to route order-flow to OTC market makers such as wholesalers. Thus,
lower access fees or harmonized trading increments might not materially
affect a retail broker-dealer's decision to route to an OTC market
maker instead of an exchange. Second, while the proposal does not allow
OTC market makers to price improve at any level that they wish, the
proposal is designed to ensure that there are usually at least 4 ticks
within the spread for nearly all stocks.\651\ Thus, the Commission
believes it is reasonable to expect that the OTC market makers,
including wholesalers, would still be able to provide meaningful price
improvement at the designated tick sizes. Because the Commission
expects that OTC market makers would still be able to provide price
improvement to retail orders, broker-dealers handling retail trades
would still have an incentive to route to wholesalers.\652\ Thus, it
would still likely be cost effective for retail broker-dealers to
continue to route to wholesalers. For these reasons, the Commission
does not expect the proposal to lead to a significant reduction in
retail orders routed to wholesalers.
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    \650\ Retail-broker-dealers may also route to wholesalers to
avoid the expenses associated with establishing connections to some
the exchanges. Wholesalers also frequently offer other services such
as free routing on orders that they do not internalize.
    \651\ The exceptions would be if a stock with a price greater
than $1.00 has a quoted spared less than $0.004. In this case, the
stock would be assigned a tick of $0.001 and there would be less
than 4 ticks within the spread. The other case would be if a stock
had a wide spread during an evaluation period and was thus assigned
a wide tick and then subsequently the tick size shrank such that
there were fewer than 3 ticks intra-spread. In this case the stock
would have fewer than 4 ticks intra spread until after the next
evaluation period.
    \652\ The effect of the proposal on retail price improvement is
discussed in greater detail in section V.D.2.
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c. Market Data
    Expediting the inclusion of odd-lot data into the exclusive SIPs
could increase competition among data providers of odd-lot information
prior to the full implementation of the MDI Rules though it would do so
less than envisioned in the MDI release, for the period until the MDI
Rules are fully implemented. Specifically, under the implementation
schedule in the MDI Rules, adding odd-lot information to core data
would occur during the parallel operation period. Adding odd-lot
information to the current exclusive SIPs would enable the exclusive
SIPs to compete directly with the exchange's proprietary data products
for use in visual display settings. Currently, the only means to get
odd-lot information is to subscribe to multiple proprietary data feeds.
This would change if odd-lots are a part of SIP data. Unlike the data
provided by the competing consolidators, the Commission does not
believe that the current exclusive SIPs are fast enough for use in
certain trading. Thus, the competition for odd-lot data would be
limited to odd-lot information used in visual display settings. To the
extent that some market participants subscribe to proprietary data for
use in visual display settings, the introduction of odd-lot information
to the exclusive SIPs can provide competition to this segment of the
market and could reduce the prices of odd-lot information provided by
the proprietary data feeds. However, the Commission does not believe
that this market is very large. Currently, for most display settings
market participants use SIP data or one of the top of book data
products offered by one of the three highest volume exchange groups and
it is unclear to what extent market participants subscribe to
proprietary data with odd-lot information for use in visual display
settings. However, if the exclusive SIPs choose to charge more for
data, then this price increase could provide a competitive advantage to
the providers of top of book data as it would become relatively less
expensive.
    The proposed requirement on the exclusive SIPs to disseminate the
accelerated odd-lot information until the exclusive SIPs are retired,
would guarantee that the odd-lot information would be
disseminated.\653\ This aspect of the proposal presents the possibility
that the new requirements on the SIPs could reduce competing
consolidator competition, which could reduce the expected benefits of
the MDI Rules. However, this effect could be small because non-SIP
competing consolidators would still have an opportunity to compete for
a significant market share. The proposed requirement could increase the
competitive advantage of exclusive SIP competing consolidators relative
to non-SIP competing consolidators \654\ because they would have
established a market for odd-lot information before having to face
competition. Because data users could increase the costs to switch to
another competing consolidator, they could stay with a SIP competing
consolidator to avoid incurring those costs. The proposal could also
reduce the costs for exclusive SIPs to become competing consolidators
by accelerating those costs before they transition, increasing the
likelihood that they would do so.\655\ The Commission recognizes that
this additional competitive advantage could dissuade some potential
competing consolidators from entering the market but believes it is
reasonable to expect this to have a limited effect on competition. In
particular, if competing consolidators can offer a lower latency
product, they can capture a part of the market that the proposal would
not affect--those who would use the odd-lot information in ways other
than visual display.\656\ If this market is significantly bigger than
the visual display market, the competitive advantage of the exclusive
SIPs would be less likely to dissuade entry and competing consolidators
could have sufficient incentive to enter the market, thus limiting the
effect on competition from the proposal.
---------------------------------------------------------------------------

    \653\ See infra section V.D.5.c for additional discussion of the
effects of this requirement, such as to guarantee that the odd-lot
information would be disseminated. While this proposal requires the
exclusive SIPs to distribute odd-lot data, the MDI Rules do not
require the competing consolidators to disseminate odd-lot data.
However, the MDI Adopting Release anticipated that at least one
competing consolidator will do so because there would be demand for
the data. See supra section V.C.3.
    \654\ See MDI Adopting Release, supra note 5, for a discussion
of how competing consolidators have higher barriers to entry than
exclusive SIPs, such as in the form of compliance costs associated
with Reg SCI.
    \655\ In the MDI Adopting Release, the Commission anticipated
that both exchanges operating exclusive SIPs would have strong
incentives to enter the competing consolidator market. See MDI
Adopting Release, supra note 5, at V.C.2.(a).(ii).
    \656\ See discussion in section V.D.5.b.
---------------------------------------------------------------------------

3. Capital Formation
    The Commission expects that the proposal could enhance capital
formation through two channels. First, the proposed reduction in the
access fee cap would reduce the amount of access fees paid by liquidity
demanders, who are more likely to be non-high-frequency traders.\657\
Analysis presented above in Table 11 estimates that, if the proposal
had been in place in the first six months of 2022, then it would have
saved liquidity demanders approximately $1.56 billion in access fees
not paid in that period. Similarly, the Commission expects that the
proposal would likely lead to an overall reduction in transaction costs
due to the reduction in the tick size.\658\ Table 4 indicates that
approximately 56% of trading volume occurs in stocks that are tick-
constrained and this volume can be expected to experience a decrease in
transaction costs due to a lower tick size facilitating bid and ask
prices that better equate liquidity supply and demand. Lower
transaction costs caused by the lower tick size for some stocks and the
lower access fee mean more capital available to investors to fund
investment.
---------------------------------------------------------------------------

    \657\ See discussion in section V.C.1 and V.C.2.
    \658\ See supra section V.D.1.

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

F. Reasonable Alternatives

    This section considers alternatives to the proposal. These
alternatives would have different costs and benefits than the proposal
and these relative costs and benefits are discussed in this section.
The alternatives are organized around three key elements of the
proposal: the extension of rule 612 to apply to trading increments;
alternative tick sizes; and alternative access fee regimes. These
alternatives could be used together or in combination with each other
and could also be paired with other elements of the proposal. Where
applicable the Commission, when considering the economic impact of an
alternative, has specified which alternatives would likely be paired
together.
1. Alternative Trading Increment
    A primary motivation for extending rule 612 to apply to minimum
pricing increments for trading (or ``trading increments'') is to
provide exchanges and ATSs an improved opportunity to potentially
innovate in ways that would allow them to be more competitive in terms
of attracting retail order flow, which could in turn increase overall
competition for retail trades and lead to higher quality order
executions for retail trades.\659\ This section discusses two
alternative methodologies that the Commission could pursue to level the
playing field in this regard between exchanges and ATSs on the one hand
and OTC market makers on the other in terms of competing for retail
order flow. It also discusses the economic effects of choosing not to
extend rule 612 to apply to trades.
---------------------------------------------------------------------------

    \659\ See text surrounding supra note 239.
---------------------------------------------------------------------------

a. $0.001 Trading Increment
    Instead of modifying rule 612 to apply to trades, the Commission
could instead modify rule 612 to require trading of all stocks priced
equal to or greater than $1.00 to occur in increments of $0.001
regardless of the tick size applicable to quotes. For stocks with
prices less than $1.00 the Commission would propose no change relative
to the proposal: stocks priced less than $1.00 would be allowed to
trade in increments of $0.0001. This alternative would also preserve an
exception for midpoint or benchmark trades, such as VWAP trades, to
execute at finer price increments.
    This alternative would preserve the ability for exchanges and ATSs
to potentially innovate in order to try and attract retail order flow,
though to a lesser extent than would be expected of the proposal by
creating a level playing field with respect to the trading increment
between exchanges and ATSs on the one hand and OTC market makers on the
other.\660\ Under this alternative suppliers of liquidity would, in
many instances, be restricted to post their quotes at price increments
larger than the trading increment. Relative to the proposal, this could
be expected to lower the amount of order flow executed at exchanges
that rely on posted liquidity to attract trading interest. This
alternative would also allow OTC market makers such as wholesalers to
offer price improvement on a price lattice that is at least as fine and
in some cases finer than what is included in the proposal.\661\ The net
effect of this alternative on retail price improvement is uncertain. As
with the proposal it is not clear whether constraining retail price
improvement to a finer price lattice would on average improve or harm
the total amount of price improvement received by retail traders
relative to what they currently receive.\662\ In some cases
constraining the lattice upon which price improvement can be offered
could improve price improvement relative to the baseline by inducing
OTC market makers to round up price improvement. In other cases they
may round down. The net effect is uncertain.
---------------------------------------------------------------------------

    \660\ See supra section V.E.2.a.ii.
    \661\ For stocks with a $0.001 tick, this alternative would
offer the same price lattice for price improvement as the proposal.
For stocks with a wider tick, this alternative would offer a finer
pricing lattice for wholesalers to offer price improvement relative
to the proposal.
    \662\ See supra section V.D.5.
---------------------------------------------------------------------------

    While the net effect of this alternative on retail price
improvement is uncertain relative to the baseline, the proposal's net
effects are more uncertain. This is because allowing retail price
improvement to always occur in increments of $0.001 is a smaller
deviation from the baseline than what is considered in the proposal.
    This alternative would have somewhat lower implementation costs
relative to the proposal. This is because market participants would not
have to develop trading systems that have to account for four tick
sizes for stocks priced equal to or greater than $1.00 and where the
trading increment can change periodically. Instead, they would have to
design systems with only one trading increment that applies to all
stocks with prices equal to or greater than $1.00 which would be
consistent through time. Consequently, the Commission estimates that
this alternative would decrease one-time implementation costs by $1.1
million relative to the proposal.\663\
---------------------------------------------------------------------------

