are traded by ATSs from the Forms ATS filed with the Commission by
ATSs.
---------------------------------------------------------------------------

4. Total Initial and Annual Reporting and Recordkeeping Burdens
    The proposed amendments to Rule 301(b)(3) of Regulation ATS would,
if adopted, increase the collection of information burdens only with
respect to those ATSs with sufficient volume in an NMS stock (0.25% or
more of the aggregate average daily share volume) that choose to
communicate actionable IOIs or that otherwise display order information
to more than one person. An ATS crossing the 0.25% threshold would be
required to provide its best-priced orders to an SRO for inclusion in
the public quote stream. As stated previously, ATSs that are completely
dark (i.e., that do not display any subscriber order information,
whether by communicating actionable IOIs or otherwise) would not be
impacted by the proposed amendments to Rule 301(b)(3).
    The Commission preliminarily believes that including actionable
IOIs as bids or offers under Rule 600(b)(8) of Regulation NMS and
reducing the average daily trading volume threshold in Rule 301(b)(3)
of Regulation ATS from 5% to 0.25% could increase the order display and
execution access obligations of ATSs that transmit actionable IOIs or
otherwise display order information to selected market participants.
These obligations could entail the initial burdens of re-programming
their current systems to monitor the ATS's percentage of trading in NMS
stocks, establishing linkages to an SRO for the purpose of submitting
orders to the SRO for public display and of providing access to market
participants wishing to trade against such orders, and expanding
systems capacity and internal controls, including establishing or
modifying applicable compliance policies and procedures, to carry out
these functions in a manner consistent with the SRO's rules.\129\ The
Commission preliminarily believes that such obligations could include
ATS staff time to build new systems or re-program current systems, as
well as ongoing ATS staff time to maintain such systems and carry out
their associated functions.
---------------------------------------------------------------------------

    \129\ Currently, under Rule 301(b)(3) of Regulation ATS, an ATS
that displays subscriber orders to any person (other than ATS
employees) and has an average daily trading volume of 5% or more of
the aggregate daily share volume for an NMS stock is required to
provide to an SRO the best priced orders for such NMS stock for
inclusion in the public quote stream. Thus, ATSs are already
required to monitor trading levels in NMS stocks and have policies
and procedures in place to do so. As a result of the proposed
amendments to Rule 301(b)(3), which would lower the average daily
trading volume threshold from 5% to 0.25% and provide for an
exception to the display obligation for orders that have a market
value of at least $200,000 and are communicated only to those who
are reasonably believed to represent current contra-side trading
interest of at least $200,000, ATSs could be required to re-program
their respective systems that monitor trading levels in NMS stocks
to reflect this change in the average daily trading volume
threshold.
---------------------------------------------------------------------------

    The Commission preliminarily estimates that the one-time, initial
annualized expense for potential ATS respondents to establish
connectivity to an SRO would be approximately $3,900,000.\130\ In
addition, the Commission preliminarily estimates that the one-time,
initial annualized burdens for all potential ATS respondents to comply
with the proposed amendments to Rule 301(b)(3) would be approximately
17,880 burden hours.\131\ This figure is based on the

estimated number of hours for initial internal development and
implementation by an ATS to re-program its system, expand system
capacity, and adjust internal controls, including costs to establish or
modify applicable compliance policies and procedures.
---------------------------------------------------------------------------

    \130\ This figure is the total initial, one-time annualized
expense to establish electronic connections with an SRO for all
potential ATS respondents and is based on discussions of Commission
staff with certain potential ATS respondents and other market
participants. The Commission derived the total estimated expense
from the following: (($25,000 relating to hardware- and software-
related expenses) + ($25,000 monthly ongoing costs to maintain the
connection x 12 months)) x (12 potential ATS respondents) =
$3,900,000.
    \131\ This figure is based on discussions of Commission staff
with certain potential ATS respondents and other market
participants. The Commission derived the total estimated one-time
burdens from the following: [((Sr. Programmer at 320 hours) +
(Compliance Manager at 20 hours) + (Compliance Attorney at 20 hours)
+ (Programmer Analyst at 20 hours) + (Sr. Systems Analyst at 30
hours)) x (2 months) + ((Sr. Programmer at 2 hours) + (Compliance
Manager at 6 hours) + (Compliance Attorney at 4 hours) + (Compliance
Clerk at 40 hours) + (Sr. Systems Analyst at 2 hours) + (Director of
Compliance at 5 hours) + (Sr. Computer Operator at 8 hours)) x (10
months)] x (12 potential ATS respondents) = 17,880 burden hours.
---------------------------------------------------------------------------

    The Commission also has estimated the ongoing expenses of complying
with the proposed amendments to Rule 301(b)(3), which could include,
among other things, maintaining connectivity with an SRO, monitoring
daily trade activity, and ensuring compliance. The Commission
preliminarily estimates that the ongoing annualized expense for all
potential ATS respondents to maintain connectivity to an SRO would be
approximately $3,600,000.\132\ In addition, the Commission
preliminarily estimates that the ongoing annualized burdens for all
potential ATS respondents to comply with the proposed amendments to
Rule 301(b)(3) would be approximately 9,648 burden hours.\133\ This
figure includes the estimated number of internal professional staff
hours for running compliance policies and procedures (including
monitoring daily trading activity), ongoing system maintenance and
development, and personnel costs associated with maintaining
connectivity to an SRO.
---------------------------------------------------------------------------

    \132\ This figure is the total ongoing annualized expense to
maintain electronic connections with an SRO for all potential ATS
respondents and is based on discussions of Commission staff with
certain potential ATS respondents and other market participants. The
Commission derived the total estimated expense from the following:
(($25,000 monthly ongoing costs to maintain the connection x 12
months)) x (12 potential ATS respondents) = $3,600,000.
    \133\ This figure is based on discussions of Commission staff
with certain potential ATS respondents and other market
participants. The Commission derived the total estimated ongoing
burdens from the following: ((Sr. Programmer at 2 hours) +
(Compliance Manager at 6 hours) + (Compliance Attorney at 4 hours) +
(Compliance Clerk at 40 hours) + (Sr. Systems Analyst at 2 hours) +
(Director of Compliance at 5 hours) + (Sr. Computer Operator at 8
hours)) x (12 months) x (12 potential ATS respondents) = 9,648
burden hours.
---------------------------------------------------------------------------

    The Commission is also proposing a change to Rule 301(b)(3)(ii)
that would add an exception to the display and execution access
requirements for orders that have a market value of at least $200,000
and are communicated only to those who are reasonably believed to
represent current contra-side trading interest of at least $200,000.
The Commission preliminarily believes that no ATS would incur any
increased burdens because of the proposed exception. An ATS would incur
either the same burdens (because it communicated no orders that met the
terms of the proposed exception) or fewer burdens (because some or all
of the orders that it communicated met the terms of the proposed
exception, thus reducing the number of orders under the proposed
amendments to Rule 301(b)(3) that the ATS would otherwise have to
provide to an SRO for inclusion in the public quote stream). Some ATSs
that might avail themselves of the proposed exception already have in
place the functionality to communicate size discovery orders, have
average execution sizes above $200,000, and have developed strategies
to identify market participants that are reasonably believed to
represent current contra-side trading interest of at least
$200,000.\134\ Thus, the Commission preliminarily believes that such
ATSs would not incur any costs if the Commission were to adopt the
proposed exception.
---------------------------------------------------------------------------

    \134\ The Commission obtains information about ATSs' trading
methods from the Forms ATS submitted to it by ATSs.
---------------------------------------------------------------------------

    The Commission seeks comment on the reporting and recordkeeping
collection of information burdens associated with the proposed
amendments. In particular:
    1. How many ATSs would incur collection of information burdens if
the proposed amendments to Regulation ATS were adopted by the
Commission?
    2. Would ATSs respond to the proposed amendments by linking to an
SRO for the purpose of displaying their best-price orders in the public
quote stream or by going completely dark? If the former, what would the
initial and ongoing PRA burdens be of linking to an SRO to provide such
orders and to offer execution access to those orders consistent with
the SRO's rules?
    3. What are the burdens, both initial and annual, that an ATS would
incur for programming, establishing connectivity to an SRO, expanding
systems capacity, and establishing compliance programs if the
Commission were to adopt the proposed amendments? Would there be
additional burdens associated with the collection of information under
these proposed amendments?
    4. What additional burdens, both initial and annual, if any, would
an ATS incur related to the proposed exception for size discovery
orders?
5. Retention Period of Recordkeeping Requirements
    An ATS would be required to retain records and information
pertaining to its operations, including information that would have to
be disclosed under the proposed amendments to Rule 301(b)(3), pursuant
to, and for the periods specified in, Regulation ATS.\135\ In addition,
the broker-dealer operating an ATS is subject to the recordkeeping
requirements specified in Section 17 of the Exchange Act and the rules
and regulations thereunder.\136\
---------------------------------------------------------------------------

    \135\ See, e.g., 17 CFR 242.302; 17 CFR 242.303.
    \136\ See 15 U.S.C. 78q; 17 CFR 240.17a-1 et seq.
---------------------------------------------------------------------------

6. Collection of Information is Mandatory
    Any collection of information pursuant to the proposed amendments
to Rule 301(b)(3) would be a mandatory collection of information.
7. Responses to Collection of Information Will Not Be Kept Confidential
    The collection of information resulting from the proposed
amendments to Rule 301(b)(3) would not be confidential and would be
publicly available.
8. Request for Comment
    Pursuant to 44 U.S.C. 3505(c)(2)(B), the Commission solicits
comment to:
    1. Evaluate whether the proposed collection of information is
necessary for the performance of the functions of the agency, including
whether the information shall have practical utility;
    2. Evaluate the accuracy of the agency's estimate of the burden of
the proposed collection of information;
    3. Enhance the quality, utility, and clarity of the information to
be collected; and
    4. Minimize the burden of collection of information on those who
are to respond, including through the use of automated collection
techniques or other forms of information technology.

C. Post-Trade Transparency for ATSs

    Certain provisions of the proposed amendments to the CTA Plan and
the Nasdaq UTP Plan would result in a new ``collection of information
requirement'' within the meaning of the PRA.\137\ The Commission is
therefore submitting this proposal to the Office of Management and
Budget (``OMB'') for review in accordance with 44 U.S.C. 3507 and 5 CFR
1320.11. The title for the collection of information requirements is
the ``CTA Plan and the Nasdaq UTP Plan, `Post-trade Transparency for
ATSs.'''

Compliance with the collection of information requirements would be
mandatory. An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a currently valid control number. OMB has not yet assigned a control
number to the new collection requirements in the proposed amendments to
the CTA Plan and Nasdaq UTP Plan.
---------------------------------------------------------------------------

    \137\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

1. Summary
    The CTA Plan and the Nasdaq UTP Plan are the joint-industry plans
that provide for the dissemination of last sale information for equity
securities and set forth the arrangements for dissemination of
consolidated trade information. Currently, trades executed in the OTC
market, including trades executed by ATSs, are reported to the
consolidated trade streams through one of the TRFs operated by FINRA on
behalf of the exchanges or to the ADF. As ATSs effect transactions in
the OTC market, they must be FINRA members and the trade reports
currently identify their trades as OTC trades. The ATS that executed
the trade, however, is not currently identified in the public data
streams.
    The proposed amendments to the CTA Plan and the Nasdaq UTP Plan
would require the disclosure of the identity of those ATSs subject to
Regulation ATS on trade reports in the public data steam. Specifically,
the proposed amendments to the CTA Plan and the Nasdaq UTP Plan would
require that all last sale prices collected by FINRA from each ATS
subject to Regulation ATS be accompanied by an identifier unique to the
ATS and be transmitted to the SIP, unless the trade is a large size
trade with a market value of at least $200,000.
    The proposed Plan amendments by redefining terms in the Plans,
indirectly would require ATSs to include a unique identifier when
transmitting last sale price data to FINRA. All ATSs currently report
their transactions to FINRA, under FINRA rules, using an MPID, but the
Commission understands some ATSs currently use the MPID of their
sponsoring broker-dealer. As a result, some ATSs may need to obtain a
unique MPID from FINRA, which FINRA provides at no cost.\138\ Those
ATSs would need to re-program their systems to substitute the new MPID
for their sponsoring broker-dealer's MPID when transmitting last sale
price data to FINRA. The Commission believes that the proposed
amendments to the CTA Plan and the Nasdaq UTP Plan with respect to the
ATSs would result in a ``collection of information,'' but would not
trigger a burden outside the ordinary and customary business of the ATS
for purposes of the PRA.
---------------------------------------------------------------------------

