meaningful volume discounts would be limited in light of the $0.0010
fee cap in that group.\933\
---------------------------------------------------------------------------

    \931\ See supra Section IV.D.2.a.
    \932\ See, e.g., Healthy Markets Letter I, at 27 (noting that
exchanges use fees collected to pay rebates).
    \933\ For NMS stocks included in Test Group 2 order flow
incentives would be substantially reduced, particularly any new
inducements that provide a discount or incentive on one side of the
market that is linked to activity on the opposite side of the
market.
---------------------------------------------------------------------------

    The Pilot also could affect competition between large and small
exchanges. The restrictions on rebates resulting from the Pilot could
harm smaller exchanges that may be competing by paying large rebates
rather than by producing better prices or execution quality.\934\ As
discussed in the Proposal,\935\ liquidity tends to consolidate.
Therefore, if smaller exchanges are unable to pay larger rebates in
test stocks, they may lose order flow to larger, more liquid exchanges.
To the extent that increased order flow in a security directed to a
particular venue encourages broker-dealers to route more orders for
that security to the venue, a liquidity externality may develop, making
the venue the preferred routing destination for all orders.\936\
Although these effects would likely last only for the duration of the
Pilot, depending on the extent of the liquidity externalities, smaller
exchanges could experience long-lasting competitive effects, such as a
reduction in trading volume that continues after the expiration of the
Pilot.\937\ The Pilot also could temporarily discourage entry of new
exchanges that might otherwise emerge to take advantage of the maker-
taker and taker-maker pricing models.\938\
---------------------------------------------------------------------------

    \934\ See supra Section IV.B.2.a.
    \935\ See the discussion of a liquidity externality in the
Proposing Release, supra note 2, at 13042.
    \936\ See id.
    \937\ One commenter suggested that the effects of the Pilot may
be permanent. See NYSE Letter I, at 4, 8.
    \938\ Academic studies suggest a number of new exchanges emerged
specifically to take advantage of maker-taker and taker-maker
pricing models. See, e.g., Angel, Harris & Spatt, supra note 530.
However, some commenters suggested that the loss of fee
differentiation would lead to an increase in venues as exchanges try
to make up for lost revenue through other means. See, e.g., Fidelity
Letter, at 8; Cboe Letter I, at 16-17.
---------------------------------------------------------------------------

    While the consolidation of liquidity may benefit market
participants, it may also make it difficult for trading centers with
low volumes in particular securities to compete with trading centers
that represent liquidity centers in these securities.\939\ In theory,
this could lead to consolidation or exit by small exchanges as a result
of the Pilot.\940\ However, the Commission believes that either of
those events is unlikely because the anticipated revenue shortfall, as
discussed above,\941\ would be for a limited duration and would not be
significant enough to cause this result.
---------------------------------------------------------------------------

    \939\ One commenter said that restricting transaction fees would
disproportionally hurt small exchanges because ``large exchanges
have diversified revenues away from transaction fees.'' See Magma
Letter, at 2.
    \940\ One commenter believed that the loss in fee
differentiation could lead to consolidation and fewer venues
overall. See Credit Suisse Commentary, at 5.
    \941\ See supra Section IV.C.2.b.i (Loss of Exchanges' Fee
Revenue).
---------------------------------------------------------------------------

    The Commission recognizes that the potential temporary competitive
impacts stemming from the Pilot would generally depend on the exposure
of each trading center to each Test Group and the Control Group of NMS
stocks, because the constraints on fees and rebates apply differently
to each group. For instance, if a high portion of an exchange's volume
was derived from stocks in Test Group 2, it may be at a particular
competitive disadvantage relative to an exchange that served markets
across all groups, because the prohibition on rebates and Linked
Pricing applicable to Test Group 2 would apply to a higher proportion
of its trading volume. However, the Commission believes that, given its
aim of producing representative groups of stocks and ETPs for the
purposes of the Pilot, trading centers are not likely to be
substantially more exposed to NMS stocks in any one group.

c. Competition Between Broker-Dealers
    The Pilot also could affect competition between broker-dealers. One
commenter believed that, due to differences in broker-dealer business
models, any reduction in rebate incentives or other forms of payment
for order flow will increase transaction costs, and that large broker-
dealers would be better able to adapt to increased trading costs and
rebate reductions than small or middle-market broker-dealers.\942\ The
commenter believed that the Pilot would disproportionately advantage
large broker-dealers who specialize in low touch execution or own ATSs
because more customers and order flow would migrate to the largest
brokers, and that the ``Commission should and is required to undertake
a rigorous cost-benefit analysis to justify any policy that favors one
group of Brokers over another.'' \943\
---------------------------------------------------------------------------

    \942\ See ASA Letter, at 2.
    \943\ Id. at 2-3.
---------------------------------------------------------------------------

    The Commission believes that the Pilot could differentially affect
small and large broker-dealers, but differences in the potential
compliance costs they face make it unclear whether the Pilot will
disproportionately advantage large broker-dealers over small or middle-
market broker-dealers. Although larger broker-dealers may possess
economies of scale which may enable them adapt better to changes in
fees and rebates, they are also more likely to be members of exchanges
and subject to the compliance costs of adjusting their systems due to
changes in exchange fee and rebate schedules discussed above.\944\ As
of December 2017, of the approximately 3,860 broker-dealers registered
with the Commission, only 397 are listed as having memberships with at
least one exchange and would encompass the set of executing broker-
dealers that would be most affected by the Pilot. Therefore, it is
likely that many small or middle-market broker-dealers will not have to
bear the compliance costs discussed above.\945\
---------------------------------------------------------------------------

    \944\ See supra Section V.C.2.b.ii (Broker-Dealer Systems
Costs).
    \945\ See id.
---------------------------------------------------------------------------

    Additionally, since larger broker-dealers are more likely to be
subject to these compliance costs, they may need to increase their
commission rates more than smaller broker-dealers to compensate for
these increased costs. This could potentially offset any advantage that
larger broker-dealers may possess in being able to absorb any revenue
loss caused by a reduction in payment for order flow, such as by being
able to offer smaller increases in commissions compared to smaller
broker-dealers. However, the Commission cannot quantify this
difference, because it lacks sufficient data on the differences in
commission rates between large and small broker-dealers.\946\
---------------------------------------------------------------------------

    \946\ See supra note 805.
---------------------------------------------------------------------------

d. Competition Between Issuers
    A number of commenters noted that the Commission, in the Proposing
Release, did not discuss the competitive effects to issuers (common
stocks) from inclusion in various Test Groups of the Pilot.\947\ While
the Pilot could potentially affect product market competition between
issuers that compete in the same product market by affecting their
ability to raise capital,\948\ the Commission does not believe that
this is likely to occur. Since the Commission does not believe that the
Pilot will have a significant effect on the ability of issuers to raise
capital,\949\ the Commission does not believe the Pilot will have a
significant effect on product market competition between issuers.
---------------------------------------------------------------------------

    \947\ See, e.g., Anixter Letter, at 1; STANY Letter, at 2; NYSE
Letter, at 2; Johnson Letter, at 1; Cott Letter, at 1; P&G Letter,
at 1; Nasdaq Letter I, at 8-9. One of these commenters ``urge[d] the
Commission to further analyze and study the potential impact of the
Transaction Fee Pilot on issuers and their securities (as well as
investors in those securities), including the impact on competition
between issuers in the pilot test groups and those in the control
group.'' See Anixter Letter, at 1. Another commenter argued that the
Commission was ``treating all issuers the same without consideration
for the very significant differences in how the securities of
different sized and priced companies trade.'' See Nasdaq Letter I,
at 8.
    \948\ See infra Section IV.D.3 (Capital Formation).
    \949\ See id.
---------------------------------------------------------------------------

    Some commenters argued that the Pilot could inadvertently pick
``winners and losers'' through the selection of securities to Test
Groups.\950\ One commenter believed that issuers in certain Test Groups
could become ``less attractive investments than control group issuers''
\951\ while another thought this could ``skew the competitive dynamic
between issuers and impact the ability of the affected issuers to raise
capital.'' \952\ They argue that among securities with similar
characteristics, securities that can offer higher rebates will attract
more liquidity and trading volume at the expense of securities with
lower rebates. Several commenters argued that issuers included in the
test groups with reduced access fees or rebates would experience wider
spreads, which would put them at a competitive disadvantage compared to
peer firms in the control group by making it more expensive for them to
engage in secondary offerings or conduct share repurchase
programs.\953\ One commenter argued that this would disproportionately
affect ``small to medium issuers'' where ``[l]iquidity rebates can be
critical . . . to motivate market makers to support the stock with
aggressive and actionable quotations.'' \954\ Although some securities
may experience changes in liquidity as a result of the Pilot,\955\ as
discussed in detail below,\956\ the Commission does not believe that
issuers, including small and mid-capitalization issuers, will
experience significant increases in the cost of capital as a result of
the Pilot.
---------------------------------------------------------------------------

    \950\ See Nasdaq Letter I, at 10; Invesco Letter, at 2
(discussing the competitive effects for ETPs).
    \951\ See NorthWestern Letter, at 2.
    \952\ See Ethan Allen Letter, at 1. See also McDermott Letter,
at 1; ProAssurance Letter, at 1; Era Letter, at 2; Avangrid Letter,
at 1-2.
    \953\ See NYSE Letter I, at 6-7; Apache Letter, at 2; Mastercard
Letter, at 2; Era Letter, at 2.
    \954\ See Nasdaq Letter I, at 8-9.
    \955\ See supra Section IV.C.2.b.iv.
    \956\ See infra Section IV.D.3 (Capital Formation).
---------------------------------------------------------------------------

    However, if the Pilot does differentially affect the cost of firms
in the same product market to raise capital, it could affect product
market competition by making it more difficult for the firms that
experienced an increase in capital costs to compete. While the
Commission acknowledges that theoretical and empirical studies suggest
that an increase in costs of capital can affect product market
competition,\957\ the Commission does not believe the Pilot will have
such an effect on product market competition between issuers. While the
Commission acknowledges that some issuers may observe a widening of
spreads and possible reductions in liquidity provision,\958\ as
discussed below,\959\ the Commission does not believe that the Pilot
will have a significant effect on capital formation for issuers.\960\
Therefore, the Commission does not believe the Pilot will have a
significant effect on product market competition between issuers.
Furthermore, the Pilot will allow the Commission to obtain data to be
able to analyze the impact of

changes to fees and rebates and how those changes affect a myriad of
issues, including their impact on competition between issuers.
---------------------------------------------------------------------------

    \957\ See, e.g., Maksimovic, V. (1995). ``Financial Structure
and Product Market Competition.'' Ch. 27 in Handbooks in Operations
Research and Management Science, Vol. 9, 887-920 (available at:
https://www.sciencedirect.com/science/article/abs/pii/S0927050705800714) and Campello, M. (2006). ``Debt Financing: Does
It Boost or Hurt Firm Performance in Product Markets?'' Journal of
Financial Economics, 82(1), 135-172 (available at: https://www.sciencedirect.com/science/article/pii/S0304405X05001777)
(hereafter ``Campello (2006)'').
    \958\ See supra Section IV.C.2.b.iv.
    \959\ See infra Section IV.D.3 (Capital Formation).
    \960\ One commenter agreed and argued that ``there simply is no
evidence that the Pilot will cause any imminent danger to any
issuer's stock price or liquidity.'' See Better Markets Letter, at
3.
---------------------------------------------------------------------------

e. Competition Between ETPs
    The Pilot may also impact the competitive dynamics between
ETPs.\961\ Although some ETPs could potentially be harmed by the
Pilot's effect on this competition, there is uncertainty regarding the
Pilot's effect on the liquidity of ETPs and therefore on competition
between ETPs.\962\
---------------------------------------------------------------------------

    \961\ A number of commenters stated concerns that the Commission
had not fully considered the competitive effects on ETPs resulting
from the Pilot. See, e.g., NYSE Letter I, at 7; ICI Letter I, at 4;
State Street Letter, at 3; STA Letter, at 4; Schwab Letter, at 3;
STANY Letter, at 4; Clearpool Letter, at 7-8; Cboe Letter I, at 17-
18; Nuveen Letter, at 1,3; BlackRock Letter, at 1-2; Fidelity
Letter, at 9; SIFMA Letter, at 4-5; Credit Suisse Commentary, at 6;
Healthy Markets Letter II, at 8; Oppenheimer Letter, at 3; ICI
Letter II, at 5; Nasdaq Letter I, at 8.
    \962\ See supra Section IV.C.2.b.iv.2.
---------------------------------------------------------------------------

    Unlike common stocks, whereby trading and investing in those
securities is likely driven by firm-specific characteristics, ETPs with
similar investment strategies may be more substitutable. For example,
some ETPs may follow the same underlying index, and only differ in
expense ratios, trading characteristics, and in some cases, tracking
error. Although some of these characteristics may be meaningful
distinctions for long-term investors, such as expense ratios, other
characteristics, such as trading characteristics, including transaction
costs, are likely to be meaningful to market participants that trade
rather than invest in some ETPs.\963\ One concern is that changes in
liquidity between similar ETPs in different Pilot groups could have an
impact on competition by harming ETPs that experience a decline in
liquidity.\964\ A decline in ETP liquidity could affect competition by
causing trading volume (demand) to migrate from an ETP that experienced
a decline in liquidity to a nearly identical ETP in another Pilot group
that might have experienced an improvement in liquidity.\965\ For
example, ETPs that are subject to higher rebates may benefit and
attract more liquidity and trading volume at the expense of similar
ETPs in different Test Groups that are restricted to offering lower
rebates.\966\ A decrease/increase in secondary market demand for an ETP
could cause a decrease/increase in the total assets under management of
the ETP's sponsor by causing authorized participants to redeem/create
creation units of ETP shares in order to take advantage of arbitrage
opportunities in the secondary market.\967\ However, one commenter
(itself an ETP sponsor) noted that the competitive effects for ETPs
would likely be temporary and minimal, and would have little effect on
investor behavior; therefore, the benefits of including ETPs in the
Pilot outweigh the potential costs of competitive impacts for
ETPs.\968\
---------------------------------------------------------------------------

