routing data should be protected from disclosure subject to the
provisions of applicable law.\527\ The Commission will deem broker-
dealer identifying order routing data as being subject to a
confidential treatment request under 17 CFR 200.83 without the need to
submit a request. The Pilot Securities Exchange List, Pilot Securities
Change List, and the Exchange Transaction Fee Summary would not be
confidential. Rather, each would be publicly posted by the exchanges.
---------------------------------------------------------------------------

    \527\ See, e.g., 5 U.S.C. 552 et seq.; 15 U.S.C. 78x (governing
the public availability of information obtained by the Commission).
---------------------------------------------------------------------------

G. Retention Period for Recordkeeping Requirements

    National securities exchanges would be required to retain records
and information pursuant to 17 CFR 240.17a-1 (Rule 17a-1 under the
Exchange Act).\528\
---------------------------------------------------------------------------

    \528\ 17 CFR 240.17a-1.
---------------------------------------------------------------------------

IV. Economic Analysis

    As discussed above, the Pilot is designed to produce information on
the impact of transaction fee-and-rebate pricing models on order
routing decisions by broker-dealers, as well as their impact on
execution and market quality.\529\ In recent years, a number of
academics and market participants have expressed concern that the
structure of exchange transaction-based fee pricing may lead, for
example, to potential conflicts of interest between broker-dealers and
their customers when brokers-dealers route customer orders to trading
centers offering rebates so that the broker-dealer can capture the
rebates, even when these venues do not offer high execution
quality.\530\ However, as discussed in more detail below, the
Commission cannot determine from existing empirical evidence the
impact, if any, of exchange transaction fee models on order routing
decisions by broker-dealers or on market and execution quality.\531\
Specifically, determining whether a causal relationship between
exchanges' transaction fee-and-rebate pricing models and broker-
dealers' behavior is complicated because, for example, such pricing
models and order routing decisions could be jointly determined and
order routing decisions could influence fees just as fees could
influence order routing decisions. Currently available data do not
permit researchers to isolate these factors and thus identify the
existence or direction of such a causal relationship, which in turn
impedes researchers' ability to determine the extent to which conflicts
may exist and any potential negative impacts may manifest.\532\
---------------------------------------------------------------------------

    \529\ Execution quality generally refers to how favorably
customer orders are executed. Execution quality measures are similar
to liquidity measures and tend to include transaction costs, the
speed of execution, the probability that the trade will be executed,
and the price impact of the trade. See NMS Adopting Release, supra
note 10, at 37513-15, 37537-38. Market quality encompasses execution
quality but also relates more generally to how well the markets
function. Market quality measures include liquidity, price
discovery, and volatility in prices. See, e.g., Henrik Bessembinder,
Trade Execution Costs and Market Quality after Decimalization, 38 J.
Fin. & Quantitative Analysis 747-77 (2003), https://doi.org/10.2307/4126742https://doi.org/10.2307/4126742; Maureen O'Hara & Mao Ye, Is
Market Fragmentation Harming Market Quality? 100 J. Fin. Econ. 459-
74 (2011), https://doi.org/10.1016/j.jfineco.2011.02.006.
    \530\ See, e.g., James Angel, Lawrence Harris & Chester Spatt,
Equity Trading in the 21st Century, 1 Q. J. Fin. (2011), https://doi.org/10.1142/S2010139211000067 (hereinafter ``Angel, Harris, &
Spatt''); Robert H. Battalio, Shane A. Corwin, & Robert H. Jennings,
Can Brokers Have It All? On the Relation Between Make-Take Fees and
Limit Order Execution Quality, 71 J. Fin. 2193-237 (2016), http://onlinelibrary.wiley.com/doi/10.1111/jofi.12422/full (hereinafter
``Battalio Equity Market Study''); Larry Harris, Maker-Taker Pricing
Effects on Market Quotations 24-25 (USC Marshall Sch. Bus., Draft
No. 0.91, 2013), http://bschool.huji.ac.il/.upload/hujibusiness/Maker-taker.pdf (hereinafter ``Harris'').
    \531\ For commenters concurring with this assessment, see, e.g.,
Barnard Letter, at 1 (stating the Pilot ``should provide credible
analyses of the effects--both positive and negative--of exchange
fees and rebates on the quality and efficiency of trading.'');
Better Markets Letter at 2 (stating that the Commission ``lacks
sufficient data to outlaw rebates'' and believed that the Pilot
``should fill this data and knowledge gap.'').
    \532\ Many commenters expressed support for the Pilot and the
utility of the information that may be gained from it. See AJO
Letter, at 1, CII Letter, at 3, NYSTRS Letter, at 1, ICI Letter I,
at 1-2, MFS Letter, at 1, Nuveen Letter, at 2, Clark-Joseph Letter,
at 1, RBC Letter I, at 2, Invesco Letter, at 2, CFA Letter, at 1,
State Street Letter, at 2, Wellington Letter, at 1, Joint Pension
Plan Letter, at 2, Oppenheimer Letter, at 2, Angel Letter I, at 1,
Vanguard Letter, at 2, Verret Letter I, at 1, T. Rowe Price Letter,
at 1.
---------------------------------------------------------------------------

    Because of the existing lack of empirical evidence regarding the
potential conflicts of interest and potential effects of exchange fee
models, additional information would assist the Commission in making
future regulatory decisions. To remedy the insufficiency of existing
empirical evidence, the Commission is adopting the Pilot to generate
data that is otherwise unavailable to study fees and rebates that
exchanges assess to broker-dealers and observe the impacts of those
fees and rebates on the markets and market participants. Specifically,
the Commission expects that the data collected is likely to shed light
on the extent, if any, to which broker-dealers route orders in ways
that benefit the broker-dealer but may not be optimal for customers,
and the extent to which exchange pricing models create distortions that
may have adverse impacts. The data obtained from the Pilot will inform
future regulatory initiatives to the ultimate benefit of
investors.\533\ In addition, the Pilot will provide information about
other potential economic effects of reducing access fee caps or
prohibiting rebates and Linked Pricing. For example, the Pilot could
offer information on whether prohibiting rebates and Linked Pricing
alters broker-dealer behavior in a manner that affects market quality,
such as by impacting quoted spreads across NMS stocks.\534\
---------------------------------------------------------------------------

    \533\ See, e.g., Babelfish Letter, at 3; Clearpool Letter, at 2;
T. Rowe Price Letter, at 1, 3, and Clark-Joseph Letter, at 1.
    \534\ See infra Section V.C.1.a.ii, for further discussion of
the benefits of studying other economic effects of transaction fees
and rebates.
---------------------------------------------------------------------------

    The Pilot is uniquely capable of generating empirical evidence that
is currently lacking because it is designed to provide an exogenous
shock to transaction fee-and-rebate pricing models across all exchanges
simultaneously and facilitate the collection of representative data
across a broad range of securities.\535\ An exogenous shock to a system
occurs when an element of the system is changed from without the
system. (i.e., the change or shock is not under the control or
influence of those within the system) but can induce endogenous (i.e.,
within the system) responses. In the Pilot's context, the exogenous
shock

takes the form of a reduction of the maximum permissible transaction
fees and a prohibition on rebates and Linked Pricing on all U.S.
equities exchanges. This shock will allow researchers to explore how
changes to fees and rebates could lead to changes in broker-dealer
order routing and market and execution quality for a broad sample of
NMS securities.\536\ Specifically, the reduction in fees or the
elimination of rebates and Linked Pricing, as required in specific Test
Groups of the Pilot, may reduce the magnitude or eliminate the
potential conflict of interest between broker-dealers and their clients
and the potential distortions introduced by exchange transaction-based
fees and rebates. These effects would, in turn, be reflected in
measurable changes to the order routing and execution quality of stocks
in the Pilot's Test Groups.
---------------------------------------------------------------------------

    \535\ See infra Section V., for discussion of existing studies
related to these topics and their limitations. See also supra
Section II.B (discussing the Nasdaq study, which examined a change
in the access fees and rebates charged by Nasdaq for 14 stocks over
a four-month period).
    \536\ See, e.g., CII Letter, at 3, NYSTRS Letter, at 1, RBC
Letter I, at 2, Joint Pension Plan Letter, at 2, Oppenheimer Letter,
at 2
---------------------------------------------------------------------------

    The terms of the Pilot are discussed in Section II above. Exchanges
will continue to be permitted to have varying fees within each Test
Group, and will be permitted to change their fees at their discretion,
subject to the proposed rule change filing requirements of Section 19
of the Exchange Act, during the Pilot for securities within each Test
Group, so long as they comply with the conditions applicable to that
Test Group.
    In the absence of the Pilot, the Commission believes it is unlikely
that exchanges would collectively undertake a similar pilot and
voluntarily coordinate the exogenous shock to fees and rebates across a
broad set of securities, broker-dealers, and exchanges that would be
required to analyze the effects of changes to fees and rebates.\537\ By
imposing the same modifications to fees and rebates on all U.S.
equities exchanges, the Pilot will allow researchers to obtain data
that will permit them to examine the impact of changes to fees and
rebates on the order routing decisions of broker-dealers. If all
exchanges were not subject to the pilot terms, the pilot data would be
limited because broker-dealers could redirect their order flow to the
non-participating exchanges. Accordingly, the Commission believes that
the Pilot will enable the collection of valuable data that would
otherwise be unavailable.
---------------------------------------------------------------------------

    \537\ See, e.g., Clearpool Letter, at 2. As discussed above,
Nasdaq conducted its own fee experiment, but other exchanges did not
conduct similar experiments simultaneous with Nasdaq.
---------------------------------------------------------------------------

    The Commission is mindful of the costs imposed by, and the benefits
obtained from, the rules it promulgates. Whenever the Commission
engages in rulemaking and is required to consider or determine whether
an action is necessary or appropriate in the public interest, Section
3(f) of the Exchange Act requires the Commission to consider whether
the action would promote efficiency, competition, and capital
formation, in addition to the protection of investors.\538\ Further,
when making rules under the Exchange Act, Section 23(a)(2) of the
Exchange Act requires the Commission to consider the impact such rules
would have on competition.\539\ Section 23(a)(2) of the Exchange Act
also prohibits the Commission from adopting any rule that would impose
a burden on competition not necessary or appropriate in furtherance of
the purposes of the Exchange Act.\540\
---------------------------------------------------------------------------

    \538\ See 15 U.S.C. 77b(b); 15 U.S.C. 78c(f).
    \539\ See 15 U.S.C. 78w(a)(2).
    \540\ Id.
---------------------------------------------------------------------------

    A few commenters challenged the sufficiency of the economic
analysis contained in the Proposal. For example, one commenter argued
the proposal was ``arbitrary and capricious'' because the Commission
failed to consider the economic consequences of its proposal and only
partially framed the costs and benefits of the Proposal, ignoring
important and significant factors and costs.\541\ Similarly, another
commenter believed that the ``cost-benefit analysis contain[ed]
numerous flaws that are inconsistent with the Commission's obligation
to provide a `reasoned basis' for its regulations,'' namely that the
Commission had ``substantially underestimated the costs of the
Proposal'' and ``fail[ed] to identify any countervailing market benefit
that justifies imposing . . . harms on . . . exchanges and issuers.''
\542\ Another commenter thought the Commission understated the
potential costs of the Pilot while overstating the benefits.\543\ For
example, some commenters noted that they anticipated the Pilot would
result in wider spreads, increased transaction costs, and increased
broker commissions, all of which would result in added costs to
investors.\544\ Several commenters thought the Commission failed to
consider or underestimated the implementation costs of the Pilot,\545\
while other commenters challenged these assertions and instead believed
the Pilot would impose minimal costs on exchanges and broker-dealers,
particularly in light of the existing processes and technology that
currently support immediately effective fee changes from the
exchanges.\546\ Finally, other commenters felt that the economic
analysis failed to adequately account for the projected costs to
particular categories of market participant.\547\
---------------------------------------------------------------------------

    \541\ See Nasdaq Letter I, at 3, 11.
    \542\ NYSE Letter I, at 3, 12. See also, e.g., Level Brands
Letter, at 1; Johnson Letter, at 1; Sensient Letter; Tredegar
Letter, at 1; Halliburton Letter, at 1.
    \543\ See ASA Letter, at 5. See also T.D. Ameritrade Letter, at
3 (estimating costs of widening spreads to its clients at
$24,000,000).
    \544\ NYSE Letter I, at 13. See also TD Ameritrade Letter, at 3
(estimating costs of widening spreads to its clients at $24,000,000
annually) and Energizer Letter, at 1.
    \545\ See STANY Letter, at 2; Cboe Letter I, at 21; Nasdaq
Letter I, at 10; FIA Letter, at 3; Citi Letter, at 5.
    \546\ See, e.g., Vanguard Letter, at 3; Better Markets Letter,
at 2; Healthy Markets Letter I, at 34; Angel Letter II, at 3.
    \547\ See, e.g., Cboe Letter, at 7 n.14 and 20 (noting failure
to adequately address lost revenue to exchanges); NYSE Letter I, at
3; NYSE Letter I, at 3 and 13 (addressing impact on small businesses
and issuers); Apache Letter, at 2 (noting potential negative cost
impacts to issuers engaged in secondary offerings or conducting
share repurchasing programs); Nasdaq Letter I, at 8 (noting
potential added cost to market makers when pricing arbitrage
opportunities because of additional complexity in exchange pricing
models under the Pilot).
---------------------------------------------------------------------------