    \138\ ATSs can obtain an additional MPID from FINRA. See FINRA
Rules 6160 and 6170.
---------------------------------------------------------------------------

    The proposed Plan amendments would require FINRA to transmit to the
SIPs a unique identifier from each ATS subject to Regulation ATS,
unless the trade is a large size trade (a trade with a market value of
at least $200,000). Currently, FINRA receives the MPID information from
the ATSs as required by FINRA rules. FINRA, however, currently removes
the MPID from the trade reports before submitting them to the SIPs.
Under the proposed Plan amendments, FINRA would need to re-program its
systems to transmit the MPIDs for ATS trades to the SIPs, except for
large size trades with market value of at least $200,000. The
Commission believes that the proposed amendments to the CTA Plan and
the Nasdaq UTP Plan with respect to FINRA would result in a
``collection of information,'' as well as a minor burden for purposes
of the PRA.
    The proposed Plan amendments would require the SIPs, for the CTA
Plan and the Nasdaq UTP Plan, to disseminate information provided to
them by FINRA. Under the proposed Plan amendments, the SIPs would need
to re-program their systems to enable them to accept as well as
transmit trade reports with the additional data element, the MPID, for
those ATS transactions that have a market value of less than $200,000.
The Commission believes that the proposed amendments to the CTA Plan
and the Nasdaq UTP Plan with respect to the SIPs would result in a
minor burden for purposes of the PRA.
    The Commission encourages comment on all of these points.
2. Proposed Use of Information
    The proposed amendments to the CTA Plan and the Nasdaq UTP Plan
would require that all last sale prices collected by FINRA from each
ATS subject to Regulation ATS be accompanied by an identifier unique to
the ATS and be transmitted to the SIP, unless the trade is a large size
trade with a market value of at least $200,000. If the Commission
adopts the proposed amendments to the Plans, some ATSs would now be
required to get a unique identifier, rather than use the identifier of
their sponsoring broker-dealer. Such information should enable the
public to determine more accurately the volume of executions occurring
on any particular ATS, as well as on ATSs in general. The SIPs must
make this information public, pursuant to the CTA Plan and Nasdaq UTP
Plan. This information is used, among other ways, by market
participants to understand the market and to inform their trading
decisions. The Commission also may use this information as part of its
general market oversight and regulatory functions.
3. Respondents
    There are approximately 73 ATSs that are subject to Regulation ATS.
Of these, approximately 30 are dark pool ATSs. The Commission
understands that some of these ATSs disseminate market data using the
identifier of their sponsoring broker-dealer while others already use a
unique identifier for their trades. Those using their sponsoring
broker-dealer's identifier would have to acquire another identifier and
incur a one-time systems cost to change the identifier that gets
affixed to their trade reports. The ATSs using a unique identifier
would not be affected for PRA purposes by the proposed Plan amendments,
because they currently use a unique identifier. All last sale prices
for OTC transactions are collected by FINRA and then transmitted to the
SIP. The Commission seeks comment on the number of ATSs that could be
affected by the proposed changes and the nature of such effects on the
ATSs, FINRA, and the SIP.
4. Total Initial and Annual Reporting and Recordkeeping Burdens
    The proposed amendments to the CTA Plan and Nasdaq UTP Plan would,
if adopted, to varying degrees, increase the collection of information
burdens for ATSs, FINRA, and the SIPs.
a. Burden on ATSs
    The Commission understands that all ATSs currently report their
transactions to FINRA pursuant to FINRA's rules using an MPID, with
some ATSs reporting their transactions using an MPID of their
sponsoring broker-dealer, while other ATSs use a unique MPID. The Plan
changes would require that each ATS have a unique MPID. Therefore, some
ATSs would have to acquire an MPID from FINRA. The Commission
preliminarily believes that ATSs that already use a unique MPID would
not incur additional collection of information burdens related to the
transmission of unique MPIDs. Those ATSs that currently use an MPID of
their sponsoring broker-dealer may incur a de minimis cost in re-
programming their systems to substitute the new MPID for the one
currently used in transmitting their transactions to FINRA.

    The Commission preliminarily believes that this collection of
information would not involve any substantive or material change in the
burden that already exists as part of the ATSs' ordinary and customary
activities in providing MPID information to FINRA in the normal course
of business, pursuant to FINRA's rules.\139\
---------------------------------------------------------------------------

    \139\ See 5 CFR 1320.3(b)(2) (``The time, effort, and financial
resources necessary to comply with a collection of information that
would be incurred by persons in the normal course of their
activities * * * would be excluded from the `burden' if the agency
demonstrates that the reporting, recordkeeping, or disclosure
activities needed to comply are usual and customary.'').
---------------------------------------------------------------------------

b. Burden on FINRA
    Currently, when FINRA reports transactions to the SIPs, the MPID is
dropped from every transaction report and an identifier is appended
indicating the trade was executed OTC. Under the proposed amendments,
each ATS trade report would carry a unique ATS indicator, in addition
to the OTC indicator, unless the trade is a large size trade. FINRA,
upon the receipt of an ATS trade report with a unique indicator would
retransmit the trade report to the SIP, after excluding the ATS
identifier from trade reports for large size trades. FINRA would have
to re-program its systems to allow for the trade report message to
carry the unique identifier for each ATS and to exclude the identifier
for large size trades from the transmission to the SIPs.
    The Commission preliminarily estimates that the one-time, initial
annualized expense for FINRA for development, including re-programming
and testing of the systems would be approximately $1,175,000.\140\
---------------------------------------------------------------------------

    \140\ This figure is the total initial, one-time annualized
expense to add unique ATS identifiers to trade report messages
transmitted to the SIPs. This figure includes the development and
testing expenses of the FINRA/NASDAQ TRF, FINRA/NYSE TRF, and the
ADF, to which ATS trades are reported. The figure is based on
discussions of Commission staff with FINRA staff.
---------------------------------------------------------------------------

    The Commission preliminarily estimates that the one-time, initial
annualized burden for FINRA development, including re-programming and
testing of the systems to comply with the proposed amendments to the
Plans would be approximately 100 burden hours.\141\
---------------------------------------------------------------------------

    \141\ This figure is based on discussions of Commission staff
with FINRA staff. This figure includes the FINRA development and
testing. The Commission derived the total estimated one-time burden
from the following: [(Programmer Analyst at 25 hours) x 2 +
(Computer Operator at 25 hours) x 2] = 100 burden hours.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the ongoing annualized
expense for FINRA would not result in a burden for purposes of the PRA,
as FINRA currently transmits trade report messages to the SIPs in the
normal course of business.\142\
---------------------------------------------------------------------------

    \142\ See supra notes 104 and 139.
---------------------------------------------------------------------------

c. Burden on the SIPs
    Currently, the SIPs do not receive an MPID from FINRA for the ATS
trades. FINRA removes the MPID and an identifier is appended indicating
the trade was executed OTC. Under the proposed Plan amendments, the
SIPs would receive from FINRA a trade report identifying the specific
ATS on which a trade was executed, unless the trade is a large size
trade. The SIPs would need to re-program their systems to allow for the
trade report message that carries the unique identifier for each ATS to
be received by the SIPs and then later allow for the transmission of
the information to the vendors.
    The Commission preliminarily estimates that the one-time, initial
annualized burden for the Securities Industry Automation Corporation
(``SIAC''), which serves as a SIP for the CTA Participants, to comply
with the proposed Plan amendments would be approximately 320 burden
hours.\143\ This figure is based on the estimated number of hours for
SIAC to provide planning, development, implementation, testing, and
quality assurance.
---------------------------------------------------------------------------

    \143\ This figure is based on discussions of Commission staff
with SIAC.
---------------------------------------------------------------------------

    The Commission further preliminarily estimates that the one-time,
initial annualized burden for the Nasdaq SIP, which serves as a SIP for
the UTP Participants, to comply with the proposed Plan amendments would
be approximately 800 burden hours.\144\ This figure is based on the
estimated number of hours for the Nasdaq SIP to develop and test the
software and work with the UTP participants and vendors regarding the
enhancement.
---------------------------------------------------------------------------

    \144\ This figure is based on discussions of Commission staff
with Nasdaq SIP.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the ongoing annualized
expense for the SIPs would not result in a burden for purposes of the
PRA, as SIPs currently transmit trade report messages in the normal
course of business.\145\
---------------------------------------------------------------------------

    \145\ See supra note 86 and accompanying text; see also note
139.
---------------------------------------------------------------------------

    The Commission seeks comment on the reporting and recordkeeping
collection of information burdens associated with the proposed
amendments. In particular:
    1. Would ATSs incur any collection of information burdens if the
proposed Plan amendments were adopted by the Commission? How many ATSs
would be required to obtain a new MPID under the proposed Plan
amendments? What would be the costs, if any, to an ATS required to
obtain a new MPID to substitute the new MPID for the one it currently
uses in transmitting last sale price data to FINRA?
    2. What are the burdens, both initial and annual, that FINRA
(including the two TRFs and the FINRA ADF) and the SIPs would incur for
programming, expanding systems capacity, and establishing compliance
programs if the Commission were to adopt the proposed amendments? Would
there be additional burdens associated with the collection of
information under these proposed Plan amendments?
5. Retention Period of Recordkeeping Requirements
    The proposed amendments to the Plans do not contain any new record
retention requirements. As an SRO subject to Rule 17a-1 under the
Exchange Act, FINRA is required to retain records of the collection of
information for a period of not less than five years, the first two
years in an easily accessible place.\146\
---------------------------------------------------------------------------

    \146\ 17 CFR 240.17a-1.
---------------------------------------------------------------------------

    As registered broker-dealers, all ATSs that would be subject to the
proposed amendments are currently required to retain records in
accordance with Rule 17a-4 of the Exchange Act.\147\
---------------------------------------------------------------------------

    \147\ 17 CFR 240.17a-4.
---------------------------------------------------------------------------

6. Collection of Information is Mandatory
    Any collection of information pursuant to the proposed amendments
to the CTA Plan and the Nasdaq UTP Plan would be a mandatory collection
of information.
7. Responses to Collection of Information Will Not Be Kept Confidential
    The collection of information resulting from the proposed
amendments to the CTA Plan and the Nasdaq UTP Plan would not be
confidential and would be publicly available.
8. Request for Comment
    Pursuant to 44 U.S.C. 3505(c)(2)(B), the Commission solicits
comment to:
    1. Evaluate whether the proposed collection of information is
necessary for the performance of the functions of the agency, including
whether the information shall have practical utility;
    2. Evaluate the accuracy of the agency's estimate of the burden of
the proposed collection of information;

    3. Enhance the quality, utility, and clarity of the information to
be collected; and
    4. Minimize the burden of collection of information on those who
are to respond, including through the use of automated collection
techniques or other forms of information technology.
    Persons wishing to submit comments on the collection of information
requirements should direct them to the following persons: (1) Desk
Officer for the Securities and Exchange Commission, Office of
Information and Regulatory Affairs, OMB, Room 3208, New Executive
Office Building, Washington, DC 20503; and (2) Secretary, Securities
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090
with reference to File No. S7-27-09. OMB is required to make a decision
concerning the collection of information between 30 and 60 days after
publication, so a comment to OMB is best assured of having its full
effect if OMB receives it within 30 days of publication. The Commission
has submitted the proposed collection of information to OMB for
approval. Requests for the materials submitted to OMB by the Commission
with regard to this collection of information should be in writing,
refer to File No. S7-27-09, and be submitted to the Securities and
Exchange Commission, Records Management, Office of Filings and
Information Services, 100 F Street, NE., Washington, DC 20549.