    \963\ For example, three ETFs that track the S&P 500 Index have
expense ratios of 9 bps (SPY), 5 bps (IVV), and 4 bps (VOO). On a
$10,000 holding over a year, this results in fees of $9, $5, and $4,
respectively, whereas on a 100-share trade, a widening of spreads by
one tick would result in a cost of $1.
    \964\ See supra Section IV.C.2.b.iv.
    \965\ A decline in an ETP's liquidity could also cause demand to
migrate to another type of investment vehicle, such as a mutual
fund, that follows the same investment strategy.
    \966\ One commenter noted that ETPs in test groups with
significant rebate reductions or restrictions could be disadvantaged
competitively to similar ETPs not subject to changes to rebates, and
because of the nature of ETPs, may lose market share to their
competitors. See Nasdaq Letter I, at 8. Many commenters agreed with
this argument. See ICI Letter I, at 4; MFS Letter, at 1; Nuveen
Letter, at 2; FIA Letter, at 4; SIFMA Letter, at 4-5; Issuer Network
Letter I, at 3; Schwab Letter, at 3; Fidelity Letter, at 9; Invesco
Letter, at 2; State Street Letter, at 3; Oppenheimer Letter, at 3;
Clearpool Letter, at 7-8; Angel Letter I, at 2; STANY Letter, at 4;
Healthy Markets Letter I, at 11; Cboe Letter I, at 17; NYSE Letter
I, at 7; Morgan Stanley Letter, at 3-4; BlackRock Letter, at 1-2.
One commenter believed that the Pilot could ``unintentionally
advantage ETFs in the lower fee group.'' Credit Suisse Commentary,
at 6.
    \967\ See supra Section IV.B.2.d (Market for Assets Under
Management).
    \968\ See Vanguard Letter, at 2. Many commenters believed that
ETPs should only be included in the Pilot if an alternative design
was implemented for ETPs, such a placing similar ETPs in the same
group or rotating ETPs between groups. See supra Section II.B.3.b
and infra Section IV.E.5.h for a summary of these comments and
discussions of the costs and benefits of alternative Pilot designs
for ETPs.
---------------------------------------------------------------------------

    One commenter stated that these competitive effects are likely to
be more challenging for small or less liquid ETPs that rely on ``market
maker support and require those same firms to provide seed capital
(e.g., capital investments).'' \969\ These commenters raised concerns
that reductions or prohibitions on rebates in certain Test Groups could
exacerbate the anticompetitive effects for the small, less liquid ETPs
in these programs by causing degradation in liquidity provision for
these ETPs.\970\
---------------------------------------------------------------------------

    \969\ See Nasdaq Letter I, at 8.
    \970\ See id. One commenter noted that 477 ETPs trade less than
2,000 shares per day, while 234 trade between 2,000 and 5,000 shares
per day. In aggregate, these ETPs have approximately $32 billion in
AUM, and the Pilot could adversely impact liquidity provision to
these names leading to unintended investor harm. See Virtu Letter,
at 7.
---------------------------------------------------------------------------

    The Commission acknowledges that the Pilot could potentially alter
the competitive dynamics between and demand for similar ETPs that are
placed in different Test and Control groups. The Pilot could
inadvertently create ``winners and losers'' among ETPs through both
competitive shifts and the potential exit of liquidity providers, and
for some ETPs if these costs are severe, could lead to exit by certain
ETPs from the market. However, as discussed in detail above,\971\ since
the Commission does not know ex ante how the Pilot will impact the
liquidity of ETPs, it is unable to quantify the effects that the Pilot
will have on competition between ETPs. One of the goals of the Pilot is
to provide the Commission with data so that it can better evaluate
these effects.
---------------------------------------------------------------------------

    \971\ See supra Section IV.C.2.b.iv.
---------------------------------------------------------------------------

    In addition to affecting ETP competition through changes in ETP
liquidity, the Pilot could also affect ETP competition through its
effects on ETPs underlying securities. As discussed in detail
above,\972\ if the Pilot impacts the liquidity of the underlying
securities, it could impact the create-redeem process for ETPs. This
could affect the price efficiency of the ETP by impacting the cost to
authorized participants of eliminating mispricing by participating in
the create-redeem process. For example, if the majority of an ETP's
underlying securities are placed in the same Test Group and experience
a decline in liquidity, it could cause the deviation between the ETPs
price and its NAV to increase, i.e., the price of the ETP could deviate
more from the price of its underlying securities. This could cause
demand for the ETP to decline and trading volume to migrate to a
similar ETP with a lower deviation between its price and NAV, whose
underlying securities might not have experienced a decrease in
liquidity.\973\ However, because of the random nature of the assignment
of securities to Pilot groups and the fact that similar ETPs may
experience similar liquidity changes in their underlying securities,
the Commission does not believe that this will have a significant
impact on competition between ETPs.
---------------------------------------------------------------------------

    \972\ See id.
    \973\ ETPs might not hold all of the securities in the index
that they track. ETPs that track similar indexes may hold different
underlying securities in their representative portfolios.
---------------------------------------------------------------------------

3. Capital Formation
    The Commission does not expect the Pilot to have a substantial
permanent impact on capital formation because the Pilot is limited in
duration and because it is not expected to have a large impact on
issuer cost of capital. However, many of the implementation costs
associated with the Pilot would require exchanges to expend resources
that they may have otherwise invested elsewhere or distributed to
shareholders in order to

maintain the List of Pilot Securities and any changes to those lists,
as well as the maintenance of the Exchange Transaction Fee Summary and
the order routing data.\974\
---------------------------------------------------------------------------

    \974\ The costs associated with implementation and compliance
with the Pilot are discussed in more detail above. See supra Section
IV.C.2.a.
---------------------------------------------------------------------------

    As discussed above,\975\ the Commission is unable to determine ex
ante the overall temporary impact of the Pilot on liquidity and total
transaction costs, because the Pilot's effects on liquidity could be
positive or negative and vary across securities. As a result, it is
unclear to what degree the Pilot will temporarily promote or harm
capital formation. On one hand, the Pilot could temporarily reduce
total transaction costs for many market participants by consolidating
liquidity and improving execution quality.\976\ To the extent that such
cost reductions are realized, they may, for instance, permit market
participants to more efficiently deploy financial resources by reducing
the cost of hedging financial risks.\977\ As a result, the Pilot may
marginally and temporarily promote capital formation. Improvements in
both liquidity and price efficiency could make capital markets more
attractive, at least for the duration of the Pilot.
---------------------------------------------------------------------------

    \975\ See supra Section IV.C.2.b.iv.
    \976\ See id.
    \977\ One commenter argues that ``the current system increases
transaction costs to the public and . . . increases the issuer
capital costs.'' See Larry Harris Letter, at 9.
---------------------------------------------------------------------------

    On the other hand, the temporary reduction in rebates to certain
Test Groups as a result of the implementation of the Pilot could widen
quoted spreads, thereby potentially leading to worse execution prices
and subsequently reducing liquidity for the duration of the Pilot.\978\
This would have similar indirect impacts on capital formation but in
the opposite direction, by increasing the cost of hedging financial
risks.
---------------------------------------------------------------------------

    \978\ See Chacko, G.C., Jurek, J.W., & Stafford, E. (2008).
``The Price of Immediacy.'' Journal of Finance, Vol. 63(3), 1253-
1290 (available at: https://onlinelibrary.wiley.com/doi/epdf/10.1111/j.1540-6261.2008.01357.x). According to Chacko et al.,
liquidity has three important dimensions: Price, quantity, and
immediacy. A market for a security is considered ``liquid'' if an
investor can quickly execute a significant quantity at a price at or
near fundamental value. See also supra Section IV.C.2.b.iv.
---------------------------------------------------------------------------

    Potentially, if the Pilot leads to a significant deterioration in
liquidity for some listed issuers,\979\ longer term, it could affect
capital formation for these securities by increasing the costs for them
to raise capital.\980\ Further, the Pilot could lead to a delay by some
issuers to raise additional capital during the Pilot's duration.\981\ A
number of commenters agreed with these assessments and expressed
concern that random assignment to certain Test Groups could adversely
affect issuers' ability to raise capital or manage their capital
structure, by increasing the cost of secondary offerings or the costs
associated with share repurchase programs.\982\
---------------------------------------------------------------------------

    \979\ See supra Section IV.C.2.b.iv.
    \980\ See supra Section IV.C.2.b.v.
    \981\ Another commenter asserted that the Pilot could harm
thinly traded stocks and the IPO market. See Nasdaq Letter III, at
9. With respect to thinly traded securities, the Commission notes
that the Pilot will exclude NMS stocks that trade less than 30,000
shares per day. The Commission notes that the Pilot will exclude new
publicly traded companies whose IPO occurs after the Pilot
Securities are selected, and therefore the Pilot should not harm the
market for new IPOs. See Section II.C.6. supra (discussing the
exclusion of certain thinly traded securities); see also Section
IV.C.2.b.v. supra (discussing the potential impact of the Pilot on
issuers).
    \982\ See e.g., Nasdaq Letter I, at 2; ASA Letter, at 3; ACCO
Letter, at 1; NorthWestern Letter, at 2.; Unitil Letter, at 1-2;
McDermott Letter, at 1; Weingarten Letter, at 1; ProAssurance
Letter, at 1; SMP Letter, at 1; Halliburton Letter, at 1; Era
Letter, at 2; Newpark Letter, at 1; Knight-Swift Letter, at 1;
Avangrid Letter, at 1-2; NYSE Letter I, at 3, 6-7, 13-14; e.g.,
Level Brands Letter, at 1; Johnson Letter, at 1; P&G Letter, at 1;
Sensient Letter, at 1; Apache Letter, at 2; Ethan Allen Letter, at
1-2. See also the discussion in supra Section IV.C.2.b.v (Impact on
Issuers).
---------------------------------------------------------------------------

    Several commenters argued that these effects would be worse for
small and medium sized companies.\983\ In theory, if the temporary
impacts on liquidity acutely impact some firms, it could lead to the
potential exit of these issuers from the capital markets, either
through acquisition or delisting. These risks could be greater for
smaller issuers, because they may not possess enough capital to ride
out negative liquidity shocks. However, the Commission does not believe
that this is likely to occur because smaller issuers tend to have high
transaction costs relative to fee and rebates.\984\
---------------------------------------------------------------------------

    \983\ See Nasdaq Letter I, at 2; ASA Letter, at 4.
    \984\ While the Commission acknowledged this possibility in the
Proposing Release, it did not suggest that such effects were likely.
Rather, the Commission stated that it did not ``expect the proposed
Pilot to have a substantial permanent impact on capital formation .
. . .'' See Proposing Release, supra note 2, at 13068-69.
---------------------------------------------------------------------------

    Alternatively, a number of commenters disagreed and did not think
the Pilot would have a significant impact on issuers' ability to raise
capital.\985\ The Commission agrees with these commenters. As discussed
in detail below, due to the limited magnitude of the effects of the
Pilot study, and the uncertain impacts on liquidity, the Commission
does not expect the Pilot will have significant effects on the ability
of firms to raise capital.
---------------------------------------------------------------------------

    \985\ See IEX Letter II, at 3-4; Healthy Markets Letter II, at
2; ICI Letter II at 4-5; T. Rowe Price Letter, at 4-5.
---------------------------------------------------------------------------

    The Pilot may also affect capital formation through its impact on
discretionary accounts. A number of broker-dealers have discretionary
agreements with their clients, wherein the broker can transact in the
client's account without the client's consent. For the duration of the
Pilot, some broker-dealers may alter the composition of their clients'
portfolios to trade and hold greater proportions of the accounts in
high-rebate NMS stocks (including ETPs) in the Control Group. Such
revisions to portfolio composition as a result of the Pilot are not
necessarily efficient from an investor's perspective and could have a
detrimental impact on capital formation insofar as they increase the
riskiness of client portfolios or decrease client portfolios' expected
returns.\986\ This behavior would temporarily distort the market for
high-rebate stocks and ETPs, creating a higher demand for these
securities and potentially leading to an inefficient allocation of
capital based on signals that are unrelated to firm fundamentals.
---------------------------------------------------------------------------

    \986\ Allocative efficiency in the context of investment choice
is optimized when there are no restrictions on the set of investment
opportunities available to an investor. See, e.g., Nielsen, N.C.
(1976). ``The Investment Decision of the Firm under Uncertainty and
the Allocative Efficiency of Capital Markets.'' Journal of Finance,
Vol. 31(2), 587-602 (available at: https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261.1976.tb01908.x) If the Pilot potentially
leads some broker-dealers to alter the investment opportunity set to
avoid securities that do not pay rebates, then allocative efficiency
for those investors would likely be impaired since the opportunity
set is restricted.
---------------------------------------------------------------------------

    One commenter analyzed secondary offerings from its listed issuers
during 2017 and found that lower liquidity was associated with a higher
cost of capital.\987\ The Commission points out that the analysis
performed by this study merely examines associations between spreads
and capital costs and does not establish that wider quoted spreads
cause higher costs of capital.\988\ To supplement this comment,
Commission staff analyzed the same secondary offerings and found that
after controlling for fundamental issuer characteristics, such as size,
book-to-market, and analyst coverage, the size of the quoted spread was
not positively related to issuers' costs of capital.\989\
---------------------------------------------------------------------------

    \987\ See NYSE Letter I, at 3.
    \988\ One commenter agreed that there is no evidence that
``issuer costs of capital are caused by quoted spreads.'' See IEX
Letter II, at 4.
    \989\ Depending on how exchanges measure discounts (a proxy
measure for the cost of capital), whether from the bid price or the
midpoint, there could be mechanical variation imposed simply by
differences on how data vendors measure discounts. Staff analyses
relied on SDC measures of discounts to approximate issuers' costs of
capital, and observed that using the same spread breakpoints,
discounts were approximately 3.6% for issuers with spreads below 20
bps, and 7.6% for issuers with spreads above 20 bps, indicating
differences in methodologies of how discounts are computed can
affect magnitudes. Regardless of the difference in magnitudes of the
discounts, low-spread issuers, on average, had lower discounts than
high spread issuers, consistent with NYSE's spread-discount
relationship. See NYSE Letter I, at 3.