    Other commenters supported the Commission's analysis. For example,
one commenter argued that ``differing estimates of costs is not a
sufficient basis alone to challenge Commission action.'' \548\ This
commenter argued that the commenters ``tend to ignore the benefit side
of cost-benefit analysis'' and believed that ``the most significant
benefit of the pilot is its potential to inform subsequent
rulemaking,'' such that the ``mere presence of uncertainty in the
Commission's estimates of potential costs and benefits does not by
itself open the pilot program to challenge.'' \549\ While acknowledging
the potential for ``liquidity effects,'' this commenter further noted
that the Commission ``is merely held to make a reasonable estimate of
those costs before adopting a pilot program,'' not to ``make a perfect
estimate'' or ``cease the pilot if the costs to liquidity prove
significant.'' \550\
---------------------------------------------------------------------------

    \548\ Verret Letter I, at 3-4. See also Verret Letter I, at 7
(asserting that ``[a]rguments by the Exchanges concerning the pilot
proposal's failure to quantify costs are irrelevant, in so far as
the proposal properly identifies where they might at present be
unquantifiable and particularly where those unquantifiable costs
relate to the data the pilot is intended to generate.'').
    \549\ Verret Letter I, at 3-4. See also IEX Letter III, at 8, 10
(arguing that these commenters ignore ``the full range of benefits
that investors could realize if rebates were banned entirely'').
    \550\ Verret Letter I, at 4-5.
---------------------------------------------------------------------------

    The economic analysis provided in the Proposing Release thoroughly
described the potential economic effects of the Transaction Fee Pilot,
including the benefits, costs, and alternatives and

the potential effect on efficiency, competition, and capital formation.
    Like the Proposing Release, where possible, the Commission has
quantified below the likely economic effects of the Pilot; however, as
explained further below, the Commission is unable to quantify all of
the economic effects because it lacks the information necessary to
provide reasonable estimates. In some cases, quantification depends
heavily on factors outside of the control of the Commission, which
makes it difficult to predict how market participants would act under
the conditions of the Pilot. For example, because of the flexibility
that market participants have with respect to the choice of trading
center for execution of transactions and because those choices can be
influenced by factors outside of the scope of the Pilot, such as volume
discounts, the Commission cannot quantify, ahead of the Pilot, the
economic impact of any changes in order routing decisions by broker-
dealers that may result from the Pilot. Nevertheless, as described more
fully below, the Commission provides both a qualitative assessment of
the potential effects and a quantified estimate of the potential
aggregate initial and aggregate ongoing costs, where feasible.

A. Background and Market Failures

    The Commission's Proposal provided a review of transaction-based
fee models, including a discussion of the history and mechanics of
transaction-based pricing and an overview of the concerns about
potential conflicts of interest between broker-dealers and their
customers attributed to access fees and rebates assessed by exchanges
as well as the potential distortions that exchange fee models can
introduce into market structure.\551\
---------------------------------------------------------------------------

    \551\ See Proposing Release, supra note 2.
---------------------------------------------------------------------------

    The Commission considered whether competition within the broker-
dealer industry, as well as competition among the equities exchanges,
is sufficient to alleviate potential conflicts of interest presented by
exchange fees and rebates and also the potential distortions such fee-
and-rebate models may introduce. The Commission believes that
competition between broker-dealers may not be capable of addressing
these potential conflicts and distortions for three reasons: asymmetric
information, switching costs, and a lack of collective action, each of
which is discussed below. Further, competition between broker-dealers
is not readily capable of independently resolving the other potential
concerns presented by exchange fee models, such as excessive
intermediation, fragmentation, complexity, and cross-subsidization
because those issues are within the exclusive control of the exchanges.
The limitations of competition among the equities exchanges is
discussed in detail below.
1. Market Failure at the Broker-Dealer Level
    The Commission considered whether competition could alleviate
potential conflicts of interest between investors and broker-dealers,
as investors choose broker-dealers to place orders on their
behalf.\552\ To the extent that investors are able to identify broker-
dealers that do not act on potential conflicts of interest in a manner
inconsistent with the interests of their customers, investors could
discourage broker-dealers from acting on such conflicts of interest and
avoid doing business with those broker-dealers that do not offer such
assurances. However, several commenters opined that competition and
deference to market forces alone would not be sufficient to challenge
the ``deeply rooted conflicts of interest'' that they believe are
present in today's market structure.\553\ For example, one commenter
noted that many institutional clients are tied to large broker/dealers
because of the multitude of services that their brokers provide, so
they cannot simply ``fire their brokers'' if they are unhappy with
their routing decisions.\554\ Further, the Commission does not believe
that competition among broker-dealers alone will be sufficient to
address potential conflicts of interest in order routing decisions
because of three conditions that are present in today's markets:
asymmetric information, switching costs, and a lack of collective
action.
---------------------------------------------------------------------------

    \552\ See Section infra IV.B.2.a.
    \553\ See, e.g., Better Market Letter at 1 (stating ``[p]ayments
by the exchanges that incentivize and induce routing decisions by
broker-dealers at the expense of best execution and market quality
is one of the most entrenched and insidious market practices today,
and requires forceful and independent intervention by the SEC.'').
See also Themis Trading Letter at 4-5; Larry Harris Letter at 9;
Clearpool at 2.
    \554\ See Themis Trading Letter I, at 5.
---------------------------------------------------------------------------

    First, asymmetric information between broker-dealers and their
customers limits the ability of customers to identify broker-dealers
that do not act on potential conflicts of interest.\555\ For example,
customers do not generally have access to information about broker-
dealers' individual sources of revenue.\556\ As discussed below in more
detail, although disclosures required pursuant to Rule 606 provide
information about material conflicts of interest related to payment for
order flow, these disclosures do not provide information on the effect
of transaction fee-and-rebate pricing models on order routing
decisions. Moreover, while under Rule 606, a customer may request
certain information about how her broker routed certain orders on her
behalf, a customer cannot necessarily use this information to compare
how these orders would have been treated by broker-dealers other than
her own. Further while recent amendments to Rule 606 would provide
customers with limited information about transaction fees paid and
transaction rebates received by the broker, the disclosure would not
provide data to enable the customer to assess the impact of exchange
transaction fees and rebates on market quality and execution quality.
---------------------------------------------------------------------------

    \555\ See Larry Harris Letter, at 3 (noting that most brokerage
customers do not know about potential broker agency problems and so
do not know that their brokers may not be representing their orders
as best they might).
    \556\ While consolidated revenues may be available from Form 10-
K filings for broker-dealers that are public reporting companies,
broker-dealers do not report revenues attributable to specific
sources, such as rebates from a particular exchange or payments for
order flow from a particular venue. For instance, revenues derived
from commissions and fees are often just reported in aggregate as
``Commissions and Fees.'' Therefore, even though aggregate revenues
for some broker-dealers are publicly available, customers do not
have access to the information on individual sources of revenue that
could reveal potential conflicts of interest.
---------------------------------------------------------------------------

    Second, even if investors had sufficient information to conclude
they would be better served by a different broker-dealer, investors may
face costs in switching broker-dealers.\557\ If these switching costs
are high relative to the costs that investors anticipate may arise from
potential conflicts of interest, investors may not switch broker-
dealers even if it appears that their broker-dealer may have acted on
conflicts of interest.
---------------------------------------------------------------------------

    \557\ These switching costs may be monetary, but may also have a
time and effort component.
---------------------------------------------------------------------------

    The presence of switching costs also may exacerbate a collective
action problem among investors.\558\ Investors could provide incentives
to broker-dealers to eliminate potential conflicts of interest by
threatening to move accounts away from broker-dealers known to act on
conflicts of interest. The collective action problem arises because,
although each customer individually bears a cost to switch accounts,
the benefits of a successful threat are available to all customers
whether they would switch or not. If the

switching costs are high relative to the proportion of customer
defections necessary to threaten a broker-dealer, customers are
unlikely to generate enough of a threat to alter broker-dealers'
behavior.
---------------------------------------------------------------------------

    \558\ Collective action occurs when a number of individuals or
entities work together to achieve a common objective, such as
investors acting to reduce the potential conflicts of interest in
order routing decisions by broker-dealers.
---------------------------------------------------------------------------

2. Market Failure at the Exchange Level
    Several commenters considered whether existing market forces,
including competition among the equities exchanges, are sufficient to
address the potential distortions caused by exchange pricing models.
Some commenters felt that ``some regulatory solution,'' like the Pilot,
``may be necessary to force market participants, particularly
exchanges, to change the manner in which they conduct business''
because competitive pressures on exchanges may serve as a barrier to
market-led reforms in this area.\559\ Further, one commenter noted that
``market forces cause the exchanges to choose maker-taker and inverted
fee models to the detriment of the public interest'' and therefore
regulatory action is necessary to address market distortions caused by
the maker-taker and taker-maker fee models.\560\
---------------------------------------------------------------------------

    \559\ Clearpool Letter, at 2. See also T. Rowe Price Letter, at
1 (``enthusiastically agree[ing] with the Commission that a pilot is
necessary to gather data,'' in part because ``exchanges have little
incentive to reduce the fee cap on their own''). See also Larry
Harris Letter, at 9 (noting that ``regulatory action is necessary to
establish a common pricing standard because market forces alone will
not do it''). Larry Harris Letter, at 6 (noting that ``exchange
holding companies have a strong interest in maintaining the current
system'' and that the ``SEC may reasonably consider these interests
when evaluating comments submitted by the exchanges''); Themis
Trading Letter II, at 3 (stating that the Commission should not be
``distracted . . . by conflicted stock exchanges desperately fearful
that their business models might come crashing down'').
    \560\ See Larry Harris Letter, at 9. See also Themis Trading
Letter I, at 5 (noting that several exchanges oppose the pilot
because they are motivated by their ``own profit incentives and not
what is best for the market'').
---------------------------------------------------------------------------

    Further, the Commission notes that one market conducted a limited
unilateral access fee experiment in 2015 to test the impact of
reductions to its fees and rebates on 14 securities traded on its
market. \561\ Several commenters noted the limited utility of that
study given its narrow scope and applicability to one market.\562\ The
fact that no other exchange joined in the 2015 access fee experiment,
or independently undertook a similar study thereafter, supports the
view that it is unlikely that competition among the exchanges alone
would compel the exchanges to study, let alone address, potential
distortions that may result from their fee and rebate models.
---------------------------------------------------------------------------

    \561\ See Proposing Release, supra note 2, at 13011-12. See also
Section IV.B.1.a.ii, infra discussing the Nasdaq Experiment in
greater detail.
    \562\ See, e.g., Themis Trading Letter I, at 3 (stating that a
``more comprehensive multilateral market-wide approach would be
needed to yield usable data that could be used to test how lower
access fees, and a lack of rebates, would impact market quality and
marketplace behavior'' (emphasis omitted)); IEX Letter III, at 6
(``Nasdaq's experiment and its outcomes aren't a perfect proxy for
what is likely to happen in the Transaction Fee Pilot. That
experiment was done unilaterally and only in highly-liquid
securities.''); Larry Harris Letter, at 9 (noting that Nasdaq's
``experimental fee reduction did not occur at all trading venues
that traded the subject securities,'' demonstrating that
``regulatory action is necessary to establish a common pricing
standard because market forces alone will not do it'').
---------------------------------------------------------------------------

B. Baseline

    We compare the economic effects of the rule, including benefits,
costs, and effects on efficiency, competition, and capital formation,
to a baseline that consists of the existing regulatory framework and
market structure. As explained above, by temporarily altering the fee
and rebate structure for certain NMS stocks (including ETPs), the Pilot
is designed to produce information on order routing behavior that would
not otherwise be available. The baseline, therefore, includes the
existing information available to the Commission in the absence of a
pilot, which the Commission could use to inform future regulatory
action.\563\ The baseline also sets out the exchanges' current
practices with respect to fees and rebates and the regulations
governing those fees and rebates.
---------------------------------------------------------------------------