VI. Consideration of Costs and Benefits

A. Actionable IOIs

    The Commission is sensitive to the costs and benefits associated
with the proposed amendment to the definition of ``bid'' and ``offer''
in Rule 600(b)(8) of Regulation NMS to apply expressly to certain
actionable IOIs. We request comment on the costs and benefits
associated with the proposed amendment. The Commission has identified
certain costs and benefits of the proposal and requests comment on all
aspects of its preliminary cost-benefit analysis, including
identification and assessments of any costs and benefits not discussed
in this analysis. The Commission also seeks comments on the accuracy of
any of the benefits identified and also welcomes comments on the
accuracy of any of the costs estimates. Finally, the Commission
encourages commenters to identify, discuss, analyze, and supply
relevant data, information or statistics regarding any such costs or
benefits.
1. Benefits
    The Commission preliminarily believes that the proposed amendment
would benefit market participants by increasing transparency and
reducing the potential for a two-tiered market. The Commission also
preliminarily believes that the proposed amendment would help encourage
displayed liquidity in the form of publicly displayed limit orders.
    As discussed above, a number of dark pools transmit IOIs to
selected market participants that convey substantial information about
their available trading interest.\148\ These messages are not included
in the consolidated quotation data, although, like displayed
quotations, they can be significant inducements for the routing of
orders to a particular trading venue. Indeed, some exchanges, when they
do not have available trading interest to execute orders at the best
displayed prices, give participants a choice of routing their orders to
undisplayed venues in response to IOIs rather than to public markets in
response to the best displayed quotations.\149\
---------------------------------------------------------------------------

    \148\ See supra note 20.
    \149\ See supra note 21.
---------------------------------------------------------------------------

    Although these IOIs may not explicitly specify the price and size
of available trading interest at the dark pool, the practical context
in which they are transmitted may render them ``actionable.'' For
example, an IOI would be actionable if it effectively alerted the
recipient that the dark pool currently has trading interest in a
particular symbol, side (buy or sell), size (minimum of a round lot of
trading interest), and price (equal to or better than the national best
bid for buying interest and the national best offer for selling
interest).
    This might occur if a dark pool sent an IOI to a group of market
participants communicating an interest in buying a specific NMS stock.
Given that Rule 611 of Regulation NMS generally prevents trading
centers, including dark pools, from executing orders at prices inferior
to the national best bid or offer (``NBBO''), the IOI recipient
reasonably can assume that the price associated with the IOI is the
NBBO or better. Moreover, the IOI may be part of a course of conduct in
which the recipient has responded with orders to the sender and
repeatedly received executions at the NBBO or better with a size of at
least one round lot. With this information (both explicit and
implicit), the recipient of the IOI can reasonably conclude that
sending a contra-side marketable order responding to the IOI will
result in an execution if the dark pool trading interest has not
already been executed against or cancelled. In this respect, actionable
IOIs are functionally quite similar to displayed quotations at the
NBBO.
    The order information communicated by actionable IOIs can be
extremely valuable. Actionable IOIs with implicit prices better than
the NBBO effectively narrow the quoted spread for an NMS stock. For
example, if the NBBO for an NMS stock were $20.10 and $20.14, an
actionable IOI to buy with an implicit price of $20.12 would, if
included in the consolidated quotation data, create a new NBBO of
$20.12 and $20.14 and thereby reduce the quoted spread by 50%. Reducing
quoted spreads is important not only for those that trade with the
displayed quotations, but also for other investors including those
whose orders are routed to OTC market makers for executions that often
are derived from NBBO prices. In addition, actionable IOIs with
implicit prices equal to the NBBO can substantially improve the quoted
depth at the best prices for an NMS stock. For example, an investor may
wish to sell 500 shares of a stock when the size of the national best
bid may be only 100 shares. The existence of multiple dark pools that
contemporaneously had transmitted actionable IOIs to buy the stock
would represent a substantial increase in the available size at NBBO
prices or better.
    The public, however, does not have access to this valuable
information concerning the best prices for NMS stocks. Rather, dark
pools transmit this information only to selected market participants.
In this regard, actionable IOIs can create a two-tiered level of access
to information about the best prices for NMS stocks that is contrary to
the Exchange Act objectives for a national market system.\150\ The
consolidated quotation data is intended to provide a single source of
information on the best prices for a listed security across all
markets, rather than force the public to obtain data from many
different exchanges and other markets to learn the best prices. This
objective is not met if dark pools or other trading venues disseminate
pricing information that is functionally quite similar to quotations,
yet is not required to be included in the consolidated quotation data.
The proposal is designed to promote transparency by requiring that the
valuable pricing information provided to selected market participants
through actionable IOIs is also made

available to the public in the consolidated quotation data.
---------------------------------------------------------------------------

    \150\ See supra note 59.
---------------------------------------------------------------------------

    The Commission also is concerned that the private use of actionable
IOIs may discourage the public display of trading interest and harm
quote competition among markets. The Commission long has emphasized the
need to encourage displayed liquidity in the form of publicly displayed
limit orders.\151\ Such orders establish the current ``market'' for a
stock and thereby provide a critical reference point for investors.
Actionable IOIs, however, often will be executed by dark pools at
prices that match the best displayed prices for a stock at another
market. In this respect, actionable IOIs at NBBO matching prices
potentially deprive those who publicly display their interest at the
best price from receiving a speedy execution at that price. The
opportunity to obtain the fastest possible execution at a price is the
primary incentive for the display of trading interest.\152\
Particularly if actionable IOIs continue to expand in trading volume,
they could significantly undermine the incentives to display limit
orders and to quote competitively, and thereby detract from the
efficiency and fairness of the national market system.
---------------------------------------------------------------------------

    \151\ See supra note 26.
    \152\ See supra note 27.
---------------------------------------------------------------------------

    Moreover, for market participants that wish to supply liquidity in
the form of non-marketable resting orders (such as those that match or
improve NBBO prices), actionable IOIs provide a tool to achieve this
result without displaying quotations publicly. The availability of
these private messages as an alternative means to attract order flow
may reduce the incentives of market participants to quote publicly.
More generally, actionable IOIs divert a certain amount of order flow
that otherwise might be routed directly to execute against displayed
quotations in other markets. Given the importance of displayed
quotations for market efficiency, the Commission is particularly
concerned about additional marketable order flow that may be diverted
from the public quoting markets and that could further reduce the
incentives for the public display of quotations. The proposal is
designed to promote the display of public quotations by eliminating a
practice that diverts order flow to private markets and by requiring
that actionable IOIs be included in the consolidated quotation data.
    By excepting IOIs with a market value of at least $200,000 that are
displayed only to those who are reasonably believed to represent
current contra-side trading interest of at least $200,000, the proposal
is also tailored to maintain the significant size discovery benefits
offered by some trading venues such as block crossing networks. In
particular, market participants such as institutional investors would
be able to find contra-side trading interest for large size without
causing price impact. In addition, the proposed exception for a
targeted size discovery mechanism would provide an opportunity for
block crossing networks and other trading venues to offer innovative
ways for investors that need to trade in large size to find contra-side
trading interest of equally large size.
    The Commission seeks comment on the anticipated benefits of the
proposed amendment. Would the proposal promote the transparency,
fairness, and efficiency of the national market system? Would it
promote fair competition among trading venues in NMS stocks? Do
commenters believe that the Commission has provided sufficient
information about the attributes of an actionable IOI for trading
venues to comply with the proposed definition? What is the typical size
of an actionable IOI? How many large orders use actionable IOIs? What
is the amount of order flow that is diverted from displayed quotations
due to actionable IOIs? Please quantify and provide supporting data if
possible.
    Comment also is requested on the proposed size discovery exclusion
from the definition of bid or offer. Would the proposed exclusion
promote more efficient trading for investors that need to trade in
large size? Is the exclusion narrowly drafted to cover those trading
mechanisms that offer valuable size discovery benefits without
inappropriately excluding trading interest concerning the best prices
and sizes for NMS stocks from the consolidated quotation data? Comment
also is requested on whether market value is the appropriate criterion
for size, and whether $200,000 is the appropriate figure. Should this
figure be higher or lower? Please explain why. For example, is the
$200,000 figure appropriate for high-priced stocks? Should the
exclusion include a size criterion based on number of shares? If yes,
should it be 10,000 shares, as in Rule 600(b)(9), or a larger or
smaller number of shares? Finally, comment is requested on whether
other criteria for size, such as percentage of average daily share
volume in a security, would be more appropriate.
2. Costs
    The Commission preliminarily anticipates that market participants
could incur certain costs if the proposed amendment is adopted. The
change in the definition of ``bid'' and ``offer'' would affect
compliance with Rule 602 of Regulation NMS.\153\ ``Bid'' and ``offer''
are key terms that determine the scope of Rule 602 of Regulation NMS.
In general, Rule 602 requires exchange members and certain OTC market
makers to provide their best-priced bids and offers to their respective
exchanges and FINRA.\154\ The exchanges and FINRA, in turn, are
required to make their best bids and offers available in the
consolidated quotation data. The Commission does not believe that the
amendment to Rule 600(b)(8) would create significant new compliance
burdens under Rule 602. Exchange members and OTC market makers would
continue to be required to provide their best-priced bids and offers to
their respective exchanges and FINRA. The proposed amendment to Rule
600(b)(8) may increase the number of ``bids'' and ``offers'' that
exchange members and OTC market makers must review to determine their
best-priced bids and offers. It is the Commission's understanding that
all exchange members and OTC market makers have systems and procedures
in place to make this determination today. As a result, the Commission
believes that any increased burden in determining their best-priced
bids and offers due to the inclusion of actionable IOIs in the
definition of ``bid'' and ``offer'' would not be significant.
---------------------------------------------------------------------------

    \153\ The proposed amendment to Rule 600(b)(8) of Regulation NMS
also may affect the obligations imposed by Rule 301(b)(3) of
Regulation ATS on ATSs that meet the specified trading volume
threshold. Given the current threshold of 5%, the Commission does
not believe that the proposed amendment of Rule 600(b)(8) would
substantially affect the quoting requirements of ATSs. The proposal
to lower the volume threshold contained in Rule 301(b)(3), however,
could affect this view. The costs associated with the proposed
amendment to Rule 301(b)(3) are discussed below.
    \154\ Under the definition of ``subject security'' in Rule
600(b)(73)(ii)(A) of Regulation NMS, an OTC market maker is not
required to provide its best bids and offers for an NMS stock if the
executed volume of the firm during the most recent calendar quarter
comprised one percent or less of the aggregate trading volume for
such NMS stock.
---------------------------------------------------------------------------

    The Commission is aware that actionable IOIs may offer benefits to
certain market participants. For example, some market participants
choose to trade in dark pools in an effort to minimize the effect of
their trading on quoted prices. The use of actionable IOIs to attract
order flow may increase the amount of volume executed in dark pools and
thereby further the trading strategies of these market participants. If
actionable IOIs were included in the consolidated quotation data, these
types of trading strategies would not be

possible because the actionable IOIs themselves would be included in
publicly quoted prices. In addition, some market participants may be
willing to allow dark pools to transmit information about their
actionable orders to selected recipients, but not be willing to provide
this information in the consolidated quotation data that is widely
disseminated to the public. If adopted, the proposal could cause these
market participants to choose not to transmit this information to
anyone and thereby reduce available pricing information for an NMS
stock (albeit, information that was only privately available).
    These potential costs of reduced trading in dark liquidity venues
and reduced availability of liquidity information would be mitigated by
the availability of the size discovery exception. The Commission
recognizes that some trading venues, such as block crossing networks,
may use actionable IOIs as part of a trading mechanism that offers
significant size discovery benefits. These benefits may be particularly
valuable for institutional investors that need to trade efficiently in
sizes much larger than those that are typically available in the public
quoting markets. These size discovery mechanisms could be rendered
unworkable, however, if their IOIs for large size were required to be
included in the consolidated quotation data. Accordingly, the
Commission's proposed amendment would exclude certain IOIs with a
market value of $200,000 or more communicated to those reasonably
believed to represent equivalent contra-side trading interest from the
current definition of ``bid'' and ``offer'' in Rule 600(b)(8). This
would maintain the significant size discovery benefits offered by
certain trading venues. Also, the Commission expects that the
compliance costs to restrict communication to large size contra-side
trading interest would be minimal because trading venues that offer
size discovery mechanisms currently have systems in place to achieve
this objective. In particular, these systems typically incorporate
minimum trade size functionalities, as well as mechanisms to help
assure that the valuable, actionable information concerning a
participant's trading interest is transmitted only to those with whom
there is a reasonable opportunity for obtaining an execution in large
size.
    In addition, the Commission expects that the negative effects of
requiring actionable IOIs to be included in the consolidated quotation
data would be mitigated by the ability of market participants to adapt
their trading strategies to the new rules. Higher incentives to display
liquidity and alternative forms of competition for order flow also
could mitigate any negative effect of the proposal. Customers of dark
pools would remain free, as they are entitled to do with quoting venues
today, to control the release of their order information.\155\
Customers could not, however, consent to the dissemination of order
information sufficient for the transmission of an actionable IOI under
$200,000, yet withhold information about their orders from the
consolidated quotation data that is made available to the public.
---------------------------------------------------------------------------

    \155\ See supra note 41 and accompanying text.
---------------------------------------------------------------------------

    The Commission generally requests comment on any direct or indirect
costs of the proposed amendment and asks commenters to quantify those
costs, where possible. In addition, the Commission requests specific
comments on the following questions:
    1. What are some of the trading strategies that employ actionable
IOIs? Is the use of such actionable IOIs in the best interest of these
traders and how would the inability to use those actionable IOIs impact
traders, markets, or investors more generally? Could similar benefits
be achieved through other means?
    2. How are market participants likely to change their behavior if
actionable IOIs must be included in the consolidated quotation data?
What are the likely effects of these changes? For example, would a
significant percentage of dark pools that currently use actionable IOIs
go completely dark? What would be the effects on traders, markets, and
investors were that to occur?
    3. How would the proposal affect competition between trading
venues?
    4. Would the size discovery exception maintain the existing
opportunities of block crossing networks and other trading venues to
offer benefits to market participants that need to trade in large size?
Do these venues currently have systems in place that would enable them
to comply at minimal cost with the terms of the exception?
    5. To what extent, if at all, would the proposed amendment to Rule
600(b)(8) increase the number of bids or offers that exchange members
and OTC market makers would be required to review and report to their
respective exchanges and FINRA for inclusion in the consolidated
quotation data?
    6. To what extent, if at all, would system changes or increases in
system capacities be necessary for exchange members or OTC market
makers to comply with the requirements of Rule 602, if the Commission
were to adopt the proposed amendments to Rule 600(b)(8)?