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

    The Commission notes that a temporary effect on transaction costs
may not have the same impact on cost of capital as a permanent effect
on liquidity and does not believe that any temporary increase in
transaction costs resulting from the Pilot could be significant enough
to affect issuers' costs of capital. Indeed, the experience with the
recent Tick Size Pilot provides an example of a temporary change in
liquidity that did not affect cost of capital. While several studies
found that the Tick Size Pilot increased transaction costs,\990\ the
findings of a DERA white paper suggest that the market did not expect
the Pilot to affect stock prices of companies in the Test Groups.\991\
Specifically, the paper finds that the announcement of the assignment
of stocks to the Test Groups and the Control Group did not generate
significant abnormal returns for stocks in the Test Groups, either in
absolute terms or relative to stocks in the Control Group.\992\ Under
the standard assumption that the market's expectations about the
effects of the Pilot were correct, this result indicates that the
increase in quoted spreads and transaction costs during with the Pilot
had no impact on stock prices. Thus, these findings cast doubt on the
idea that temporary changes in transaction costs affected the cost of
capital of small capitalization companies. In addition, because the
Tick Size Pilot enacted a 500% increase in the tick size, that pilot
could arguably have a bigger direct impact on transaction costs than
the Transaction Fee Pilot, which would reduce rebates by 30% of a tick.
---------------------------------------------------------------------------

    \990\ See e.g., Hu, E., Hughes, P., Ritter, J., Vegella, P., &
Zhang, H. (2018). ``The Tick Size Pilot Plan and Market Quality.''
SEC White Paper (available at: https://www.sec.gov/dera/staff-papers/white-papers/dera_wp_tick_size-market_quality).
    \991\ See Pachare, S. & Rainer, I. (2018). ``Does the Tick Size
Affect Stock Prices? Evidence from the Tick Size Pilot Announcement
of the Test Groups and the Control Group,'' SEC White Paper
(available at: https://www.sec.gov/dera/staff-papers/white-papers/dera_wp_does_the_tick_size_affect_stock_prices). See also fn. 13 in
Albuquerque, R.A., Song, S., & Yao, C. (2018). ``The Price Effects
of Liquidity Shocks: A Study of SEC's Tick Size Experiment.''
Working Paper (available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3081125), reporting on their finding that the
stock prices did not react to the announcement of which stocks were
in the pilot.
    \992\ The results were similar when they limit the analysis to
stocks with pre-Pilot quoted spreads smaller than $0.05.
---------------------------------------------------------------------------

    One commenter disagreed and believed that the findings of the DERA
white paper were flawed.\993\ This commenter argued that the DERA study
``relies on a selective, narrow, and irrelevant data set'' and that
``focusing on a few days around the time when stocks were assigned to
test groups within the Tick Pilot, and not a materially longer period
of time during which the Tick Pilot's quoting and trading restrictions
were in effect, is a clear indication that DERA narrowly tailored its
study to reach a specific and flawed conclusion.'' \994\ This commenter
stated that it ``does not believe that the White Paper supports any
conclusion regarding the impact of the Tick Pilot on investors or the
potential impact of the Transaction Fee Pilot on issuers.'' \995\
---------------------------------------------------------------------------

    \993\ See NYSE Letter V, at 1.
    \994\ See id. at 2.
    \995\ See id. at 3.
---------------------------------------------------------------------------

    However, another commenter noted that ``DERA's event study is
informative to a central criticism'' raised by some commenters that
``upon implementation of the [Pilot], spreads will widen in stocks
chosen for the `low rebate' or `no rebate' buckets and that wider
spreads will harm issuers of the impacted stocks.'' \996\ This
commenter found the ``lack of price impact . . . telling,'' because
``the price of . . . stock is the primary measure'' of ``potential harm
to issuers . . . .'' \997\ This commenter explained that, ``if
liquidity diminishes, or expected returns of the stock decline, this
would be reflected in the value of the stock--and no such statistically
significant decline in value was found.'' \998\ The commenter believed
that the short duration of DERA event study was appropriate because
``markets rapidly incorporate new information'' into stock prices.\999\
The Commission agrees with this commenter and believes that the DERA
white paper used an appropriate methodology to study how the increase
in quoted spreads and transaction costs from the Tick Size Pilot
affected the stock prices and cost of capital of firms in the Test
groups. The Commission believes that the DERA white paper did not rely
on a ``selective, narrow, and irrelevant data set'' and instead picked
the appropriate time period, the few days surrounding publication of
the list of which stocks would be included in the test and control
groups, to examine how the market reacted to the information about
which stocks would have their spreads widen as a result of the Tick
Size Pilot. This approach is standard in the academic literature
because information is quickly incorporated into stock prices at the
time it is made public. The Commission believes that the DERA white
paper is relevant to this Pilot because it examines how a firm's cost
of capital is affected by a temporary widening of the firm's spreads,
which is a potential effect of this Pilot.\1000\ As discussed above and
noted by the commenter,\1001\ if a firm's cost of capital increased as
a result of the wider spreads caused by the Tick Size Pilot, we would
expect that stock's price to decline during the announcement of test
and control groups.
---------------------------------------------------------------------------

    \996\ See Verret Letter II, at 1.
    \997\ See id. at 2.
    \998\ See id.
    \999\ See id. at 3.
    \1000\ See supra Section IV.C.2.b.iv.
    \1001\ See Verret Letter II, at 2.
---------------------------------------------------------------------------

    The Commission recognizes that another paper comes to the opposite
conclusion regarding the impact of the Tick Size Pilot on costs of
capital, but does not find the paper convincing. This paper compares
the stock price reactions of stocks in the test and control groups
around the time the Tick Size Pilot was implemented.\1002\ They find
that stocks in the test groups that experienced a decrease in liquidity
when the tick size widened also experienced a decrease in prices,
relative to stocks in the control group, around the time the Tick Size
Pilot was implemented.\1003\ However, it is unclear exactly what the
return differences documented in the study are measuring. If investors
expected that test group stocks would experience a temporary reduction
in liquidity during the Tick Size Pilot and that this would make it
more costly for those stocks to raise capital, then standard economic
assumptions would expect to see a negative stock price reaction for
test group stocks around the announcement of the Tick Size Pilot test
and control group stocks, not during the time period following the Tick
Size Pilot implementation.
---------------------------------------------------------------------------

    \1002\ See Albuquerque et al. (2018), supra note 991.
    \1003\ The list of stocks assigned to the Tick Size Pilot test
and control groups was announced on September 3, 2016. The rollout
of the Tick Size Pilot was implemented on a staggered basis over
October 2016. See Hu et al. (2018), supra note 990.
---------------------------------------------------------------------------

    Given the results of the DERA study and the uncertainty surrounding
the Albuquerque et al (2018) results, combined with the fact that the
average trading cost increase, i.e. decrease in liquidity, during the
Tick Size Pilot is greater than the expected potential effects on
liquidity during the Transaction Fee Pilot, the Commission

believes that the costs of capital are unlikely to significantly
increase for Test Group stocks due to a temporary decrease in liquidity
during the Transaction Fee Pilot. Because the Tick Size Pilot was
conducted on firms with small market capitalizations, this should also
help alleviate concerns for small to mid-capitalization issuers about
temporary decreases in liquidity increasing the costs related to
raising capital. One commenter agreed that, although some issuers may
have temporary widening of spreads over the Pilot duration, any changes
to liquidity caused by the Pilot are unlikely to affect the costs to
firms when raising capital.\1004\ Therefore, the Commission does not
believe that issuers, including small and mid-capitalization issuers,
will experience significant increases in the cost of capital as a
result of the Pilot.
---------------------------------------------------------------------------

    \1004\ See IEX Letter II, at 3-4.
---------------------------------------------------------------------------

E. Alternatives

    The Commission considered several alternatives to the Pilot,
including: (1) Proceed to propose rule amendments without first
conducting a Pilot; (2) expand the Pilot to include off-exchange
venues, including ATSs; (3) include a trade-at provision; (4) conduct
alternative pilots; and (5) adjust the design of the Pilot (e.g.,
including a number of alternatives proposed by commenters).
1. Propose Rulemaking Without Conducting a Pilot
    Several commenters suggested that the Commission should proceed
with rulemaking rather than first conducting the Pilot. For example, as
discussed elsewhere in this release,\1005\ as an alternative to
conducting the Pilot, one commenter suggested that the Commission
impose a ``gradual reduction of the current fee cap across all stocks
periodically.'' \1006\ Such an approach would address the concerns
raised by a number of commenters, discussed above, about the potential
impact on largely identical ETPs and listed issuers that are placed in
different test groups, without the added cost and complexity of
rotating stratified samples through the Pilot.\1007\ In addition, such
an approach could provide data on successive reductions in the current
fee cap, which could be useful to the Commission if it considers future
policy making to reduce the Rule 610(c) fee cap.
---------------------------------------------------------------------------

    \1005\ See supra Section II.C.8(g) and (h) and Section IV.E.4.
    \1006\ Morgan Stanley Letter, at 2.
    \1007\ See supra note 104 and accompanying text.
---------------------------------------------------------------------------

    However, depending on the number of fee caps to be tested, this
alternative would increase instability in the markets in terms of the
fee regime that markets are subject to. This would occur because the
cap would be reduced successively and linearly and each tranche would
need to be in place for a sufficient amount of time in order to obtain
statistical power. Further, without a control group, researchers would
be unable able to conduct a differences-in-differences analysis as the
data would be subject to the impact of events across time, which would
frustrate the ability of researchers to compare groups to one another
over time. The Commenter was open to having a control group not subject
to the decline in fees, which would allow for identifying causality.
However, even with the inclusion of a control group, this alternative
would still increase the time in which markets are subject to
instability in fees and rebates and the time needed to understand the
impact of fees and rebates because at each different fee level the
Commission would need to test that fee level for a sufficient time to
gain statistical power. Further, including a control group in this
alternative could potentially result in different treatment for largely
identical ETPs, as in the adopted Pilot, but with an increase in the
potential time needed for study.
    Alternatively, this commenter suggested that the Commission
implement ``dynamic, stock specific ticks with transaction fees capped
at, for example, 10% of the tick size (e.g. $0.0010 per share if a
penny tick; $0.0050 per share if a nickel tick.)'' \1008\ Another
commenter suggested that, rather than pursuing the Pilot, the
Commission should amend Rule 610(c) to reduce the access fee cap to
$0.0010 and also conduct ``an abbreviated study of the effects of
eliminating rebates'' similar to the ``no-rebate'' Test Group.\1009\
One commenter recommended that the Commission ``ban maker-taker and
inverted transaction fee pricing as well as all volume-based discounts
that are not clearly and directly related to cost savings'' \1010\
while another suggested that the Commission enhance the duty of best
execution in lieu of a pilot.\1011\
---------------------------------------------------------------------------

    \1008\ Id. at 2-3.
    \1009\ Goldman Sachs Letter, at 1-4.
    \1010\ Larry Harris Letter, at 9.
    \1011\ See Nasdaq Letter, at 1, 3.
---------------------------------------------------------------------------