    \663\ A uniform trading increment would primarily affect trading
centers as opposed to other market participants. To reflect the
simplicity of this alternative relative to the proposal, the
Commission is revising down the implementation cost for trading
centers by $20,000: from $140,000 per trading center to $120,000,
for a total reduction in cost of approximately [$20,000*54 [ap]]
$1.1 million.
---------------------------------------------------------------------------

b. Do Not Apply Rule 612 to Trading
    The Commission could amend rule 612 to apply only to accepting,
ranking, and quoting but not to trading--reflecting the current
baseline application of rule 612. The advantage to this alternative
would be that broker-dealers, including wholesalers, could still offer
price improvement relative to exchanges in whatever increments they
choose--leaving unchanged a wholesaler's ability to offer price
improvement relative to the baseline. This alternative would eliminate
the uncertainty in the proposal regarding how applying the tick
increment to trading could affect retail price improvement.\664\
---------------------------------------------------------------------------

    \664\ Id.
---------------------------------------------------------------------------

    Not applying the tick increment to trading would reduce the ability
of exchanges and ATSs to potentially innovate in ways that could make
them more competitive at some point when competing for retail order
flow. This would occur because the OTC market makers would retain their
advantages in terms of sub-penny pricing that exchanges and ATSs do not
have.\665\
---------------------------------------------------------------------------

    \665\ See supra section V.C.1. for a discussion on why the
application of the tick size to only quoting provides an advantage
to wholesalers competing for order flow.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the compliance costs
associated with this alternative would be less than those discussed for
the proposal.\666\ The proposal would require market participants to
update systems to account for rule 612 being applied to trading
systems. This alternative would remove that proposed expansion of rule
612 and would thus lower the associated compliance costs. The
Commission estimates that this alternative would reduce the one-time
implementation costs of the proposal by an estimated $3.8 million.\667\
---------------------------------------------------------------------------

    \666\ See supra section V.D.6.
    \667\ Not applying rule 612 to trading increments would
primarily affect the implementation costs associated with trading
venues as opposed to other market participants. For this alternative
the Commission estimates that this alternative would lower
compliance costs for trading centers by half because that the
alternative would only require modifications to one aspect of the
systems of market participants (quoting) as opposed to both quoting
and trading. Thus, this alternative would lower the initial $140,000
compliance cost estimate for trading centers by $70,000, to $70,000,
for a total reduction in cost of approximately [$70,000*54 [ap]]
$3.8 million.

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

c. Segmented Trade Exemption
    Similarly, the Commission could also apply the tick increment to
trading and quoting, but exempt segmented trades, such as most retail
trades, from the trading requirements of rule 612 in one of two ways as
follows. First, to conform with current retail liquidity programs, the
Commission could allow a lower uniform trading and quoting increment of
$0.001 for segmented orders such as those executed off-exchange (such
as by a wholesaler) or on-exchange Retail Liquidity Program in stocks
priced equal to or greater than $1.00. This alternative would allow for
qualifying segmented orders in an exchange retail liquidity program or
an off-exchange trading center such as a wholesaler to receive price
improvement on qualifying orders in increments of $0.001. Second, the
Commission could exempt segmented trades from the trading requirements
of rule 612 altogether, thus not placing any restrictions on the
trading increment of segmented trades.
    Either of these alternatives would produce the same net effect on
retail price improvement as those discussed earlier in this section.
Specifically, applying a $0.001 increment to retail trades would lead
to a net uncertain effect on overall retail price improvement, while
exempting retail trades from the trading requirements of proposed rule
612 would leave retail price improvement unchanged relative to the
baseline.
    Additionally, the effect on ATSs' and exchanges' abilities to
potentially innovate to attract retail order flow would likewise be
unchanged. In the case of a $0.001 segmented trading tick, the ability
for exchanges and ATSs to potentially innovate in ways that could
increase their ability to compete for retail order flow would be
increased relative to the baseline and would be similar to the
proposal. In the case where retail trades are exempt from the trading
requirements of proposed rule 612 the competitive position of exchanges
and ATSs relative to OTC market makers would be unchanged relative to
the baseline.
    The originating broker would need to identify qualifying segmented
orders \668\ with the addition of a segmented order identifier affixed
to the order. This alternative would use a two-part definition of the
term ``segmented order.'' First, the order must be for an account of a
natural person, or an account held in legal form on behalf of a natural
person or group of related family members. Second, for such an account,
the average daily number of trades executed in NMS stocks must be less
than 40 in each of the preceding six calendar months. Defining
``segmented order'' this way would encompass the marketable orders of
individual investors with expected low adverse selection costs that
retail brokers currently route to wholesalers for handling and
execution. These orders already are segmented in practice.
---------------------------------------------------------------------------

    \668\ For this alternative the Commission would define an
originating broker as any broker with responsibility for handling a
customer account, including, but not limited to, opening and
monitoring the customer account and accepting and transmitting
orders for the customer account.
---------------------------------------------------------------------------

    Limiting qualifying segmented orders to ``natural persons'' for
purposes of this alternative would draw on existing rules designed to
identify the orders of individual investors. For example, the
definition of ``retail customer'' in the Commission's Regulation Best
Interest (``Regulation BI'') is limited to a ``natural person.'' \669\
Moreover, several national securities exchanges operate programs for
trading ``retail'' orders that are limited to accounts of natural
persons or certain accounts on behalf of natural persons. This
definition of segmented order would be closely related to these
rules,\670\ as well as to FINRA's fee schedule for Nasdaq's Trade
Repository Facility.\671\ Patterning the definition of segmented order
on existing SRO rules would leverage market knowledge. This would help
minimize the costs of compliance because broker-dealers would already
be familiar with identifying orders as for the accounts of natural
persons, or for related accounts, in these other contexts. In addition
to the accounts of natural persons themselves, the definition would,
consistent with SRO rules, cover accounts held in legal form on behalf
of natural persons or groups of related family members. Including
related family members in this alternative is designed to not restrict
the types of arrangements that may be set up to benefit family groups,
including individual retirement accounts, corporations, and limited
liability companies for the benefit of related family members.
---------------------------------------------------------------------------

    \669\ 17 CFR 240.15l-1(b)(1) (defining ``retail customer'' as,
among other things, a natural person who receives a recommendation
of any securities transaction from a broker-dealer and uses the
recommendation primarily for personal, family, or household
purposes).
    \670\ E.g., IEX Rule 11.190(b)(15) (providing, among other
things, that ``[a] Retail order must reflect trading interest of a
natural person'' and that ``[a]n order from a retail customer can
include orders submitted on behalf of accounts that are held in a
corporate legal form--such as an Individual Retirement Account,
Corporation, or a Limited Liability Company--that have been
established for the benefit of an individual or group of related
family members, provided that the order is submitted by an
individual.''); and Nasdaq, Equity 7, section 118 (defining a
``Designated Retail Order'' as originating from a ``natural person''
and explaining that ``[a]n order from a `natural person' can include
orders on behalf of accounts that are held in a corporate legal
form--such as an Individual Retirement Account, Corporation, or a
Limited Liability Company--that has been established for the benefit
of an individual or group of related family members, provided that
the order is submitted by an individual'').
    \671\ FINRA Rule 7620A (defining a ``Retail Order'' as
originating from a ``natural person'' and explaining that ``[a]n
order from a `natural person' can include orders on behalf of
accounts that are held in a corporate legal form, such as an
Individual Retirement Account, Corporation, or a Limited Liability
Corporation that has been established for the benefit of an
individual or group of related family members, provided that the
order is submitted by an individual'').
---------------------------------------------------------------------------

    The second part of such a definition of segmented orders would
focus on the frequency of trading in an account. It would limit the
average daily number of trades executed in NMS stocks in an account to
less than 40 for each of the six preceding calendar months. This would
exclude very active traders whose orders are likely to impose a much
higher level of adverse selection costs on liquidity providers than the
less-active accounts that are more typical of individual investors. For
example, very active traders may use sophisticated trading tools, such
as application programming interfaces (APIs) and computer algorithms,
to submit their orders. These tools can enable highly active trading
strategies that impose much higher adverse selection costs on liquidity
providers than the manual placement of orders by a natural person.
Rather than prohibiting any opportunity for investors to use
potentially beneficial trading tools,\672\ however, the proposed
definition specifies a maximum level of trading activity as a means to
limit the level of adverse selection costs.
---------------------------------------------------------------------------

    \672\ Some SRO rules, for example, prohibit the use of any
computerized methodology for submitting retail orders. See, e.g.,
NYSE Rule 7.44(a)(3) (defining ``retail order'' in the context of
NYSE's RLP to require that ``the order does not originate from a
trading algorithm or any other computerized methodology'').
---------------------------------------------------------------------------

    The level is supported by an analysis of the distribution of order
activity across accounts reported to the Consolidated Audit Trail as
being held for the benefit of an ``Individual Customer'' for the first
six months of 2022.\673\ Across this period, slightly

more than 99.9% of Individual Customer accounts originated, on an
average daily basis, 40 or fewer orders associated with a trade. The
median number of daily-average orders associated with a trade from
accounts at or below this threshold was less than one.\674\ The median
number of daily-average orders associated with a trade from accounts
above this threshold was approximately 68.\675\ Accordingly, the
threshold in the proposed rule is designed to capture the overwhelming
majority of individual investor accounts while excluding accounts that
might impose a higher level of adverse selection costs on liquidity
providers.\676\
---------------------------------------------------------------------------

    \673\ Analysis of Consolidated Audit Trail data for all orders
originated from an account marked as held for the benefit of an
Individual Customer, Jan. 1, 2022, through June 30, 2022. This
analysis counted any order associated with one or more trades or
fills in an order lifecycle. For the Consolidated Audit Trail,
account type definitions are available in Appendix G to the CAT
Reporting Technical Specifications for Industry Members (https://catnmsplan.com/), for the field name ``accountHolderType.'' Account
types represent the beneficial owner of the account for which an
order was received or originated, or to which the shares or
contracts are allocated. Possible types are: Institutional Customer,
Employee, Foreign, Individual Customer, Market Making, Firm Agency
Average Price, Other Proprietary, and Error. An Institutional
Customer account is defined by FINRA Rule 4512(c) as a bank,
investment adviser, or any other person with total assets of at
least $50 million. An Individual Customer account means an account
that does not meet the definition of an ``institution'' and is also
not a proprietary account. Therefore, the CAT account type
``Individual Customer'' includes natural persons as well as
corporate entities that do not meet the definitions for other
account types.
    \674\ Id.
    \675\ Id.
    \676\ In other contexts, national securities exchanges currently
characterize certain types of orders according to the level of
activity associated with a market participant's account. With
respect to trading in listed options, several exchanges include the
concept of ``Professional'' order, and these orders, which must be
identified as such, are distinguished from other customer orders.
For example, pursuant to Cboe Exchange, Inc. (``CBOE'') Rule 1.1,
``Professional'' means any person or entity that is not a broker or
dealer in securities and places more than 390 orders in listed
options per day on average during a calendar month for its own
beneficial account(s). Under CBOE's rules, all Professional orders
are distinguished from other public customer orders (i.e., orders
for persons other than broker-dealers), must be marked as such, and
are handled by CBOE's trading platform in the same manner as broker-
dealer orders unless otherwise specified. See CBOE Rule 1.1. See
also NYSE Arca Rule 1.1; Nasdaq, Options 1, section 1(a)(47); and
BOX Rule 100(a)(52).
---------------------------------------------------------------------------