    \563\ See supra Section IV.E.1 for the discussion of the
alternative that the Commission proceed with rulemaking initiatives
without first conducting the Pilot. That alternative differs from
the baseline presented here because it directly presumes regulatory
changes whereas the baseline for the Economic Analysis does not
presume regulatory changes resulting from the Pilot.
---------------------------------------------------------------------------

1. Current Information Baseline
    While the theoretical studies referenced in the Proposing Release
suggest that transaction-based fee models create potential issues for
investors,\564\ limited empirical evidence exists to date about the
extent that potential conflicts of interest arise from maker-taker and
taker-maker pricing models and how exchange transaction-based fees and
rebates impact market and execution quality and affect the integrity
and structure of the U.S. equity markets.\565\ Consequently, the
relation between transaction-based pricing and conflicts of interest is
not well understood.\566\ Additionally, commenters are divided as to
how to interpret existing knowledge. One Commenter stated that we had
``much to learn'' \567\ while other commenters felt that there was
sufficient existing knowledge to move directly to rule making without a
Pilot.\568\
---------------------------------------------------------------------------

    \564\ See, e.g., Proposing Release supra note 6 at Section IV.A.
and C.
    \565\ Several commenters supported the Pilot as a necessary step
to produce data to inform the heavily contested debate surrounding
the impact of exchange fees and rebates on order routing, market
quality, and execution quality. See, e.g., Barnard Letter, at 1
(``historically there are many views on this topic, but a paucity of
credible data from which to draw conclusions''); Wellington Letter,
at 1, and Clark-Joseph Letter, at 1.
    \566\ See Nuveen Letter, at 2
    \567\ See e.g., Spatt Letter, at 3
    \568\ See e.g., Larry Harris Letter, at 10
---------------------------------------------------------------------------

    Below, we discuss the existing information currently available to
the Commission or the public that concerns the relationship between
transaction-based fee-and-rebate pricing models and order routing
decisions and we describe the limitations of this information for use
in policy discussions regarding transaction-based fees and rebates and
the potential conflicts of interest and potential distortions that may
accompany them. We then discuss the potential to produce additional
information regarding the impact of exchange fees and rebates absent
the Pilot.
    While a number of studies attempt to document the relation between
transaction-based fees, order routing decisions, and execution quality,
these studies and available data sources are limited in ways that are
likely to reduce the strength of conclusions that relate to the impact
of transaction-based fees and rebates on order routing decisions and
the existence or magnitude of potential conflicts of interest between
broker-dealers and their customers. This section details these
limitations.
a. Limitations of Existing Studies
    Multiple commenters submitted empirical evidence that they argued
was consistent with conflicts of interest. For example, one Commenter
cited evidence that trade execution algorithms that are fee sensitive
tend to have lower execution quality than algorithms that are not fee
sensitive.\569\ Another Commenter cited existing academic, industry,
and government sources suggesting the existence of conflicts of
interest, or of the investing public's perception that there exist
conflicts of interest.\570\ Another commenter suggested evidence
existed that routing decisions were not always in the best interest of
investors by arguing that adverse selection differs by exchange, and
that this difference can be observed using TAQ data.\571\ Another
commenter presented their study arguing that

longer queues lead to increased transaction costs, and connected longer
queues with the practice of paying rebates.\572\ Another Commenter
referenced a study suggesting that trading costs vary across
exchanges.\573\
---------------------------------------------------------------------------

    \569\ See Babelfish Letter, at 2-3
    \570\ See CFA Letter, at 2
    \571\ See Healthy Markets Letter I, at 2, 6
    \572\ See IEX Letter IV, at 9
    \573\ See AGF Letter, at 1
---------------------------------------------------------------------------

    Although the above listed commenters all felt that the evidence did
suggest that fees and rebates led to conflicts of interest, other
commenters did not come to the same conclusion. One commenter felt that
there was ``no evidence that fee practices are harming investors or
interfering with fair competition'' and consequently felt that a Pilot
was not justified.\574\ The studies and analysis presented by
Commenters and the studies discussed below have significant limitations
with regard to establishing causal links between fees and rebates and
order routing decisions. These limitations fall primarily into two
categories: (1) The results of the studies may not be representative,
and (2) the results of the studies cannot make a causal connection
needed to inform on potential conflicts of interest.
---------------------------------------------------------------------------

    \574\ See CBOE Letter I, at 5 See also Nasdaq Letter I, at II-12
---------------------------------------------------------------------------

    When a study's results are representative, the results can be
applied across a broadly defined group. Drawing broad inferences from
limited samples could be problematic because the results might be
specific to specific securities, broker-dealers, or trading venues. In
the context of regulatory decision-making, representative results
should inform on the potential effects over the scope of the market
covered by the decision. When results are not representative of the
full scope of a regulatory decision, that regulatory decision may have
an unpredictable effect over the part not represented by the results.
For example, if the results of a study cover only certain types of
issuers, the results may not apply to all types of issuers and
therefore, any regulatory changes based on such studies may have
unanticipated effects on the types of issuers not included in the
study.
    In addition to limitations in how representative results may be,
existing studies cannot test for causal relationships between
transaction fees and order routing decisions, even around fee
revisions. Because transaction-based fees and order routing decisions
could be jointly determined, researchers cannot readily disentangle the
direction of causality, and therefore cannot determine the extent that
potential conflicts exist. The identification of causal relations
between fees and order routing decisions becomes increasingly complex
because exchanges frequently modify their fees.\575\ In practice,
researchers attempt to identify and measure causal relations in two
ways: (1) Exogenous shocks and (2) econometric techniques, such as an
instrumental variables approach.\576\
---------------------------------------------------------------------------

    \575\ Over the last five years, the exchanges, on average, have
made 34 revisions, or approximately 6.7 revisions per year, to their
transaction-based fees and rebates. See infra Section IV.B.2.b.
    \576\ The method of instrumental variables is used to estimate
causal relationships when controlled experiments or exogenous shocks
are not feasible. An ``instrument'' changes the explanatory variable
but has no independent effect on the dependent variable, allowing a
researcher to uncover the causal effect of the explanatory variables
on the dependent variable of interest.
---------------------------------------------------------------------------

    The Commission disagrees with one commenter who felt that
sufficient data existed to move forward with regulation prohibiting
rebates because ``the theory is well-accepted, and no prior evidence
contradicts it.'' \577\ In the absence of causal data, regulators can
use theory--and their best judgment based on their expertise--to guide
their decision making. However, in this case, for the reasons discussed
throughout this release, the Commission believes that empirically
assessing the various theories, causal impacts, and effects of the
transaction fee-and rebate pricing model is appropriate.
---------------------------------------------------------------------------

    \577\ See Harris Letter, at 10.
---------------------------------------------------------------------------

i. Battalio Equity Market Study
    According to the Battalio Equity Market Study, broker-dealers
appear to trade execution quality of customer orders, as measured by
the likelihood of and time to execution (and not price), for the
rebates obtained by providing liquidity to maker-taker venues.\578\ By
routing orders to exchanges that pay high rebates, broker-dealers may
engage in rebate capture at the expense of client execution.\579\ Using
data obtained from mandatory Rule 606 disclosures over a two-month
window,\580\ the Battalio Equity Market Study also identified that four
of the ten broker-dealers included in the analysis route limit orders
exclusively to market makers or to exchanges that offered the largest
liquidity rebates (and charged the highest access fees). A number of
tests in the Battalio Equity Market Study also show that low-fee venues
provide better execution quality for limit orders, as measured by the
likelihood of an order fill, the speed of execution, and realized
spreads, relative to high-fee venues, suggesting that order routing
decisions to high rebate venues are likely to be suboptimal from a
customer's perspective, and may be indicative of potential conflicts of
interest.
---------------------------------------------------------------------------

    \578\ The Battalio Equity Market Study's abstract of the paper
states: ``We identify retail brokers that seemingly route orders to
maximize order flow payments by selling market orders and sending
limit order to venues paying large liquidity rebates. . . . [W]e
document a negative relation between limit order execution quality
and rebate/fee level. This finding suggests that order routing
designed to maximize liquidity rebates does not maximize limit order
execution quality. . . .'' See Battalio Equity Market Study, supra
note 5307, at 2193.
    \579\ See Battalio Equity Market Study, supra note 5307. See
also supra Section IV.A.2, for an overview of the potential
conflicts of interest that emerge.
    \580\ Rule 606 requires broker-dealers to provide quarterly
reports that provide an overview of their routing practices. See
Securities Exchange Act Release No. 51808 (November 27, 2000), 65 FR
75414, (December 1, 2000) (hereinafter ``Disclosure of Order
Execution and Routing Practices''). See also supra note 310 and
accompanying text and infra Section IV.B.1.b.i, ``Rule 606 Data.''
---------------------------------------------------------------------------

    Although the Battalio study provides evidence suggestive of
conflicts of interest, the study has a number of limitations which
render the Commission unable to use this study to robustly determine
that rebates cause costly conflicts of interest for broker-dealers.
First, the Battalio Equity Market Study uses order level data from a
single broker-dealer to determine the relation between maker-taker fees
and limit order execution quality.\581\ Analysis based on observation
of a single broker-dealer may not provide representative results
because the relation between transaction-based fees and potential
conflicts of interest may not be generalizable to other broker-dealers.
For example, over 400 broker-dealers maintain membership with at least
one U.S. equities exchange.\582\ If the single broker-dealer examined
in the Battalio Equity Market Study has significantly different order
routing behavior than the average broker-dealer that routes orders to
exchanges, the information obtained from examining the relation between
transaction-based fees and order routing decisions of that broker-
dealer would not be representative of the entire market and therefore
would provide an incomplete representation of potential conflicts of
interest.
---------------------------------------------------------------------------

    \581\ The Battalio Equity Market Study, however, does not
specify whether the limit orders are marketable or non-marketable
limit orders, as Rule 606 disclosures do not segment these orders.
See Battalio Equity Market Study, supra note 530.
    \582\ Estimates based on data from Form 1 of the X-17A-5
filings. As of December 31, 2017, 3,860 broker-dealers that filed
form X-17A-5. See infra Section IV.B.2.a.
---------------------------------------------------------------------------

    The Battalio Equity Market Study also relies on a sample of Rule
606 order routing reports obtained directly from the reporting
entities' websites from a limited sample of ten well-known national
retail brokers from a single quarterly reporting cycle (October and

November 2012). As discussed above, approximately 400 broker-dealers
are members of at least one national securities exchange. The ten
retail brokers analyzed in the Battalio Equity Market Study make up
approximately 2.1% of the broker-dealers with exchange memberships, and
less than 0.3% of broker-dealers overall. Although these are well-known
retail brokers, due to the lack of representativeness of the sample
(e.g., the majority of the broker-dealers represented in the Battalio
Equity Market Study are online broker-dealers), these broker-dealers
may be more (or less) likely than the average broker-dealer to route
customer orders in ways that benefit themselves at the expense of their
customers. The findings in the Battalio Equity Market Study, therefore,
may not be representative of a broader sample of broker-dealers.
Moreover, the Commission is unable to determine if the Battalio Equity
Market Study's analyses of the Rule 606 disclosure data has statistical
power because the authors did not provide any statistical analyses
beyond the percentage of market or limit orders routed to a particular
exchange.
    In sum, the absence of an exogenous shock to access fee caps or
rebates outside the control of exchanges leaves the authors unable to
definitively determine the causes of broker-dealers' order routing
decisions. Consequently, the authors are unable to disentangle whether
fees and rebates drive broker-dealer order routing decisions or order
routing decisions determine fees and rebates chosen by exchanges.
ii. The Nasdaq Experiment
    Nasdaq independently conducted an experiment, whereby it lowered
access fees and rebates for a sample of 14 stocks over a period of four
months in 2015, providing an exogenous shock to the transaction-based
pricing model on the exchange. The Nasdaq experiment lowered both the
access fees charged and the liquidity rebates paid on the securities
included in their study.\583\ Nasdaq produced two reports on the
experiment \584\ and an academic study examining the experiment was
submitted as a comment.\585\ Both Nasdaq's first study report and the
Swan study indicate that when Nasdaq lowered fees and rebates they lost
market share in the stocks with lower fees and rebates. According to
analysis in the Swan study, the market share that Nasdaq lost appeared
to migrate to other make-take venues with higher fees and rebates.
Additionally, both Nasdaq's analysis as well as the Swan study find
that the experiment led to a decrease in the fraction of time that
Nasdaq quoted at the NBBO. The Swan study also estimated a variety of
additional tests to measure the impact of the experiment on various
aspects of market quality. The results of these tests are mixed. The
Swan study found that the Nasdaq experiment improved market quality on
Nasdaq in terms of improved fill rates and fill times as well as
narrower cum-fee effective spreads and cum-fee realized spreads.\586\
---------------------------------------------------------------------------