    Several commenters opined on the potential benefits and reduced
costs of these alternatives as compared to proceeding with the Pilot.
For example, according to one commenter, a gradual ``walk down''
approach would be preferable to the Pilot because it would allow the
Commission to ``observe order routing behavior changes, while applying
the same economics to all stocks uniformly'' and would ``eliminate
concerns about issuers being subject to disparate treatment.'' \1012\
According to this commenter, it also would ``eliminate[ ] concerns that
the Pilot results will not reflect the actual outcome if such changes
are applied more broadly to stocks outside of the Pilot.'' \1013\
Similarly, another commenter noted that it would be ``more effective
and less damaging to the equities market to strengthen and better
articulate the broker-dealers' Duty of Best Execution'' than proceeding
with the Pilot, which the commenter believed would impost ``tremendous
costs'' to investors and potentially ``upend[ ] the existing economics
and framework around equity executions.'' \1014\ Further, one commenter
noted that because ``there is broad recognition'' that the access fee
cap should be reduced, there is no need to incur the costs associated
with the Pilot and the Commission should simply reduce the fee cap to
$0.0010 to ensure that displayed prices reflect the actual economic
costs of an execution, while also allowing exchanges to continue to
offer rebates to incentivize liquidity provision if they chose to do
so, while also maintaining their net capture rates.\1015\ This
commenter believed that lowering the fee cap to $0.0010 would provide
``immediate benefits to the equities markets with respect to price
transparency and addressing conflicts of interest'' \1016\ and would be
``better calibrated with today's market pricing.'' \1017\ Another
commenter argued that ``the effects of maker-taker and inverted
transaction fee pricing on the markets are well understood'' and
therefore concluded that it was very unlikely that ``we will learn
anything of value about the economics of exchange transaction fee
pricing'' from the Pilot.\1018\ Consequently, this commenter believed
that the Commission should mandate that the exchanges return to a
traditional transaction fee pricing

model, which the commenter believed would not result in much cost to
market participants.\1019\
---------------------------------------------------------------------------

    \1012\ Morgan Stanley Letter, at 2.
    \1013\ Id. at 2.
    \1014\ Cboe Letter I, at 12, 21-22. See also Nasdaq Letter I, at
2 (referring to the Pilot as a ``risky experiment'').
    \1015\ Goldman Sachs Letter, at 1, 3.
    \1016\ Id. at 1-3.
    \1017\ Id. at 4.
    \1018\ Larry Harris Letter, at 9-11. See also Goldman Sachs
Letter, at 4 (stating there is ``broad support in favor of lowering
the Fee Cap today,'' and the Pilot ``will not yield a different
conclusion.'').
    \1019\ Id.
---------------------------------------------------------------------------

    However, other commenters strongly supported the Pilot as a first
step because it ``should provide data to enable the Commission to
determine the impact of transaction-based fees and rebates on order
routing behavior, on execution quality and on market quality'' and
believed the data collected would ``support appropriate reforms to U.S.
equity market structure.'' \1020\ Among those who supported conducting
the Pilot before considering rulemaking, one commenter noted the lack
of information regarding the rebates paid by each exchange to each
broker and stated that such lack of disclosures ``reinforce the
difficulty in assessing the impact of the structure of a[cc]ess fees on
distorting best execution, conflict[s] of interest and competitiveness
of exchange pricing.'' \1021\ Still another commenter opined that the
Pilot ``is a necessity'' to provide a ``quantitative approach to which
stocks require liquidity support and how much a rebate should be to
incent support.'' \1022\
---------------------------------------------------------------------------

    \1020\ RBC Letter I, at 2.
    \1021\ Spatt Letter, at 4.
    \1022\ Babelfish Letter, at 3.
---------------------------------------------------------------------------

    The diversity of opinion and lack of consensus among the commenters
regarding the impact of fees and rebates on market quality and order
routing behavior support the view that further study in this area is
warranted before permanently adopting any changes through rulemaking.
As discussed above, there was sharp disagreement between commenters
about the potential impacts of reductions in fees and rebates, yet
there is little data available to evaluate these claims on a broad
scale. As discussed above, the Commission believes that there is no
need to delay proceeding with the Pilot in order to pursue other
potential equity market structure initiatives. Equity market structure
issues have been considered for a number of years and, as a result of
several initiatives in this area, the Commission has developed the
Pilot, which is focused on and is intended to gather empirical evidence
on the impact of exchange transaction fees and rebates. Similarly, the
Commission does not believe that it needs to complete the Pilot before
proceeding to consider all other equity market structure initiatives.
The Commission expects that it will continue to evaluate the need for
other changes to equity market structure during the pending of the
Pilot.
2. Expand Transaction Fee Pilot To Include Non-Exchange Trading Centers
    The Transaction Fee Pilot would not require ATSs or other non-
exchange trading venues to comply with the limits to transaction fees
or rebates imposed by the Pilot. Some commenters believed that non-
exchange trading centers should be included in the Pilot and that the
representativeness of the data obtained from the Pilot would be
impaired by the exclusion of ATSs and other off-exchange trading
centers.\1023\ For example, one commenter stated that the Pilot ``would
not gather any insight into the trading patterns at those centers''
because the Commission would be unable to ``follow order flow across
all trading venues in the market, leaving it with an incomplete picture
of the issue it seeks to study.'' \1024\ Another commenter believed
that excluding non-exchange trading centers could skew the results of
the Pilot, as broker-dealers could shift order flow away from exchanges
in response to the Pilot, thereby limiting the Commission's
understanding of the overall impact of changes to transaction-based
fees and rebates.\1025\
---------------------------------------------------------------------------

    \1023\ See Section II.A.4 for a summary of these comments. Some
commenters believed that non-exchange trading centers should only be
subject to the rebate prohibitions of the no-rebate Test Group. See,
e.g., Capital Group Letter, at 3; AJO Letter, at 1; Nasdaq Letter
III, at 9.
    \1024\ NYSE Letter I, at 9. See also, e.g., Cboe Letter I, at
12, 19; Nasdaq Letter I, at 2, 5; ViableMkts Letter, at 1-2.
    \1025\ Wellington Letter, at 2. See also, e.g., Oppenheimer
Letter, at 3. One commenter also believed that the Pilot could
affect the way that securities are traded off-exchange and confound
the Commission's ability to understand the baseline for remuneration
occurring off-exchange or the impact that the Pilot has on that
baseline. Nasdaq Letter I, at 7. The Commission does not believe
that its ability to analyze the impact of changes to transaction-
based fees and rebates will be unduly limited, due to information
that is now available from Regulation ATS-N and Rule 606.
---------------------------------------------------------------------------

    An alternative design that includes non-exchange trading centers
like ATSs would be broader than the Pilot--not only because such a
design would include more trading venues, but also because such a
design would have to account for the fact that non-exchange trading
centers like ATSs use other inducements, besides transaction-based fees
and rebates, to incent order flow.\1026\ The inclusion of non-exchange
trading centers could, therefore, supply information about a more
complete set of order routing decisions, increase the
representativeness of the results obtained, and provide a deeper
understanding regarding the ways in which exogenous shocks to
transaction-based fees and rebates (and other inducements) affect order
routing decisions. For example, a pilot that included non-exchange
trading centers, and regulated the inducements used by such centers,
might impact payment for the internalization of retail order flow,
which would allow researchers to evaluate how these inducements affect
retail order routing. A pilot that addressed payment for order flow on
non-exchange trading centers could, in turn, result in more retail
order flow being routed to lit exchanges, which also could increase
displayed liquidity and potentially improve price efficiency.
---------------------------------------------------------------------------

    \1026\ See, e.g., Morgan Stanley Letter, at 3 n.5; BIDS Letter,
at 1-2; AJO Letter, at 2.
---------------------------------------------------------------------------

    However, the inclusion of non-exchange trading venues may be
difficult to implement. First, non-exchange trading venues charge
idiosyncratic and individually-negotiated fees to market participants,
and often bundle fees for ATS usage with other broker-dealer fees, such
that it would be exceptionally difficult to create and then impose a
uniform fee regime on such venues.\1027\ For example, it is unclear how
an ATS that charges an ``all in'' flat fee for service and does not
charge individually for executions would be able to comply with a
transaction-based fee cap. To comply with the Pilot's transaction-based
pricing restrictions, non-exchange venues may be required to entirely
restructure their customer relationships to move to a transaction-based
pricing model for the duration of the Pilot, which would impose notable
costs on those venues. Further, any alternative design would address
other inducements provided by non-exchange trading centers aside from
transaction-based fees and rebates, in order to produce a fully
accurate analysis of the impact of fees and inducements on order
routing behavior, market quality, and execution quality. Such a design
would be much more complex that the current Proposal. Finally, an
alternative design that included non-exchange trading centers also
would impose costs on such venues that would be higher relative to the
costs imposed on exchanges under the current design, because the Pilot
would require non-exchange trading venues to track and report more
detailed information than is currently required by the

Commission.\1028\ As discussed above, exchanges are required to file
each fee change with the Commission on Form 19b-4 and to disclose the
entirety of their schedule of fees on their website, while non-
exchanges venues are not subject to those requirements. Thus, including
non-exchange trading venues in an alternative version of the Pilot
would likely increase the costs of the Pilot because it would require a
dramatic shift in the disclosure regime for these trading centers.
---------------------------------------------------------------------------

    \1027\ See, e.g., AJO Letter, at 2-3. It is possible that non-
exchange trading venues might respond to the Pilot by choosing to
change their existing fee structures to align with the maker-taker
(or taker-maker) pricing models employed by exchanges, which could
lead to additional costs for such venues. See, e.g., Virtu Letter,
at 6; SIFMA Letter, at 5; Clearpool Letter, at 4; Healthy Markets
Letter I, at 9-10.
    \1028\ Although Form ATS-N requires ATSs to provide public
disclosures about the different types of fees they charge, along
with the ranges of those fees and service bundling, these
disclosures do not provide as much information as the fee
disclosures that will be required by the Pilot.
---------------------------------------------------------------------------

    Although the Pilot excludes non-exchange trading centers, the
Commission will still be able to obtain information regarding the
proportion of trades executing on such platforms from several sources.
First, several transaction datasets, including trade reporting facility
(TRF) data and TAQ data, provide information on off-exchange trades,
including ATS trades. Further, FINRA produces periodic (weekly) data on
the total shares of NMS securities executed on individual ATSs.\1029\
Thus, researchers would obtain information from the Pilot to identify
whether exogenous shocks to transaction-based fees on exchanges have an
effect on order routing decisions, including whether broker-dealers
alter their routing of order to ATSs during the Pilot.
---------------------------------------------------------------------------

    \1029\ By combining the FINRA volume data executed by ATSs for a
given security with other data, such as TAQ, which would provide
total share volume for a given security, a researcher would be able
to estimate the fraction of ATS trading as a percentage of total
trading in NMS securities over the same time period.
---------------------------------------------------------------------------

3. Trade-At Test Group
    The Commission considered an alternative in which the Transaction
Fee Pilot would include a ``trade-at'' provision in conjunction with
the changes to the fees and rebates currently in the Pilot. The trade-
at alternative would require that orders be routed to a market with the
best displayed price or are executed at a materially improved price.
    Some commenters supported including a trade-at subgroup to provide
supplemental information to the Commission about how a combination of
trade-at provisions coupled with revisions to transaction-based fees
and rebates affect broker-dealer order routing decisions.\1030\ Some
other commenters, however, asserted that including a trade-at
requirement could compromise the results of the Pilot as it would
introduce an additional variable to one or more treatment groups.\1031\
To address this concern, the Pilot could include separate test
subgroups that also include a trade-at requirement, in addition to
requirements regarding transaction fees and/or rebates.
---------------------------------------------------------------------------

    \1030\ See, e.g., Adorney Letter, at 1; Birch Bay Letter, at 1;
NYSE Letter II, at 5.
    \1031\ See, e.g., See Citadel Letter, at 6; Fidelity Letter, at
10; Citigroup Letter, at 3; SIFMA Letter, at 4; TD Ameritrade
Letter, at 7; Virtu Letter, at 5; ICI Letter I, at 2.
---------------------------------------------------------------------------

    Such an approach would require including more stocks in the Pilot.
If the amount of securities in each Test Group were too small, the
Pilot results would not achieve statistical power. Accordingly, in
order to provide information on the impacts of an exogenous shock to
transaction fees and rebates while also providing additional
information on the effects of a trade-at requirement, the Pilot either
would need to increase the number of Pilot securities or add to its
duration.
    The expected impact on liquidity of the inclusion of a trade-at
test group is unclear. The recently concluded Tick Size Pilot included
a trade-at test group. The Tick Size Pilot included a trade-at group
because exchanges were concerned that, in the current market
environment, a significantly larger tick size could induce order flow
to go off exchange.\1032\ For the Transaction Fee Pilot, commenters
were split on whether marketable order flow will be more or less likely
to flow to off-exchange trading centers, with some believing that as
access fees for some test groups decline, order flow could be drawn
back to exchanges. However, in considering the Tick Size Pilot, it is
important to note that it only considered the impacts of trade-at when
the tick size was increased and only for smaller, less liquid stocks.
The effects might not be the same with 1 cent tick size and more liquid
stocks that are included in the Pilot. One commenter noted that in the
trade-at test group for the Tick Size Pilot, the number of shares
displayed at the NBBO increased and quote volatility was reduced in the
trade-at test group relative to the other test groups.\1033\
Nevertheless, analysis of the Tick Size Pilot data does not reveal
significant execution quality or market quality effects of a trade-at
rule. Specifically, the data suggests there was no change in effective
spreads or price efficiency due to the trade-at requirement.\1034\
Results from the Tick Size Pilot also suggest that trade-at impacts
trade location. Specifically, off-exchange share of trading volume
decreased and on-exchange market share increased, particularly at
inverted exchanges. However, volume for midpoint crossing off-exchange
venues increased, but this could be the result of the midpoint
exception to the Tick Size Pilot's trade-at requirements.\1035\ This
shift in trading volume may occur because a trade-at provision
increases incentives to display prices because off-exchange trading
centers would no longer be able to match the best price offered
elsewhere, but instead would have to provide significant price
improvement or start displaying their quotes at the NBBO. These
findings suggest that the inclusion of a trade-at test group may
benefit exchanges, which may experience increased trading volumes, but
be costly for off-exchange venues, which may lose trading volume.
---------------------------------------------------------------------------