    The Commission expects that this alternative would result in
additional costs beyond those of the proposal. The Commission believes
it reasonable to expect that the definition of a qualifying segmented
retail order used for purposes of this alternative would result in
direct initial and ongoing costs to broker-dealers associated with the
monitoring of retail accounts and the affixation of an identifier to
segmented retail orders. The Commission estimates that a total of 157
originating brokers and routing brokers would incur a one-time
implementation costs of $170,000 to add a segmented order marker to
existing systems.\677\ The 157 originating brokers would incur an
estimated additional initial cost of $33,760 per broker related to
hiring in-house and outside counsel to review and update existing
policies and procedures to identify segmented retail orders along with
$3,472 per year for ongoing review.\678\ The Commission would not
expect the collection of data on account trading frequency to introduce
new costs as brokers are already required to maintain customer trading
information.\679\ However the Commission estimates that originating
brokers would have to modify existing technology to explicitly monitor
customer trade frequency for an estimated one-time cost per broker-
dealer of $95,480.\680\ Market centers where segmented retail orders
would be transacted are estimated to have to incur similar initial one-
time costs of $170,000 to update their systems to receive and manage
orders marked as a segmented retail order.
---------------------------------------------------------------------------

    \677\ This estimate is based on industry sources of the cost to
program systems to add a new marking classification and adjusted for
inflation. See, e.g., Securities Exchange Act Release No. 94313
(Feb. 25, 2022), 87 FR 14950, 14976 (Mar. 16, 2022) (proposing
amendments to Regulation SHO) (``Regulation SHO Amendment
Proposal'').
    \678\ The Commission estimates the initial costs related to
employing legal counsel to review and update policies to be:
(Attorney at $462 for 40 hours) + (Compliance Counsel at $406 for 10
hours) + (Deputy General Counsel at $663 for 5 hours) + (Chief
Compliance Officer at $589 for 5 hours) + (10 hours of review x
($496/hour for outside counsel service) = $33,760. With ongoing
annual costs to be: (Attorney at $462 for 4 hours) + (Compliance
Counsel at $406 for 4 hours) = 8 ongoing burden hours and $3,472.
    \679\ See 17 CFR 240.17a-3(a) (requiring broker-dealers to make
and keep, among other things, current blotters containing an
itemized daily record of all purchases and sales of securities and
the account for which each such purchase and sale was effected).
    \680\ The Commission estimates this cost to be: (Sr. Programmer
at $368 for 160 hours) + (Sr. Database Administrator at $379 for 40
hours) + (Sr. Business Analyst at $305 for 40 hours) + (Attorney at
$462 for 20 hours) = 260 initial burden hours and a monetized cost
of $95,480.
---------------------------------------------------------------------------

    Alternatively, the Commission could use a definition of retail
order that is qualitative in nature, for example as originating from a
natural person and not using an application-program interface. Relative
to the alternative outlined above, this alternative might be less
costly because there would not be the need to monitor trading activity.
However, it would still be necessary to adopt systems to identify
retail customers. Moreover, this alternative might achieve less of the
benefit of harmonization across trading and quoting, as off-exchange
venues have greater ability to segment and therefore to attract the
retail order flow.
2. Alternative Tick Sizes
    One reason why the Commission chose the particular tick size
cutoffs in this proposal was to have sufficient ticks intra-spread to
preserve meaningful price improvement.\681\ Most current price
improvement would be unaffected by the proposal because it occurs as a
result of a midpoint trade, or it occurs in increments that currently
align with the baseline tick of $0.01.\682\ However, for the minority
of price improvement that could potentially be affected by the tick
size change and the application of the tick size to trading
applications, 4-8 ticks intra-spread can help preserve meaningful price
improvement opportunities--though the net effect is uncertain.\683\ The
range of 4-8 ticks intra-spread comes at the cost of increasing the
likelihood that, due to natural variation in spreads, a stock could
trade with a smaller tick when a wider tick might provide a better
trading environment.\684\ If the Commission were to adopt one of the
alternatives in section V.F.1 then the Commission could utilize
alternative tick regimes that do not consider the need to provide price
improvement only in units of the tick size. This section discusses
alternative tick size regimes that the Commission could implement in
this case.
---------------------------------------------------------------------------

    \681\ See supra section II.F.2 for additional discussion.
Specifically, see text surrounding supra note 210 where the
Commission states, ``[t]he Commission believes that proposing to
vary the minimum pricing increments . . . represents a balancing of
pricing, liquidity, complexity, and price improvement
opportunities.'' See also text surrounding supra note 221 where the
Commission states ``The Commission also selected these particular
pricing increments because, as described above, the proposed
amendments to rule 612 are designed to (1) correlate the Time
Weighted Average Quoted Spread to the minimum pricing increments by
limiting the number of potential price points within the spread
which in turn should mitigate the loss of liquidity that can occur
when the minimum tick size is reduced, and (2) preserve meaningful
price improvement for the majority of NMS stocks that would trade at
minimum pricing increments that are $0.005 or less.''
    \682\ See Table 3 and surrounding analysis finding that only 18%
of current price improvement occurs in sub-penny increments and not
as a result of a midpoint trade.
    \683\ See supra section V.D.5 for additional analysis on this
topic.
    \684\ See Table 10 and surrounding analysis.
---------------------------------------------------------------------------

    To clarify the discussion, for all alternatives discussed in this
section the following conditions apply. First, the Commission would not
amend rule 612 to apply to trading situations. Thus, all alternatives
here apply tick sizes only to quoting.\685\ This allows the Commission

to consider tick size regimes without having to balance the need for
OTC market makers to have sufficient ticks intra-spread in order to
offer price improvement, though these alternatives would not offer the
benefit of leveling the playing field across execution venues with
respect to price improvement. Second, the tick sizes discussed refer
explicitly to stocks priced equal to or greater than $1.00. For stocks
with a share price of less than $1.00 in every case there would be no
change in rule 612 relative to the baseline--i.e., a tick of $0.0001
that does not apply to trading.\686\ This reflects the fact that in the
proposal the only change to rule 612 for stocks priced less than $1.00
was that the tick size of $0.0001 would also apply to trading. Given
the fact that all alternatives in this section are predicated on rule
612 not being expanded to trading, the trading environment for stocks
priced less than $1.00 would not change relative to the baseline, and
so the analysis in this section focuses exclusively on tick sizes for
stocks priced equal to or greater than $1.00. These first two
conditions would lower implementation costs. Third, the access fee cap
would not deviate from the proposal. Specifically, for stocks priced
equal to or greater than $1.00 the access fee cap would be 10 mils
whenever the tick size is greater than or equal to $0.002 and 5 mils
for stocks with tick sizes less than $0.002 and prices greater than or
equal to $1.00. For stocks priced less than $1.00 the access fee cap
would be 0.05% of the value.\687\ This condition acknowledges that the
alternative tick sizes discussed in this section do not affect the
economics of access fees or the reasons why the Commission is seeking
to reduce the access fee.\688\ Consequently, for all alternatives
discussed in this section the Commission would retain the tick size
regime in the proposal. This condition would lead to the same
implementation costs associated with access fee caps that is presented
in the proposal.\689\ Fourth, all proposals in this section would
provide a tick size exception for midpoint trades and benchmark trades
such as VWAP or TWAP trades--reflecting the value that such trades
offer to investors.\690\ This condition likewise does not deviate from
the proposal, and thus the compliance costs associated with this
condition are accounted for in Section V.D.6. Fifth, for the quoted
spread based tick size regimes the Commission would use the same
process described in the proposal to determine a stock's Time-Weighted
Average Quoted Spread: Evaluation Periods that last one month and occur
four times per year where Time-Weighted Average Quoted Spread is the
time weighted quoted spread during normal trading hours.\691\ Because
this condition does not represent a change relative to the proposal,
the implementation costs would be as discussed in the proposal.\692\
---------------------------------------------------------------------------

    \685\ The economic effects of not applying rule 612 to trading
are discussed in section V.F.1. Alternatively, the Commission could
adopt any of the other alternatives presented in section V.F.1, the
effect of which would be to combine the economic effects discussed
in this section with those of the specific alternative in V.F.1
adopted.
    \686\ This stems from the first assumption which is that rule
612 is not amended in this alternative to apply to trading
situations. For stocks with prices less than $1.00, this was the
only proposed change to rule 612 relative to the baseline.
Consequently, the economic effects of this aspect of the
alternatives discussed in this section are not discussed here. See
section V.C.1 for a discussion of the tick size baseline for stocks
with prices less than $1.00.
    \687\ The economic effects of this aspect of the alternatives
discussed in this section are not discussed here, but are discussed
in the discussion of the proposal. See, e.g., sections V.D.2 and
V.E.
    \688\ See supra sections III.C, V.C.2, and V.D.2.
    \689\ See supra section V.D.6 for a discussion of these
implementation costs.
    \690\ See text surrounding supra note 247 for a discussion of
the role that midpoint and benchmark trades play.
    \691\ See supra section II.F.2.a for additional details on this
process.
    \692\ See supra section V.D.6 of a discussion of the costs of
implementing this aspect of the proposal.
---------------------------------------------------------------------------

a. Quoted Spread Based Approaches
    Without the need to balance the ability of OTC market makers such
as wholesalers to offer retail price improvement when determining the
tick size thresholds, the Commission could shrink the bands where the
given tick sizes apply or consider different tick size structures.
Shrinking the bands limits the risk that stocks may trade with too many
ticks intra-spread due to time series variation in quoted spreads by
both limiting the total number of stocks that receive a tick size
reduction and also limiting the size of the tick size reduction for
stocks that do qualify for a tick size reduction relative to the
proposal.
    In Table 10, the Commission estimated that if the proposal had been
implemented in the first six months of 2022, approximately 3.4% of
share volume and 7.4% of dollar volume would have received a lower tick
size and then transacted when spreads were wider than 10 ticks intra
spread--the point at which analysis suggested TSP stocks would have
traded better with a wider tick.\693\ By shrinking the bands where the
tick sizes apply the Commission could mitigate the risk of shrinking
the tick too much and harming market quality for some trading volume
while still providing relief to stocks that are currently tick or near-
tick-constrained in the current $0.01 tick regime.
---------------------------------------------------------------------------

    \693\ See supra section V.D.1.
---------------------------------------------------------------------------