B. ATS Display Obligations

    The Commission is sensitive to the costs and benefits associated
with the proposed amendments to Rule 301(b)(3) of Regulation ATS. The
Commission requests comment on the costs and benefits associated with
these proposed amendments. The Commission has identified certain costs
and benefits of the proposal and requests comment on all aspects of its
preliminary cost-benefit analysis, including identification and
assessments of any costs and benefits not discussed in this analysis.
The Commission also seeks comments on the accuracy of any of the
benefits identified and also welcomes comments on the accuracy of any
of the cost estimates. Finally, the Commission encourages commenters to
identify, discuss, analyze, and supply relevant data, information, or
statistics regarding any such costs or benefits.
1. Benefits
    The emergence of dark pools as a significant source of liquidity
for NMS stocks raises a variety of important policy issues that deserve
consideration. Some dark pools transmit actionable IOIs to selected
market participants for the purpose of attracting contra-side order
flow to the ATS.\156\ Such actionable IOIs function quite similarly to
displayed quotations and, as a result, dark pools that distribute such
actionable IOIs are no longer truly dark; rather they are ``lit'' to a
select group of market participants but dark with respect to the rest
of the public. The Commission preliminarily believes that this practice
is creating a two-tiered market and an inequitable distribution of
price information.\157\
---------------------------------------------------------------------------

    \156\ See supra section II (describing the use of actionable
IOIs).
    \157\ See id.
---------------------------------------------------------------------------

    It has been a longstanding Commission concern to avoid two-tiered
markets, whereby certain market participants have access to information
or order flow that others do not.\158\ The public quote stream is
intended to provide a single source of information on the best prices
for NMS stocks across all markets, rather than force the public to
obtain data from many different exchanges and other trading venues to
learn the best prices.\159\ This objective is not being met if dark
pools or other markets disseminate pricing information

that is functionally quite similar to quotations, yet is not required
to be included in the public quote stream.\160\
---------------------------------------------------------------------------

    \158\ See supra section II (describing the purpose of the
consolidated quotation data stream).
    \159\ See id.
    \160\ See id.
---------------------------------------------------------------------------

    Congress in 1975 endorsed the development of a national market
system and granted the Commission broad authority to implement it.\161\
Chief among the objectives of the national market system are
coordinating markets, reducing fragmentation, and limiting the
possibility of tiered markets where the best trading opportunities are
available only to selected market participants.\162\ As the Commission
has long recognized, proper coordination of markets requires
transparency and access across the national market system.\163\ Market
participants must be able to know where the best trading opportunities
exist and have the ability to execute orders in response to those
opportunities. The Commission has taken a number of actions designed to
further these goals,\164\ including by providing, through Regulation
ATS, a regulatory framework that permits competition among and
innovation by exchange and non-exchange trading centers while
attempting to minimize detrimental market fragmentation. As the
Commission observed in 1997, the failure ``to fully coordinate trading
on alternative trading systems into national market systems mechanisms
has impaired the quality and pricing efficiency of secondary equity
markets. * * * Although these systems are available to some
institutions, orders on these systems frequently are not available to
the general investing public.''\165\ The Commission noted that such
``hidden markets''--where superior quotations might be available to a
subset of market participants--impeded the goals of the national market
system.\166\
---------------------------------------------------------------------------

    \161\ See Public Law 94-29, 89 Stat. 97 (1975) (adopting Section
11A of the Exchange Act).
    \162\ See 15 U.S.C. 78k-1(a)(1)(D) (``The linking of all markets
for qualified securities through communication and data procession
facilities will foster efficiency, enhance competition, increase the
information available to brokers, dealers, and investors, facilitate
the offsetting of investors' orders, and contribute to best
execution of such orders.'') See also Regulation ATS Proposing
Release and Concept Release (citing inter alia SEC, Statement of the
Securities and Exchange Commission on the Future Structure of the
Securities Markets (February 2, 1972), 37 FR 5286 (March 14, 1972));
Securities Exchange Act Release No. 36310 (September 29, 1995), 60
FR 52792 (October 10, 1995).
    \163\ See, e.g., Regulation ATS Proposing Release, supra note
53, 63 FR at 23511.
    \164\ See supra note 55.
    \165\ Concept Release, supra note 53, 63 FR at 30492. See also
Regulation ATS Proposing Release, supra note 53, 63 FR at 23514.
    \166\ See Regulation ATS Proposing Release, 63 FR at 23514-15
(``The use of these systems to facilitate transactions in securities
at prices not incorporated into the [national market system] has
resulted in fragmented and incomplete dissemination of quotation
information. Recent evidence suggests that the failure of the
current regulatory approach to fully integrate trading on
alternative trading systems into [the national market system]
mechanisms has impaired the quality and pricing efficiency of
secondary equity markets, particularly in light of the explosive
growth in trading volume on such alternative trading systems'').
---------------------------------------------------------------------------

    The proposed amendments to Rule 301(b)(3), together with the
proposed changes to Rule 600(b)(8) of Regulation NMS, seek to inhibit
the development of ``hidden'' or partially lit markets that result in a
tiered market structure, and thus strengthen the national market system
for the benefit of public investors. By more fully coordinating trading
on ATSs into the national market system, the proposed amendments are
designed to improve pricing efficiency and execution quality in NMS
stocks.
    As described above, the Commission is proposing to amend Rule
301(b)(3)(i)(B) of Regulation ATS \167\ to reduce the average daily
trading volume threshold that would trigger display obligations for an
ATS from 5% to 0.25%. The Commission is also proposing to amend Rule
301(b)(3)(ii) of Regulation ATS \168\ to clarify that an ATS must
publicly display and provide execution access to its best-priced orders
in NMS stocks when such orders are displayed to more than one person
(other than ATS employees), regardless of whether such persons are
subscribers of the ATS. In addition, the Commission is proposing to
amend Rule 301(b)(3)(ii) to mirror the proposed exception in the
definition of ``bid'' or ``offer'' in Rule 600(b)(8) for orders having
a market value of at least $200,000 and which are communicated only to
market participants who are reasonably believed to represent current
contra-side trading interest of at least $200,000. Together with the
proposal to amend the definition of ``bid'' or ``offer'' in Rule
600(b)(8) to explicitly include actionable IOIs, these proposed
amendments to Rule 301(b)(3) of Regulation ATS are designed to increase
the opportunity for all market participants to discover and interact
with the best-priced orders, while offering certain large orders the
opportunity for size discovery.
---------------------------------------------------------------------------

    \167\ 17 CFR 242.301(b)(3)(i)(B).
    \168\ 17 CFR 242.301(b)(3)(ii).
---------------------------------------------------------------------------

    The Commission believes that broker-dealers operating ATSs should
be subject to quoting requirements that broadly parallel those
applicable to other market participants. Currently, the order display
and execution access requirements in Regulation ATS do not apply unless
an ATS has an average daily trading volume threshold in an NMS stock of
5% or more. Few if any ATSs exceed the 5% threshold for any NMS stocks
although, as explained above,\169\ ATSs collectively account for a
significant share of trading volume. Many dark pool ATSs communicate
order information via actionable IOIs that could, if appropriately
integrated, contribute to the overall efficiency and quality of the
national market system. Without any attendant change to Regulation ATS
to lower the 5% threshold, the proposed amendments to the definitions
of ``bid'' or ``offer'' in Rule 600(b)(8) of Regulation NMS would have
less effect, because most ATSs could continue to communicate actionable
IOIs only to selected market participants. Therefore, in conjunction
with the proposed amendments to Rule 600(b)(8), the Commission is
proposing to substantially lower the threshold at which an ATS incurs
an obligation under Regulation ATS to provide orders to an SRO for
inclusion in the public quote stream. The Commission preliminarily
believes that such amendment would be consistent with the mandate set
forth in Section 11A of the Exchange Act \170\ to promote a national
market system.
---------------------------------------------------------------------------

    \169\ See supra notes 9 and 10 and accompanying text.
    \170\ 15 U.S.C. 78k-1.
---------------------------------------------------------------------------

    The Commission also preliminarily believes that, by expanding the
pool of orders that would be required to be incorporated into the
consolidated public quote stream, the proposed amendments to Rule
301(b)(3) would have the potential in many cases to narrow the NBBO or
to increase the quoted size at the existing NBBO.\171\ As noted above,
requiring that actionable IOIs be incorporated into the public quote
stream is particularly important now given their increasing
prevalence.\172\ Thus, although 0.25% is only a small portion of
average daily trading volume, actionable IOIs sent by even small ATSs,
when aggregated, may represent a significant percentage of the orders
that would set the price of, or increase the size available at, the
NBBO.\173\ The Commission preliminarily believes that making most such
orders visible and available to the market as a whole could represent a
substantial benefit to investors. Furthermore, incorporating the best-
priced orders from all but the smallest ATSs into the public quote
stream

would increase the value of the public quote stream.
---------------------------------------------------------------------------

    \171\ See supra section II.
    \172\ Id.
    \173\ See id. (noting dark pools in the aggregate account for
7.2% of aggregate trading volume in the NMS).
---------------------------------------------------------------------------

    The Commission is also proposing to amend Rule 301(b)(3) to include
an exception from the order display and execution access requirements
for certain large orders, which would mirror the proposed exception
with respect to the definition of ``bid'' or ``offer'' in Rule
600(b)(8) of Regulation NMS. This exception would apply to orders with
a market value of $200,000 or more that are communicated only to those
who are reasonably believed to represent current contra-side trading
interest of at least $200,000. Pursuant to the proposed exception, an
ATS could display these large orders to potential counterparties
reasonably believed to represent contra-side trading interest of at
least $200,000 without triggering the order display and execution
access requirements of Rule 301(b)(3).
    As noted earlier, the Commission recognizes that some trading
venues, such as block crossing networks, may use actionable IOIs as
part of a trading mechanism that offers significant size discovery
benefits.\174\ These benefits may be particularly valuable for
institutional investors that need to trade efficiently in sizes much
larger than those that are typically available in the public quoting
markets.\175\ These size discovery mechanisms could be rendered
unworkable, however, if their narrowly targeted IOIs for large size
were required to be included in the public quote stream.\176\ The
Commission preliminarily believes that the proposed exception would
facilitate greater opportunity for ATS subscribers to discover size
without generating adverse market impact.
---------------------------------------------------------------------------

    \174\ See supra Section VI.A.1.
    \175\ See id.
    \176\ See id.
---------------------------------------------------------------------------