    \1032\ See Tick Size Pilot Approval Order at 27538-42. As
discussed above in Section IV.D.2, a number of commenters have
expressed similar concerns with respect to the Transaction Fee
Pilot, whereby a reduction in rebates could widen spreads and lead
to a migration of order flow to off-exchange trading centers. In the
Tick Size Pilot, the trade-at provision applied when the tick size
was increased and only smaller, less liquid stocks were included in
that pilot. The Transaction Fee Pilot, on the other hand, also will
include more liquid stocks and does not test the wider tick
increments that were the subject of the Tick Size Pilot, so the
effects of trade-at may or may not be the same between the two
pilots.
    \1033\ See Birch Bay Capital Letter, at 1. Other commenters that
supported the inclusion of a trade-at test group. See, e.g., C&C
Letter, at 1. But see Citadel Letter, at 6 (noting that there was no
evidence of improvement in market quality in the trade-at test
groups in the Tick Size Pilot).
    \1034\ Id. at 990. See also Farley, Ryan and Eric Kelley and
Walter Puckett, Dark Trading Volume and Market Quality: A Natural
Experiment (April 3, 2018) available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3088715.
    \1035\ See Comerton-Forde, Carole and Gregoire, Vincent and
Zhong, Zhuo, Inverted Fee Structures, Tick Size, and Market Quality
(August 10, 2018), Journal of Financial Economics (JFE),
Forthcoming, available at SSRN: https://ssrn.com/abstract=2939012 or
http://dx.doi.org/10.2139/ssrn.2939012.
---------------------------------------------------------------------------

4. Alternative Pilot
    One commenter suggested an alternative to the Pilot that would
involve directly lowering the Rule 610(c) access fee cap to $0.0010 and
establishing a moratorium on fee increases for existing market data,
connectivity, and co-location services.\1036\ The commenter believed
its alternative would allow a direct test of the ``anachronistic''
610(c) fee cap level and make exchange fees more competitive with non-
exchange venues.\1037\ In addition, similar to the other alternative
discussed directly above, it would impose a lower cap on

all NMS stocks simultaneously and thereby address the potential
competitive impact on largely identical ETPs and listed issuers. The
commenter suggested this alternative would reduce the complexity of
implementation and would avoid ``introducing new classes of
restrictions'' including prohibition on payment of transaction-based
rebates.\1038\ Further, in linking transaction fees to market data and
connectivity fees, the commenter suggested that its alternative would
address commenters' desire ``to reduce their cost to trade'' without
banning rebates for liquidity provision, which it argued could
negatively impact displayed quotes.\1039\
---------------------------------------------------------------------------

    \1036\ See NYSE Letter III, at 3; see also Issuer Network Letter
II, at 4.
    \1037\ See id.
    \1038\ See id. The commenter also suggested that avoiding this
``new class of restrictions'' would limit the ``likelihood of court
challenge'' to the Pilot. Id.
    \1039\ See id.
---------------------------------------------------------------------------

    However, the combined fee cap and moratorium would not feature a
control group. While the commenter suggested the Commission could ``use
comparisons to the preceding period to evaluate its efficacy,'' the
absence of a control group could frustrate researchers' ability to
detect changes as the results could be influenced by short-term
external events. This alternative also does not directly test the
absence of rebates.
    Further, the direct link between transaction fees and market data
and connectivity fees is unclear in the context of the Pilot's
objectives. In particular, the potential distortions that can accompany
fee-and-rebate pricing models are unique to exchange transaction fee-
and-rebate pricing models and do not directly result from market data
and connectivity services. It is therefore unclear how the moratorium
on market data fees would impact the objective of the Pilot to study
how rebates and fees affect order routing decisions and market quality.
    Finally, the commenter's suggested moratorium would only apply to
``existing'' market data and connectivity and would therefore preserve
current fee levels for those services and would seem to not restrict an
exchange's ability to offer new and improved market data, connectivity,
and co-location services potentially at higher fee levels. While a
moratorium on market data and connectivity fees during a transaction
fee experiment could be beneficial to the extent it holds steady a
separate variable that can have a marginal impact on order routing,
those costs are fixed and therefore the impact, if any, would be
slight. Further, to the extent that exchanges were free to introduce
new products at different price points, the moratorium could be easily
circumvented. Accordingly, with the exception of the moratorium on
market data fees, the suggested alternative is substantively similar to
the alternative discussed above to not conduct any pilot and instead
proceed to immediately lower the 610(c) fee cap.
5. Adjustments to the Transaction Fee Pilot Structure
    The alternatives described above provide significant revisions to
the approach or the representativeness of the Transaction Fee Pilot.
This section complements and expands on the discussion in Section
II.C., above, to discuss a number of alternatives and adjustments to
the basic structure of the Pilot. These include an alternative time
frame for the Pilot duration or the pre- and post-Pilot Periods, a zero
access fee test group, alternative access fee caps, and the inclusion
of non-displayed liquidity or depth-of-book provisions in Test Group 1.
a. Length of the Core Pilot
    The core Pilot would last for two years with an automatic sunset at
the end of the first year unless the Commission publishes a notice
determining that the Pilot shall continue for up to one additional
year.\1040\ Alternatively, the Pilot could feature an earlier or later
Pilot sunset or a longer or shorter Pilot duration. As discussed above
in Section II.D., a number of commenters discussed the proposed Pilot
duration, with some believing the proposed duration would incentivize
participation and disincentivize ``waiting out'' the Pilot, with others
believing that a shorter duration would be sufficient to produce
results and still others recommending that the Pilot run for a full two
year period with no automatic sunset. Further, one commenter questioned
the Commission's statement that the market reacts quickly to pricing
changes implemented by exchanges, but that some market participants
might not change their behavior unless the Pilot was in place for at
least a year.\1041\
---------------------------------------------------------------------------

    \1040\ See supra Section II.D. for a summary and discussion of
the commenters discussing the Pilot's proposed duration.
    \1041\ See NYSE Letter I, at 16.
---------------------------------------------------------------------------

    As alternatives to the Pilot's duration, the Commission considered
an earlier Pilot sunset that would shorten the anticipated Pilot
duration, reducing the time period during which potential negative (or
positive) temporary effects resulting from the Pilot could occur.
However, if the anticipated duration of the Pilot were too short, some
broker-dealers could choose to not alter their current order routing
behavior and wait out the length of the Pilot, which would limit the
usefulness of the information obtained by the Pilot.\1042\ In other
words, in response to the comment noted above, while many market
participants may quickly adopt their order routing in response to fee
and rebate changes, others may take longer to respond. A shorter
anticipated duration also could reduce the usefulness of the
information and the benefits provided by the Pilot, if it reduced the
statistical power of any analyses, because it would make it more
difficult for researchers to detect whether an effect actually
exists.\1043\
---------------------------------------------------------------------------

    \1042\ See infra Section IV.C.1.a.iii, which discusses the
potential limitations associated with pilots, including a discussion
that some market participants could choose to not alter their
behavior if the Pilot had a short duration.
    \1043\ To address commenter concerns about the size of the
Pilot, the Commission performed a supplemental analysis that refined
the power analysis included in the Proposing Release. Based on this
refined power analysis, the Commission estimates that it would
require a minimum Pilot duration of 12 months to achieve sufficient
statistical power to detect whether an effect is actually present;
therefore, any Pilot duration shorter than 12 months would have
diminished ability to detect the effect of transaction-based fees
and rebates on order routing decisions, execution quality, and
market quality. See Section IV.C.1.a.ii.(1) and supra note 695 for
further information on this supplemental analysis.
---------------------------------------------------------------------------

    Conversely, as the anticipated Pilot duration increases so too
would the costs for exchanges, as this would extend the duration of the
changes to their revenue models and the costs of compliance with the
Pilot requirements. However, all else being equal, increasing the
duration beyond the automatic sunset at one year, or up to the maximum
two years, is unlikely to provide any significant increases in the
benefits identified above, unless some event occurs during the first
year that impacts the Pilot study in a way that potentially could make
the results unrepresentative, in which case an extension of the Pilot
for additional time (up to two years) could increase the benefits. As
discussed in Section IV.C.1.a.i, the Commission believes that the Pilot
duration with a one-year sunset would make it economically worthwhile
for broker-dealers to alter their order-routing decisions, because it
would likely be costly for broker-dealers to sit out the full duration
of the Pilot or retain pre-Pilot order routing decisions for its
duration. Further, a longer Pilot duration would increase the exposure
of market participants to the uncertain outcomes of the pilot in terms
of liquidity, trading volume, market

share, competition etc. that are discussed above.
    The Commission could alternatively adopt a pilot with a fixed two-
year duration. A two-year pilot without the possibility of an automatic
sunset at the end of the first year would have the same maximum costs
as a pilot with a sunset, but would not have the potential to reduce
costs in the event that the sunset occurs. On the other hand, broker-
dealers could perceive higher expected costs of not adapting to the
Pilot under the alternative because they could expect the sunset to
reduce the anticipated duration of the Pilot. However, the Commission
believes that broker-dealers that base their order routing decisions on
transaction-based fees and rebates will incur sufficient costs from not
enacting changes to their order routing decisions in response to the
Pilot with an expected one-year sunset such that they are not likely to
sit out the Pilot Period; therefore, a mandatory two-year pilot would
not likely provide any additional behavioral change that would not
already be obtainable from the Pilot.
b. Length of Pre- and Post-Pilot Periods
    The Pilot requires a six-month pre-Pilot Period and a six-month
post-Pilot Period, which would allow the Commission and the public to
compare order routing decisions in the same stocks both with and
without the Pilot restrictions as well as across stocks in different
test groups. Alternatively, the Commission could adopt shorter pre-
Pilot and post-Pilot Periods, which a few commenters recommended.\1044\
Shorter pre- and post-Pilot Periods would reduce costs to exchanges of
having to provide the Exchange Transaction Fee Summary and order
routing data. These reduced costs come at the trade-off of shorter
horizons for data collection that could lead to reduced statistical
power and reduced ability of the Pilot to produce representative
results.\1045\
---------------------------------------------------------------------------

    \1044\ See IEX Letter I, at 4; FIA Letter, at 4. But cf. FIF
Letter, at 9; Health Markets Letter I, at 19.
    \1045\ The Commission staff estimates that with the given number
of stocks in the Pilot, that the Pilot would need to produce
approximately six months of pre and post Pilot data to detect
changes unique to ETPs and stocks, The power tests determined the
number of days of data that would be required to detect a 10% change
in the daily volume of various subgroups of securities for stocks
and a 10% change in quoted spreads for ETPs.
---------------------------------------------------------------------------

    In particular, a short pre-Pilot Period introduces additional risk
that analysis of certain Pilot data may be uninformative. Even if
researchers were to wait until the conclusion of the post-Pilot period
to begin analysis, they may not be able to identify the effects of the
Pilot because data obtained from the post-Pilot period could be
confounded by information about the Pilot. For example, if exchanges
alter their fee structures in the post-Pilot period as a result of the
Pilot (rather than revert back to their fee models in effect prior to
the Pilot), data from the post-Pilot period likely would be unable to
supplement or substitute for data obtained from a shorter pre-Pilot
Period, underscoring the importance of a longer pre-Pilot Period. Thus,
the value of any analyses obtained from the Pilot may be limited,
thereby reducing the information obtained from such analyses for any
potential regulatory recommendations.
c. Zero Access Fee Test Group
    As discussed above, a few commenters recommended that the Pilot
include a zero access fee test group to further test the relationship
between exchange fee models and order routing, which would effectively
serve to temporarily remove a source of revenue for exchanges entirely
from a subset of securities.\1046\ This approach could produce
additional information, such as how order routing behavior and
execution quality change in the absence of transaction-based fees (and
likely rebates), that could be useful to the Commission to facilitate
future policy decisions regarding the transaction-based pricing
structures of exchanges.
---------------------------------------------------------------------------

    \1046\ See, e.g., Healthy Markets Letter I, at 8; OMERS Letter,
at 2.
---------------------------------------------------------------------------

    The inclusion of a zero access fee test group would eliminate the
transaction-based fee model for a subset of securities, which could
force exchanges to create entirely new revenue models for securities in
this test group with uncertain outcomes for both exchanges and market
participants. Doing so presents the risk that if coupled to the current
Pilot, the inclusion of a zero access fee test group could contaminate
the analysis of both the current test groups and the zero access fee
test group. This could occur if exchanges determine that it is cheaper
to subsidize trading in the zero access fee group with revenue earned
from the control group and the other test groups. In this case the
inclusion of the zero access fee test group would alter the behavior of
the exchanges with regard to all their other securities, which would
weaken the exogeneity of the shock imposed by the Pilot for all test
groups.
d. Alternative Test Groups
    As discussed above, the Pilot will have two test groups: (1) One
that caps access fees at $0.0010 and (2) one that prohibits rebates or
Linked Pricing for displayed and non-displayed liquidity and along the
entire depth of the limit order book. Alternatively, the Commission
could have proposed other test groups with different caps on access
fees. For example, the Commission could instead have proposed only caps
on access fees (i.e., fees for removing liquidity), similar to those in
the EMSAC recommendation,\1047\ or could have increased the number of
test groups to test more gradations in alternative fee caps. As a few
commenters suggested, and as discussed above, the Commission also could
have included a test group with a higher fee cap level than Rule 610(c)
or no cap on fees at all.\1048\ Further, as discussed above, a few
commenters suggested other alternatives, like basis point pricing or
pricing based on the tick size.
---------------------------------------------------------------------------