    In addition to narrowing Time-Weighted Average Quoted Spread bands
at which the proposed tick sizes apply, the Commission could also
revise the total number of tick sizes. The proposal has 4 tick sizes
for stocks priced equal to or greater than $1.00. The Commission could
adjust this number down to increase simplicity but at the cost of
potentially assigning a stock to a tick regime that may not be optimal,
or up to expand the tick size regime to stocks with wider spreads--
increasing complexity but ensuring that all stocks have a tick size
that is tailored to their Time-Weighted Average Quoted Spread.
i. Alternative Tick Threshold
    The proposal contains a total of 4 tiers for stocks equal to or
above $1, and targets between 4 and 8 ticks intra-spread.
Alternatively, the Commission could reduce the number of tiers from 4
to 3, with similar ticks but with tighter criteria for reducing the
tick size, as follows:
    i. No smaller than $0.0025, if the Time-Weighted Average Quoted
Spread for the NMS stock during the Evaluation Period was less than
$0.01.
    ii. No smaller than $0.0050, if the Time-Weighted Average Quoted
Spread for the NMS stock during the Evaluation Period was greater than
$0.01 but less than or equal to $0.02;
    iii. No smaller than $0.01, if the Time-Weighted Average Quoted
Spread for the NMS stock during the Evaluation Period was greater than
$0.02.
    This alternative would target 2-4 ticks intra-spread. The empirical
analysis presented in Section V.D.1 suggested that stocks with less
than 2 ticks intra-spread generally benefited from the reduction in the
tick size that accompanied the end of the TSP while stocks with more
than 15 ticks may have been harmed. By targeting 2-4 ticks intra-spread
this alternative would provide relief to stocks that are currently tick
or near-tick-constrained while also reducing the risk that a stock is
harmed by trading with too many ticks intra-spread.
    A key difference of this alternative relative to the proposal is
that a smaller fraction of overall trading volume would be assigned a
smaller tick size: only those stocks with Time-Weighted Average Quoted
Spreads less than $0.02. Thus a higher fraction of overall trading
volume would remain at the $0.01 tick size.
    The Commission estimates that the costs to implement this
alternative

would be similar or slightly lower as compared to the proposal because
there would be three rather than four tick sizes that market
participants would be required to adapt to, and the process for
determining which stock received which tick size would be the same as
the proposal.
    Relative to the proposal, this alternative would more specifically
target trading volume that is tick or near-tick-constrained as a stock
would be required to have a Time-Weighted Average Quoted Spread less
than $0.02 to qualify for any reduction in the tick size. Additionally,
by targeting 2-4 ticks intra-spread instead of 4-8, this alternative
would lower the risk that normal variation in quoted spreads through
time could lead trading in some stocks some of the time to be worse off
relative to the proposal.
    Another difference between this alternative and the proposal
pertains to what would occur should a reduction in the tick size result
in a widening of spreads. Consider, for example, a stock that trades at
a Time-Weighted Average Quoted Spread of $0.013. If the proposal were
adopted, and after the implementation period, such a stock could go
from a tick size of $0.01 to $0.001. One possible scenario is that
spreads might widen (though the analysis suggests this is not the most
likely scenario). Should spreads widen to, say $0.03, the tick would
revert to $0.005; however spreads would be wider than they had been. In
contrast, under this alternative, the stock would be assigned to the
$0.005 bucket, rather than the $0.002 bucket. Spreads would be less
likely to widen, but should they do so (consider $0.03), the tick would
revert to $0.01. Under the proposal, spreads would have to undergo a 3-
fold increase, to $0.04, to once again qualify for $0.01. Under this
alternative, due to the less severe reduction in the tick size relative
to the proposal, the spread would be less likely to widen due to a
smaller tick, and were it to widen, it would need a less severe
increase in the spread to revert to a tick of $0.01.
    This alternative would also result in a smaller financial impact on
any exchange relying on access fee revenue because none of the buckets
would qualify for the 5 mil access fee. Additionally, because the
smallest tick size would be assigned an access fee cap of 10 mils, the
access fee cap for stocks trading beneath $1.00 would be 0.10% rather
than 0.05% in the proposal--resulting in a smaller reduction in
exchange transaction revenue for this trading volume.
ii. Two-Tiered Alternative
    Alternatively, the Commission could simplify the tick size proposal
and consider a two-tiered tick alternative for stocks priced equal to
or greater than $1.00 where only tick-constrained stocks, i.e., those
with Time-Weighted Average Quoted Spreads less than or equal to $0.011
during an evaluation month, receive a tick of $0.005 while all other
stocks retain a tick of $0.01.\694\
---------------------------------------------------------------------------

    \694\ For stocks with prices equal to, or greater than, $1.00
per share, a $0.01 tick would provide a floor on the feasible quoted
spread (see supra note 448). See supra note 448 for a discussion of
using a $0.011 threshold for the spread of tick-constrained stocks.
---------------------------------------------------------------------------

    One advantage of this alternative relative to the proposal is that
it would be simpler than the proposal as it would eliminate two of the
tick sizes. Market participants, but retail investors in particular,
might find it less confusing if the only two tick sizes were one penny
and half a penny.
    Also, to the extent that the proposal raises the concern that tick
sizes would be too small for some stocks, this alternative would have
the benefit that fewer stocks would be trading at a smaller tick, and
the minimum tick itself would be substantially wider.
    However, the analysis in Section V.D.1 suggests that this
alternative could leave some stocks with a spread that is artificially
wide, specifically near-tick-constrained stocks which could trade at
spreads that are wider than they would be with a smaller tick. For
example, a stock with average spread of $0.013 would be frequently
trading with just one tick in between the best bid and best offer.
Empirical analysis from section V.D.1 suggests that reducing the tick
for this stock would, on average, reduce costs for investors. Moreover,
if a stock priced equal to or greater than $1.00 has a Time-Weighted
Average Quoted Spread of $0.005 then under the proposed changes to rule
612 that stock would receive a tick size of $0.001 providing 5 ticks
intra-spread. Under this alternative that same stock would receive a
$0.005 tick and would be tick-constrained with only one tick intra-
spread. Albeit with the smaller tick relative to the current
environment the distortive effects of the tick size would be smaller
than what they currently are.
    This alternative would have somewhat lower implementation costs
relative to the proposal due to the fact that market participants would
only be required to program systems to account for two tick sizes
instead of four tick sizes. However, the reduction in cost relative to
the proposal would be relatively small because market participants
would still be required to build systems to adapt to multiple tick
sizes that could periodically change. Once this functionality is built
out, the Commission preliminarily believes that the cost of two tick
size tiers would not be significantly larger than the cost of four tick
size tiers. Thus, while acknowledging that the implementation costs of
this proposal would likely be somewhat lower than those of the
proposal, the Commission believes that the estimates for the proposal
would be reasonable and seeks comment on this belief.
    Because no stock would be assigned a tick size of $0.001 in this
alternative, the access fee cap for all transactions priced greater
than $1.00 would be 10 mils. At this level the Commission expects that
IEX could maintain its current net capture on all transactions priced
greater than $1.00 and thus a cost of the proposal to IEX would be
eliminated. Additionally to harmonize the access fee cap for trading
above and below $1.00 the Commission would enact a transaction fee cap
of 0.1% (instead of 0.05%) for transactions priced less than $1.00.
This higher transaction fee cap would effectively double, relative to
the proposal, the revenue that the exchanges could earn from
transactions priced less than $1.00 which would cut in half the
expected lost revenue associated with the proposal articulated in Table
12. Specifically, this alternative would reduce the estimated lost
revenue to exchanges by approximately $45 million per year.\695\
---------------------------------------------------------------------------

    \695\ In Table 12, the Commission estimated that the reduction
in the access fee cap for transactions priced less than $1.00 from
the baseline 0.3% to 0.05% in the proposal would lead to
approximately $89 million per year reduction in exchange transaction
revenue. Half of $89 million is approximately $45 million.
---------------------------------------------------------------------------

iii. Include Wider Ticks Than $0.01
    The Commission could expand the proposal to include ticks wider
than $0.01 for stocks with spreads wider than $0.04. In doing so the
Commission could seek to target 4-8 ticks intra-spread for all wider-
spread stocks. This alternative would apply the results from the
empirical analysis suggesting that stocks with two or fewer ticks
intra-spread would benefit from a reduction in the tick size while
stocks with 10-15+ ticks intra spread would not.\696\ Consequently, the
Commission could extend the 4-8 tick intra-spread target in the
proposal to all stocks. For example stocks with spreads greater than
$0.08 and less than $0.16 could have a tick of

$0.02. Stocks with spreads greater than $0.16 but less than $0.32 could
have a tick size of $0.04 and so on.
---------------------------------------------------------------------------

    \696\ See analysis in supra section V.D.1, Table 9.
---------------------------------------------------------------------------

    This alternative could potentially improve the trading environment
for stocks with wider spreads by minimizing the costs associated with
having too many ticks intra-spread.\697\ It would also increase
complexity relative to the proposal because market participants would
need to adapt to an environment with a larger number of tick sizes.
---------------------------------------------------------------------------

    \697\ See Barardehi, et al. (2022), supra note 85.
---------------------------------------------------------------------------

iv. Alternative Proposed in NASDAQ White Paper
    Nasdaq has offered an alternative in a white paper.\698\ This
alternative would have stocks trading with spreads below 0.011 receive
a tick size of $0.005. Stocks with spreads between $0.01 and $0.02
would continue to trade at an increment of $0.01, stocks with spreads
between $0.02 and $0.05 would trade at an increment of $0.02, between
$0.05 and $0.1 at $0.05, $0.1 to $0.25 to $0.10 and those above $0.25
to $0.25. Spreads would be determined every six-months based on the
Time-Weighted Average Quoted Spread over the prior six months. The
Commission believes that the compliance costs of this alternative would
be similar to the proposal due to the similar nature of the
alternative.
---------------------------------------------------------------------------

    \698\ See Nasdaq Intelligent Tick, supra note 180. See also
supra section II.E.2.
---------------------------------------------------------------------------

    This alternative has two distinct disadvantages relative to the
proposal. First, a stated assumption underlying this proposal is that
``stocks should trade at or near their Time-Weighted Average Quoted
Spread.'' \699\ Consequently, the proposal targets at most 2.5 ticks
intra spread for most stocks.\700\ The empirical analysis provided in
Section V.D.1 indicated that TSP stocks that had fewer than two ticks
intra-spread prior to the conclusion of the TSP benefited from the
reduction in the tick size when the stock's tick size reverted from
$0.05 to $0.01. Thus, our analysis indicates that fewer than 2 ticks
intra-spread is on average too few and that stocks would trade better
with more ticks intra spread. Thus this alternative might harm market
quality relative to the proposal for many stocks. Additionally, this
alternative does not provide a mechanism for most stocks to receive a
lower tick size. For example if a stock is trading with a Time-Weighted
Average Quoted Spread of $0.025, under this alternative it would
receive a tick size of $0.02. However, since the tick size also defines
the minimum tick possible this stock could never trade at less than
$0.02 and thus would never qualify for a smaller tick. This
disadvantage could be solved by multiplying all of the tick size
thresholds by some multiple such as 1.1 to allow stocks that become
tick-constrained by the assigned tick to receive a smaller tick size.
---------------------------------------------------------------------------