    \583\ The Nasdaq study lowered access fees to $0.0005 and
rebates to $0.0004 simultaneously for a set of 14 securities, half
of which identified Nasdaq as the primary listing exchange, the
other half which identified the NYSE as the primary listing
exchange. Nasdaq released two reports see infra note 584 (examining
the changes to a number of metrics related to market quality).
    \584\ The first report provided by Nasdaq can be found on their
webpage http://qnasdaqomx.com/AccessFeeExperiment (``Nasdaq's first
report'', or the ``first Nasdaq report''). The second report
provided by Nasdaq can be found at http://people.stern.nyu.edu/jhasbrou/SternMicroMtg/SternMicroMtg2015/Supplemental/ (``Nasdaq's
second report'', or the ``Second Nasdaq report'').
    \585\ See Swan Letter which submitted the paper: Yiping Lin,
Peter Swan, & Frederick Harris, Why Maker-Taker Fees Improve
Exchange Quality: Theory and Natural Experiment Evidence, Working
Paper, (2018), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3034901 (hereinafter ``Swan study'');
Nasdaq's Second Report, at 1.
    \586\ Cum fee indicates that the computation of spreads included
the fee or rebate charged. It is a measure of the total cost of
transacting.
---------------------------------------------------------------------------

    While cum-rebate effective spreads, fill rates and fill times
improve on the Nasdaq during the experiment, the Swan study finds that
the experiment diminished market quality in terms of quoted spreads and
raw realized spreads which both increase during the experiment.\587\
Additionally, the Swan study shows that some measures of market quality
were unchanged by the Nasdaq experiment, namely, the Swan study finds
no change in raw effective spread.\588\ In Nasdaq's second report on
the experiment they examine various market quality measures and find no
impact on effective spread, relative effective spread, quoted spread,
relative quoted spread, displayed dollar depth at the NBBO, time
between quote updates on the consolidated tape, and time between price
changes in the NBBO on the consolidated tape.
---------------------------------------------------------------------------

    \587\ The effective spread is the cost to transact and is
defined as two times the absolute difference between the price of a
trade and the prevailing midpoint at the time of trade. The
effective spread can be decomposed into two components, the realized
spread and price impact of the trade. The price impact is generally
viewed as the portion of the effective spread that compensates
market makers for adverse selection losses. The realized spread is
the portion of the spread that market makers `realize' after adverse
selection costs are taken into account. Raw realized spreads are
realized spreads that do not take into account the all-in cost of
trading, i.e., they exclude rebates from the calculations
    \588\ Raw effective spreads are effective spreads that do not
take into account the all-in cost of trading, i.e., they exclude
fees from the calculations.
---------------------------------------------------------------------------

    In examining the impact of the experiment on price efficiency, the
Swan study finds mixed evidence that prices quoted on Nasdaq become
less efficient during the experiment. First, the Swan study finds that
global price impact declines during the experiment. Price impact is
commonly employed as a measure of the informativeness of trades. The
Swan study explains the decline in price impact with a theoretical
model which suggests that rebates subsidize market makers for the
adverse selection costs that they bear-thereby allowing them the
ability to bear additional adverse selection which induces informed
traders to trade more aggressively in the presence of rebates.
Consequently, their model predicts that informed trades will congregate
on exchanges with high rebates. Additionally, the Swan study finds
using variance ratios that price efficiency declines on Nasdaq during
the experiment. However when using autocorrelation of trades as a
measure of price efficiency, the tests indicate a decrease in
autocorrelation--suggesting more efficient stock prices on Nasdaq.\589\
Additional analysis on price efficiency comes from Nasdaq's second
report which explores the impact of their experiment on market wide
price efficiency and finds no change in price impact, autocorrelation
of trades, or variance ratios.
---------------------------------------------------------------------------

    \589\ The interpretation of the price efficiency results is
difficult because it is unclear what price efficiency on one
exchange means in the absence of the other exchanges. Usually price
efficiency is measured across all exchanges trading a given
security.
---------------------------------------------------------------------------

    The Swan study also empirically examines how the Nasdaq experiment
impacted the trading behavior of high frequency traders (``HFTs'') and
non-HFTs and finds that as a result of the experiment HFTs added
liquidity less often and took liquidity more often while non-HFTs did
the opposite. Nasdaq also examined trading behavior and found that
there was a shift in the composition of the top five liquidity
providers for the securities that occurred as a result of the
experiment. The top five liquidity providers prior to the start of the
pilot significantly reduced their liquidity provision from 44.5% of the
liquidity provided pre-pilot to 28.7% in the pilot period. However, the
top five liquidity providers from the pilot period had a significant
increase in their liquidity provision from 29.7% pre-pilot to 41.5% in
the pilot period.

    While Nasdaq believes that the results from their study do not
support the need for a pilot,\590\ the Commission disagrees because the
Nasdaq experiment and the subsequent analysis suffers from the
following limitations. First, the Nasdaq experiment may not be
representative of the broader market. Nasdaq selected 14 stocks to be
part of the analysis, which represent 0.3% of all NMS stocks. The
sample is unlikely to be representative of the universe of NMS
securities for two reasons: (1) The sample included a small number of
stocks (and no ETPs),\591\ and (2) less than one-third of these stocks
were small or mid-capitalization at the time of the analysis, although
most had market capitalizations close to $3 billion immediately prior
to the study.\592\ The small number of stocks makes interpretation of
the results more difficult because a change to such a small number of
stocks may not be significant enough for traders to alter their
behavior.\593\
---------------------------------------------------------------------------

    \590\ See Nasdaq Letter I, at 10.
    \591\ Only common stocks were included in the Nasdaq study,
while the proposed Pilot will include NMS stocks, which includes
common stocks as well as ETPs.
    \592\ Market capitalizations are computed from CRSP shares
outstanding and stock price, as of December 31, 2014. See also
Themis Trading Letter I, at 2; NorthWestern Letter, at 1 and IEX
Letter III, at 6.
    \593\ Nasdaq acknowledges this limitation in their second report
analyzing the experiment. See supra note 584 See also Themis Trading
Letter I, at 2 and IEX Letter III, at 6 for commenters expressing
similar concerns about the representativeness of Nasdaq's sample.
---------------------------------------------------------------------------

    Additionally, the Commission is not able to make inference about
the effect of a market wide change to fees and or rebates from the
Nasdaq experiment because, as noted by multiple commenters, the effects
of the experiment apply to a single exchange: Nasdaq.\594\ As the other
equities exchanges did not have similar changes to transaction-based
fees and rebates, any inferences drawn from the Nasdaq study may not be
valid under different circumstances in which all equities exchanges
were subject to consistent revisions to transaction-based fees. \595\
---------------------------------------------------------------------------

    \594\ See Swan Letter, at 3; Themis Trading Letter I, at 2;
Credit Suisse Commentary, at 2, Larry Harris Letter, at 9, and IEX
Letter III, at 6.
    \595\ This point was acknowledged in Nasdaq's second report. See
supra note 584. This point was also brought up by multiple
commenters. See Swan Letter, at 3; Credit Suisse Commentary, at 2;
and Larry Harris Letter, at 9.
---------------------------------------------------------------------------

    Lastly, none of the analysis of the Nasdaq study analyzes the
impact of potential conflicts of interest on order routing decisions.
Further, even if the Nasdaq study had analyzed a causal relationship
between transaction-based fees and rebates and potential conflicts of
interest, the limited representativeness of the Nasdaq sample would
limit the generality of the study.
iii. Options Market Studies
    Three studies have examined exogenous shifts between maker-taker
and payment for order flow pricing models on U.S. options
exchanges.\596\ These studies found that the movement from a payment
for order flow model to a maker-taker model led to a decrease in
execution costs for option classes affected by the shift, improved
quoted spreads, and altered broker-dealer order routing behavior to
account for the fees.\597\ However, the change to a payment for order
flow model from a maker-taker model yielded better execution quality,
but a reduction in the number of orders and order volume.\598\ With
respect to the transition between forms of pricing models that occurred
on the option exchanges, discussed above, the key limitation is the
comparison of maker-taker pricing models with payment for order flow
pricing models. For example, studies that explore these regime shifts
between maker-taker to payment for order flow models are not comparing
situations in which one regime could theoretically have lower conflicts
of interest than the other. Each of these models is likely to create
potential conflicts of interest that could affect how broker-dealers
route their customer orders,\599\ although evidence does not suggest
that one form of pricing model is more or less prone to conflicts than
another. Moreover, the change from one form of pricing model to another
could introduce new conflicts of interest or impacts on market and
execution quality that did not previously exist. Therefore, the
Commission believes that exchange-driven transitions between maker-
taker and payment for order flow pricing models are not likely to
provide information about potential conflicts of interest and impacts
on market and execution quality driven by the maker-taker and taker-
maker models or to inform the Commission about future regulatory
decisions regarding transaction-based fee models. Additionally, these
studies lack causality. Specifically the decision to invert an exchange
from a taker/maker to a maker/taker exchange, which these studies are
based on, is an endogenous decision, and therefore these studies lack
the ability to make causal inference further hindering the Commission's
ability to draw inference from these studies.
---------------------------------------------------------------------------

    \596\ See Amber Anand, Jian Hua, & Tim McCormick, Make-Take
Structure and Market Quality: Evidence from the U.S. Options
Markets, 62 Mgmt. Sci. 3085, 3217-90 (2016), https://pubsonline.informs.org/doi/abs/10.1287/mnsc.2015.2274 (hereinafter
``Anand, Hua, & McCormick''); Robert Battalio, Todd Griffith, &
Robert Van Ness, Make-Take Fees versus Order Flow Inducements:
Evidence from the NASDAQ OMX PHLX Exchange, 12th Ann. Mid-Atlantic
Res. Conf. in Fin. (2017), http://www1.villanova.edu/content/dam/villanova/VSB/assets/marc/marc2017/SSRN-id2870000.pdf (hereinafter
``Battalio, Griffith, and Van Ness''); Robert Battalio, Andriy
Shkilko, & Robert Van Ness, To Pay or Be Paid? The Impact of Taker
Fees and Order Flow Inducements on Trading Costs in U.S. Options
Markets, 51 J. Fin. & Quantitative Analysis (Oct. 2016) 1637, 1637-
62 https://www.cambridge.org/core/journals/journal-of-financial-and-quantitative-analysis/article/div-classtitleto-pay-or-be-paid-the-impact-of-taker-fees-and-order-flow-inducements-on-trading-costs-in-us-options-marketsdiv/0782CE3E9679C29BB910A66192D27201 (hereinafter
``Battalio, Shkilko & Van Ness''). Anand, Hua, & McCormick explores
the transition from a payment for order flow model to a maker-taker
model on NYSE ARCA, while Battalio, Griffith, and Van Ness as well
as Battalio, Shkilko, & Van Ness examine the shift on NASDAQ OMX
PHLX (``PHLX'') from a maker-taker model to a payment for order flow
model.
    \597\ Id.
    \598\ Id.
    \599\ See Battalio, Shkilko & Van Ness, supra note 596, at 1637-
62.
---------------------------------------------------------------------------

b. Limitations of Existing and Anticipated Data
    Some Commenters suggested that existing data sources could be
employed in lieu of a Pilot to study the Commissions objectives.\600\
Another Commenter argued that enhancing existing data would be
sufficient.\601\ To this end, the Commission considered whether a
number of existing data sources could be used independently or in
combination to relate transaction-based fees to order routing and
execution quality. This section discusses these data sources. For
instance, in the Battalio Equity Market Study and the Nasdaq study
discussed above, the authors employed some combination of Rule 606
data, proprietary broker-dealer data, the Trade and Quote (TAQ)
database,\602\ and proprietary exchange data. In addition, while not
employed in previous studies, CAT data, OATS data, Rule 605 data, Form
ATS-N data, and exchanges' Form 19b-4 fee filings and fee schedules
available from each exchange's website, could provide insights into the
relation between transaction-based fees, order routing, and execution
quality, and fees

and other arrangements. As noted above, several data sources provide
information on order routing and execution quality. While researchers
could use these data sources to produce some representative results
regarding the relation between transaction-based fees, order routing,
and execution quality, the Commission believes that available data has
several limitations, which include: Granularity, completeness,
periodicity, format, and availability.
---------------------------------------------------------------------------