    \1047\ The maximum access fee caps under the EMSAC
recommendation would be $0.0020 (Test Group 1), $0.0010 (Test Group
2), and $0.0002 (Test Group 3).
    \1048\ See, e.g., Angel Letter II, at 2; Cboe Letter I, at 28
---------------------------------------------------------------------------

    Many alternatives would have replaced the no-rebate test group with
another access fee cap group. These options could provide information
to help refine the analysis of the impact of access fees on various
market outcomes. However, if the Pilot did not include a no-rebate test
group and only studied exogenous shocks to access fees, it would
produce more limited information about the role that rebates play in
affecting market outcomes. As discussed in more detail above, the
Commission believes that it is important to have a test group that
specifically focuses on the removal of rebates and the corresponding
impact on conflicts of interest, execution quality, and market quality.
    An alternative to increase the number of test groups to study the
impact of the various levels of access fee on various market outcomes
could produce additional refinement to the data currently in the Pilot.
However, to produce more gradation in the caps to access fees, would
increase the complexity of the Pilot, and potentially increase the
implementation costs to account for the additional test groups.
Increasing the number of test groups would also increase the number of
stocks subject to the pilot thereby increasing the fraction of the
market exposed to the uncertain outcomes of the Pilot.
e. Non-Displayed Liquidity and Depth of Book
    Only Test Group 2, which eliminates rebates or Linked Pricing,
would restrict

fees or rebates or Linked Pricing in non-displayed liquidity and depth-
of-book, though a small number of commenters suggested expanding those
conditions to Test Group 1.\1049\ As discussed in Section II.C., under
the Pilot, incentives to move liquidity away from the displayed
liquidity or the top-of-book could be created if rebates are not
eliminated along the entire depth of the book as well as for displayed
and non-displayed liquidity. If an exchange were to offer rebates for
those types of orders, it would reduce the benefits of the no-rebate
test group as it would inhibit the Commission's ability to collect data
on a treatment group in which rebates do not exist and thus cannot
impact or potentially distort the markets and market participants.
---------------------------------------------------------------------------

    \1049\ See Clearpool Letter, at 3-4; Healthy Markets Letter I,
at 16.
---------------------------------------------------------------------------

    An alternative could have applied the transaction fee restrictions
in Test Group 1 to both non-displayed liquidity and the depth-of-book.
However, the Commission believes this is unnecessary. In particular,
the Commission does not believe that exchanges would have the incentive
to charge higher fees or pay higher rebates for executions against or
of non-displayed and depth of book compared to fees and rebates charged
against or of top-of book depth in Test Group 1 securities. Unlike the
problem associated with exchanges offering rebates (in the no-rebate
test group) for these types of orders that could emerge if rebates or
Linked Pricing were not prohibited across the entire depth of the limit
order book, the Commission does not believe that under the Pilot
incentives would emerge for exchanges to charge higher fees to access
non-displayed interest or depth-of-book quotes. Charging more for non-
displayed liquidity as well as the depth of the limit order book would
lead to increased uncertainty for market participants that take
liquidity, as they would not be able to control whether their
executions are with displayed or non-displayed liquidity and would be
uncertain of their fees when they enter their orders. If the fees
differed between displayed and non-displayed liquidity, broker-dealers
would face cost uncertainty when making routing decisions over what
access fees they would incur. From the exchanges' perspective, having
differing fees for posting or interacting with displayed and non-
displayed liquidity would be burdensome to track and more costly to
administer and, to the extent the uncertainty it creates dissuades
market participants from routing to their market, could ultimately
cause them to lose order flow.
f. Linked Pricing
    Test Group 2 will prohibit rebates and Linked Pricing. As discussed
above, a few commenters suggested that the Commission also prohibit
exchanges from offering other inducements, including discounts on non-
transaction fees that are linked to trading volumes in the no-rebate
Test Group.\1050\ While such an approach would have the added benefit
of testing a greater absence of exchange-offered inducements, it would
further increase costs and add to the complexity and scope of the
Pilot. As currently designed, the no-rebate Test Group is intended to
test the extent to which exchange rebates introduce potential
distortions to execution quality and market quality and introduce
conflicts of interest in order routing. Adding more variables to the
Pilot will increase its complexity, size, and cost, while potentially
reducing benefits by inhibiting the Commission's stated focus on
gathering data specifically on the impact of exchange transaction
rebates. With more variables, it becomes difficult to isolate the
impact of any particular change without dramatically expanding the
size, scope, and complexity of the Pilot.
---------------------------------------------------------------------------

    \1050\ See RBC Letter I, at 3; MFS Letter, at 2-3.
---------------------------------------------------------------------------

    Alternatively, the Commission could instead prohibit only rebates,
without also prohibiting Linked Pricing, in Test Group 2. While such an
approach would reduce costs and simplify the Pilot design, it could
reduce the benefits of Test Group 2. Specifically, one of the aims of
Test Group 2 is to examine the impact between take fees (rebates) and
make rebates (fees) in current exchange fee-and-rebate pricing models.
For example, as discussed above, fees may be set above their
equilibrium price (within the current regulatory structure) in order to
subsidize rebates. An alternative that prohibits rebates but not the
ability of an exchange to cross-subsidize make rebates from take fees
(or vice versa) would provide opportunities for exchanges to work
around the rebate prohibition thus perpetuating the potential
subsidization distortion. Consequently, such an alternative would
reduce the benefits of Test Group 2 by reducing the effectiveness of
the information received about NMS stocks in the no-rebate Test Group.
    Finally, the Commission could ban Linked Pricing for all market
participants in Test Group 2, including market makers. This alternative
would allow the Commission to study how markets react in the absence of
both rebates and Linked Pricing incentives, whereas the adopted Rule
does not allow this analysis. The Commission recognizes that banning
Linked Pricing in Test Group 2 may yield different results than under
the adopted Rule, which permits an exchange to adopt rules to provide
non-rebate Linked Pricing to its registered market makers in
consideration for the market maker meeting rules-based market quality
metrics. However, the Commission is interested in specifically
exploring the effect of eliminating rebates, but continuing to allow
Linked Pricing for a narrow, targeted segment of the market, i.e.,
market makers with specific obligations designed to improve an
exchange's market quality without the various effects previously
discussed that may be associated with rebates, in order to understand
any effects of rebates on liquidity. In so much as this is an
alternative that could be considered at the completion of the Pilot,
the Commission seeks to test specifically for this scenario.
g. Execution Quality Data
    The Pilot does not require the exchanges to produce publicly
available information on order execution quality statistics. As an
alternative, the Commission could require that the exchanges produce
daily order execution quality statistics similar to that required in
Appendix B.1 of the Tick Size Pilot Plan. Compared to the Pilot, this
alternative could provide information on order-based measures of
execution quality such as effective spreads, price improvement, and
realized spreads for liquidity taking orders, in addition to the trade-
based measures available from public data sources. As noted in the
baseline, order-based measures of execution quality from the
incorporation of order size and the costs of latency. Exchanges
currently have systems in place to produce daily order-based execution
quality data, which would limit implementation costs. However, the
Commission recognizes that exchanges incur ongoing costs to produce
these data.
    Unlike for the Tick Size Pilot, the Commission does not believe
that daily order-based execution quality statistics are as important
for the Transaction Fee Pilot as it was for the Tick Size Pilot and
that the benefits for the Transaction Fee Pilot could be marginal. In
particular, the Commission believes that trade-based execution quality
statistics will be sufficient to measure execution quality for
liquidity taking orders and notes that the order routing data to be
received by the Commission will contain data that

can facilitate the measurement of execution quality for liquidity
providing orders.
h. Excluding or Rotating Securities
    As discussed above in Section II.B., some commenters were concerned
that the Pilot could introduce unintended adverse competitive effects
for ETPs or corporate issuers that were placed in certain test groups
if those test groups resulted in negative impacts on the trading
characteristics of those securities. Accordingly, some commenters,
discussed above, recommended either excluding ETPs from the Pilot,
clustering ETPs following similar strategies into a single test group,
or rotate ETPs through the various test groups and the control
group.\1051\ Other commenters, discussed above, suggested allowing
issuers to opt out of the Pilot.\1052\ The benefits of such an approach
would be the avoidance of potential harm or disparate impact on a
particular ETP or issuer vis-[agrave]-vis its peers and primary
competitors. As discussed more fully above, that potential for harm is
uncertain at best and commenters held deeply conflicting views with
some asserting that the Pilot could cause widespread harm while others
argued that its impact will be mostly positive when considering the
potential distortions that will be mitigated or alleviated in the
absence of exchange rebates or lower fees.
---------------------------------------------------------------------------

    \1051\ See supra Section II.B.
    \1052\ See id.
---------------------------------------------------------------------------

    Although there is a potential for temporary competitive effects as
a result of the Pilot, outright exclusion of ETPs or clustering like
ETPs in the same test group would harm the representativeness of the
data produced by the Pilot or the ability of the Pilot to facilitate
causal analyses. Exclusion of ETPs, for example, could undermine the
ability of the Commission to use the Pilot results to inform future
policy making with respect to exchange fees, particularly if ETPs have
the potential to respond differently to changes to fees and rebates
than do other types of NMS stocks.
    Similarly, as discussed above, allowing issuers to opt out of the
Pilot could undermine the representativeness of the Pilot's treatment
groups and potentially bias the Pilot's results, depending on the
number of issuers that opt out and whether some unobservable
characteristic is correlated with both an issuer's decision to opt out
and market outcomes. In turn, the benefits of the Pilot would be
reduced if researchers are less able to draw specific conclusions about
the impact of the Pilot as a result of issuers opting out of the Pilot.
    Another alternative solution would be to rotate all stocks and or
ETPs through each of the test groups for a given amount of time such
that all stocks and ETPs spend the same amount of time in each test
group. This methodology would reduce potential costs by mitigating
potential competitive effects of the Pilot on issuers by ensuring that
all stocks and ETPs receive similar exposure to each test group.
Rotation would also have the advantage of allowing many more changes
from one test group to another, which would create additional
independent observations about the effect of the Pilot on various
outcomes, potentially increasing statistical power.
    The realization of the benefit of additional statistical power
would depend on how broker-dealers react to the changes. If broker-
dealers need to adjust after every change, the statistical power could
be lower with rotation than without. To the extent that broker-dealers
design their order routing algorithms to the test group, then the time
needed for broker-dealers to adapt to a set of Pilot securities that
changes every few months would be minimal. The broker-dealer would
simply replace one list of securities in a given test group with
another. In this case there would likely be a period at the beginning
of the Pilot where broker-dealers experiment somewhat to optimize their
algorithms in which the data on broker dealer behavior would be
noisier, but after that initial adjustment, broker-dealers would not
need to repeat their experimentation after every rotation. However, to
the extent that broker-dealers' order routing algorithms are bespoke to
a given security, rotation could decrease the statistical power of the
tests because each rotation would include a period of time during which
broker-dealers adjust where the data is noisier and harder to extract a
signal from.
    This alternative, however, is also likely to be more complex and
have higher costs than the Pilot. The exchange compliance costs of
rotation would be marginally greater than the compliance costs of the
Pilot because it would involve additional compliance checks and
complexity, but would likely be largely automated. The added complexity
for exchanges could be more significant because complexity increases
the risk of errors. To the extent that broker-dealers set up their
systems to automate the rotation, they, too would have only marginally
higher costs with rotation. However, to the extent that broker-dealers'
order routing algorithms are bespoke to a given security, then rotation
would be both more costly for broker-dealers who would have to re-
optimize their algorithms every time a stock is included or excluded
from a given test group.

V. Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (``RFA'') \1053\ requires Federal
agencies, in promulgating rules, to consider the impact of those rules
on small entities. The Commission certified, pursuant to section 605(b)
of the RFA,\1054\ that, if adopted, Rule 610T would not have a
significant impact on a substantial number of small entities.\1055\
---------------------------------------------------------------------------

    \1053\ 5 U.S.C. 601 et seq.
    \1054\ 5 U.S.C. 605(b).
    \1055\ The Pilot is discussed in detail in Sections I and II,
above. We discuss the potential economic consequences, including the
estimated compliance costs and burdens, of the Pilot in Section IV
(Economic Analysis) and Section III (Paperwork Reduction Act) above.
---------------------------------------------------------------------------

    The Commission solicited comments regarding this certification and
received 1 comment.\1056\ The commenter stated that ``the Commission is
obligated under the RFA to adequately address the Proposal's costs to
small-capitalization issuers covered under the statute.'' \1057\ The
commenter cited Aeronautical Repair Station Ass'n v. FAA as support for
its assertion that the RFA requires the Commission to take into account
costs to small-capitalization issuers as they are ``third-party
entities incur[ing] downstream costs.'' \1058\ The Commission believes
the commenter misconstrues the legal finding in the case to which it
cited, as the case confirms the general premise that the RFA analysis
shall focus on the impact of a rule on a substantial number of small
entities that are ``directly affected and therefore regulated by,'' in
other words subject to, such rule's requirements.\1059\ For purposes of
the Commission rulemaking in connection with the RFA, Rule 610T, by its
terms, applies only to national securities exchanges registered with
the Commission under Section 6 of the Exchange Act.\1060\
---------------------------------------------------------------------------

    \1056\ See NYSE Letter I, at 13-14.
    \1057\ Id. at 14, n.50.
    \1058\ See id. (citing 494 F.3d 161, 177 (D.C. Cir. 2007)).
    \1059\ See Aeronautical Repair Station Ass'n v. FAA, 494 F.3d
161, 177 (D.C. Cir. 2007) (further stating that the RFA ``requires
that the agency conduct the relevant analysis or certify `no impact'
for those small businesses that are `subject to' the regulation,
that is, those to which the regulation `will apply.' '').
    \1060\ See supra Sections III (Paperwork Reduction Act) and IV
(Economic Analysis) (discussing, among other things, the current
market environment and compliance obligations for national
securities exchanges).