    \699\ See Nasdaq Intelligent Tick, supra note 180, at 16.
    \700\ The proposal would limit increases in the tick size to
$0.25, and so to the extent that a stock's prevailing spread
surpasses this amount, it could trade at more than 2.5 ticks intra
spread. However, as indicated in Table 4, transactions in stocks
with quoted spreads greater than $0.25 represent less than 4% (20%)
of share (dollar) volume thus the intelligent tick proposal would
target the majority of trading volume with less than 2.5 ticks
intra-spread.
---------------------------------------------------------------------------

    This alternative shares some of the benefits with the proposal. In
both cases the proposal would reduce the risk of pennying by ensuring
that for most stocks there would be relatively few ticks intra-spread.
It reduces the risk that that the proposal could narrow spreads too
much for some stocks. It also provides some relief to tick-constrained
stocks by allowing them to trade at a $0.005 tick.
v. Step-Down/Step-Up Mechanism
    The Commission could alternatively add a ``step-up/step-down''
mechanism to the proposal or to any of the alternatives above to
prevent stocks from transitioning more than one tick size tier at a
time. For example, under the proposal, a stock trading with a $0.005
tick that ends the quarter with a time-weighted average spread of
$0.006 would switch to a minimum increment of $0.001, skipping over the
minimum increment of $0.002. With a step-up/step-down mechanism, this
stock would ``step-down'' to rather than skip the minimum of $0.002;
only stocks with a minimum increment of $0002 and a Time-Weighted
Average Quoted Spread of less than $0.008 would be eligible to move to
a minimum increment of $0.001. Likewise, a stock would be assigned the
next larger tick in the tick size schedule if it traded with a wider
spread than prescribed by its tick size tier, regardless of whether the
spread was large enough to be assigned to a tier with an even larger
tick size.
    A step-up/step-down mechanism would help avoid any potentially
large shifts in tick size under the proposal. This alternative,
however, could prolong the costs associated with being tick-constrained
or near-tick-constrained and tick assignment. Further, this alternative
would be more complex as the resulting tick size would not only depend
on the stock's time-weighted average spread but would also depend on
the stock's prevailing minimum increment. This additional complexity
may lead to confusion amongst market participants who would not
actively track tick size assignments, though in terms of implementation
the Commission does not expect that the additional requirement of
tracking a stock's previous tick size would lead to higher
implementation costs than those in the proposal.
b. Other Approaches
i. Uniform $0.005 Tick for All Stocks Priced Equal to or Greater Than
$1.00
    The Commission could reduce the minimum tick size to a half a cent
($0.005) for the quoting and trading of all NMS stocks that are priced
at or above $1.00. A primary advantage of this alternative is that it
would reduce complexity relative to the proposal as there would be a
uniform tick size for all stocks trading equal to or greater than $1.00
while also allowing tick-constrained stocks a smaller tick.
Additionally, there is a risk that, for unknown reasons, some stocks
that would qualify for a smaller tick under the proposal would trade
better with a wider tick. For these stocks this alternative would be
better than the proposal both because the tick size reduction is not as
severe as the proposal. The disadvantage to this proposal is that, as
shown in section V.D.1, a smaller tick for wide spread stocks can harm
liquidity, thus applying a smaller tick to all securities would likely
harm execution quality for some stocks with wide spreads.
    This alternative would also have lower initial one-time compliance
costs and no ongoing costs relative to the proposal because this
alternative provides just one modification to the current tick size
regime: a reduction in the tick from $0.01 to $0.005 for all stocks
priced greater than $1.00. Thus it would be cheaper to implement. The
Commission estimates that this alternative would lower implementation
costs relative to the proposal by approximately $14 million.\701\
---------------------------------------------------------------------------

    \701\ See Table 13 for enumerated cost estimates of the
proposal. For trading centers, the Commission estimates that this
alternative would lower compliance costs by $90,000 from $140,000 to
$50,000 to reflect the fact that the rule would only apply to
quoting and not to trading, thus only one part of the trading
center's systems would need to be modified and that the
modifications to the quoting systems would be simpler than the
proposal. There would be no one-time or ongoing costs associated
with monitoring Time-Weighted Average Quoted Spreads. Additionally,
entities adjusting order entry systems for the new tick would not
need to adjust their systems to add any tick size dynamism beyond
what exists in the baseline. Thus, the Commission estimates that
entities with order entry systems would see their implementation
costs decline by $7,000 from $11,000 to $5,000 per order entry
system. For the same reasons, the Commission estimates that
operators of smart order routers would see their compliance costs
decrease from $11,000 to $5,000. [$90,000*54 (trading centers) +
$7,000*1,192 (order entry systems) + $7,000*282 (smart order
routers) [ap] $14 million].

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

    Additionally, because no stock would be assigned a tick size of
$0.001 in this alternative, the access fee cap for all transactions
priced greater than $1.00 would be 10 mils if kept proportional to the
tick size. At this level the Commission expects that IEX could maintain
its current net capture on all transactions priced greater than $1.00
and thus a cost of the proposal to IEX would be eliminated.
Additionally to harmonize the access fee cap for trading above and
below $1.00 the Commission would enact a transaction fee cap of 0.1%
(instead of 0.05%) for transactions priced less than $1.00. This higher
transaction fee cap would effectively double, relative to the proposal,
the revenue that the exchanges could earn from transactions priced less
than $1.00 which would cut in half the expected lost revenue associated
with the proposal articulated in Table 12. Specifically, this
alternative would reduce the estimated lost revenue to exchanges by
approximately $45 million per year.\702\
---------------------------------------------------------------------------

    \702\ In Table 12, the Commission estimated that the reduction
in the access fee cap for transactions priced less than $1.00 from
the baseline 0.3% to 0.05% in the proposal would lead to
approximately $89 million per year reduction in exchange transaction
revenue. Half of $89 million is approximately $45 million.
---------------------------------------------------------------------------

ii. Variable Tick Size Based on Price
    The Commission could also implement a tick regime that is based
solely on the share price of the securities. This alternative
effectively would expand the current regime where quotes for NMS stocks
priced less than $1.00 have a tick of one hundredth of a penny while
quotes for NMS stocks priced at or greater than $1.00 have a tick of
$0.01. The advantage to this approach relative to the quoted spread
tick alternative discussed in the previous section is that it is
simpler to implement as it would be a static rule that requires no
computations by the listing exchange. The primary disadvantage to this
alternative relative to using the quoted spread based measures is that
price, while a useful benchmark because it is correlated with quoted
spreads, is not perfectly correlated with the quoted spread--the key
economic variable of interest when determining tick sizes--and stocks
with similar prices can have spreads that vary significantly.\703\ Thus
it is likely that under a price based regime some stocks would have a
tick size that is too wide relative to their quoted spread and others
too small.
---------------------------------------------------------------------------

    \703\ See Mackintosh, supra note 475, for evidence that stock
prices and quoted spreads are correlated but not perfectly so.
---------------------------------------------------------------------------

    The Commission could implement a price based tick schedule as
follows.

------------------------------------------------------------------------
                            Price                                 Tick
------------------------------------------------------------------------
Less than $1.................................................    $0.0001
$1 to $10....................................................      0.001
$10 to $50...................................................      0.005
Greater than $50.............................................       0.01
------------------------------------------------------------------------

    This tick schedule effectively would add two intermediate tick
levels to the current regime. For stocks with prices below $1.00 and
above $50.00, there would be no change relative to the existing tick
regime. However, for stocks with prices between $1.00 and $10.00 the
tick would be $0.001, and for stocks between $10.00 and $50.00 the tick
would be $0.005.
    Table 14 provides descriptive statistics based on data from March
2022 for the various price levels.\704\ The first price group of stocks
is those with prices less than $1.00. Trading in these stocks accounted
for approximately 8% of share trading volume in March 2022. For these
stocks, there would be no change in the trading environment relative to
what is currently in place. Stocks in price group two with prices
between $1.00 and $10.00, i.e., stocks that would be assigned a tick
size of $0.001 under this alternative accounted for a total of 28% of
all share trading volume. Of this trading volume, the majority (78%)
occurred in tick-constrained stocks, while 21% of volume in this price
group occurred in stocks with a spread between $0.01 and $0.10. In this
group of stocks very little trading volume occurred in stocks with a
spread greater than $0.10. Thus, the effect of lowering the tick to a
tenth of a cent for stocks in this price group would likely improve the
trading environment for the 78% of trading that is currently tick-
constrained in this price range. For the remaining 22% of trading
volume in this price category, the trading in stocks that are not
currently tick-constrained, the effect of reducing the tick to a tenth
of a cent could be negative based on the analysis in section V.D.1.
---------------------------------------------------------------------------

    \704\ Each day, total trading volume for a stock would be
allocated into one of the four price groups based on that stock's
VWAP on that day. Then, the total trading volume in each of the
price groups, as well as average number of stocks that fall into
each price group each day is computed for the month of Mar. 2022
(the hypothetical first evaluation month in the examples presented
in section V.G.1.b.). This methodology is an estimate of the amount
of trading volume that would have been allocated to each of the
price groups. For example, in this methodology, a stock with a VWAP
of just below $1.00 on a trading day would have all of its trading
volume allocated to the $1.00 trading bin even though some fraction
of its trading volume may have occurred intra-day at prices at or
above $1.00. However, this bias will be minor because there will
also be some stocks with prices just above the relevant thresholds
and the incorrect trades will likely mostly cancel out.
Additionally, the overwhelming majority of trading volume does not
occur right on the thresholds, so the noise created by using a VWAP
based methodology instead of a trade by trade methodology is likely
to be minor.