    \600\ See STANY Letter, at 2; Nasdaq Letter I, at 11-12; NYSE
Letter I, at 17; and Nasdaq Letter III, at 1-2.
    \601\ See Era Letter, at 1. But cf. IEX Letter II, at 9.
    \602\ Battalio Equity Market Study, supra note 530, relies on
Rule 606 disclosures to identify order routing for a small sample of
broker-dealers, proprietary broker-dealer data from a single smart-
order routing system to capture limit order execution quality for
this broker-dealer's orders, and the TAQ data to measure execution
quality as a function of each venue's taker fee or rebate.
---------------------------------------------------------------------------

i. Rule 606 Data
    Rule 606 requires broker-dealers to make publicly available
quarterly reports that provide an overview of their routing practices
on certain orders in NMS securities. As amended, broker-dealers must
provide information for the ten venues to which the largest number of
total non-directed orders were routed for execution and for any venue
to which five percent or more of non-directed orders were routed for
execution. Rule 606 disclosures also require broker-dealers to disclose
in a standardized format material aspects of their relationships with
trading venues to which they route orders, including a description of,
among other things, the payment for order flow and any profit sharing
relationships, which, like rebates, could influence the broker-dealer's
order routing decision and potentially lead to potential conflicts of
interest for broker-dealers when routing orders.\603\ Researchers and
other analysts interested in order routing data can download these
forms quarterly directly from broker-dealer websites.
---------------------------------------------------------------------------

    \603\ See Section III.B.3 of Amendments to Order Handling
Disclosure, supra note 310.
---------------------------------------------------------------------------

    Some commenters believed that the amendments to the Rule 606 data
would render the Pilot unnecessary.\604\ Indeed, a few commenters
suggested that Rule 606 data, perhaps combined with other existing
data, would be sufficient to study conflicts of interest among broker-
dealers.\605\ The Commission disagrees that this type of analysis would
serve the purposes of the Pilot.\606\ Such an approach would not
adequately advance the Pilot's broader purpose to study the effects
that exchange transaction fee-and-rebate pricing models may have on
order routing behavior, execution quality, and market quality, in
addition to conflicts of interest between brokers and their customers
that are presented when exchanges pay rebates.\607\ Further, disclosure
alone would not provide an exogenous shock that generates measurable
responses capable of providing insight into the effects of fees and
rebates on the markets and market participant behavior.
---------------------------------------------------------------------------

    \604\ See Cboe letter I, at 26; FIA Letter, at 3; STANY Letter,
at 2; Nasdaq Letter I, at 1-2, 4; NYSE Letter I, at 18.
    \605\ See STANY Letter, at 2; Nasdaq Letter I, at 11-12; ERA
Letter, at 1.
    \606\ See also IEX Letter I, at 9.
    \607\ See, e.g., ICI Letter II at 3.
---------------------------------------------------------------------------

    In addition, the quarterly frequency of the public Rule 606 reports
by broker-dealers is different from the frequency of changes in fee
schedules by exchanges (e.g., as presented in Table 2, over a recent
five-year measurement period, the average exchange updated its fees
schedule approximately 6.7 times per year).\608\ Further, while the
Rule 606 data provides order routing at the broker-dealer level, such
information is not granular enough to thoroughly study potential
conflicts of interest. Specifically, the 606 data is aggregated at the
quarterly level. This frequency will not enable researchers to look at
the full picture of how a broker-dealer responds to fees because
exchanges on average revise their fee schedules 6.7 times per year.
With 13 exchanges this amounts to 87 fee changes per year.
Consequently, the fees that exchanges charge in a given quarter
relative to the other exchanges will likely change multiple times
within a quarter. Consequently, Rule 606 data is limited in how it can
be employed to evaluate comprehensively the impact of order flow
responding to fees and rebates.
---------------------------------------------------------------------------

    \608\ Not every fee schedule revision pertains to transaction
fees or rebates. To focus only on these revisions, each Form 19b-4
fee filing was evaluated to determine that revisions to fees or
rebates were pertinent to this baseline.
---------------------------------------------------------------------------

    The value of Rule 606 disclosures for identifying possible
conflicts of interest resulting from transaction-based fees would be
limited for a number of additional reasons. First, each broker-dealer
discloses data for only its top ten order routing venues. Second,
because broker-dealers disclose data at a quarterly frequency, a five-
year sample of Rule 606 data for a single broker-dealer, would include
only 20 observations, limiting statistical power.
    In sum, the Commission believes that the amended Rule 606 data will
provide useful information to complement the Pilot; however it is
insufficient by itself to determine the impact of exchange transaction
fees and rebates on broker-dealer order routing decisions, or inform
the Commission of the impact of exchange pricing on market and
execution quality.\609\
---------------------------------------------------------------------------

    \609\ Multiple commenters expressed views similar to this and
urged the Commission to adopt 606 amendments prior to the adoption
of the Pilot. See, e.g., Citadel Letter, at 3; OMERS Letter, at 3;
ICI Letter I, at 5-6; Fidelity Letter, at 2; IEX Letter II, at 9.
---------------------------------------------------------------------------

ii. CAT Data and OATS Data
    Once the CAT Phase 1 becomes operational,\610\ the Commission and
SROs will have information on all exchange routing and exchange
executions for all NMS securities. In CAT Phase 1, exchanges would
record and report order events on every order they receive for NMS
securities. Order events include order receipt, order routes, order
modifications, order cancellations, and order executions. Likewise, the
Order Audit Trail Systems (OATS) data could inform on order routing
decisions.\611\ The OATS data tracks customer orders from the receipt
of the order through execution or cancellation. Information in the OATS
data reflects the terms of the order, including the security, price,
shares, account type, handling instructions, and side of the market for
which the order was placed; where the order was routed for execution;
modifications to the order; and execution information, including the
capacity in which the firm acted in the trade.
---------------------------------------------------------------------------

    \610\ See supra Section II.E.3.vi.
    \611\ See Nasdaq Letter I, at 4.
---------------------------------------------------------------------------

    Although the CAT and OATS data could feasibly be used to produce
order routing data similar to that required by the Pilot, as indicated
by one commenter, without the corresponding ``randomized trial,'' the
use of OATS data alone would be insufficient to determine causality in
the effect of fees and rebates on order routing decisions because it
would not be possible to determine from the data whether fees respond
to changes in order routing decisions or whether order routing
decisions respond to changes in fees. Consequently, in the absence of
an exogenous shock to fees, CAT and OATS data cannot provide the
Commission with robust evidence about how access fees impact order
routing decisions.\612\
---------------------------------------------------------------------------

    \612\ See Verret Letter I, at 4.
---------------------------------------------------------------------------

iii. Proprietary Broker-Dealer Data
    Proprietary data from broker-dealers or exchanges could also
provide information about order routing decisions. Broker-dealer data
include information on the orders received and routed by that broker-
dealer, including where the broker-dealer routed orders, whether the
orders execute, and the price, size, and time of execution. Exchange
data include information on the orders received by an exchange,
including which members routed orders to the exchange, whether the
orders execute, and the price, size, and time of

execution. Indeed, several commenters stated that if 606 data were not
sufficient to answer the Commission's questions about broker dealer
routing decisions, then the Commission could request routing tables and
information directly from broker-dealers or request other Transaction
Cost Analysis (TCA) data to supplement the 606 data.\613\
---------------------------------------------------------------------------

    \613\ See Nasdaq Letter I, at 11-12 and FIA Letter, at 3.
---------------------------------------------------------------------------

    While these data would provide potentially more granular data about
order routing, as proprietary datasets, there is no standard format
that exchanges or broker-dealers use to aggregate this data, which
makes cross broker-dealer or cross exchange comparison difficult. Even
if a dataset of proprietary data could be produced from data obtained
directly from exchanges or broker-dealers, the data would still lack an
exogenous shock to fees which is necessary to determine a causal link
between order routing decisions and exchange fees.
iv. Rule 605 Data
    A few commenters suggested that Rule 605 data used in conjunction
with other data such as Rule 606 data, could provide information about
broker dealer conflicts of interest.\614\ Rule 605 data provides
information about execution quality by market center, including
exchanges, ATSs, and broker-dealers that execute orders, by requiring
standardized reports of statistical information regarding order
execution, and was designed to improve the public disclosure of order
execution practices by exchanges.\615\ These data are available monthly
from market center websites or data vendors, and provide information on
execution quality statistics such as transaction costs, execution
speed, and fill rates reported separately for marketable and non-
marketable orders.
---------------------------------------------------------------------------

    \614\ See STANY Letter, at 2 and Nasdaq Letter I, at 11-12.
    \615\ See Disclosure of Order Execution and Routing Practices,
supra note 580, at 75417-25.
---------------------------------------------------------------------------

    While Rule 605 data is available to researchers and may provide
information about execution quality, it too has a number of
limitations. For example, Rule 605 data provides execution quality
information for both marketable and non-marketable orders; however, the
methodologies for estimating measures of the speed of execution of non-
marketable orders are outdated.\616\ For instance, Rule 605 measures
realized spreads based on quotations five minutes after the time of
order execution and recent research suggests using quotations that more
closely follow a trade, because any temporary price impact of a trade
goes away within seconds, not minutes, of the trade.\617\ Finally, Rule
605 data is limited in that it covers only held orders and orders of
less than 10,000 shares.
---------------------------------------------------------------------------

    \616\ See Securities Exchange Act Release No. 61358 (January 14,
2010), 75 FR 3594 (January 21, 2010) (hereinafter ``Concept
Release'').
    \617\ See, e.g., Jennifer Conrad & Sunil Wahal, The Term
Structure of Liquidity Provision (August 8, 2018) (unpublished
manuscript) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2837111.
---------------------------------------------------------------------------

v. TAQ Data
    Beyond Rule 605 data, researchers could also use the TAQ database
as a means of measuring order execution quality or estimating market
share to use as a measure for order routing decisions. The TAQ database
is publicly available (for a fee) from NYSE and provides access to all
trades and top of the book quotes for NMS securities, from which
researchers and other analysts can estimate trade-based measures of
execution quality such as effective spreads.
    While TAQ data are available to academic researchers, TAQ has a
number of limitations in its precision in the measurement of order
routing and execution quality. An exchange's market share can differ
significantly from its share of orders received because exchanges
reroute orders they cannot execute at the best prices and some
exchanges reroute more orders than others. In addition, TAQ doesn't
provide information on the brokers or dealers underlying the trades or
quotes, so TAQ cannot tell us about the decisions of individual
brokers. While TAQ facilitates the estimation of trade and quote-based
measures of execution and market quality, it does not facilitate the
estimation of order-based measures of execution quality, which are more
precise than trade-based measures. In particular, order-based measures
allow for the consideration of order size, which can be different and
often larger than trade size. Order-based measures also consider the
costs of latency whereas trade-based measures do not. Additionally,
since TAQ only provides data on trades it does not provide a means of
estimating execution quality for limit orders.
vi. Information From Exchange 19b-4 Filings
    Finally, researchers both in and outside of the Commission, who
wish to link fees and rebates to various outcomes, can manually create
datasets of exchange fees and rebates from the information that
exchanges provide on their websites and release in their Notice of
Filing of Proposed Rule Changes, which would capture information
contained in exchanges' Form 19b-4 fee filings. The Form 19b-4 fee
filings record changes to the existing exchange fee schedules with the
Commission. At any point that an exchange chooses to make a change to
any aspect of its fees and rebates, the exchange must provide notice to
the Commission that it is filing a proposed rule change to amend its
existing fee and rebate schedule. Exchanges may file their revisions to
fees and rebates for immediate effectiveness upon submitting the Form
19b-4 fee filings with the Commission.
    A key limitation to this data, particularly for researchers outside
the Commission, is that exchanges use bespoke terminology to classify
their fees and rebates. Consequently, identifying comparable fees
across exchanges is difficult. For example, identifying the base or
top-tier fees across exchanges could be difficult for researchers. As
shown in Table 2 below, the average exchange has 24 different access
fee categories and 21 different rebate categories. Further, exchanges
do not disclose per share average or median fees charged and rebates
earned on any report or filing, so such information is unavailable to
the public. To add to the impediments to fee data aggregation and
comparison, Form 19b-4 fee filings are available only as PDF files
downloadable from the Commission's website, thereby increasing the
costs of aggregation across exchanges over time by researchers.
    Lastly, even if a comprehensive dataset of fee changes were
created, it would not be sufficient by itself to study the link between
order routing decisions and fees because the dataset can only tell when
and how an exchange revised fees, and not why the fee changed or if the
fee change affected order routing behavior. In essence the data still
lacks the ability to establish a causal connection between fee changes
and order routing decisions.
vii. Form ATS-N
    Following implementation in January 2019, the public will have more
information on ATS conflicts of interest and fees. In particular, in
June 2018, the Commission adopted amendments to 17 CFR 242.300 through
242.303 (Regulation ATS) and 17 CFR 240.3a1-1 (Rule 3a1-1 under the
Exchange Act).\618\ As part of these amendments, NMS Stock ATSs will be
required to

publicly report on new Form ATS-N information about the manner in which
the ATS operates and activities of the broker-dealer operator and its
affiliates, as well as potential conflicts of interest within the NMS
Stock ATSs. While Form ATS-N will contain high level information on
operations and affiliates of the ATS, it will not contain detailed
information, such as ATS routing tables. Therefore, it would not
contain detailed information on how fees and rebates affect the order
routing decisions of the ATS.
---------------------------------------------------------------------------