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

    With regard to a national securities exchange, the Commission's
definition of a small entity is an exchange that has been exempt from
the reporting requirements of 17 CFR 242.601 (Rule 601 of Regulation
NMS), and is not affiliated with any person (other than a natural
person) that is not a small business or small organization.\1061\ None
of the national securities exchanges registered under Section 6 of the
Exchange Act that would be subject to the Pilot are ``small entities''
for purposes of the RFA. In particular, none of the equities exchanges
are exempt from Rule 601 of Regulation NMS. Accordingly, the proposed
rule will not apply to any ``small entities.'' Therefore, for the
foregoing reasons, the Commission again certifies that Rule 610T will
not have a significant economic impact on a substantial number of small
entities for purposes of the RFA.
---------------------------------------------------------------------------

    \1061\ See 17 CFR 240.0-10(e).
---------------------------------------------------------------------------

VI. Statutory Authority and Text of the Rule Amendments

    Pursuant to the Exchange Act, and particularly Sections 3(b), 5, 6,
11A, 15, 17, and 23(a) thereof, 15 U.S.C. 78c, 78e, 78f, 78k-1, 78o,
78q, and 78w(a), the Commission amends title 17 of the Code of Federal
Regulations in the manner set forth below.

List of Subjects

17 CFR Part 200

    Administrative practice and procedure, Authority delegations
(Government agencies), Organization and functions (Government
agencies).

17 CFR Part 242

    Brokers, Reporting and recordkeeping requirements, Securities.

    For the reasons set out in the preamble, the Commission amends
title 17, chapter II of the Code of Federal Regulations as follows:

PART 200--ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND
REQUESTS

0
1. The authority citation for part 200 continues to read in part as
follows:

    Authority:  15 U.S.C. 77c, 77o, 77s, 77z-3, 77sss, 78d, 78d-1,
78d-2, 78o-4, 78w, 78ll(d), 78mm, 80a-37, 80b-11, 7202, and 7211 et
seq., unless otherwise noted.
* * * * *

0
2. Amend Sec.  200.30-3 by adding (a)(84) to read as follows:

Sec.  200.30-3  Delegation of authority to Director of Division of
Trading and Markets.

* * * * *
    (a) * * *
    (84) To issue notices pursuant to 17 CFR 242.610T(b)(1)(i) and (c)
(Rule 610T(b)(1)(i) and (c)).
* * * * *

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

0
3. The authority citation for part 242 continues to read 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.

0
4. Add Sec.  242.610T to read as follows:

Sec.  242. 610T  Equity transaction fee pilot.

    (a) Pilot pricing restrictions. Notwithstanding Sec.  242.610(c),
on a pilot basis for the period specified in paragraph (c) of this
section, in connection with a transaction in an NMS stock, a national
securities exchange shall not:
    (1) For Test Group 1, impose, or permit to be imposed, any fee or
fees for the display of, or execution against, the displayed best bid
or best offer of such market that exceed or accumulate to more than
$0.0010 per share;
    (2) For Test Group 2, provide to any person, or permit to be
provided to any person, a rebate or other remuneration in connection
with an execution, or offer, or permit to be offered, any linked
pricing that provides a discount or incentive on transaction fees
applicable to removing (providing) liquidity that is linked to
providing (removing) liquidity, except to the extent the exchange has a
rule to provide non-rebate linked pricing to its registered market
makers in consideration for meeting market quality metrics; and
    (3) For the Control Group, impose, or permit to be imposed, any fee
or fees in contravention of the limits specified in Sec.  242.610(c).
    (b) Pilot securities--(1) Initial List of Pilot Securities. (i) The
Commission shall designate by notice the initial List of Pilot
Securities, and shall assign each Pilot Security to one Test Group or
the Control Group. Further, the Commission may designate by notice the
assignment of NMS stocks that are interlisted on a Canadian securities
exchange to Test Group 2 or the Control Group.
    (ii) For purposes of this section, ``Pilot Securities'' means the
NMS stocks designated by the Commission on the initial List of Pilot
Securities pursuant to paragraph (b)(1)(i) of this section and any
successors to such NMS stocks. At the time of selection by the
Commission, an NMS stock must have a minimum share price of $2 to be
included in the Pilot and must have an unlimited duration or a duration
beyond the end of the post-Pilot Period. In addition, an NMS stock must
have an average daily volume of 30,000 shares or more to be included in
the Pilot. If the share price of a Pilot Security in one of the Test
Groups or the Control Group closes below $1 at the end of a trading
day, it shall be removed from the Pilot.
    (iii) For purposes of this section, ``primary listing exchange''
means the national securities exchange on which the NMS stock is
listed. If an NMS stock is listed on more than one national securities
exchange, the national securities exchange upon which the NMS stock has
been listed the longest shall be the primary listing exchange.
    (2) Pilot Securities Exchange Lists. (i) After the Commission
selects the initial List of Pilot Securities and prior to the beginning
of trading on the first day of the Pilot Period each primary listing
exchange shall publicly post on its website downloadable files
containing a list, in pipe-delimited ASCII format, of the Pilot
Securities for which the exchange serves as the primary listing
exchange. Each primary listing exchange shall maintain and update this
list as necessary prior to the beginning of trading on each business
day that the U.S. equities markets are open for trading through the end
of the post-Pilot Period.
    (ii) The Pilot Securities Exchange Lists shall contain the
following fields:
    (A) Ticker Symbol;
    (B) Security Name;
    (C) Primary Listing Exchange;
    (D) Security Type:
    (1) Common Stock;
    (2) ETP;
    (3) Preferred Stock;
    (4) Warrant;
    (5) Closed-End Fund;
    (6) Structured Product;
    (7) ADR; and
    (8) Other;
    (E) Pilot Group:
    (1) Control Group;
    (2) Test Group 1; and
    (3) Test Group 2;
    (F) Stratum Code; and
    (G) Date the Entry Was Last Updated.
    (3) Pilot Securities Change Lists. (i) Prior to the beginning of
trading on each trading day the U.S. equities markets are open for
trading throughout the end of the post-Pilot Period, each primary
listing exchange shall publicly post on its website downloadable files
containing a Pilot Securities Change List, in pipe-delimited ASCII
format, that lists each separate change applicable to any Pilot
Securities for

which it serves or has served as the primary listing exchange. The
Pilot Securities Change List will provide a cumulative list of all
changes to the Pilot Securities that the primary listing exchange has
made to the Pilot Securities Exchange List published pursuant to
paragraph (b)(2) of this section.
    (ii) In addition to the fields required for the Pilot Securities
Exchange List, the Pilot Securities Change Lists shall contain the
following fields:
    (A) New Ticker Symbol (if applicable);
    (B) New Security Name (if applicable);
    (C) Deleted Date (if applicable);
    (D) Date Security Closed Below $1 (if applicable);
    (E) Effective Date of Change; and
    (F) Reason for the Change.
    (4) Posting requirement. All information publicly posted in
downloadable files pursuant to paragraphs (b)(2) and (3) of this
section shall be and remain freely and persistently available and
easily accessible by the general public on the primary listing
exchange's website for a period of not less than five years from the
conclusion of the post-Pilot Period. In addition, the information shall
be presented in a manner that facilitates access by machines without
encumbrance, and shall not be subject to any restrictions, including
restrictions on access, retrieval, distribution and reuse.
    (c) Pilot duration. (1) The Pilot shall include:
    (i) A six-month ``pre-Pilot Period;''
    (ii) A two-year ``Pilot Period'' with an automatic sunset at the
end of the first year unless, no later than thirty days prior to that
time, the Commission publishes a notice that the Pilot shall continue
for up to one additional year; and
    (iii) A six-month ``post-Pilot Period.''
    (2) The Commission shall designate by notice the commencement and
termination dates of the pre-Pilot Period, Pilot Period, and post-Pilot
Period, including any suspension of the one-year sunset of the Pilot
Period.
    (d) Order routing datasets. Throughout the duration of the Pilot,
including the pre-Pilot Period and post-Pilot Period, each national
securities exchange that facilitates trading in NMS stocks shall
prepare and transmit to the Commission a file, in pipe-delimited ASCII
format, no later than the last day of each month, containing sets of
order routing data, for the prior month, in accordance with the
specifications in paragraphs (d)(1) and (2) of this section. For the
pre-Pilot Period, order routing datasets shall include each NMS stock.
For the Pilot Period and post-Pilot Period, order routing datasets
shall include each Pilot Security. Each national securities exchange
shall treat the order routing datasets as regulatory information and
shall not access or use that information for any commercial or non-
regulatory purpose.
    (1) Dataset of daily volume statistics, with field names as the
first record and a consistent naming convention that indicates the
exchange and date of the file, that include the following
specifications of liquidity-providing orders by security and separating
orders by order designation (exchanges may exclude auction orders) and
order capacity:
    (i) Code identifying the submitting exchange.
    (ii) Eight-digit code identifying the date of the calendar day of
trading in the format ``yyyymmdd.''
    (iii) Symbol assigned to an NMS stock (including ETPs) under the
national market system plan to which the consolidated best bid and
offer for such a security are disseminated.
    (iv) The broker-dealer's CRD number and MPID.
    (v) Order type code:
    (A) Inside-the-quote orders;
    (B) At-the-quote limit orders; and
    (C) Near-the-quote limit orders.
    (vi) Order size codes:
    (A) <100 share bucket;
    (B) 100-499 share bucket;
    (C) 500-1,999 share bucket;
    (D) 2,000-4,999 share bucket;
    (E) 5,000-9,999 share bucket; and
    (F) >=10,000 share bucket.
    (vii) Number of orders received.
    (viii) Cumulative number of shares of orders received.
    (ix) Cumulative number of shares of orders cancelled prior to
execution.
    (x) Cumulative number of shares of orders executed at receiving
market center.
    (xi) Cumulative number of shares of orders routed to another
execution venue.
    (xii) Cumulative number of shares of orders executed within:
    (A) 0 to < 100 microseconds of order receipt;
    (B) 100 microseconds to < 100 milliseconds of order receipt;
    (C) 100 milliseconds to < 1 second of order receipt;
    (D) 1 second to < 30 seconds of order receipt;
    (E) 30 seconds to < 60 seconds of order receipt;
    (F) 60 seconds to < 5 minutes of order receipt;
    (G) 5 minutes to < 30 minutes of order receipt; and
    (H) >= 30 minutes of order receipt.
    (2) Dataset of daily volume statistics, with field names as the
first record and a consistent naming convention that indicates the
exchange and date of the file, that include the following
specifications of liquidity-taking orders by security and separating
orders by order designation (exchanges may exclude auction orders) and
order capacity:
    (i) Code identifying the submitting exchange.
    (ii) Eight-digit code identifying the date of the calendar day of
trading in the format ``yyyymmdd.''
    (iii) Symbol assigned to an NMS stock (including ETPs) under the
national market system plan to which the consolidated best bid and
offer for such a security are disseminated.
    (iv) The broker-dealer's CRD number and MPID.
    (v) Order type code:
    (A) Market orders; and
    (B) Marketable limit orders.
    (vi) Order size codes:
    (A) <100 share bucket;
    (B) 100-499 share bucket;
    (C) 500-1,999 share bucket;
    (D) 2,000-4,999 share bucket;
    (E) 5,000-9,999 share bucket; and
    (F) >=10,000 share bucket.
    (vii) Number of orders received.
    (viii) Cumulative number of shares of orders received.
    (ix) Cumulative number of shares of orders cancelled prior to
execution.
    (x) Cumulative number of shares of orders executed at receiving
market center.
    (xi) Cumulative number of shares of orders routed to another
execution venue.
    (e) Exchange Transaction Fee Summary. Throughout the duration of
the Pilot, including the pre-Pilot Period and post-Pilot Period, each
national securities exchange that facilitates trading in NMS stocks
shall publicly post on its website downloadable files containing
information relating to transaction fees and rebates and changes
thereto (applicable to securities having a price equal to or greater
than $1). Each national securities exchange shall post its initial
Exchange Transaction Fee Summary prior to the start of trading on the
first day of the pre-Pilot Period and update its Exchange Transaction
Fee Summary on a monthly basis within 10 business days of the first day
of each calendar month, to reflect data collected for the prior month.
The information prescribed by this section shall be made available
using the most recent version of the XML schema published on the
Commission's website. All information publicly posted pursuant to this