                                               Table 14--Share Volume by Price Group and Quoted Spread \a\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Average      % Total      % Group      % Total      % Group
             Price group                    Spread group        number of      share        share        dollar       dollar    % of stocks   % of group
                                                                  stocks       volume       volume       volume       volume                    stocks
--------------------------------------------------------------------------------------------------------------------------------------------------------
Less than $1........................  Tick-Constrained.......          259            7           93            0           91            2           25
                                      $0.011 < Spread < $0.10          651            1            7            0            9            6           64
                                      Spread > $0.10.........          112            0            0            0            0            1           11
$1 < Price < $10....................  Tick-Constrained.......          540           22           78            2           74            5           18
                                      $0.011 < Spread < $0.10        1,994            6           21            1           24           17           67
                                      Spread > $0.10.........          454            0            2            0            2            4           15
$10 < Price < $50...................  Tick-Constrained.......          397           23           59           12           57            3            7
                                      $0.011 < Spread < $0.10        2,982           14           37            8           39           26           55
                                      Spread > $0.10.........        2,017            1            4            1            4           18           37
Price > $50.........................  Tick-Constrained.......           97            6           24           10           13            1            5

                                      $0.011 < Spread < $0.10          715           14           55           41           54            6           34
                                      Spread > $0.10.........        1,264            5           21           25           33           11          61
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ This table provides estimates of the distribution of trading volume that occurs in stocks with various price and quoted spread levels. Each day in
  Mar. 2022 stocks are divided into four price groups (less than $1.00, $1.00 < Price < $10, $10 < Price < $50, and Price > $50) and three quoted spread
  groups (Spread < $0.011 i.e., tick-constrained, $0.011 < Spread < $0.10, and Spread > $0.10). Price is determined using that day's VWAP, and quoted
  spreads are computed using the time weighted quoted spread during regular trading hours. Both statistics are obtained from the WRDS intra-day
  indicators. Once a stock is assigned to a particular quoted spread and price group all of that stock's trading volume across all venues for that day
  is determined. This table computes the average number of stocks in each of the 12 unique price/spread groups during our sample. It also presents the
  total share and dollar volume falling into each of the 12 groups. The table also provides percentage summations for each price group that illustrate
  what fraction of trading volume in each price group falls into each quoted spread category. These computations are presented in columns with titles
  beginning with % Group.

    Stocks with a price range of between $10.00 and $50.00, i.e.,
stocks that would be assigned a half cent tick, represent about 38% of
share trading volume. Of this 38% of trading volume, approximately 59%
occurs in stocks that are currently tick-constrained, 37% occurs in
stocks that are not tick-constrained but have an average spread of less
than $0.10. The remaining 4% occurs among stock with spreads wider than
$0.10. For tick-constrained stocks, a reduction in the tick size to a
half a penny from the current one cent would likely improve market
quality for these stocks. For the 37% of trading volume in this price
range that occurs in stocks with spreads less than $0.10 but that are
not tick-constrained, the average quoted spread is approximately $0.05.
For these stocks, a half cent tick represents 10 ticks within the
quoted spread. Ten ticks intra-spread is in line with the maximum
number of intra-spread ticks allowable for stocks receiving a tick size
reduction under the proposal, and the empirical analysis in Section
V.D.1 suggests that stocks trading at approximately 10 ticks or less
intra-spread do not need a reduction in the spread to improve market
quality. For the 4% of trading volume in this group with average quoted
spreads above $0.10, the average quoted spread is approximately $0.27,
and a half cent tick would introduce over 50 price levels within the
spread. At this level, the half cent tick could be too small and could
harm market quality by increasing complexity and the risk of pennying.
    The last category of stocks, those with prices greater than $50,
account for approximately 28% of share trading volume. For these
stocks, the tick would not change relative to the baseline environment.
    This alternative would have implementation costs similar to those
discussed section V.D.6 with the exception that the 5 listing exchanges
would not be required to monitor quoted spreads and to send tick size
information to the SIPs, reducing one-time costs by $95,000 and ongoing
costs by $45,000 per year.\705\
---------------------------------------------------------------------------

    \705\ See Table 13 for enumerated cost estimates of the
proposal.
---------------------------------------------------------------------------

    This alternative would also reduce the effect relative to the
proposal on IEX's net capture. Specifically, in the proposal the
Commission estimated that approximately half of trading volume is in
tick-constrained stocks that would receive a tick size of $0.001 and an
associated access fee cap of 5 mils. This is the volume that IEX would
be estimated to receive a reduced net capture of 1 mil. However, as
shown in Table 14, stocks priced between $1.00 and $10.00 only account
for an estimated 28% of total share volume. Consequently, this
alternative would reduce by approximately half the estimated fraction
of trading volume that would receive the 5 mil access fee cap and thus
would reduce IEX's lost net capture on trades priced greater than $1.00
relative to the proposal by about half.
iii. Cboe Proposal
    Cboe has also put forth an alternative methodology for determining
the tick size.\706\ This alternative would apply three layers of
filtering to stocks to determine if the stock qualified for a $0.005
tick. First, the stock would need to be consistently trading with a
Time-Weighted Average Quoted Spread of $0.011. Then among those stocks,
only those with high quote-size-to-trade-size-ratios would be further
considered for a tick size reduction. Cboe argues that a high quote-
size-to-trade-size-ratio is indicative of there being ample liquidity
but investors being discouraged from crossing the spread due to the
high tick. If a stock's quote-size-to-trade-size-ratio is greater than
the 75th percentile among stocks that are trading with quoted spreads
less than $0.011 then it would qualify for consideration as a candidate
for a tick size reduction. The last criterion relates to the notional-
turnover-ratio. This criterion is designed to eliminate stocks that are
relatively thinly traded from consideration for a tick size reduction.
To be a candidate for a tick reduction a stock must also be above the
top 75th percentile among stocks with a Time-Weighted Average Quoted
Spread less than $0.011. Thus, the three criteria to receive a tick
size reduction would be a Time-Weighted Average Quoted Spread less than
$0.011, and the stock must be above the 75th percentile among stocks
with a Time-Weighted Average Quoted Spread less than $0.011 in both its
quote-size-to-trade-size-ratio and its notional-turnover-ratio. This
plan would re-evaluate stocks on a quarterly or bi-annual basis.
---------------------------------------------------------------------------

    \706\ See Cboe Proposal, supra note 104.
---------------------------------------------------------------------------

    Relative to the proposal, this alternative would limit the tick
size reduction to an estimated 4% of dollar trading volume. This
proposal would also limit the tick size reduction for these stocks to
$0.005. Thus to the extent that some stocks that would receive a lower
tick size in the proposal but would not benefit from a lower tick size
for unknown reasons, these stocks would be better off under this
alternative due to its limited scope.
    This alternative would be considerably more complex than the
proposal and it is unclear which entity would have responsibility for
computing the quote-size-to-trade-size-ratio and the notional-turnover-
ratio 75th percentile thresholds as these thresholds require a
standardized methodology to be applied to all stocks regardless of
listing exchange. This alternative could also leave some stocks that
could perhaps benefit from a smaller tick size with a wider one, thus
the problem of tick-constrained stocks might persist to a greater
extent in this alternative than in the proposal.

3. Alternative Access Fee
    The Commission could also consider alternative access fee caps that
are higher or lower than those in the proposal. These alternative
access fee caps could be paired with either the tick sizes in the
proposal or the alternatives considered in Section V.F.2. To the extent
that a given alternative access fee cap interacts with tick sizes, the
Commission addresses that in the discussion below.
a. Higher or Lower Access Fees
    For stocks priced below $1.00 the Commission could consider access
fees that are higher than 0.05% of the share price. Doing so would
increase the amount of net revenue that the exchanges could earn on
transactions in stocks priced less than $1.00 which would limit the
costs of the proposal for the exchanges. However, doing so comes with
the tradeoff that it risks creating an access pricing discontinuity at
$1.00 whereby it becomes more expensive at $1.00 to transact. Since
stocks priced less than $1.00 tend to be smaller market cap stocks,
this discontinuity could make it relatively more expensive to trade
these smaller stocks.\707\
---------------------------------------------------------------------------

    \707\ See Qianqiu Liu, S. Ghon Rhee, and Liang Zhang, On the
Trading Profitability of Penny Stocks, (working paper Aug. 26,
2011), available at https://ssrn.com/abstract=1917300 (retrieved
from SSRN Elsevier database) for a description of the
characteristics of low priced stocks.
---------------------------------------------------------------------------

    The baseline access fee cap of 0.3% is equivalent to 30 mils if the
share price is exactly $1.00. Thus at $1.00 the access fee cap of 0.3%
is equivalent to 30 mils and begins to decline from there as the price
declines. Thus there is a smooth transition in terms of the access fee
cap between stocks priced equal to or greater than $1.00 to those
priced less than $1.00. The proposal is similarly designed to create a
smooth transition between the per share access fee cap of 5 mils for
stocks priced equal to or greater than $1.00 and the proportional
access fee cap of 0.05% for stocks priced less than $1.00.
    Choosing an access fee greater than 0.05% would create a
discontinuity where at $1.00 it becomes relatively more expensive on a
per share level to transact. For example a stock priced at $1.00 would
have either a 5 or 10 mil access fee cap under the proposal. If the
Commission retained the current baseline 0.3% access fee cap for stocks
priced less than $1.00 then as soon as the stock price dropped below
$1.00 the access fee cap would jump to the equivalent of approximately
30 mils at the $1.00 threshold.\708\ As the share price continued to
decline below $1.00 the access fee cap would also decline, but would
not be lower than the equivalent of 10 mils on a per share basis until
the stock price crossed below $0.30 per share and would not be lower
than 5 mils until the stock price dropped below $0.15. Thus raising the
access fee cap for stocks priced less than $1.00 higher than the
proposed level of 0.05% would create a discontinuity at $1.00 where it
becomes more expensive to transact.
---------------------------------------------------------------------------

    \708\ $1.00*0.3% = $0.0030 or 30 mils.
---------------------------------------------------------------------------

    Making it relatively more expensive to transact shares priced less
than $1.00 risks, the alternative would create a discontinuity, which
could potentially harm liquidity for smaller cap stocks. Despite such a
discontinuity, this alternative would still lower trading costs
relative to the baseline so long as the proportion chosen for the
access fee cap for sub $1.00 transactions was below the baseline level
of 0.3%. Thus, relative to the baseline, it would likely become less
expensive to trade sub $1.00 stocks on most exchanges--potentially
improving their liquidity relative to the baseline, but not relative to
the proposal.\709\
---------------------------------------------------------------------------

    \709\ This statement presumes prevailing market practice
continues whereby exchanges charge one side of the transaction the
full access fee for sub $1.00 transactions and offer no rebates. In
this case, the Commission believes it reasonable to expect that
following the reduction of the transaction fee cap for stocks priced
less than $1.00, the average access fee charged would go down to the
new and lower access fee cap for these transactions.
---------------------------------------------------------------------------

    For stocks priced greater than $1.00 the Commission could likewise
raise or lower the access fees from those in the proposal. The primary
advantage to lowering the access fee cap would be that it could help
reduce supply and demand distortions caused by access fees and their
associated rebates. However, if the access fee cap is lowered beneath
approximately 3 mils, then the exchanges could struggle to maintain
their net capture and their estimated financial losses due to a lower
net capture would increase. If the access fee cap is lowered beneath 6
mils, then, while most exchanges would be able to maintain their net
capture, IEX would likely not, placing it at a disadvantage relative to
other exchanges because IEX primarily funds itself through access fees.
The Commission estimates that this alternative would carry the same
compliance costs as the proposal because it is structurally the same as
the proposal.\710\
---------------------------------------------------------------------------