2. Costs
    The Commission preliminarily anticipates that ATSs could incur
certain costs if the proposed amendments were adopted. Under the
proposed amendments, ATSs that display orders in NMS stocks (except for
orders that have a market value of at least $200,000 and are
communicated only to those who are reasonably believed to represent
current contra-side trading interest of at least $200,000) to more than
one person, whether by communicating actionable IOIs or otherwise, and
meet the proposed average daily trading volume threshold of 0.25% would
be subject to the order display and execution access requirements of
Rule 301(b)(3) of Regulation ATS.\177\
---------------------------------------------------------------------------

    \177\ The Commission is not proposing to amend Rule
301(b)(3)(iii) of Regulation ATS. For an ATS that is required to
display orders pursuant to Rule 301(b)(3)(ii), Rule 301(b)(3)(iii)
requires such ATS to provide to any broker-dealer that has access to
the SRO to which the ATS provides the prices and sizes of its best-
priced orders the ability to effect a transaction with such orders
that is: (a) equivalent to the ability of such broker-dealer to
effect a transaction with other orders displayed on the SRO; and (b)
at the price of the highest priced buy order or lowest priced sell
order displayed for the lesser of the cumulative size of such priced
orders entered therein at such price, or the size of the execution
sought by such broker-dealer. See 17 CFR 242.301(b)(3)(iii).
---------------------------------------------------------------------------

    The Commission does not preliminarily expect that the costs of
monitoring daily trade volume associated with the proposed amendments
to Rule 301(b)(3) would be significant. Each ATS is already required to
monitor its trading volumes. However, ATSs might incur some costs to
adjust their current monitoring programs to take account of the
proposed reduction in the display threshold from 5% to 0.25%. In
addition, as described above, the proposed amendments might impose
certain costs, both initial and ongoing, on dark pool ATSs that
currently transmit actionable IOIs and could be required to change
their business models. Likewise, the proposed amendments could impose
costs, both initial and ongoing, on any ATS that is currently
displaying, or might in the future decide to display, order information
and that might, if the Commission adopts the proposed amendments,
decide instead to operate as a completely dark ATS. The Commission
notes that each ATS could avoid any such costs by not displaying orders
at all, or by selectively displaying only large orders that qualify for
the proposed exception.
    For an ATS that is impacted by the proposed amendment to Rule
301(b)(3), initial adjustment costs could include system re-programming
to monitor the ATS's percentage of trading in NMS stocks,\178\
establishing linkages to an SRO for the purpose of submitting orders to
the SRO for public display and of providing access to market
participants wishing to trade against such orders, and expanding
systems capacity and internal controls, including establishing or
modifying applicable compliance policies and procedures, to carry out
these functions in a manner consistent with the SRO's rules. The
Commission preliminarily believes that such adjustment costs could
include ATS staff time to build new systems or re-program current
systems, as well as ongoing ATS staff time to maintain such systems and
carry out their associated functions.
---------------------------------------------------------------------------

    \178\ Currently, under Rule 301(b)(3) of Regulation ATS, an ATS
that displays subscriber orders to any person (other than ATS
employees) and has 5% or more of the aggregate daily share volume
for an NMS stock is required to provide to an SRO its best-priced
orders for such NMS stock for inclusion into the public quote
stream. Thus, ATSs are already required to monitor trading levels in
NMS stocks. As a result of the proposed amendments to Rule
301(b)(3), which would lower the average daily trading volume
threshold from 5% to 0.25%, ATSs could be required to re-program
their respective systems that monitor trading levels in NMS stocks
to reflect the lower threshold. Based on discussions of Commission
staff with certain potential ATS respondents and other market
participants, the Commission preliminarily believes that costs of
such re-programming would not be significant, although it requests
comment on that point.
---------------------------------------------------------------------------

    For purposes of the PRA, the Commission preliminarily estimated
that the initial annualized expense for all potential ATS respondents
to establish connectivity to an SRO would be approximately
$3,900,000.\179\ In addition, the Commission preliminarily estimated
that the initial annualized expense to comply with the proposed
amendments to Rule 301(b)(3) would be approximately $3,815,520.\180\
This figure is based on the estimated number of hours and hourly costs
\181\ for initial internal development and implementation by an ATS to
re-program the system, expand the system capacity, and adjust internal
controls, including costs to establish or modify applicable compliance
policies and procedures for an initial implementation period of two
months, plus the estimated costs associated with running compliance
policies and procedures (including monitoring daily trading activity),
ongoing system maintenance and development, and estimated internal
costs associated with maintaining connectivity to an SRO,

and ensuring compliance for a period of ten months, multiplied by 12
(the Commission's estimate of the number of potentially impacted ATSs).
---------------------------------------------------------------------------

    \179\ See supra note 130.
    \180\ This figure is based on discussions of Commission staff
with certain potential ATS respondents and other market
participants. The Commission derived the total estimated initial
annualized expense from the following: [((Sr. Programmer (320 hours)
at $292 per hour) + (Compliance Manager (20 hours) at $258 per hour)
+ (Compliance Attorney (20 hours) at $270 per hour) + (Programmer
Analyst (20 hours) at $193 per hour) + (Sr. Systems Analyst (30
hours) at $244 per hour)) x (2 months) + ((Sr. Programmer (2 hours)
at $292 per hour) + (Compliance Manager (6 hours) at $258 per hour)
+ (Compliance Attorney (4 hours) at $270 per hour) + (Compliance
Clerk (40 hours) at $63 per hour) + (Sr. Systems Analyst (2 hours)
at $244 per hour) + (Director of Compliance (5 hours) at $388 per
hour) + (Sr. Computer Operator (8 hours) at $75 per hour)) x (10
months)] x (12 potential ATS respondents) = $3,815,520.
    \181\ Hourly figures are from SIFMA's Management & Professional
Earnings in the Securities Industry 2008 and SIFMA's Office Salaries
in the Securities Industry 2008, modified by Commission staff to
account for an 1,800-hour work-year and multiplied by 5.35 or 2.93,
as appropriate, to account for bonuses, firm size, employee
benefits, and overhead.
---------------------------------------------------------------------------

    The Commission also preliminarily estimated the ongoing expenses of
complying with the proposed amendments to Rule 301(b)(3), which could
include, among other things, maintaining connectivity with an SRO,
monitoring daily trade activity, and ensuring compliance. For purposes
of the PRA, the Commission preliminarily estimated that the ongoing
annualized expense for all potential ATS respondents to maintain
connectivity to an SRO would be approximately $3,600,000.\182\ In
addition, the Commission preliminarily estimated that the ongoing
annualized expense for all potential ATS respondents to comply with the
proposed amendments to Rule 301(b)(3) would be approximately
$1,261,440.\183\ This figure is based on the estimated number of hours
and hourly costs \184\ for running compliance policies and procedures
(including monitoring daily trading activity), ongoing system
maintenance and development, and estimated internal costs associated
with maintaining connectivity to an SRO, and ensuring compliance for a
period of 12 months, multiplied by 12 (the Commission's estimate of the
number of potentially impacted ATSs).
---------------------------------------------------------------------------

    \182\ See supra note 132.
    \183\ This figure is based on discussions of Commission staff
with certain potential ATS respondents and other market
participants. The Commission derived the total estimated ongoing
burdens from the following: ((Sr. Programmer (2 hours) at $292 per
hour) + (Compliance Manager (6 hours) at $258 per hour) +
(Compliance Attorney (4 hours) at $270 per hour) + (Compliance Clerk
(40 hours) at $63 per hour) + (Sr. Systems Analyst (2 hours) at $244
per hour) + (Director of Compliance (5 hours) at $388 per hour) +
(Sr. Computer Operator (8 hours) at $75 per hour)) x (12 months) x
(12 potential ATS respondents) = $1,261,440.
    \184\ See supra note 181.
---------------------------------------------------------------------------

    The Commission is also proposing a change to Rule 301(b)(3)(ii)
that would add an exception to the order display and execution access
requirements for orders that have a market value of at least $200,000
and are communicated only to those who are reasonably believed to
represent current contra-side trading interest of at least $200,000.
The Commission preliminarily believes that an ATS would not incur any
costs relating to order display and execution access because of the
proposed exception. An ATS would incur either the same costs as it
would otherwise (because it communicated no orders that met the terms
of the proposed exception) or fewer costs (because some or all of the
orders that it communicated met the terms of the proposed exception,
thus reducing the number of orders that would otherwise have to be
publicly disseminated under the proposed amendments to Rule 301(b)(3)).
Each ATS is already required under Rule 301(b)(3) to monitor its order
flow; the Commission preliminarily believes that tracking which orders
qualify for the proposed exception would require no additional costs
beyond those otherwise required, although it requests comment on that
point.
    The proposed amendments to Rule 301(b)(3) of Regulation ATS are
designed to balance the benefits of technology and flexible regulation
with the need for appropriate coordination among trading centers. The
Commission understands that linkage costs have fallen substantially
since it adopted Regulation ATS. Nevertheless, the Commission is
sensitive to the costs of its regulation and the proposed amendments on
current and new ATSs, as well as the potential effect on their
development. The Commission preliminarily believes that reducing the
average daily trading volume threshold to 0.25% would provide an
appropriate level under which ATSs could display subscriber orders to
more than one person (whether by sending actionable IOIs or otherwise)
without imposing substantial costs associated with linking to an SRO.
    Consistent with the reasons enunciated in the Regulation ATS
Adopting Release for establishing the 5% threshold and as discussed in
this release, the Commission preliminarily believes that proposing a
reduction of the ATS display threshold to 0.25% is warranted at this
time. The Commission also preliminarily believes that the goals and
objectives of lowering the threshold justify the costs associated with
linking to an SRO. For ATSs that would be subject to the order display
and execution requirements if the Commission were to adopt the 0.25%
threshold, the Commission preliminarily believes that the current costs
of linking to an SRO are not significant.\185\ Communications and
order-routing systems have improved significantly since Regulation ATS
was originally adopted. Robust and extremely fast linkages that were
not available at that time are now widely offered on commercially
reasonable terms, and the market for these services is highly
competitive, further reducing their cost.\186\
---------------------------------------------------------------------------

    \185\ This information is based on discussions of Commission
staff with certain potential ATS respondents and other market
participants.
    \186\ See id.
---------------------------------------------------------------------------

    In addition, the Commission preliminarily believes that the
proposed amendments to Rule 301(b)(3) of Regulation ATS would not, if
adopted, impose any substantive or material costs on SROs under the
requirements of Rule 602 of Regulation NMS. Under the proposal, order
information that is communicated by ATSs to more than one person
outside the public quote stream (whether via actionable IOIs or
otherwise) could be required to be incorporated into the public quote
stream. As described above, to accomplish this, the ATS would be
required to send the order information to an SRO, and that SRO would be
responsible under Rule 602 for the incorporation of the information in
the consolidated public quote stream. The Commission preliminarily
believes that any costs associated with including such ATS orders with
the large volume of quotations that SROs already include in the public
quote stream under Rule 602 would not be material.
    As noted previously, an ATS that sends actionable IOIs or otherwise
displays subscriber orders to more than one person (other than ATS
employees) and exceeds the proposed 0.25% threshold for an NMS stock
could avoid the direct costs of linking to an SRO by going completely
dark. The Commission recognizes that such a choice could be viewed as a
potential cost of the proposed amendments. An ATS that, under the
existing 5% threshold, generates contra-side interest for its
subscriber orders by communicating actionable IOIs might--if it ceased
to do so--effect fewer executions, which could lead to a loss of
revenue and market share for the ATS. The Commission is sensitive to
this potential cost, but preliminarily believes that it would be
mitigated by the proposed exception for size discovery orders and
justified by the overall benefits of the proposal to the national
market system.
    The proposed amendment to Rule 301(b)(3) could also impose costs on
ATS subscribers that currently receive executions arising from ATSs'
use of actionable IOIs. If the proposal is adopted, such subscribers
might incur costs to re-evaluate their order execution strategies. For
example, if a subscriber currently uses an ATS that communicates
actionable IOIs, and the ATS is above the proposed display threshold of
0.25% in one or more NMS stocks, the subscriber would have to evaluate
whether it is better served by having its orders in displayed markets