    \618\ See Securities Exchange Act Release Nos. 83663 (July 18,
2018), 83 FR 38768 (August 7, 2018).
---------------------------------------------------------------------------

    Form ATS-N also will require ATSs to provide public disclosures
about the different types of fees they charge, along with the ranges of
those fees and whether they are bundled with any other services.
However this information would not be nearly as granular as the exact
fee disclosures that would be required by the Pilot. Nor do they
provide as much information as the fee disclosures that exchanges are
currently required to disclose. These limitations make it difficult to
use the ATS-N data to make causal inference about the impact of fees
and rebates on order routing decisions.
c. The Potential To Study the Causal Link Between Fees, Rebates, and
Conflicts of Interest Absent a Pilot
    Absent a Pilot, the Commission does not believe it would have
comprehensive, empirical evidence to study the effects on the market
that the Pilot is intended to study. In particular, as indicated above,
the Commission does not believe the theoretical evidence on incentives
and potential other effects are indicative of broker-dealers actually
acting on those incentives. Further, even if the data sources above did
not suffer from their limitations, researchers would struggle to
identify the causality necessary to robustly link fee and rebate
effects on order routing to order execution quality.
    Indeed, this link requires two steps: First establishing a causal
link between fees and rebates and order routing and then between fee-
based order routing and order execution quality. Even with perfect
data, any study linking fees and rebates to order routing would suffer
from an inability to draw conclusions about causality. While such a
study might find a correlation between fees/rebates and order routing
decisions, the researchers would be unable to conclude which event was
driving which. In particular, since exchanges compete for market share,
it is reasonable to expect that exchanges change their fees and rebates
in response to changes in order routing decisions by broker dealers. If
this is the case it would be the order routing decisions that drive the
exchange fees. The data alone do not allow researchers to distinguish
whether order routing determines fees or whether fees determine order
routing.
    Similarly, existing data, even if it didn't have the limitations
above, would not enable researchers to infer the causal impact of fee-
based order routing on order execution quality. If fees and execution
quality are linked, then exchanges may change their fees in response to
changes in execution quality. For example, raising rebates might
attract more liquidity providers and induce additional order flow to
the exchange. An exchange that is experiencing low execution quality
might raise rebates to address this problem. Under these circumstances,
an empirical analysis that lacks an exogenous shock to fees/rebates
might erroneously conclude that increased rebates cause a conflict of
interest because they are correlated with low execution quality and
increased order flow. Such a conclusion might lead the Commission to
draw incorrect conclusions.
2. Current Market Environment
    This section provides an overview of the competitive landscape that
could be affected as a result of revisions to the transaction-based fee
structure required by the Pilot. Where information is currently
available to the Commission, a description of the current practices of
exchanges along dimensions that are relevant to the Pilot (e.g.,
summary information on their current fee schedule or the frequency of
fee revisions) are included. The Commission requested that commenters
provide additional information to inform the baseline as part of the
proposal. Where available, the baseline has been supplemented to
reflect additional baseline information that was received from
commenters.
a. Market for Trading Services
    The market for trading services, which is served by exchanges,
ATSs, and other liquidity providers (internalizers and others), relies
on competition to supply investors with execution services at efficient
prices. These trading venues, which compete to match traders with
counterparties, provide platforms for price negotiation and the
dissemination of trading information. The market for trading services
in NMS stocks currently consists of 13 national equity market exchanges
and 34 operational ATSs. Other off-exchange venues include broker-
dealer internalizers and wholesalers, which execute a substantial
volume of retail order flow. The remainder of this section discusses
the current competitive landscape for exchanges, ATSs, and others
relevant to our economic analysis of the Pilot.
    Since the adoption of Regulation NMS in 2005, the market for
trading services has become more fragmented and competitive. Of the 13
exchanges, seven are maker-taker exchanges and four are taker-maker
pricing exchanges, as shown in Table 1; the NYSE American and IEX
operate as flat-fee exchanges.\619\ Since Regulation NMS was adopted in
2005, the market for trading services has become significantly more
competitive as measured by the decline in market share of individual
exchanges, discussed in more detail below. The number of U.S. equities
exchanges has increased by over 60%, as the number of exchanges
increased from eight exchanges in 2005 to 13 exchanges operating
today.\620\ Several studies have suggested that transaction-based fee
pricing partially drove the increase in the number of U.S. equities
exchanges since 2005.\621\
---------------------------------------------------------------------------

    \619\ IEX charges a flat fee of $0.0009 for trades against non-
displayed liquidity on both sides of the market, and charges $0.0003
for trade execution against displayed liquidity. See IEX, Investors
Exchange Fee Schedule (August 1, 2018), https://iextrading.com/trading/fees (last visited September 18, 2018). As of March 2018,
EDGA is no longer operating as a taker-maker market, but is also
operating as a flat-fee venue. See Cboe, Cboe US Equities (2018)
http://markets.cboe.com/us/equities/ (last visited September 18,
2018).
    \620\ While the number of exchanges was eight, there were other
non-exchange trading venues in 2005 (i.e., ECNs), which were
displayed markets that utilized a standard price-time-priority
market model similar to exchanges. Although 13 U.S. equities
exchanges currently operate as of March 2018, the majority of these
exchanges are part of exchange families. For instance, NYSE, NYSE
Arca, NYSE American, and NYSE National, are all part of the NYSE
Group, which is wholly owned by the Intercontinental Exchange (ICE),
while Nasdaq, Phlx, and BX, are owned by Nasdaq. BATS, BATS-Y, EDGA,
and EDGX, which all operated as ATSs in 2005, are all subsidiaries
of Cboe Global Market, Inc. IEX became a registered exchange in
2016. Further, NSX (NYSE National) existed as an exchange in 2005,
but halted operations in 2016. It was acquired by NYSE/ICE in
January 2017 and was re-opened for trading in May 2018. See
Intercontinental Exchange, NYSE Finalizes Acquisition of National
Stock Exchange, Bus. Wire: News (Jan. 31, 2017, 6:28 p.m.) https://www.businesswire.com/news/home/20170131006474/en/. Researchers can
adequately control for exchanges that are subsidiaries of the same
parent when conducting analyses of the effect of changes in
transaction-based fees on order routes.
    \621\ See, e.g., Angel, Harris, & Spatt, supra note 530; Harris,
supra note 530.
---------------------------------------------------------------------------

    Execution services are a lucrative business, which encourages new
trading centers to enter the market in the hopes of capturing rents
associated with order

execution.\622\ As discussed in the proposing release, liquidity
externalities, where the more liquid venues attract more interest and
therefore more liquidity, could result in a single venue (or very
limited number of venues) being the preferred trading location for any
given stock because all traders could optimally route orders to the
venue with the highest liquidity for a given stock.\623\ But if rebates
offered by exchanges are large enough, they provide incentives for
market participants to route orders to those venues, in order to
capture the rebates, and possibly despite the liquidity profile or
execution quality of those venues. Rebates offered by exchanges,
therefore, may ``break'' the liquidity externality.
---------------------------------------------------------------------------

    \622\ See, e.g., Angel, Harris, & Spatt, supra note 530; Harris,
supra note 530.
    \623\ See Proposing Release, supra note 2, at 13042. See also
ICI Letter II at 4.

                                    Table 1--U.S. National Equities Exchanges
----------------------------------------------------------------------------------------------------------------
                                                                                Exchange in      Market share
                   Exchange                         Market fee type \624\           2005?           \625\ (%)
----------------------------------------------------------------------------------------------------------------
Cboe BZX: https://markets.cboe.com...........  Maker-Taker...................                               6.14
Cboe BYX: https://markets.cboe.com...........  Taker-Maker...................                               4.86
Cboe EDGA: https://markets.cboe.com..........  Taker-Maker...................                               1.26
Cboe EDGX: https://markets.cboe.com..........  Maker-Taker...................                               5.58
BX: www.nasdaqtrader.com.....................  Taker-Maker...................         [check]               3.00
Phlx (PSX): www.nasdaqtrader.com.............  Maker-Taker...................         [check]               0.70
Nasdaq: www.nasdaqtrader.com.................  Maker-Taker...................         [check]              15.76
NYSE Arca: https://www.nyse.com/markets......  Maker-Taker...................         [check]               8.87
NYSE American \626\: https://www.nyse.com/     Flat Fee......................         [check]               0.32
 markets.
NYSE: https://www.nyse.com/markets...........  Maker-Taker...................         [check]              12.16
NYSE National \627\: https://www.nyse.com/     Taker-Maker...................         [check]               0.64
 markets.
CHX: www.chx.com.............................  Maker-Taker...................         [check]               0.57
IEX: www.iextrading.com......................  Flat-fee......................                               6.14
                                              ------------------------------------------------------------------
    Total....................................  ..............................  ...............             66.00
----------------------------------------------------------------------------------------------------------------

    Table 1 highlights that the market share of trading volume among
exchanges is not very concentrated. Although NYSE and Nasdaq have the
largest market share of approximately 12% and 16%, respectively, among
the exchanges, as of July 2018, these two exchanges collectively
account for less than 30% of the total market share of trading volume
for NMS stocks, indicating that the market for trading services has
become decentralized, and has become more so over time. For instance,
between 2004 and 2013, the NYSE's market share of NYSE-listed stocks
declined from approximately 80% to 20%, while market share of other
exchanges and off-exchange trading centers has increased.\628\ This
decentralization provides market participants with a choice among
venues when they route orders, and may also encourage exchanges to
compete to attract order flow.
---------------------------------------------------------------------------

    \624\ See supra notes 3 and 4.
    \625\ Shares are computed based on trading volume in August
2018. Market shares for the exchanges reported do not add up to
100%, because approximately 34% of trading volume is executed off-
exchange on over-the-counter venues. These market share figures
differ slightly from the ones in footnote 9 of Cboe Letter I, which
provided market share for May 2018. While these differences could
result from the focus on more recent data, the Commission is not
sure if the differences could also be driven by differing
methodologies. Nonetheless, the figures in Cboe Letter I are
consistent with the conclusions in this release. Also, the off-
exchange share differs slightly from the 39% share in Nasdaq Letter
I, at 2. Note that the off-exchange share in the Proposing Release
was 40%.
    \626\ Since July 2017, NYSE American has not been a purely
maker-taker market as only certain types of market participants
(electronic Designated Market Makers) are eligible for rebates. See
NYSE American Equities Price List (July 26, 2018), https://www.nyse.com/publicdocs/nyse/markets/nyse-american/NYSE_America_Equities_Price_List.pdf.
    \627\ NYSE acquired NSX in January 2017, and the exchange is now
known as NYSE National. The exchange was re-opened for trading in
May 2018 as taker-maker exchange.
    \628\ See Angel, Harris, & Spatt, supra note 5307, Figures 2.17
and 2.18. Although less evident than for NYSE-listed securities, the
effect is similar for the Nasdaq market.
---------------------------------------------------------------------------

    A number of commenters suggested that exchanges compete intensely
with each other to attract order flow.\629\ Transaction-based fees
represent one means by which national securities exchanges may compete
for order flow, and exchanges may adopt business models that focus on
attracting order flow by offering large rebates or charging competitive
fees. Exchanges may also develop different business models to attract
different types of order flow.\630\ For example, maker-taker venues may
offer large rebates to attract liquidity supplying orders.\631\ They
may then rely on this liquidity to attract marketable orders, to which
they charge a high transaction fee in order to both offset the cost of
the large rebates and to ensure a profitable transaction pricing model.
Alternatively, inverted exchanges offer higher rebates to compete to
attract marketable orders. Exchanges may also compete for order flow on
other dimensions as well, by offering better execution quality, better
technology, and innovations in order types and other trading
mechanisms.\632\
---------------------------------------------------------------------------