    \710\ See supra section V.D.6 for an estimate of the compliance
costs associated with the proposal.
---------------------------------------------------------------------------

    Under the assumption that exchanges maintain the 2 mil net capture
rate, rebates would rise or fall with access fees. To the extent that
lower rebates aid market quality, this benefit would be differentially
realized relative to the proposal.
b. Tie Access Fee to the Tick Size With Current Proportion of 30%
    The current access fee cap for quotations $1.00 or more of 0.3
cents per share on a one cent tick size is 30% of the tick size. The
proposal would lower access fee caps within set parameters of the stock
price and minimum pricing increment. As an alternative to the proposal,
the Commission could implement an access fee cap that applies
proportionally at any tick size. This alternative would carry the same
implementation costs as the proposal. It would also allow fees and
rebates to facilitate similar intra-tick pricing as the current system
of fees and rebates, which can narrow spreads in certain
instances.\711\ It would also allow for greater rebates to be paid in
stocks with wider ticks, which under the proposal are those with wider
spreads, which could lead to a more efficient manner of rewarding
liquidity provision.
---------------------------------------------------------------------------

    \711\ See supra section V.D.3.
---------------------------------------------------------------------------

    The proposal considers a schedule with ticks of $0.001, $0.002,
$0.005, and $0.01 for different stocks. Under this alternative, for
stocks with a $0.01 tick size, the proportional access fee cap would
remain 30 mils per share. For stocks with a tick size of $0.005, the
access fee cap would be 15 mils. For stocks with a tick size $0.002,
the access fee cap would be 6 mils. Lastly, for stocks with a tick size
of $0.001, the access fee cap would be 3 mils. Thus this alternative
would reduce fees on stocks with ticks of $0.001 and $0.002 relative to
the proposal but would otherwise raise fees. Under the assumption that
exchanges set their access fee at the cap and their rebate
approximately 2 mils lower to maintain their estimated 2 mil net
capture, the prevailing access fee would equal 3 mils and rebates 1 mil
for stocks with a $0.001 tick. For stocks with a $0.002 tick size the
access fee would be 6 mils and rebates 4 mils. Given the low level of
these rebates, it is possible that exchanges might cease offering
rebates because they are too low to play a role in routing decisions.
On the other hand, under the same net capture assumption that places
the rebate 2 mils lower than the cap, rebates may be more significant
than under the proposal for stocks with a $0.005 tick. For stocks with
a $0.01 tick and a 30 mil access fee the market could operate the same
as it currently does; thus, the Commission expects the

trading environment to be as described in the baseline section V.C.2.
    As with the proposal, reducing the profit that can be earned by
providing liquidity could induce some market participants that
specialize in liquidity provision to reduce participation in such
stocks. For stocks that are currently tick-constrained, this would
likely improve market quality as it would reduce fill times, fill
rates, and queue lengths on maker-taker exchanges due to less
competition to provide liquidity. For stocks with wider spreads, the
effect of lowering the access fee cap to 15 mils might not play a
significant role in the participation rate of market makers given that
the access fee and rebate for these stocks is such a small fraction of
the spread.
    Relative to the proposal, the Commission does not expect there
would be significant operational costs added to exchanges or broker-
dealers to implement a variable access fee regime. The Commission
expects that each of the 15 exchanges that charge access fees for
trading would be required to prepare and submit a Rule 19b-4 filing
with the Commission at a cost of $48,400 per exchange for a total one-
time cost of $726,000 across all exchanges. Although the anticipated
cost of adding a variable access fee regime likely would not differ
from the proposal, adding four access fee caps would increase the
complexity of exchange fee and rebate structures because the exchanges
would need to add at least four fee/rebate levels to reflect the four
new access fee caps.
    Relative to the proposal, and under the assumption that most
exchanges maintain a net capture of 2 mils, this alternative is not
likely to affect net capture for any exchange except potentially IEX.
Because IEX is funded primarily through net capture, it appears to have
a higher capture rate than other exchanges and, under this alternative,
that would be bounded from above by 3 mils on stocks with tick sizes
less than $0.001. Assuming a net capture of 6 mils, the proposed
changes to rule 612, with a 5 mil access fee cap, would represent a
reduction in the net capture on volume with a $0.001 tick of 1 mil. In
section V.D.3 the Commission estimates that IEX would lose an estimated
$3 million annually in revenue due to the 5 mil access fee cap reducing
by 1 mil its net capture on volume that would be assigned a $0.001
tick. Using the same methodology, this alternative would increase the
estimated decline in net transaction fee revenue to $9 million, or
combining with a decrease in net transaction revenue among sub $1.00
stocks, a decline of 22% in total net transaction fee revenue. Thus,
this alternative would disadvantage IEX more than the proposal.
    Alternatively, the Commission could have proposed this alternative
in combination with alternatives on the tick sizes that do not have a
minimum increment as low as $0.001. In these cases, this alternative
would not have this disadvantage. As a variation on this alternative,
the Commission could tie access fees to exchanges at a level other than
30%. A fixed percentage rather than level would preserve the ability to
reward liquidity providers when spreads are higher. However, relative
to the proposal, access fees would remain high, or, depending on the
level chosen, be higher.
c. Uniform 10 Mil Access Fees Regardless of Tick Size
    The Commission could impose a uniform access fee cap of $0.0010, or
10 mils, across all NMS stocks for quotes equal to or greater than
$1.00. A uniform 10 mil access fee cap would help to preserve the
structure of the current transaction based business model for exchanges
while still mitigating many of the distorting effects of rebates for
stocks with tighter spreads. An additional benefit from having a
uniform access fee cap would be to avoid any additional market
complexity associated with a variable access fee cap. The Commission
recognizes that an access fee cap of 10 mils for stocks that would
otherwise have a 5 mil access fee cap under the proposal, would provide
exchanges with enough pricing freedom to continue to offer economically
meaningful rebate-tiering.
    Implementing a uniform 10 mil access fee cap would necessitate an
alternative tick size schedule as the access fee cap should not be
greater than \1/2\ of the tick size in order to preserve coherence
between net and nominal price rankings of trading venues.\712\ This
would not be possible with an access fee cap of $0.001 and a lowest
possible proposed tick size of the same amount, as would be the case
for the smallest tick size tier from the proposal. For example, suppose
that the quoted price on an inverted venue is one tick less competitive
than that displayed on a maker-taker venue. If the access fee on the
maker-taker venue and the rebate on the inverted venue are together
greater than one tick (the difference in the nominal quoted prices), a
marketable order would receive a better net execution on the inverted
venue despite the maker-taker venue having a more competitive quoted
price.\713\ If the Commission were to adopt this alternative, the
combination of tick size and access fee cap would allow for incoherent
venue rankings, and there would be instances where some trades would
have to execute at suboptimal net prices because current Regulation NMS
rules dictate that marketable orders be routed to venues with the best
nominal quoted prices without regard to what the net proceeds may
be.\714\ In order to accommodate a uniform access fee cap of $0.001,
the Commission might also consider modifying the proposal to eliminate
the $0.001 tick. In short, the Commission could impose a minimum tick
of $0.002 on all transactions with Time-Weighted Average Quoted Spreads
less than $0.02. The Commission does not expect that the adoption of
this alternative tick size regime to introduce any differential
implementation costs compared to those presented under the proposal.
---------------------------------------------------------------------------

    \712\ Net and nominal price rankings are coherent if sorting
trading venues on the competiveness of their nominal quoted prices
yields the same ordering as sorting on prices net of fees and
rebates.
    \713\ To illustrate, with a $0.001 tick size: Exchange A has a
top bid quote of $10.011 and charges a taker fee of $0.0007, over
half the tick size, so the net price to sell is $10.0103. Exchange
B, an inverted venue, has a top bid of $10.010 with a taker rebate
of $0.0006 so the net price to sell is $10.0106. On net, executing a
sale on exchange B would result in a better execution than on
exchange A even though exchange A is posting a better nominal price.
    \714\ See CFR 242.611.

------------------------------------------------------------------------
            Avg quoted spread                  Tick       Access fee cap
------------------------------------------------------------------------
$0.02 or less...........................         $0.0020         $0.0010
$0.02-$0.05.............................          0.0050          0.0010
Greater than $0.05......................          0.0100          0.0010
------------------------------------------------------------------------

    Eliminating the $0.001 tick could mean that stocks that are
currently tick-constrained would receive a $0.002 tick instead of a
$0.001 tick. Thus, these stocks would have at most 5 ticks intra
spread. To the extent that these stocks would further benefit from a
smaller tick, as envisioned under the proposal, those benefits would be
limited. However, based on the empirical analysis in section V.D.1 the
Commission does not expect this change to significantly harm market
quality for these stocks. However, for stocks with spreads that would
have qualified them for a $0.001 tick under the proposal, the amount of
price improvement that retail investors could receive from wholesalers
or retail liquidity programs could be limited. The wider tick would
make it more likely that a wholesaler would find it unprofitable to
offer price improvement to a retail trade and could reduce the total
price improvement offered to retail traders in these stocks.
d. Lower Uniform Access Fee
    The Commission could require a uniform access fee cap for all
transactions priced equal to or greater than $1.00 regardless of the
tick size that is imposed for that given stock transaction to reflect
the uniform nature of the variable costs incurred by the exchanges to
facilitate transactions and that is as low as possible to allow most
exchanges to maintain their estimated 2 mil net capture on protected
transactions.\715\ Consequently the Commission could impose a uniform
access fee cap of 3 mils on all transactions priced equal to or greater
than $1.00 regardless of the tick. This alternative is structurally
similar to the proposal and thus the Commission believes that this
alternative would carry with it the same implementation costs as the
proposal.\716\
---------------------------------------------------------------------------

    \715\ For transactions below $1.00, the Commission could
implement an access fee that harmonizes the access fee for greater
than $1.00 transactions with those less than $1.00--e.g., an access
fee cap of 10 mils on transactions greater than $1 would be
accompanied by an access fee cap of 0.10% for transactions below
$1.00 and an access fee cap of 5 mils on transactions priced equal
to or greater than $1.00 would be accompanied by an access fee cap
of 0.05% for transactions less than $1.00. In this case, the access
fee cap of 3 mils for transactions greater than $1.00 would coincide
with an access fee cap of 0.03% on transactions less than $1.00.
    \716\ See supra section V.D.6. for a discussion of
implementation costs related to the change in the access fee cap.
---------------------------------------------------------------------------

