one commenter noted that the Venue Limitation would increase
message traffic and potentially cause systems failures.\336\ Commenters
also argued that the Venue Limitation was anti-competitive.\337\ In
particular, commenters stated that off-exchange trading centers should
not be forced to route orders to the exchanges.
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    \334\ See supra Section IV.D.3.d.
    \335\ See supra Section IV.D.3.d.
    \336\ See CMR Letter II at 7.
    \337\ See supra note 189 and accompanying text.
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    After carefully considering the comments, the Commission is
modifying the Trade-At Prohibition to remove the Venue Limitation. The
Commission notes that the Venue Limitation was not prescribed in the
June 2014 Order. The Commission believes that the Venue Limitation
would have unnecessarily restricted the ability of off-exchange market
participants to execute orders in the Pilot Securities of Test Group
Three.\338\ Further, the Commission believes that the Venue Limitation
would not have created additional incentives to display liquidity and
thus is not necessary to support the purposes of the Trade-At
Prohibition.\339\ The Commission believes that the Size Limitation, as
discussed above, should be sufficient to incentivize displayed
liquidity because price matching generally would be permitted only if
the market participant otherwise was publicly displaying an order in a
size at least as large as the size of the matching transaction. The
Commission does not believe the Venue Limitation would incentivize any
material amount of additional displayed liquidity, and thus would not
have provided additional economic information for the Tick Size Pilot.
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    \338\ A potential cost of the Venue Limitation would have been
that a broker-dealer would need to connect to the ADF to display
off-exchange, thereby incurring initial set-up costs for
connectivity and costs to maintain that connectivity. In addition,
each quote displayed on the ADF, in addition to an exchange, would
result in costs to the broker-dealer related to message and
recordkeeping capacity and fees and associated quoting activity
costs to be paid to FINRA.
    \339\ The incremental effect of the Venue Limitation would be to
encourage those who display on an exchange to display off-exchange.
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    Further, the Commission believes that removing the Venue Limitation
should mitigate commenter concerns about the complexity and cost of
implementing the Trade-At Prohibition by reducing the need for off-
exchange trading centers to route orders to the exchanges. Therefore,
the Commission deems it appropriate to change the NMS plan by removing
the Venue Limitation.\340\
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    \340\ The Commission notes that the NMS plan includes three
examples for how the Trade-At Prohibition would operate. Those
examples do not implicate the Venue Limitation and therefore the
Commission is not modifying the examples. See NMS plan supra note 3.
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e. Modifying the Definition of Block Size
    The Trade-At Prohibition proposed by the Participants included a
Block Size order exception whereby the price matching of orders of a
``block size'' would be permitted. The Participants, consistent with
the June 2014 Order, proposed to use the ``block size'' definition set
forth in Regulation NMS, which is an order (1) of at least 10,000
shares or (2) with a market value of at least $200,000.\341\ Several
commenters explained that a block size order for small capitalization
stocks is generally considered to be substantially smaller than that
for large capitalization stocks, and thus the Trade-At Prohibition
included in the proposed Tick Size Pilot

would unduly restrict institutional trading.\342\
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    \341\ 17 CFR 242.600(a)(9).
    \342\ See supra Section IV.D.3.e.
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    In light of the views expressed by the commenters and after
supplemental staff analysis, the Commission deems it is appropriate to
modify the definition of ``block size,'' for purposes of the Tick Size
Pilot. Specifically, an order (1) of at least 5,000 shares or (2) with
a market value of at least $100,000 will be considered a block size for
purposes of the Tick Size Pilot. This block size adjustment aligns with
commenters' request for a smaller block size to reflect trading
characteristics for potential Pilot Securities, and is consistent with
the Commission staff analysis which indicates that, based on the
modified selection criteria, the potential Pilot Securities, on
average, trade at comparatively smaller sizes than securities with
larger market capitalization. The following table reflects staff
analysis:

                                Table 2 \343\--Trade Size Distribution Statistics
----------------------------------------------------------------------------------------------------------------
                                                                      Percent of     Percent  of   Percent  of $
                          Shares/Dollars                                trades      share  volume      volume
----------------------------------------------------------------------------------------------------------------
                                           Panel A: All NMS securities
----------------------------------------------------------------------------------------------------------------
>=10,000 shares or >=$200,000.....................................            0.24          13.04          16.27
----------------------------------------------------------------------------------------------------------------
                                Panel B: Stocks eligible for the Tick Size Pilot
----------------------------------------------------------------------------------------------------------------
>=1,000 shares or >=$20,000.......................................            2.08          26.61          23.37
>=3,000 shares or >=$60,000.......................................            0.38          15.44          13.91
>=5,000 shares or >=$100,000......................................            0.18          12.03          11.24
>=10,000 shares or >=$200,000.....................................            0.07           8.68           8.61
----------------------------------------------------------------------------------------------------------------

    In particular, Table 2 indicates that among all NMS securities,
trades with at least 10,000 shares or with a market value of at least
$200,000 constitute 0.24 percent of all trades, 13.04 percent of traded
share volume, and 16.27 percent of traded dollar volume. In contrast,
among stocks eligible for the Tick Size Pilot, trades with at least
10,000 shares or with a market value of at least $200,000 constitute
only 0.07 percent of all trades, 8.68 percent of traded share volume,
and 8.61 percent of traded dollar volume.
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    \343\ Data in Panel A covers all securities in the NYSE's Trade
and Quote database, which consists of all NMS securities except
options. Data in Panel B covers common stocks with average price
greater than $2 per share, average daily trading volume smaller or
equal than one million shares, and market capitalization smaller or
equal than $3 billion. All data covers the period of July 1, 2013--
August 31, 2013 and comes from the NYSE's Trade and Quote Data.
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    The Commission received one comment suggesting that Block Size
orders should be able to execute in subpenny increments in a manner
similar to Retail Investor Orders that receive price improvement.\344\
However, to avoid undermining the incremental design of the Tick Size
Pilot, the Commission does not believe that Block Size orders in the
Tick Size Pilot should have the same execution increments as Retail
Investor Orders.
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    \344\ See supra note 194 and accompanying text.
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    The Commission also notes that the modified Block Size definition
should ease some of the burden related to the Trade-At Prohibition.
Specifically, the modified Block Size definition should mitigate any
potential disruption to the institutional trading of Pilot Securities
by allowing more of such orders to match protected quotes. Therefore,
the Commission deems it appropriate to modify the definition of Block
Size to lower the thresholds.
f. Addressing Other Test Group Three Exceptions
    The Participants proposed nine exceptions (numbers 4 through 12) to
the Trade-At Prohibition that were not specified in the June 2014
Order. These exceptions were based on the exceptions to Rule 611.\345\
Commenters raised concerns that the exceptions were too numerous and
added to the complexity of the Tick Size Pilot.\346\ One commenter,
however, agreed with the rationale for using the Rule 611
exceptions.\347\
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    \345\ 17 CFR 242.611(b)(2).
    \346\ See supra Section IV.D.3.f.
    \347\ See CHX Letter at 18 (supporting the exceptions as
proposed).
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