    \629\ See, e.g., CBOE Letter I, at 2; NASDAQ Letter I, at 11-13.
One commenter suggested that in the Proposal, the Commission made
the assumption that exchange groups had market power without
providing evidence to support the assumption. This commenter also
argued that no exchange group controls even 25 percent of market
share and that competition is robust between and among equities
exchanges. See NASDAQ Letter I, at 12-13.
    \630\ One commenter suggested that in the Proposal, the
Commission failed to account for the two-sided nature of exchange
platforms when assessing the competitive impact of the Proposal. See
NASDAQ Letter II, at 4-5. In the Proposal, the Commission separately
discussed the potential impact of the Pilot on the competition for
trading volume, see the Proposal, supra note 2, at 13068. The
Commission also discussed some ways the Pilot could potentially
impact marketable and nonmarketable order flow, see the Proposal,
supra note 2, at 13057. Additionally, in Section IV.D.2.a, the
Commission separately discusses the potential effects of the Pilot
on marketable and non-marketable order flow.
    \631\ A number of commenters said exchanges use rebates to
compete to attract limit orders to supply liquidity. See, e.g.
NASDAQ Letter I, at 12; Virtu Letter, at 3; State Street Letter, at
2.
    \632\ One commenter also suggested that exchanges also compete
to attract to liquidity using many costly features, including
rebates, incentive programs, superior execution systems, regulatory
quality, and customer service. See NASDAQ Letter I, at 12.
---------------------------------------------------------------------------

    In addition to competing with other U.S. equities exchanges,
exchanges also compete for order flow with off-exchange trading
centers, including ATSs, internalizers, and others. One way exchanges
compete with off-exchange trading venues is through the use of rebates.
For example, a number

of commenters argued that one way exchanges compete with off-exchange
trading venues is by using liquidity rebates to attract liquidity and
narrow the displayed spread, which makes it more expensive for off-
exchange trading venues to either match or improve upon the NBBO.\633\
Exchange transaction fees may also affect competition between exchanges
and off-exchange trading venues. For example, commenters suggested that
broker-dealers may opt to route order flow off-exchange in order to
avoid higher transaction fees charged by exchanges.\634\ Off-exchange
trading venues may also compete with exchanges to attract order flow by
offering more flexibility in how they execute orders. One commenter
noted that ``market participants choose to send orders to off-exchange
venues for reasons other than avoiding fees,'' including ``investors
anonymity, the ability to trade in more granular tick sizes, the
flexibility to segment the treatment of different types of clients, the
ability to choose trading counterparties, and the ability to
accommodate customer errors.'' \635\
---------------------------------------------------------------------------

    \633\ See e.g., FIA Letter, at 3-4; NYSE Letter I, at 6; Grasso
Letter, at 4.
    \634\ See e.g., IEX Letter I, at 3; Credit Suisse Commentary, at
2.
    \635\ See NYSE Letter I, at 6.
---------------------------------------------------------------------------

    Off-exchange trading makes up a substantial fraction of total
volume, as approximately 34% of all transaction reports are routed
using the NYSE and Nasdaq Trade Reporting Facilities as of August
2018.\636\ Of that off-exchange NMS share volume, approximately 14% was
attributable to ATSs, of which 34 traded NMS securities as of August
2018.\637\ The remaining 21% of off-exchange share volume is routed to
other off-exchange trading centers, such as internalizers.\638\
---------------------------------------------------------------------------

    \636\ Data on off-exchange market share are available from Cboe
http://markets.cboe.com/us/equities/market_share/ (last visited
November 8, 2018).
    \637\ The estimates of ATSs that trade NMS stocks and ATS trade
volume share was developed using weekly summaries of trade volume
collected from ATSs pursuant to FINRA Rule 4552. See also Securities
Exchange Act Release No. 76474 (November 18, 2015), 80 FR 80998,
81109 (December 28, 2015) (hereinafter ``Regulation of NMS Stock
Alternative Trading Systems''). The estimates in this release were
calculated in the same manner as in the cited release. See also OTC
(ATS & Non-ATS) Transparency, FINRA: Reg. Filing & Reporting (2018),
http://www.finra.org/Industry/Compliance/MarketTransparency/ATS/.
    \638\ Total market share is collected from Cboe http://markets.cboe.com/us/equities/market_share/ (last visited November 8,
2018). ATS weekly market share is collected from FINRA, https://otctransparency.finra.org (last visited November 8, 2018).
---------------------------------------------------------------------------

    In aggregate, broker-dealers and other market participants have a
large and varied set of options as to where they route orders, whether
to exchanges or to off-exchange trading centers. Moreover, empirical
evidence suggests that traditional exchanges, such as NYSE and Nasdaq,
are losing market share to off-exchange trading centers and newer
exchanges,\639\ which may provide different incentives to broker-
dealers in order to attract this order flow, including transaction fees
and rebates. We discuss the current levels of transaction-based fees in
Section IV.B.2.e below.
---------------------------------------------------------------------------

    \639\ See Angel, Harris, & Spatt, supra note 530.
---------------------------------------------------------------------------

b. Market for Liquidity Provision
    Several commenters discussed the importance of liquidity providers
to an exchange's ability to compete in the market for trading
services.\640\ Within the exchange framework, liquidity providers, such
as market makers, other proprietary traders, and investors, compete to
supply liquidity to liquidity demanders. They compete by posting
displayed limit orders on exchanges, or by posting undisplayed limit
orders on exchanges or ATSs. Liquidity providers profit by buying at a
price lower than the price at which they sell and/or by collecting
rebates that are greater than the fees they pay. Hence, an execution is
a necessary means of profiting from liquidity provision, whether the
liquidity provider seeks to profit from price changes or rebates.
---------------------------------------------------------------------------

    \640\ See, e.g., Cboe Letter I; NYSE Letter I.
---------------------------------------------------------------------------

    Liquidity providers, and traders more generally, seek to manage
their trading profits by managing the tradeoff between the price they
get in an execution, the certainty of execution, and any adverse
selection resulting from the execution.\641\ When a liquidity supplier
more aggressively prices their limit order, they increase the chance
that their order will execute, but they trade this off against their
order executing at a worse price and increased chance of their order
being adversely selected if it does execute.
---------------------------------------------------------------------------

    \641\ See NYSE Letter II at 8 for more concrete factors
considered by liquidity providers.
---------------------------------------------------------------------------

    To get an execution, the limit orders need to be at the top of a
queue at a given price and venue and placed on a venue able to attract
liquidity demanders. Displaying a limit order attracts liquidity
demanders to the venue displaying the limit order, and thus improves
the probability of execution, but could also increase the risk of being
adversely selected, which reduces profits. For example, an algorithm
that is skilled at identifying short-term price movements may be
programmed to hit displayed limit buy orders at a price following a
signal that the price is about to go down. In such a situation, the
liquidity provider is unlikely to quickly sell at a price higher than
the recent purchase, and therefore, these situations are costly for the
liquidity provider. One way to attempt to reduce adverse selection
costs is to not display the limit order. When the order is not
displayed, the traders with the price signals may not see it and, as a
result, would be less likely to pick it off. On the other hand, an
undisplayed limit order also risks not getting executed when an
execution would be profitable. For example, an undisplayed limit buy
order is less likely to execute than a displayed limit buy order just
prior to an increase in the price because marketable sell orders that
do not anticipate the price increase are likely to route to venues with
competitively priced limit buy orders and would not be able to identify
which venues have undisplayed limit buy orders.
    Rebates and fees can also affect where liquidity providers choose
to supply liquidity. Maker-taker exchanges, which pay rebates to
liquidity suppliers, provide them with extra revenue when trades are
executed. This could encourage liquidity suppliers to post at more
aggressive prices for some securities, subject to the fact that
displayed quotes on stock exchanges must be priced in one-cent
increments. However, competition among liquidity suppliers to earn
rebates could lead to longer queues in an order book, which could
decrease the chance that a liquidity supplier's order executes unless
they are at or near the front of the queue. In contrast, inverted
exchanges, which charge liquidity suppliers a fee when they supply
liquidity and offer a rebate to takers of liquidity, usually have
shorter queue lengths and an economic incentive to take liquidity,
which increases the chance that a liquidity supplier's order executes.
c. Market for Broker-Dealer Services
    The Commission considered the potential for the Pilot to affect
competition among broker-dealers that route institutional and retail
orders. These broker-dealers compete in a segment of the market for
broker-dealer services. The market for broker-dealer services is highly
competitive, with most business concentrated among a small set of large
broker-dealers and thousands of small broker-dealers competing in niche
or regional segments of the market.\642\ Large broker-dealers

typically enjoy economies of scale over small broker-dealers and
compete with each other to service the smaller broker-dealers, who are
both their competitors and their customers.\643\ As of December 31,
2017, approximately 3,860 broker-dealers filed Form X-17a-5. These
firms vary in size, with median assets of approximately $800,000,
average assets of nearly $1 billion, and total assets across all
broker-dealers of approximately $4 trillion. The twenty largest broker-
dealers held approximately 72% of the assets of broker-dealers overall,
with total assets of $2.89 trillion, indicating the high degree of
concentration in the industry. Of the 3,860 broker-dealers that filed
Form X-17a-5, 397 are members of U.S. equities exchanges. Broker-
dealers that are members of equities exchanges had, on average, higher
total assets than other broker-dealers, with median assets of $25.5
million, average assets of $9.2 billion, and total assets across all
broker-dealers that are members of exchanges of $3.65 trillion.
---------------------------------------------------------------------------

    \642\ See Securities Exchange Act Release No. 63241 (November 3,
2010), 75 FR 69791, 69822 (November 15, 2010) (hereinafter ``Risk
Management Controls for Brokers or Dealers with Market Access'').
    \643\ See id. Larger brokers, or those with more order flow,
also benefit from the economies of scale that accompany the tiering
structure typically provided by exchanges. Accordingly, the brokers
with the most liquidity-providing orders may benefit
disproportionately from rebates because they generally receive
higher rebates within the various tiered pricing models of
exchanges.
---------------------------------------------------------------------------