or in completely dark pools. The strategies that they adopt in response
to the proposal might not be as profitable as those they are employing
currently. In addition, market participants that currently receive
actionable IOIs might no longer have access to such trading
opportunities and could incur costs to adapt their strategies if the
number of IOIs that they receive decreases.
    Nevertheless, the Commission preliminarily believes that the costs
to such subscribers and to recipients of actionable IOIs would be
justified by the benefits to the national market system as a whole. For
the reasons discussed in this release, the Commission preliminarily
believes that the proposal would reduce the possibility of a tiered
market structure and provide better access for all investors to the
best-priced orders in NMS stocks. This outcome would benefit all market
participants.
    The Commission requests comment on the costs and benefits of the
proposed amendments to Rule 301(b)(3) of Regulation ATS discussed
above, as well as any costs and benefits not already described which
could result from them. The Commission also requests data to quantify
any potential costs or benefits. In addition, the Commission requests
specific comment on the following questions:
    1. Currently, ATSs can display orders in NMS stocks to more than
one person without triggering the order display and execution access
requirements in Rule 301(b)(3) if they do not exceed the 5% threshold.
Under the proposed amendments to Rule 301(b)(3), many ATSs would lose
the ability to display orders in this manner, and would have to either
publicly display those orders or go completely dark. What are the costs
and benefits of eliminating the ability of ATSs to communicate
actionable IOIs to only a limited group?
    2. Would the proposed amendments likely result in an increase in
the number of ATSs that submit their best-priced orders to an SRO for
inclusion in the public quote stream? Why or why not? What benefits
would result from more ATSs submitting their best-priced orders in NMS
stocks to an SRO for inclusion in the public quote stream? Can those
benefits be quantified? If so, how? What are the potential adverse
effects?
    3. If ATSs respond to the proposed amendments by going completely
dark, what costs or benefits would result for: (a) those ATSs, (b)
market participants that currently receive actionable IOIs from those
ATSs, and (c) the national market system as a whole?
    4. For ATSs that would choose to respond to the proposed amendments
by submitting their best-priced orders in NMS stocks to an SRO for
inclusion in the public quote stream, what are the costs of
establishing the necessary linkages to an SRO? To what extent do those
ATSs already have the capability to submit orders to an SRO? Could
existing systems and communications infrastructure be adapted for that
purpose and, if so, at what cost? Please describe and quantify in terms
of both initial and ongoing costs.
    5. What would be the costs and benefits of setting the display
threshold at 0.25%? Would this change achieve the Commission's goals of
increasing price competition in the national market system? Why or why
not? Would there be greater benefits to the market as a whole by
eliminating the threshold altogether (i.e., setting the threshold at
0%) and thereby requiring any ATS that displays a subscriber order to
more than one person to include that order in the public quote stream?
    6. What costs would be imposed on new ATSs if the Commission were
to adopt the proposed 0.25% threshold or to eliminate it entirely?
Would a low or no threshold create a barrier to entry for new ATSs? Why
or why not?
    7. Under the proposed amendments, an ATS could continue to
communicate customer orders in NMS stocks outside the public quote
stream if those orders had a market value of at least $200,000 and were
displayed only to those who are reasonably believed to represent
current contra-side trading interest of at least $200,000. What would
be the benefits of allowing such display by ATSs of these orders? Would
the execution quality of such orders decline if they instead had to be
placed (either in full or in smaller pieces) in displayed markets or
completely dark pools? What are the costs to the market of allowing
such orders to be displayed by ATSs without requiring their inclusion
in the public quote stream?

C. Post-Trade Transparency for ATSs

    The Commission is sensitive to the costs and benefits associated
with the proposed Plan amendments. The Commission has identified
certain costs and benefits of the proposed Plan amendments and requests
comment on all aspects of this cost-benefit analysis, including
identification and assessment of any costs and benefits not discussed
in the analysis. The Commission seeks comment and data on the value of
the benefits identified. The Commission also requests those commenters
to provide data so the Commission can improve the cost estimates,
including identification of statistics relied on by commenters to reach
conclusions on cost estimates.
1. Benefits
    The proposed Plan amendments would require the disclosure of the
identity of ATSs on their trade reports in the public data stream to
improve post-trade transparency. The proposed Plan amendments would
require that all ATSs subject to Regulation ATS use a unique
identifier, and would require that the identity of the ATS that
executed a trade be included in the public data stream. The Commission
believes this proposal to improve post-trade transparency would enhance
public confidence in the securities markets by providing accurate
information regarding the volume of transactions effected by ATSs as
trading venues. This disclosure of information would provide the
marketplace with a more complete and accurate picture of trading
activity in ATSs thereby improving the quality and pricing efficiency
of the equity markets. The Commission preliminarily believes that such
information would help investors to assess trading volume of ATSs
(including ECNs and dark pools) and to evaluate which ATSs may have
liquidity in particular stocks, enabling orders to be more efficiently
routed to trading venues. ATSs with more liquidity may receive
additional orders from investors. The proposed Plan amendments are
intended to address the Commission's long held belief that transparency
promotes efficient securities markets.\187\
---------------------------------------------------------------------------

    \187\ The Commission has held the view that transparency not
only allows all market participants to assess overall supply and
demand, but also counteracts the effects of fragmentation without
forcing all executions into one market. In particular, transparency
reduces the information gap between investors with differing degrees
of sophistication because all investors can monitor the quality of
executions they receive. Additionally, the Commission has held the
view that transparency reduces the likelihood of transactions at
non-competitive prices and provides more immediate and useful
information for investigating questionable conduct. See supra note
108.
---------------------------------------------------------------------------

    Commenters should provide specific data and analysis to support any
comments they submit with respect to these benefit estimates.
2. Costs
    The Commission believes that ATSs would not incur significant costs
in connection with the proposed Plan amendments in addition to those
already created by the requirements of Rule 601 of the Exchange
Act.\188\ Currently FINRA rules require each trade to include an MPID.
The Commission understands that some

ATSs report their transactions using an MPID of their sponsoring
broker-dealer, while other ATSs use a unique MPID. The Plan changes
would require that each ATS have a unique MPID, necessitating some ATSs
to acquire an MPID from FINRA. ATSs can obtain an additional MPID from
FINRA at no cost.\189\ Those ATSs that currently use an MPID of their
sponsoring broker-dealer could incur a de minimis cost in re-
programming their systems to substitute the new MPID for the one
currently used in transmitting their transactions to FINRA.
---------------------------------------------------------------------------

    \188\ See supra, note 84.
    \189\ See FINRA Rules 6160 and 6170.
---------------------------------------------------------------------------

    FINRA, upon receipt of this unique indicator would retransmit the
trade report to the SIP, after excluding the ATS identifier from trade
reports for large size trades. For purposes of the PRA, the Commission
preliminarily estimated that the initial annualized expense for the
FINRA/NASDAQ TRF, FINRA/NYSE TRF, and the ADF would be approximately
$1,175,000.\190\ In addition, the Commission preliminarily estimated
that the initial annualized expense for FINRA internal development and
testing would be approximately $13,400.\191\ Therefore, the grand total
of the one-time, initial annualized expense for FINRA's development,
re-programming, and testing of the systems to comply with the proposed
Plan amendments would be approximately $1,188,400. The Commission
preliminarily believes that the ongoing annualized expense for FINRA
would be de minimis, as FINRA currently transmits trade report messages
to the SIPs in the normal course of business.
---------------------------------------------------------------------------

    \190\ This figure is the total initial, one-time annualized
expense to add unique ATS identifiers to trade report messages
transmitted to SIPs. This figure includes the development and
testing expenses of the FINRA/NASDAQ TRF, FINRA/NYSE TRF, and the
ADF, to which ATS trades are reported. The figure is based on
discussions of Commission staff with FINRA staff. See supra section
V.C.4.b.
    \191\ This figure is based on discussion of Commission staff
with FINRA staff. This figure includes FINRA internal development
and testing. The Commission derived the total estimated one-time
burdens from the following: [(Programmer Analyst at 25 hours) x 2 at
$193 per hour] + [(Computer Operator at 25 hours) x 2 at $75 per
hour] = $13,400. See supra section V.C.4.b.
---------------------------------------------------------------------------

    The SIPs (SIAC and Nasdaq SIP) would need to modify their trade
report message to carry the unique identifier for each ATS. Currently,
when transactions are reported to the SIP by FINRA, the MPID is dropped
and an identifier is appended indicating the trade was executed OTC.
Under the proposed Plan amendments, each ATS trade report would carry
an ATS indicator, in addition to the OTC indicator, unless the trade is
a large size trade. The Commission preliminarily estimated that the
initial annualized expense for SIAC and Nasdaq SIP would be
approximately $175,000.\192\ The Commission preliminarily believes that
the ongoing annualized expense for the SIPs would be de minimis, as the
SIPs currently transmit trade report messages in the normal course of
business. The Commission notes that the proposed Plan amendments could
affect order routing as investors may choose to change their routing
strategies based on the additional disclosure under the proposed
amendments of the ATS where the trade was executed.
---------------------------------------------------------------------------

    \192\ This figure is the total initial, one-time annualized
expense to provide planning, development, implementation, testing,
and quality assurance for the SIPs. The figure is based on
discussions of Commission staff with SIAC and Nasdaq SIP staff. See
supra section V.C.4.c.
---------------------------------------------------------------------------

    The Commission generally requests comment on all aspects of these
cost estimates for the proposed amendments to the Plans. Commenters
should provide specific data and analysis to support any comments they
submit with respect to these cost estimates.

VII. Consideration of Burden on Competition, and Promotion of
Efficiency, Competition and Capital Formation

    Section 3(f) of the Exchange Act \193\ requires the Commission,
whenever it engages in rulemaking and is required to consider or
determine whether an action is necessary or appropriate in the public
interest, to consider whether the action would promote efficiency,
competition, and capital formation. In addition, Section 23(a)(2) of
the Exchange Act \194\ requires the Commission, when making rules under
the Exchange Act, to consider the impact of such rules on competition.
Section 23(a)(2) 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. As discussed below,
the Commission's preliminary view is that the proposed amendments
should promote efficiency and competition. It preliminarily believes
that the proposals would have minimal impact, if any, on promotion of
capital formation.
---------------------------------------------------------------------------

    \193\ 15 U.S.C. 78c(f).
    \194\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

A. Actionable IOIs

    The proposed amendment to the definition of ``bid'' or ``offer'' in
Rule 600(b)(8) of Regulation NMS would expressly limit its exclusion of
IOIs to those ``that are not actionable'' and those that are actionable
but involve a market value of at least $200,000 that are communicated
only to those who are reasonably believed to represent current contra-
side trading interest of at least $200,000. The definition of bid or
offer is a key element in determining the public quoting requirements
of exchanges and OTC market makers. As discussed above, the proposed
amendments are designed to help promote fair competition by providing a
definition of ``bid'' or ``offer'' that would apply to all types of
trading venues and, thereby, treat actionable IOIs similarly in those
venues. The proposal is further designed to promote competition and
enhance efficiency by including all actionable IOIs in the consolidated
quotation stream, thereby eliminating the potential that IOIs create
for two-tiered access to information on the best prices for NMS stocks.
Given that actionable IOIs provide explicit or implicit information
regarding symbol, side (buy or sell), size and price, there is little
practical reason to treat actionable IOIs differently from displayed
quotations at the NBBO.
    Currently, dark pools' IOIs often are executed at prices that match
the best displayed prices for a stock at another market, potentially
depriving those who publicly display their interest at the best price
from receiving a speedy execution at that price. The opportunity to
obtain the fastest possible execution at a price is the primary
incentive for the display of trading interest.\195\ If adopted, the
proposal could encourage the public display of trading interest and
promote quote competition among markets by eliminating a practice that
diverts order flow to private markets. Increasing the volume of order
flow routed to public quoting markets could reward market participants
for displaying their trading interest, thus leading to an increase in
the display of trading interest. Such a result would be consistent with
the Commission's emphasis on the need to encourage displayed
liquidity--a critical reference point for investors.\196\ Moreover,
increasing the volume of order flow directed to public quotations could
increase the incentives for markets to compete by displaying the
quotations that would attract such order flow. The proposal thereby
could promote competition for the displayed liquidity that is vital to
the fairness and efficiency of the market for NMS stocks. Encouraging
the use of displayed limit orders could help improve the price
discovery process, and in turn,

contribute to increased liquidity and depth in the market.\197\
---------------------------------------------------------------------------

    \195\ See NMS Release, supra note 26.
    \196\ See supra note 26.
    \197\ See Order Handling Rules Release, supra note 26, at 48293
(``[T]he display of customer limit orders advances the national
market system goal of the public availability of quotation
information, as well as fair competition, market efficiency, best
execution, and disintermediation.'').
---------------------------------------------------------------------------

    Further, the proposed amendment to the current definition of
``bid'' or ``offer'' would exclude any IOIs ``for a quantity of NMS
stock having a market value of at least $200,000 that are communicated
only to those who are reasonably believe to represent current contra-
side trading interest of at least $200,000.'' This exception is
designed to benefit investors trading in large sizes by allowing them
to trade more efficiently than they could if these quotes were required
to be included in the public quotation stream. As discussed above, some
trading venues may use actionable IOIs as part of a trading mechanism
that locates contra-side trading interest for large size orders without
causing price impact on the markets. It also could promote competition
by enabling trading venues to continue to offer existing size discovery
mechanisms, as well as leaving room for trading venues to innovate and
offer additional types of size discovery mechanisms.
    Based on the analysis above, the Commission preliminarily believes
that the proposed amendment to the definition of ``bid'' or ``offer''
in Rule 600(b)(8) to apply expressly to actionable IOIs would not
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act. The Commission also
believes, as discussed above, that the proposed amendment would promote
efficiency and competition, and would have minimal impact, if any, on
promotion of capital formation.
    The Commission requests comment on all aspects of this analysis
and, in particular, on whether the proposed amendment would place a
burden on competition, as well as the effect of the proposal on
efficiency, competition, and capital formation. Commenters are
requested to provide empirical data and other factual support for their
views if possible.