paragraph (e) shall be and remain freely and persistently available and
easily accessible on the national securities exchange's website for a
period of not less than five years from the conclusion of the post-
Pilot Period. In addition, the information shall be presented in a
manner that facilitates access by machines without encumbrance, and
shall not be subject to any restrictions, including restrictions on
access, retrieval, distribution, and reuse. The Exchange Transaction
Fee Summary shall contain the following fields:
    (1) Exchange Name;
    (2) Record Type Indicator:
    (i) Reported Fee is the Monthly Average;
    (ii) Reported Fee is the Median; and
    (iii) Reported Fee is the Spot Monthly;
    (3) Participant Type:
    (i) Registered Market Maker; and
    (ii) All Others;
    (4) Pilot Group:
    (i) Control Group;
    (ii) Test Group 1; and
    (iii) Test Group 2;
    (5) Applicability to Displayed and Non-Displayed Interest:
    (i) Displayed only;
    (ii) Non-displayed only; and
    (iii) Both displayed and non-displayed;
    (6) Applicability to Top and Depth of Book Interest:
    (i) Top of book only;
    (ii) Depth of book only; and
    (iii) Both top and depth of book;
    (7) Effective Date of Fee or Rebate;
    (8) End Date of Currently Reported Fee or Rebate (if applicable);
    (9) Month and Year of the monthly realized reported average and
median per share fees and rebates;
    (10) Pre/Post Fee Changes Indicator (if applicable) denoting
implementation of a new fee or rebate on a day other than the first day
of the month;
    (11) Base and Top Tier Fee or Rebate:
    (i) Take (to remove):
    (A) Base Fee/Rebate reflecting the standard amount assessed or
rebated before any applicable discounts, tiers, caps, or other
incentives are applied; and
    (B) Top Tier Fee/Rebate reflecting the amount assessed or rebated
after any applicable discounts, tiers, caps, or other incentives are
applied; and
    (ii) Make (to provide):
    (A) Base Fee/Rebate reflecting the standard amount assessed or
rebated before any applicable discounts, tiers, caps, or other
incentives are applied; and
    (B) Top Tier Fee/Rebate reflecting the amount assessed or rebated
after any applicable discounts, tiers, caps, or other incentives are
applied;
    (12) Average Take Fee (Rebate)/Average Make Rebate (Fee), by
Participant Type, Test Group, Displayed/Non-Displayed, and Top/Depth of
Book; and
    (13) Median Take Fee (Rebate)/Median Make Fee (Rebate), by
Participant Type, Test Group, Displayed/Non-Displayed, and Top/Depth of
Book.

    By the Commission.

    Dated: December 19, 2018.
Brent J. Fields,
Secretary.

    Note: The following Appendix will not appear in the Code of
Federal Regulations.

Appendix A

Key to Comment Letters Cited in Proposed Transaction Fee Pilot for NMS
Stocks (File No. S7-05-18):

1. E-mail from David Adorney, C & C Trading LLC, to Commission, dated
March 15, 2018 (``Adorney E-mail'').
2. Letter from Peter L. Swan, Professor of Finance, School of Banking
and Finance, UNSW Sydney Business School, to Brent J. Fields,
Secretary, Commission, dated March 26, 2018 (``Swan Letter'').
3. Letter from O. Mason Hawkins, CFA, Chairman & CEO, et al.,
Southeastern Asset Management, Inc., et al., to Brent J. Fields,
Secretary, Commission, dated April 6, 2018 (``Joint Asset Managers
Letter'').
4. Letter from Adam D. Clark-Joseph, University of Illinois at Urbana-
Champaign, to Brent J. Fields, Secretary, Commission, dated April 9,
2018 (``Clark-Joseph Letter'').
5. Letter from Brent Woods, Chief Executive Officer, and Joseph
Scafidi, Director of Trading, Brandes Investment Partners, to Brent J.
Fields, Secretary, Commission, dated April 10, 2018 (``Brandes
Letter'').
6. Letter from Sal Arnuk and Joe Saluzzi, Partners, Co-Founders and Co-
Heads of Equity Trading, Themis Trading LLC, to Brent J. Fields,
Secretary, Commission, dated April 27, 2018 (``Themis Trading Letter
I'').
7. Presentation from the Institutional Equity Division, Morgan Stanley,
to the Division of Trading and Markets, Commission, dated May 1, 2018
(``Morgan Stanley Presentation'').
8. E-mail from Tim Quast, President, Modern Networks IR LLC, to Brett
Redfearn, Director, Division of Trading and Markets, Commission, dated
May 2, 2018 (``ModernIR E-mail'').
9. Letter from Sean D. Paylor, Trader, AJO, L.P., to Brent J. Fields,
Secretary, Commission, dated May 7, 2018 (``AJO Letter'').
10. Letter from Tim Quast, President & Founder, Modern Networks IR LLC,
to Brent J. Fields, Secretary, Commission, dated May 9, 2018
(``ModernIR Letter'').
11. Letter from Jeffrey P. Mahoney, General Counsel, Council of
Institutional Investors, to Brent J. Fields, Secretary, Commission,
dated May 10, 2018 (``CII Letter'').
12. Letter from Kelvin To, Founder& President, Data Boiler
Technologies, LLC, to Brent J. Fields, Secretary, Commission, dated May
14, 2018 (``Data Boiler Letter'').
13. Letter from Chris Barnard to Commission, dated May 14, 2018
(``Barnard Letter'').
14. Letter from David Mechner, Chief Executive Officer, Pragma
Securities, to Brent J. Fields, Secretary, Commission, dated May 14,
2018 (``Pragma Letter'').
15. Letter from Stuart J. Kaswell, Executive Vice President & Managing
Director, General Counsel, Managed Funds Association, to Brent J.
Fields, Secretary, Commission, dated May 15, 2018 (``MFA Letter'').
16. Letter from Timothy J. Mahoney, Chief Executive Officer, BIDS
Trading L.P., to Brent J. Fields, Secretary, Commission, dated May 15,
2018 (``BIDS Letter'').
17. Letter from Brent Robertson, Managing Director, Trading, and Rob
Gouley, Principal, Trading, Ontario Municipal Employees Retirement
System Administration Corporation, to Brent J. Fields, Secretary,
Commission, dated May 15, 2018 (``OMERS Letter'').
18. Letter from Marc Lipson, Robert F. Vandell Research Professor,
Professor of Business Administration, University of Virginia School,
Darden School of Business, to Commission, dated May 15, 2018 (``Lipson
Letter'').
19. Letter from Anthony W. Godonis, Principal, Director of Trading,
Copeland Capital Management, LLC, to Brent J. Fields, Secretary,
Commission, dated May 18, 2018 (``Copeland Letter'').
20. Letter from George Hessler, CEO, Magma Trading, to Brent J. Fields,
Secretary, Commission, dated May 18, 2018 (``Magma Letter'').
21. Letter from Eric Swanson, CEO, XTX Markets LLC, to Brent J. Fields,

Secretary, Commission, dated May 22, 2018 (``XTX Letter'').
22. Letter from Douglas A. Cifu, Chief Executive Officer, Virtu
Financial Inc., to Brent J. Fields, Secretary, Commission, dated May
23, 2018 (``Virtu Letter'').
23. Letter from Susan M. Olson, General Counsel, Investment Company
Institute, to Brent J. Fields, Secretary, Commission, dated May 23,
2018 (``ICI Letter I'').
24. Letter from Mary E. Keefe, Managing Director, Regulatory Affairs,
Nuveen, LLC, to Brent J. Fields, Secretary, Commission, dated May 23,
2018 (``Nuveen Letter'').
25. Letter from Thomas K. Lee, Executive Director & CIO, et al., New
York State Teachers' Retirement System, to Brent J. Fields, Secretary,
Commission, dated May 23, 2018 (``NYSTRS Letter'').
26. Letter from Hubert De Jesus, Global Head of Market Structure and
Electronic Trading, and Joanne Medero, U.S. Head of Global Public
Policy, BlackRock, Inc., to Brent J. Fields, Secretary, Commission,
dated May 23, 2018 (``BlackRock Letter'').
27. Letter from Frank L. Jobert, Jr., Executive Director, Louisiana
Trustee Education Council, to Brent J. Fields, Secretary, Commission,
dated May 23, 2018 (``LATEC Letter'').
28. Letter from Joanna Mallers, Secretary, FIA Principal Traders Group,
to Brent J. Fields, Secretary, Commission, dated May 24, 2018 (``FIA
Letter'').
29. Letter from Theodore R. Lazo, Managing Director & Associate General
Counsel, Securities Industry and Financial Markets Association, to
Brent J. Fields, Secretary, Commission, dated May 24, 2018 (``SIFMA
Letter'').
30. Letter from Patrick J. Healy, Founder & CEO, Issuer Network, to
Brent J. Fields, Secretary, Commission, dated May 24, 2018 (``Issuer
Network Letter I'').
31. Letter from Linda M. Giordano, Co-Founder & CEO, and Jeffrey M.
Alexander, Co-Founder & President, Babelfish Analytics, Inc., to Brent
J. Fields, Secretary, Commission, dated May 24, 2018 (``Babelfish
Letter'').
32. Letter from Dennis M. Kelleher, President & CEO, et al., Better
Markets, Inc., to Brent J. Fields, Secretary, Commission, dated May 24,
2018 (``Better Markets Letter'').
33. Letter from Rich Steiner, Electronic Trading Strategist, RBC
Capital Markets, to Brent Fields, Secretary, Commission, dated May 24,
2018 (``RBC Letter I'').
34. Letter from William H. Hebert, Managing Director, Financial
Information Forum, to Brent J. Fields, Secretary, Commission, dated May
24, 2018 (``FIF Letter'').
35. Letter from Paul M. Russo, Managing Director, Goldman Sachs & Co.
LLC, to Brent J. Fields, Secretary, Commission, dated May 24, 2018
(``Goldman Sachs Letter'').
36. Letter from Tyler Gellasch, Executive Director, Healthy Markets
Association, to Brent J. Fields, Secretary, Commission, dated May 24,
2018 (``Healthy Markets Letter I'').
37. Letter from Jason Clague, Executive Vice President, Operational
Services, Charles Schwab & Co., Inc., to Brent J. Fields, Secretary,
Commission, dated May 25, 2018 (``Schwab Letter'').
38. Letter from Joseph Brennan, Principal & Global Head of Equity
Investment Group, Vanguard, to Brent J. Fields, Secretary, Commission,
dated May 25, 2018 (``Vanguard Letter'').
39. Letter from Marc R. Bryant, Deputy General Counsel, Fidelity
Investments, to Brent J. Fields, Secretary, Commission, dated May 25,
2018 (``Fidelity Letter'').
40. Letter from Stephen John Berger, Managing Director, Government &
Regulatory Policy, Citadel Securities, to Brent J. Fields, Secretary,
Commission, dated May 25, 2018 (``Citadel Letter'').
41. Letter from Kevin Cronin, Global Head of Trading, Invesco Ltd., to
Brent J. Fields, Secretary, Commission, dated May 25, 2018 (``Invesco
Letter'').
42. Letter from Micah Hauptman, Financial Services Counsel, Consumer
Federation of America, to Brent J. Fields, Secretary, Commission, dated
May 25, 2018 (``CFA Letter'').
43. Letter from Heidi W. Hardin, General Counsel, MFS Investment
Management, to Brent J. Fields, Secretary, Commission, dated May 25,
2018 (``MFS Letter'').
44. Letter from Timothy J. Coyne, Global Head of ETF Capital Markets,
and Nathaniel N. Evarts, Head of Trading, Americas, State Street Global
Advisors, to Brent J. Fields, Secretary, Commission, dated May 25, 2018
(``State Street Letter'').
45. Letter from Dennis Simmons, Executive Director, Committee on
Investment of Employee Benefit Access, to Brent J. Fields, Secretary,
Commission, dated May 25, 2018 (``CIEBA Letter'').
46. Letter from Lisa Mahon Lynch, Director, Trading & Counterparty
Services, Wellington Management Company LLP, to Brent J. Fields,
Secretary, Commission, dated May 25, 2018 (``Wellington Letter'').
47. Letter from Kevin Duggan, Managing Director, Execution & Treasury,
Capital Markets, Ontario Teachers' Pension Plan, et al., to Brent J.
Fields, Secretary, Commission, dated May 25, 2018 (``Joint Pension Plan
Letter'').\1062\
---------------------------------------------------------------------------

    \1062\ The Commission notes that it separately received a copy
of a signatory page already attached to this letter from Karl Polen,
Chief Investment Officer, Arizona State Retirement System, dated May
21, 2018. For purposes of this summary, the copy has not been
counted as a separate letter or comment.
---------------------------------------------------------------------------

48. Letter from Tim Gately, Managing Director, Head of Americas
Equities, Citigroup Global Markets Inc., to Brent J. Fields, Secretary,
Commission, dated May 25, 2018 (``Citi Letter'').
49. Letter from Michael Jacejko, Birch Bay Capital, LLC, to Brent J.
Fields, Secretary, Commission, dated May 25, 2018 (``Birch Bay
Letter'').
50. Letter from Cynthia Lo Bessette, General Counsel & Executive Vice
President, OFI Global Asset Management, Inc., et al., OppenheimerFunds,
Inc., to Brent J. Fields, Secretary, Commission, dated May 25, 2018
(``Oppenheimer Letter'').
51. Letter from Ray Ross, Chief Technology Officer, Clearpool Group, to
Brent J. Fields, Secretary, Commission, dated May 25, 2018 (``Clearpool
Letter'').
52. Letter from James J. Angel, Associate Professor of Finance,