d. Market for Assets Under Management
    Many commenters expressed concern about the impact of the Pilot on
the market for assets under management, particularly on exchange-traded
products (``ETPs''). Asset management firms compete with each other in
a segment of the market for assets under management. They offer
different types of investment vehicles, such as mutual funds, close-end
funds, and ETPs,\644\ which compete with each other to attract investor
funds. Investor funds in an investment vehicle are pooled together and
invested in financial assets, with investors sharing any profits or
losses incurred by the investment vehicle according to each investor's
interest in the vehicle. Asset management firms generally earn revenue
by charging fees based on the value of the assets they manage on behalf
of investors in their investment vehicles.\645\
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    \644\ Not all ETPs are pooled investment vehicles. For example,
exchange traded notes (``ETNs''), which are a subset of ETPs, are
unsecured, unsubordinated debt securities that trade in the
secondary market on exchanges.
    \645\ Investment companies can also earn revenue from other
activities such as lending securities.
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    Investment vehicles compete with other investment vehicles that
follow similar investment strategies to attract investor funds. They
often rely on differences in expense ratios, tracking error, and
redemption and trading characteristics when competing to attract
investor funds.\646\
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    \646\ Actively managed investment vehicles also rely on their
historical performance when competing to attract investor funds.
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    One subset of investment vehicles are ETPs. ETPs differ from other
investment vehicles in their trading and redemption characteristics.
ETPs are investment vehicles that issue shares that can be bought or
sold throughout the day on securities exchanges in the secondary market
at a market-determined price.
    ETPs provide investors with a diverse set of investment options.
While the first ETPs held portfolios of securities that replicated the
component securities of broad-based domestic stock market indexes, some
ETPs now track more specialized indexes, including international equity
indexes, fixed-income indexes, or indexes focused on particular
industry sectors such as telecommunications or healthcare. Some ETPs
seek to track highly customized or bespoke indexes, while others seek
to provide a level of leveraged or inverse exposure to an index over a
fixed period of time. Investors also have the ability to invest in ETPs
that do not track a particular index and are actively managed.
    A number of commenters noted that ETP issuers face strong
competition within similar investment strategies and that small
differences in fees and trading characteristics, such as spreads, daily
volume, and intraday volatility, may be meaningful to market
participants when deciding which ETPs to trade or invest in.\647\
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    \647\ See, e.g. JPMorgan Letter, at 4; STANY Letter, at 4;
Healthy Markets Letter II, at 8; Morgan Stanley Letter, at 3-4.
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    As of September 2018,\648\ there were 2,003 ETPs categorized as
exchange traded funds (``ETFs''), 223 ETPs categorized as non-ETF ETPs,
and 18 ETPs categorized as ETMFs.\649\ As of this date, ETPs had total
net assets of $3.74 trillion. The ten largest ETPs accounted for 28.0%
of total ETP net assets and 27.8% of the average dollar trading volume
on secondary markets.
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    \648\ The results are based on data collected from Bloomberg and
Morningstar as of September 30, 2018 for US-domiciled ETPs.
    \649\ ETFs operate under exemptive orders that allow them to
register as investment companies under the Investment Company Act.
See 15 U.S.C. 80a-3(a)(1). Non-ETF ETPs are other ETPs that are not
registered under the Investment Company Act. Some are pooled
investment vehicles with shares that trade on a securities exchange,
but they are not ``investment companies'' under Investment Company
Act because they do not invest primarily in securities. Such ETPs
may invest primarily in assets other than securities, such as
futures, currencies, or physical commodities (e.g., precious
metals). Others are not pooled investment vehicles. For example,
ETNs are senior, unsecured, unsubordinated debt securities that are
linked to the performance of a market index and trade on securities
exchanges. See fn. 10 and accompanying text in the ETF Proposal,
infra note 651, at 37333. ETMFs are exchange traded managed funds.
ETMFs also operate under exemptive orders that allow them to
register as investment companies under the Investment Company Act,
but they have different disclosure requirements than ETFs. See, e.g.
Eaton Vance Management, et al., Investment Company Act Rel. Nos.
31333 (Nov. 6, 2014) (notice) and 31361 (Dec. 2, 2014) (order).
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    As the statistics above indicate, ETFs represent the majority of
ETPs, they possess characteristics of both mutual funds, which issue
redeemable securities, and closed-end funds, which generally issue
shares that trade at market-determined prices on a national securities
exchange and are not redeemable.\650\ Similar to mutual funds, ETFs
continuously offer their shares for sale. Unlike mutual funds, however,
ETFs do not sell or redeem individual shares. Instead, ``authorized
participants'' that have contractual arrangements with the ETF (or its
distributor) purchase and redeem ETF shares directly from the ETF in
blocks called ``creation units.'' \651\
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    \650\ The Investment Company Act defines ``redeemable security''
as any security that allows the holder to receive his or her
proportionate share of the issuer's current net assets upon
presentation to the issuer. See 15 U.S.C. 80a-2(a)(32). While
closed-end fund shares are not redeemable, certain closed-end funds
may elect to repurchase their shares at periodic intervals pursuant
to rule 23c-3 under the Investment Company Act (``interval funds'').
Other closed-end funds may repurchase their shares in tender offers
pursuant to rule 13e-4 under the Exchange Act.
    \651\ The Commission's exemptive orders typically contain a
representation by the applicant that an authorized participant will
be either: (a) A broker or other participant in the continuous net
settlement system of the National Securities Clearing Corporation, a
clearing agency registered with the Commission and affiliated with
the Depository Trust Company (``DTC''), or (b) a DTC participant,
which has executed a participant agreement with the ETF's
distributor and transfer agent with respect to the creation and
redemption of creation units. See, e.g., Emerging Global Advisors,
LLC, et al., Investment Company Act Release Nos. 30382 (February 13,
2013), 78 FR 11909 (February 20, 2013) (notice) and 30423 (March 12,
2013) (order) and related application. In June 2018, the Commission
proposed a new rule under the Investment Company Act of 1940 that
would permit ETFs that satisfy certain conditions to operate without
obtaining an exemptive order. In connection with the proposed
exemptive rule, the Commission proposed to rescind certain exemptive
orders that have been granted to ETFs and their sponsors. See
Securities Exchange Act Release No. 10515 (June 28, 2018), 83 FR
37332 (July 31, 2018) (``ETF Proposal'').
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    An authorized participant that purchases a creation unit of ETF
shares directly from the ETF deposits with the ETF a ``basket'' of
securities and other assets identified by the ETF that day, and then
receives the creation unit of

ETF shares in return for those assets.\652\ The basket is generally
representative of the ETF's portfolio \653\ and, together with a cash
balancing amount, equal in value to the aggregate NAV of the ETF shares
in the creation unit.\654\ After purchasing a creation unit, the
authorized participant may hold the individual ETF shares, or sell some
or all of them in secondary market transactions. The redemption process
is the reverse of the purchase process: The authorized participant
redeems a creation unit of ETF shares for a basket of securities and
other assets.\655\ While the Commission currently lacks data on
authorized participants, a 2015 survey-based study of fifteen fund
sponsors, which together offer two-thirds of all existing ETFs
(covering 90% of all ETF assets), finds that the average ETF has 34
authorized participant agreements.\656\ The study further reports that
creation and redemption transactions occurred only on between 10% to
20% of trading days and that only 10% of the daily activity in all ETF
shares (by volume) are creations or redemptions.\657\
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    \652\ An ETF may impose fees in connection with the purchase or
redemption of creation units that are intended to defray operational
processing and brokerage costs to prevent possible shareholder
dilution (``transaction fees'').
    \653\ The basket might not reflect a pro rata slice of an ETF's
portfolio holdings. Subject to the terms of the applicable exemptive
relief, an ETF may substitute other securities or cash in the basket
for some (or all) of the ETF's portfolio holdings. Restrictions
related to flexibility in baskets have varied over time. See the ETF
Proposal, supra note 651, at 37354-58.
    \654\ Non-ETF ETPs also offer creation and redemption processes.
Some Non-ETF ETPs that are organized as pooled investment vehicles
may offer creation and redemption processes similar to ETFs. Other
Non-ETF ETPs may offer creations or redemptions on a less frequent
basis. For example, some ETNs may only be redeemed weekly.
    \655\ An authorized participant may act as a principal for its
own account when purchasing or redeeming creation units from the
ETF. Authorized participants also may act as agent for others, such
as market makers, proprietary trading firms, hedge funds or other
institutional investors, and receive fees for processing creation
units on their behalf. See Abner, D.J. The ETF Handbook: How to
Value and Trade Exchange Traded Funds, 2nd ed., Wiley Finance (2016)
(``ETF Handbook'').
    \656\ See, e.g., Antoniewicz, R. & Heinrichs, J. (2014).
``Understanding Exchange-Traded Funds: How ETFs Work.'' ICI Research
Perspective, Vol. 20(5) (available at: https://www.ici.org/pdf/per20-05.pdf) (``Antoniewicz'').
    \657\ NSCC is the sole provider of clearing services for ETF
primary market transactions. Whether a creation or redemption order
is eligible to be processed through NSCC depends on the eligibility
for NSCC processing of the securities in the ETF's basket. See id.
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    Investors can purchase individual ETF shares in the secondary
market at prices that may deviate from the ETF's NAV. As a result, ETF
investors may trade shares at prices that do not necessarily reflect
the intrinsic value of the underlying ETF assets.\658\
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    \658\ It is possible for both the ETF's NAV per share and its
market price to deviate from the intrinsic value of the ETF's
underlying portfolio. In addition, there may be cases in which the
ETF's market price is closer to the intrinsic value of the ETF's
portfolio than its NAV per share. See, e.g., Madhavan, A. & Sobczyk,
A. (2016) ``Price Discovery and Liquidity of Exchange-Traded
Funds.'' Journal of Investment Management, Vol 14(2) (available at:
https://www.joim.com/price-dynamics-and-liquidity-of-exchange-traded-funds-2/).
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    As discussed in the ETF Proposal,\659\ the combination of the
creation and redemption process with secondary market trading in ETF
shares provides arbitrage opportunities that are designed to help keep
the market price of ETF shares at or close to the NAV per share of the
ETF.\660\ For example, if ETF shares are trading on national securities
exchanges at a ``discount'' (a price below the NAV per share of the
ETF), an authorized participant can purchase ETF shares in secondary
market transactions and, after accumulating enough shares to compose a
creation unit, redeem them from the ETF in exchange for the more
valuable securities in the ETF's redemption basket.\661\ The authorized
participant's purchase of an ETF's shares on the secondary market,
combined with the sale of the ETF's basket assets, may create upward
pressure on the price of the ETF shares, downward pressure on the price
of the basket assets, or both, bringing the market price of ETF shares
and the value of the ETF's portfolio holdings closer together.\662\
Alternatively, if ETF shares are trading at a ``premium'' (i.e., a
price above the NAV per share of the ETF), the transactions in the
arbitrage process are reversed and, when arbitrage is working
effectively, keep the market price of the ETF's shares close to its
NAV.\663\
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    \659\ See the ETF Proposal, supra note 651, at 37384.
    \660\ ETFs also operate under several conditions designed to
facilitate an efficient arbitrage mechanism. For example, ETFs are
required to provide some degree of transparency regarding their
portfolio holdings by disclosing their holdings prior to the
commencement of trading each business day (i.e., portfolio
transparency).
    \661\ This redemption would also cause the ETF's assets under
management to decline.
    \662\ As part of this arbitrage process, authorized participants
are likely to hedge their intraday risk. For example, when ETF
shares are trading at a discount to an estimated intraday NAV per
share of the ETF, an authorized participant may short the securities
composing the ETF's redemption basket. After the authorized
participant returns a creation unit of ETF shares to the ETF in
exchange for the ETF's baskets, the authorized participant can then
use the basket assets to cover its short positions.
    \663\ Market participants also can engage in arbitrage activity
without using the creation or redemption processes by buying/
shorting shares in the ETF while simultaneously shorting/buying the
ETF's underlying assets.
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    However, authorized participants, other market participants, and
arbitrageurs acting in secondary markets may incur costs and be exposed
to risk when engaging in arbitrage. The costs include bid-ask spreads
and transaction fees associated with the arbitrage trades. In addition,
during the time it takes arbitrageurs to execute these trades, they are
exposed to the risk that the prices of the basket assets and the ETF
shares change. As a consequence, arbitrageurs may decide to wait for
any mispricing between the market price of ETF shares and NAV per share
to widen until the expected profit from arbitrage is large enough to
compensate for any additional costs and risks associated with engaging
in the transaction.\664\
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    \664\ As discussed above, authorized participants can also hedge
the intraday risk associated with the arbitrage process. See supra
note 662.
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    A number of commenters noted that, in order to promote liquidity in
thinly-traded ETPs, exchanges offer market makers who meet certain
quoting requirements enhanced rebates when supplying liquidity in
certain less actively traded ETPs.\665\
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    \665\ See, e.g., Virtu Letter, at 7; Cboe Letter I, at 17-18.
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e. Transaction-Based Fees and Rebates
    Exchanges are required to disclose their current fee schedules,
which include transaction-based fees and rebates, connectivity fees,
membership fees, among others.\666\ When exchanges update their fees,
they are required to file Form 19b-4 with the Commission; fee changes
are permitted to take effect upon filing under Section 19(b)(3)(A) of
the Exchange Act.\667\ Although these fee schedules and Form 19b-4 fee
filings contain information about fees beyond transaction-based fees
and rebates, in this baseline, the discussion is limited to only
transaction-based fees and rebates and any changes thereto.
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    \666\ See 17 CFR 240.19b-4(m)(1), which requires each SRO to
post and maintain a current and complete version of its rules,
including those related to transaction-based fees and rebates, on
its website.
    \667\ As discussed supra Section IV.B.1.b.vi, fee information,
such as that included in exchange fee schedules or Form 19b-4 fee
filings, does not have standardization or formatting requirements.
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    Table 2 reports the range of minimum and maximum transaction fees
and rebates, as well as the number of categories for each (in
parentheses below the fee ranges), by exchange, as reported by each
exchange on their recent fee schedules.\668\ On average,

U.S. exchanges have 18 access fee categories and 21 rebate categories
associated with these fee schedules.\669\ For the maker-taker
exchanges, access fees do not exceed the Rule 610(c) cap at $0.0030,
but are as little as zero in some fee categories for some exchanges;
taker-maker exchanges, because they are not restricted in the amount
they can charge to non-marketable limit orders, have fees that range as
high as $0.0033. Seven exchanges have some categories of rebates that
exceed the maximum access fees charged by exchanges.\670\
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    \668\ The transaction fee and rebate ranges in Table 2 are
collected from recent fee schedules (as of July 31, 2018) available
from each individual exchange's website (listed in Table 1). Table 2
provides the date from which these fee schedules were reported. The
ranges in fees are the minimum and maximum fees and rebates reported
by each exchange.
    \669\ This average does not include the IEX exchange as the fee
structure is a flat one. See also, e.g., RBC Letter II (attaching a
report titled ``Complexity of Exchange Pricing and Corresponding
Challenges to Transparency and Routing'' in which they identify
``1,023 separate pricing `paths'--i.e., separate fees or rebates--
across these exchanges.'').
    \670\ See, e.g., CFA Letter, at 6.
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    Table 2 also provides the number of fee revisions for the exchanges
as reported in their Form 19b-4 fee filings to the Commission in the
last five years (August 1, 2013-July 31, 2018). Exchanges, on average,
have changed their fee schedules 34 times in the last five years,\671\
indicating that the average exchange revises its transaction-based fee
schedules about seven times per year (approximately every 7.4 weeks).
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    \671\ The median number of revisions to fee and rebate schedules
by exchanges is 41 over the five-year period.

    Table 2--Summary of Transaction-Based Fee Schedules for U.S. National Equities Exchanges as of July 2018