B. ATS Display Obligations

    As discussed above, the proposed amendments to Rule 301(b)(3) are
intended to reduce the potential for two-tiered markets and further
integrate the best-priced orders available on ATSs into the national
market system. By revising the order display and execution access
requirements in Rule 301(b)(3) to reflect proposed revisions to the
definition of ``bid'' or ``offer'' in Rule 600(b)(8) of Regulation NMS,
the Commission aims to foster greater price transparency, more vigorous
competition, and stronger, more integrated markets.\198\
---------------------------------------------------------------------------

    \198\ See supra section II.
---------------------------------------------------------------------------

    ATSs that currently use actionable IOIs could respond to the
proposed amendments to Regulation ATS by displaying some of these
orders in the public quote stream. The proposed amendments to Rule
301(b)(3) are designed to incorporate more order information into the
public quote stream and promote quote competition. Actionable IOIs
communicated by ATSs to selected market participants often provide
important pricing information and could improve the NBBO or add to the
size available at the NBBO if they were included in the public quote
stream. Both of these impacts could improve the pricing efficiency and
overall execution quality available in the national market system.
Requiring more such IOIs to be integrated into the public quote stream
also could further competition among orders and among markets.
    ATSs that currently use actionable IOIs could respond to the
proposed amendments to Regulation ATS by going completely dark. This
outcome could reduce the potential benefits to efficiency and quote
competition. Nevertheless, this response would reduce the likelihood of
two-tiered markets, where some market participants have information
about and access to the best-priced orders that others do not. In
addition, such a response would reduce the fraction of order flow that
is diverted from market participants that publicly display their
interest.
    Moreover, the Commission preliminarily believes that the proposed
amendments to Rule 301(b)(3) would strike an appropriate balance
between encouraging competition among market centers and the need for
appropriate coordination among them. The Commission's proposal to lower
the trading volume threshold in Rule 301(b)(3) from 5% to 0.25% is
designed to recognize significant changes in market structure and
practice among market participants that have occurred since Regulation
ATS was adopted, while at the same time not lowering the volume
threshold to a level that would create an inappropriate barrier to
entry for new ATSs.
    The Commission also preliminarily believes that, by keeping
barriers to entry reasonably low for new ATSs and strengthening the
national market system, the proposed amendments to Rule 301(b)(3) would
promote competition. A significant number of ATSs have been launched
since the Commission adopted Regulation ATS in 1998. Competition
between ATSs and exchanges, and between ATSs, has yielded numerous
benefits for investors and the national market system as a whole,
including faster and more robust trading technology, new trading
strategies, and lower transaction costs, which in turn support highly
liquid markets with wide investor participation. The Commission thus
believes that reasonably low barriers to entry for ATSs has generally
helped to promote competition and efficiency.
    For these reasons, the Commission preliminarily believes that the
changes to Rule 301(b) would likely have a positive impact on
competition and efficiency, would have minimal impact, if any, on
promotion of capital formation, and would not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act. The Commission generally requests comment on the
competitive effects of the proposed amendments to Rule 301(b)(3) on any
market participant. The Commission also requests comment on what impact
the proposed amendments to Rule 301(b)(3) would have on competition,
efficiency, and capital formation. The Commission requests comment on
all aspects of this analysis and, in particular, on whether the
proposed amendments to Rule 301(b)(3) would place a burden on
competition, as well as the effect of the proposal on efficiency,
competition, and capital formation. Commenters are requested to provide
empirical data and other factual support for their views, if possible.

C. Post-Trade Transparency for ATSs

    The Commission's preliminary view is that the proposed amendments
to post-trade transparency requirements for ATSs should promote
efficiency and competition. The Commission believes that the proposed
amendments to the Plans would improve post-trade transparency as Plan
Participants would be required to include identifying information,
specifying the trading center that executed the trade in the
consolidated data stream disseminated to the public. This information
should lead to more efficient order routing, as investors would know on
which ATS a particular security has been traded. This improved post-
trade transparency should promote competition among trading venues as
the public would be better able to assess where trading volume is being
executed. Furthermore,

such uniform and reliable reporting practices may promote efficiency by
facilitating the flow of information among ATSs, broker-dealers,
exchanges, investors, and other market participants. As discussed, the
Commission preliminarily believes that this change would bring the
trade reporting requirements for ATSs in line with the trade reporting
requirements for exchanges. Requiring the public disclosure of which
ATS executed a trade should enable the public to determine more
accurately the volume of executions occurring on any particular ATS, as
well as on ATSs in general. The Commission expects that investors would
direct orders to ATSs that provided liquidity in a particular issue.
Greater transparency should also enhance the ability of investors to
receive best execution for their orders. Transparency should result in
more efficient routing of orders to venues with liquidity. The
Commission preliminarily believes that some ATSs could receive
additional trading interest when investors are able to identify that
the ATS has liquidity in a particular stock.
    The Commission preliminarily believes the proposed Plan amendments
would promote efficiency and competition and would have minimal impact,
if any, on promotion of capital formation. In addition, the Commission
preliminarily believes that the proposed Plan amendments would not
impose any burden on competition not necessary or appropriate in the
furtherance of the purposes of the Exchange Act.
    The Commission requests comment on all aspects of this analysis
and, in particular, on whether the proposed amendments would place a
burden on competition, as well as the effect of the proposal on
efficiency, competition, and capital formation. Commenters are
requested to provide empirical data and other factual support for their
views if possible.

VIII. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996, or ``SBREFA,'' \199\ the Commission must advise the OMB as
to whether the proposed regulation constitutes a ``major'' rule. Under
SBREFA, a rule is considered ``major'' where, if adopted, it results or
is likely to result in: (1) An annual effect on the economy of $100
million or more (either in the form of an increase or a decrease); (2)
a major increase in costs or prices for consumers or individual
industries; or (3) significant adverse effect on competition,
investment or innovation. If a rule is ``major,'' its effectiveness
will generally be delayed for 60 days pending Congressional review.
---------------------------------------------------------------------------

    \199\ Public Law 104-121, Title II, 110 Stat. 857 (1996)
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note
to 5 U.S.C. 601).
---------------------------------------------------------------------------

    The Commission requests comment on the potential impact of the
proposed rule amendments on the economy on an annual basis, on the
costs or prices for consumers or individual industries, and on
competition, investment or innovation. Commenters are requested to
provide empirical data and other factual support for their view to the
extent possible.

IX. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \200\ requires Federal
agencies, in promulgating rules, to consider the impact of those rules
on small entities. Section 603(a) \201\ of the Administrative Procedure
Act,\202\ as amended by the RFA, generally requires the Commission to
undertake a regulatory flexibility analysis of all proposed rules, or
proposed rule amendments, to determine the impact of such rulemaking on
``small entities.'' \203\ Section 605(b) of the RFA states that this
requirement shall not apply to any proposed rule or proposed rule
amendment, which if adopted, would not ``have a significant economic
impact on a substantial number of small entities.'' \204\
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    \200\ 5 U.S.C. 601 et seq.
    \201\ 5 U.S.C. 603(a).
    \202\ 5 U.S.C. 551 et seq.
    \203\ Although Section 601(b) of the RFA defines the term
``small entity,'' the statute permits agencies to formulate their
own definitions. The Commission has adopted definitions for the term
small entity for the purposes of Commission rulemaking in accordance
with the RFA. Those definitions, as relevant to this proposed
rulemaking, are set forth in Rule 0-10, 17 CFR 240.0-10. See
Securities Exchange Act Release No. 18451 (January 28, 1982), 47 FR
5215 (February 4, 1982) (File No. AS-305).
    \204\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------

A. Actionable IOIs

    Pursuant to Rule 605(b) of the RFA, the Commission certifies that
the proposed amendment of Rule 600(b)(8) of Regulation NMS, if adopted,
would not have a significant economic impact on a substantial number of
small entities. The proposed amendment of Rule 600(b)(8) of Regulation
NMS would revise the definition of ``bid'' or ``offer'' by expressly
limiting its exclusion of IOIs to those ``that are not actionable and
indications of interest for a quantity of NMS stock having a market
value of at least $200,000 that is communicated only to those who are
reasonably believed to represent current contra-side trading interest
of at least $200,000.'' The practical result of the amendment would be
that actionable IOIs that do not meet the size discovery exclusion
would be ``bids'' or ``offers.''
    ``Bid'' and ``offer'' are key terms that determine the scope of
Rule 602 of Regulation NMS. In general, Rule 602 requires exchange
members and OTC market makers to provide their best-priced bids and
offers to their respective exchanges and FINRA. The exchanges and
FINRA, in turn, are required to make their best bids and offers
available in the consolidated quotation data. The exchanges subject to
the requirements of Rule 602 are not small entities as defined by
Commission rules,\205\ and FINRA, a national securities association, is
not a small entity.
---------------------------------------------------------------------------

    \205\ See 17 CFR 240.0-10(e).
---------------------------------------------------------------------------

    The proposed amendment to Rule 600(b)(8) could increase the number
of ``bids'' and ``offers'' exchange members and certain OTC market
makers must review to determine their best-priced bids and offers. Some
exchange members and OTC market makers may be small entities pursuant
to Rule 0-10(c) under the Exchange Act.\206\ It is the Commission's
understanding that all exchange members and OTC market makers currently
have systems and procedures in place to determine their best-priced
bids and offers. As a result, the Commission believes that the proposed
amendment would not result in a significant economic impact on a
substantial number of exchange members and OTC market makers when
determining their best-priced bids and offers due to the proposed
inclusion of actionable IOIs in the definition of ``bid'' or ``offer.''
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    \206\ See 17 CFR 240.0-10(c).
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    The Commission encourages written comments regarding this
certification. The Commission requests that commenters describe the
nature of any impact on small entities and provide empirical data to
support the extent of the impact.

B. ATS Display Obligations

    The Commission also certifies that the proposed amendments to Rule
301(b)(3) of Regulation ATS would not, if adopted, have a significant
economic impact on a substantial number of small entities.
    For purposes of Commission rulemaking in connection with the RFA, a
small entity includes a broker-dealer with total capital (net worth
plus subordinated liabilities) of less than $500,000 on the date in the
prior fiscal year as of which its audited financial

statements were prepared pursuant to Rule 17a-5(d) under the Exchange
Act,\207\ or, if not required to file such statements, a broker-dealer
with total capital (net worth plus subordinated liabilities) of less
than $500,000 on the last day of the preceding fiscal year (or in the
time that it has been in business, if shorter); and is not affiliated
with any person (other than a natural person) that is not a small
business or small organization.\208\ An entity that complies with
Regulation ATS must, among other things, register as a broker-
dealer.\209\ Thus, the Commission's definition of small entity as it
relates to broker-dealers also applies to ATSs.
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    \207\ See 17 CFR 240.17a-5(d).
    \208\ See 17 CFR 240.0-10(c).
    \209\ See 17 CFR 242.301(b)(1).
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    The proposed amendments to Rule 301(b)(3) would lower the average
daily trading volume threshold that triggers the order display and
execution access requirements applicable to ATSs. Accordingly, the
proposed amendments to Rule 301(b)(3) could result in more ATSs being
subject to these requirements.
    The Commission notes that there are approximately 73 ATSs that are
subject to Regulation ATS. Of these, approximately 11 communicate
actionable IOIs in NMS stocks to more than one person and approximately
one other ATS displays subscriber orders in NMS stocks on a limited
basis in some other fashion. Therefore, the Commission preliminarily
believes that approximately 12 respondents could be impacted by the
proposed amendments to Rule 301(b)(3).\210\ The Commission
preliminarily does not believe that any of these 12 ATSs would be a
``small entity'' as defined above.\211\ Therefore, the Commission
certifies that the proposed amendments to Rule 301(b)(3), if adopted,
would not have a significant economic impact on a substantial number of
small entities for purposes of the RFA.
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    \210\ The Commission preliminarily believes that the remaining
61 ATSs would not be affected by the proposed amendments because
they: (a) do not display subscriber orders in NMS stocks to more
than one person (whether by communicating actionable IOIs or
otherwise), (b) are ECNs and already publicly display subscriber
orders, or (c) do not effect transactions in NMS stocks.
    \211\ This preliminary estimate is based on discussions with
industry participants, including ATSs that could be impacted by the
proposed changes to Rule 301(b)(3) and information provided in Forms
ATS and ATS-R, as filed with the Commission. The Commission notes
that most of the 12 potential ATS respondents are affiliated with
large broker-dealer firms, none of which is a ``small entity'' under
the RFA.
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    The Commission encourages written comments regarding this
certification. The Commission requests that commenters describe the
nature of any impact on small entities and provide empirical data to
support the extent of the impact.

C. Post-Trade Transparency for ATSs

    The Commission also certifies that the proposed amendments to the
CTA Plan and Nasdaq UTP Plan, would not, if adopted, have a significant
economic impact on a substantial number of small entities.
    Rule 608,\212\ adopted by the Commission under Section 11A,
establishes procedures for proposing amendments to national market
system plans such as the CTA Plan and the Nasdaq UTP Plan. Paragraph
(b)(2) states that the Commission may propose amendments to an
effective national market system plan by publishing the text of the
amendment together with a statement of purpose of the amendments.
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    \212\ 17 CFR 242.608.
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    The CTA Plan and the Nasdaq UTP Plan amendments apply to the twelve
Plan Participants, none of which is a small entity. The requirement for
trade reports to now include a unique identifier for ATS transactions,
which would be included on the trade reports in the public data stream,
would require FINRA, for trades effected by ATSs, to include an
additional data element in the trade report that is submitted to the
SIPs. FINRA, a national securities association, and the SIPs are not
small entities.
    The Commission's definition of small entity as it relates to
broker-dealers also applies to ATSs.\213\ The Commission preliminarily
believes that there would be no significant economic impact on any of
the 73 ATSs that are subject to Regulation ATS that meet the definition
of small entity as defined above. Currently, the identity of an ATS
transaction is not disseminated with the trade information they report
to the public data stream. The CTA Plan and the Nasdaq UTP Plan
amendments would require that each ATS use a unique MPID to report its
transactions to FINRA, rather than report its transactions using the
MPID of its sponsoring broker-dealer. The ATSs that do not already use
a unique MPID would need to replace the MPID for their sponsoring
broker-dealer with a unique MPID at no significant economic cost to the
ATS. Therefore, the Commission certifies that the proposed amendments
to the Plans, if adopted, would not have a significant economic impact
on a substantial number of small entities for purposes of the RFA.
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    \213\ See supra notes 207-209 and accompanying text.
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    The Commission encourages written comments regarding this
certification. The Commission requests that commenters describe the
nature of any effect on small entities and provide empirical data to
support the extent of the impact.

X. Statutory Authority

    Pursuant to the Exchange Act and particularly, Sections 2, 3(b), 5,
6, 11, 11A, 15, 15A, 17(a) and (b), 19, 23(a), and 36 thereof, 15
U.S.C. 78b, 78c(b), 78e, 78f, 78k, 78k-1, 78o, 78o-3, 78q(a) and (b),
78s, 78w(a), and 78mm, the Commission proposes to amend Rule 600 of
Regulation NMS, Rule 301 of Regulation ATS, and the CTA Plan and Nasdaq
UTP Plan.

XI. Text of Proposed Amendments to the CTA Plan and Nasdaq UTP Plan

A. The CTA Plan

    The Commission hereby proposes to amend the CTA Plan to amend the
definition of trade report to provide for a unique identifier on each
trade report of a trade effected by an Alternative Trading System.
    Set forth below are the changes the Commission is proposing to the
language of the CTA Plan. Additions are italicized and deletions are in
brackets.

I. Definitions

    (m) ``Last sale price information'' means (i) the last sale prices
reflecting completed transactions in Eligible Securities, (ii) the
volume and other information related to those transactions, (iii) the
identifier of the Participant furnishing the prices, (iv) the
identifier of the Alternative Trading System furnishing the prices to
FINRA, and [iv] (v) other related information.

VI. Consolidated Tape

    (f) Market Identifiers. Each such last sale price when made
available by means of the high speed line shall be accompanied by the
appropriate alphabetic symbol identifying the market of execution;
provided, however, that all last sale prices collected by FINRA and
reported to the Processor shall, when so made available by the
Processor, be accompanied by a distinctive alphabetic symbol
distinguishing such last sale prices from those reported by any
exchange or other reporting party, and all last sale prices reported by
brokers or dealers required to file a plan with the SEC pursuant to the
Rule shall, when so made available by the Processor, be accompanied by
a distinctive alphabetic symbol distinguishing such last sale prices
from

those reported by FINRA or any exchange.
    All last sale prices collected by FINRA from Alternative Trading
Systems that are subject to Regulation ATS shall be accompanied by a
unique identifier identifying the Alternative Trading System that
executed the trade (``ATS Identifier''). All last sale prices collected
by FINRA from Alternative Trading Systems that are subject to
Regulation ATS shall, when reported to the Processor by FINRA and when
made available by the Processor, be accompanied by a unique ATS
Identifier, unless the last sale price is for a transaction with a
market value of at least $200,000.

VIII. Collection and Reporting of Last Sale Data

    (a) Responsibility of Exchange Participants. The AMEX, BATS, the
BSE, the CBOE, the CHX, the ISE, Nasdaq, the NSX, the NYSE, NYSE Arca
and the PHLX will each collect and report to the Processor all last
sale price information to be reported by it relating to transactions in
Eligible Securities taking place on its floor. In addition, FINRA shall
collect from its members all last sale price information to be included
in the consolidated tape relating to transactions in Eligible
Securities not taking place on the floor of an exchange and shall
report all such last sale price information to the Processor in
accordance with the provisions of Section VIII(b) hereof, unless the
last sale price is collected by FINRA from an Alternative Trading
System subject to Regulation ATS for a transaction with a market value
of at least $200,000, in which case FINRA shall not report an ATS
Identifier as part of the last sale price. It will be the
responsibility of each Participant and each other reporting party, as
defined in Section III(d) hereof, to (i) report all last sale prices
relating to transactions in Eligible Securities as promptly as
possible, unless the last sale price is collected by FINRA from an
Alternative Trading System subject to Regulation ATS for a transaction
with a market value of at least $200,000, in which case FINRA shall not
report an ATS Identifier as part of the last sale price, (ii) establish
and maintain collection and reporting procedures and facilities such as
to assure that under normal conditions not less than 90% of such last
sale prices will be reported within that period of time (not in excess
of one and one-half minutes) after the time of execution as may be
determined by CTA from time to time in light of experience, and (iii)
designate as ``late'' any last sale price not collected and reported in
accordance with the above-referenced procedures or as to which the
reporting party has knowledge that the time interval after the time of
execution is significantly greater than the time period referred to
above. CTA shall seek to reduce the time period for reporting last sale
prices to the Processor as conditions warrant.

B. The Nasdaq UTP Plan

    The Commission hereby proposes to amend the Nasdaq UTP Plan to
amend the definition of trade report to provide for a unique identifier
on each trade report of a trade effected by an Alternative Trading
System.
    Set forth below are the changes the Commission is proposing to the
language of the Nasdaq UTP Plan. Additions are italicized and deletions
are in brackets.

III. Definitions

    U. ``Transaction Reports'' means reports required to be collected
and made available pursuant to this Plan containing the stock symbol,
price, and size of the transaction executed, the Market in which the
transaction was executed, and related information, including a buy/
sell/cross indicator and trade modifiers, reflecting completed
transactions in Eligible Securities and, in the case of FINRA, the
FINRA member that entered the report, if such member is an alternative
trading system subject to Regulation ATS.

VI. Functions of the Processor

C. Dissemination of Information

3. Transaction Reports
    The Processor shall disseminate on the UTP Trade Data Feed a data
stream of all Transaction Reports in Eligible Securities received from
Participants. Each transaction report shall be designated with a symbol
identifying the Participant in whose Market the transaction took place,
and in the case of FINRA, with the identity of the FINRA member
reporting the transaction if such member is an alternative trading
system subject to Regulation ATS, unless the last sale price is for a
transaction with a market value of at least $200,000.

VIII. Transmission of Information to Processor by Participants

B. Transaction Reports

    Each Participant shall, during the time it is open for trading, be
responsible promptly to collect and transmit to the Processor
Transaction Reports in Eligible Securities executed in its Market by
means prescribed herein. With respect to orders sent by one Participant
Market to another Participant Market for execution, each Participant
shall adopt procedures governing the reporting of transactions in
Eligible Securities specifying that the transaction will be reported by
the Participant whose member sold the security. This provision shall
apply only to transactions between Plan Participants.
    Transaction Reports shall include:
    1. Identification of the Eligible Security, using the Nasdaq
Symbol;
    2. The number of shares in the transaction;
    3. The price at which the shares were purchased or sold;
    4. The buy/sell/cross indicator;
    5. The Market of execution; [and,]
    6. Through appropriate codes and messages, late or out-of-sequence
trades, corrections and similar matters[.]; and,
    7. In the case of FINRA, the identity of the FINRA member reporting
the transaction if such member is an alternative trading system subject
to Regulation ATS, unless the last sale price is for a transaction with
a market value of at least $200,000.

XII. Text of Proposed Rule Amendments

List of Subjects in 17 CFR Part 242

    Brokers, Reporting and recordkeeping requirements, Securities.

    For the reasons set out in the preamble, the text of Title 17,
Chapter II, of the Code of Federal Regulations is proposed to be
amended as follows.

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

    1. The authority citation for Part 242 continues to read in part as
follows:

    Authority:  15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2),
78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g),
78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29, and
80a-37.

    2. Revise Sec.  242.301(b)(3)(i) and (ii) to read as follows:

Sec.  242.301  Requirements for alternative trading systems.

* * * * *
    (b) * * *
    (3) * * *
    (i) An alternative trading system shall comply with the
requirements set forth in paragraph (b)(3)(ii) of this section, with
respect to any NMS stock in which the alternative trading system:
    (A) Displays subscriber orders to any person (other than
alternative trading system employees); and
    (B) During at least 4 of the preceding 6 calendar months, had an
average daily

trading volume of 0.25 percent or more of the aggregate average daily
share volume for such NMS stock as reported by an effective transaction
reporting plan.
    (ii) Such alternative trading system shall provide to a national
securities exchange or national securities association the prices and
sizes of the orders (other than orders having a market value of at
least $200,000 that are displayed only to those who are reasonably
believed to represent current contra-side trading interest of at least
$200,000) at the highest buy price and the lowest sell price for such
NMS stock, displayed to more than one person (other than alternative
trading system employees), for inclusion in the quotation data made
available by the national securities exchange or national securities
association to vendors pursuant to Sec.  242.602.
* * * * *
    3. Section 242.600 is amended by revising paragraph (b)(8) to read
as follows:

Sec.  242.600  NMS security designation and definitions.

* * * * *
    (b) * * *
    (8) Bid or offer means the bid price or the offer price
communicated by a member of a national securities exchange or member of
a national securities association to any broker or dealer, or to any
customer, at which it is willing to buy or sell one or more round lots
of an NMS security, as either principal or agent, but shall not include
indications of interest that are not actionable and indications of
interest for a quantity of NMS stock having a market value of at least
$200,000 that are communicated only to those who are reasonably
believed to represent current contra-side trading interest of at least