    At this level most exchanges could maintain their estimated net
capture of approximately 2 mils per transaction without leaving much,
if any, excess revenue for the exchanges to fund rebates or volume
based tiering. Thus, the economic effect of this alternative would be
to effectively eliminate rebates and volume based tiering.
    For an exchange, managing the system of fees and rebates along with
associated volume based tiering is not costless. Thus, if the exchanges
believe that the incentives offered through tiered pricing and rebates
would not be meaningful enough to affect behavior sufficiently to
justify the costs then it may cease to offer them opting instead for a
simpler fee structure that might or might not include rebates. The
Commission views this outcome as possible and even probable, however
there would be significant uncertainty regarding how likely this
outcome is because the Commission lacks data on how expensive these
programs are to administer. What is certain is that the dramatic
reduction in the range of fees and rebates that the exchanges could
offer under a 3 mil fee cap would mean that even if the exchanges
continue offering rebates or volume based tiering, the economic impact
of these programs would be significantly diminished.\717\
---------------------------------------------------------------------------

    \717\ The economic effects of rebates are discussed in supra
section V.D.3 including liquidity provision effects, intra-tick
pricing, and order routing. Each of these effects would be greatly
mitigated with a lower access fee cap. Volume based tiering creates
an incentive for broker-dealers to concentrate orders on one
exchange to qualify for higher rebates or lower access fees.
Reducing the access fee cap to 3 mils would significantly reduce
this incentive by reducing the total amount of discount that an
exchange could offer.
---------------------------------------------------------------------------

    The reduction or elimination of rebates that is expected to
accompany the reduction in the access fee cap would significantly
reduce the total revenue per share traded that liquidity providers earn
on maker-taker exchanges relative to either the baseline or the
proposal. Thus, this alternative would likely decrease the profits
earned by liquidity providers specifically algorithmic and high-
frequency traders that specialize in liquidity provision and rebate
capture strategies. These traders would likely see their trading
profits decrease more under this alternative than the proposal.
    Another key difference with a 10 mil access fee cap is more
apparent at larger tick levels, such as at a full cent tick, a 3 mil
access fee would provide very little in the way of intra-tick pricing
given that the access fee and associated rebate would be such a small
fraction of the tick size. Thus, for stocks with larger ticks this
alternative would be more restrictive than the proposal in terms of
pricing levels that could be realized once fees and rebates are
included in the price.
    A significant disadvantage of this alternative relative to the
proposal is that it would severely constrain exchanges like IEX that
choose to fund themselves primarily through access fees. IEX has an
estimated 6 mil net capture, and reducing the access fee cap to 3 mils
would cut by around half IEX's net revenue from transactions. This
reduction in revenue could require IEX to change its business model.
The Commission estimates that if nothing else were to change concerning
trading volume relative to the first six months of 2022, then this
alternative could cost IEX as much as 40% of its transaction fee
revenue (approximately $20 million per year).\718\
---------------------------------------------------------------------------

    \718\ This estimate uses the same methodology as is used to
produce the estimates in Table 12 but applies a 3 mil net capture on
trading volume at or above $1.00.
---------------------------------------------------------------------------

e. Ban on Rebates
    The Commission could also ban rebates but leave the access fee cap
unchanged, or lowered to 10 mils for transactions priced equal to or
greater than $1.00. For stocks priced lower than $1.00 the Commission
could either leave the access fee cap unchanged at 0.3% or lowered to
0.1% to match any reduction in the access fee cap for stock priced
equal to or greater than $1.00 to 10 mils. This alternative would
eliminate the liquidity provision distortions associated with rebates,
to the extent these continue to exist under the proposal.\719\ Also,
because high access fees would not be needed to fund rebates, the
Commission expects that this alternative would lead to access fees that
are less than 5 mils on most exchanges. It would also provide an
advantage relative to the proposal in that it would leave exchanges
that use access fees as their primary source of revenue the opportunity
to continue doing so without restriction. Consequently, if the
Commission chose to ban rebates but leave the access fee cap unchanged
relative to the baseline, then this alternative would have the
advantage relative to the proposal in that it would not affect the
exchange's net capture and thus the exchanges would not be financially
worse off under this alternative. If the Commission chose to lower the
access fee cap to 10 mils for stocks priced equal to or greater than
$1.00 and to 0.1% for stocks priced less than $1.00, then the exchanges
would still lose money on transactions priced below $1, but could still
earn their full estimated net capture on transactions equal to or
greater than $1.00. A disadvantage of this alternative relative to the
proposal is that it restricts the ability for the exchanges to innovate
with respect to

rebates. While rebates could be an inefficient and distortive form of
liquidity subsidization, exchanges potentially could innovate with
rebates to increase their efficiency and decrease their distortive
effects. Banning rebates would foreclose such an outcome. Banning
rebates could potentially result in exchanges using other means to
attract liquidity which might have other drawbacks such as offering
beneficial pricing for other products or special privileges to large
liquidity providers.\720\
---------------------------------------------------------------------------

    \719\ See supra section V.D.3 for additional discussion of these
distortions.
    \720\ Proposed rule changes cannot take effect unless approved
by the Commission or otherwise permitted by subsection 19(b) of the
Exchange Act. 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

4. Do Not Accelerate Odd-Lot Information or Create BOLO
    The Commission could alternatively accelerate the definition of
round lot but not accelerate the odd-lot information from the MDI Rules
or the requirement to establish a BOLO.\721\ Doing so would help
mitigate any potential deleterious effects that MDI acceleration would
have on future competing consolidator (CC) competition as well as lower
the implementation costs of the proposal for exchanges and SIPs. It
could also reduce the costs on data users. However, the alternative
would result in a stronger economic effect from the decline in depth
expected from the reduction in tick size and the definition of round
lot.\722\
---------------------------------------------------------------------------

    \721\ See section IV.B. regarding the acceleration of including
odd lot information as a part of core data and implementing the
round lot definition from the MDI Rules. See section IV.D. with
regards to the proposed establishment of specifying the best odd lot
orders to buy and sell (BOLO).
    \722\ See sections V.D.1. and V.D.5 for discussions of these
effects.
---------------------------------------------------------------------------

    This alternative would avoid harming the competition in the
competing consolidator market that would result from the competitive
advantage afforded to SIPs by the proposal. Requiring the exclusive
SIPs to invest in the needed infrastructure necessitated by the
proposed acceleration of the odd-lot information from the MDI Rules may
increase the SIPs competitive advantage by reducing their costs to
become competing consolidators.\723\ The alternative would not provide
this competitive advantage because the odd-lot information from the MDI
Rules would be implemented during the transition period, allowing non-
SIP competing consolidators the same opportunity as SIP competing
consolidators to capture this market share.
---------------------------------------------------------------------------

    \723\ See section V.E.2.c. in relation to MDI acceleration and
CC competition.
---------------------------------------------------------------------------

    This alternative would have lower implementation costs relative to
the proposal as forgoing the proposed MDI acceleration would reduce
many of the compliance costs necessitated by the proposal. The SIPs
would not have to incur the costs associated with collecting and
disseminating any additional information that would result from the
inclusion of odd lot information in NMS data until the full
implementation of the MDI Rules. The SIPs would avoid any redundant
costs from having to update their systems twice. Similarly, the
exchanges would not incur costs associated with reporting odd-lot
information until the full implementation of the MDI Rules.\724\
---------------------------------------------------------------------------

    \724\ See supra sections V.D.5 and V.D.6 for a discussion of the
estimated costs of accelerating the MDI Rules.
---------------------------------------------------------------------------

    This alternative would reduce the benefits of the MDI acceleration.
In particular, this alternative would not result in the benefits
associated with allowing individual investors whose broker-dealers
subscribe to the data to visually monitor the market environment and
determine profitable trading opportunities as early as they would be
able to under the proposal. It would also not result in the benefits of
offering market participants a standard benchmark that reflects
available odd-lot liquidity.
    The alternative would also increase the effects of a reduction in
displayed depth at the NBBO resulting from either a smaller tick size
or a smaller round lot. If the odd lot information is not included in
the SIP data feed, the proposal could result in market participants who
rely on the SIPs receiving less information regarding the liquidity
available in the market. This is because the reduction in tick size is
expected to distribute liquidity across more price levels, reducing the
depth reported at the NBBO.\725\ This loss of information could be
further exacerbated with the implementation of the round lot
definition, which will lower the depth of liquidity reported at the
NBBO. Market participants who do not receive odd lot and depth of book
information from proprietary data feeds would incur a loss of
information content for stocks priced greater than $250. Avoiding such
loss would entail incurring fees to subscribe to such data.
---------------------------------------------------------------------------

    \725\ See supra section V.D.1.
---------------------------------------------------------------------------

G. Request for Comment

    The Commission is sensitive to the potential economic effects,
including costs and benefits, of the proposed Rule. The Commission has
identified certain costs and benefits associated with the proposal and
requests comment on all aspects of its preliminary economic analysis,
including with respect to the specific questions below. The Commission
encourages commenters to identify, discuss, analyze, and supply
relevant data, information, or statistics regarding any such costs or
benefits.
    58. Has the Commission accurately described the market failures in
this release? Why or why not? Are there additional market failures or
other economic justifications related to these issues that are not
described in this release?
    59. Has the Commission sufficiently described the baseline for its
economic analysis concerning tick sizes, access fees, and round lot
data, its characteristics and structure? Are there additional relevant
market features or participants that are not discussed in the baseline
which relate to this release? If so, please describe.
    60. Has the Commission accurately assessed the baseline of the use
and prevalence of subpennies and subpenny price improvement? Why or why
not? Are there any additional statistics or analysis that the
Commission should consider in the baseline? If so, please provide that
analysis.
    61. Has the Commission accurately assessed the degree of tick-
constraints in current markets? Why or why not? Is the Commission using
appropriate conceptual and empirical definitions of tick-constrained
and new tick-constrained? If not, what would be more appropriate
definitions and what difference would those alternative definitions
have on the baseline analysis, costs, and benefits? Are there
additional statistics or analysis that the Commission should consider
in the baseline? If so, please provide that analysis.
    62. The tick size baseline incorporates the implementation of the
MDI Rules. Has the Commission accurately assessed how the baseline for
the proposal differs from the status quo, including in the data
analyses presented? Why or why not?
    63. Has the Commission accurately assessed the impact of access
fees and rebates, and the inability to determine access fees at the
time of trade, on potential conflicts of interest? Why or why not? Are
there other sources of data or other analysis that the Commission could
use to assess the impact of access fees and rebates and the inability
to determine access fees at the time of trade on potential conflicts of
interest? If so please provide such data and analysis.
    64. Has the Commission accurately assessed the net capture of the
exchanges between access fees and rebates on non-auction trading in
shares

priced greater than $1.00 as approximately 2 mils? Why or why not? If
not please provide analysis supporting a different net capture level.
    65. Has the Commission accurately assessed the net capture of the
exchanges on non-auction trading in shares priced less than $1.00 as
approximately 0.28% of value? Why or why not? If not please provide
analysis supporting a different net capture level.
    66. Has the Commission accurately described current market practice
where fees and rebates are generally not passed through from broker-
dealers to their customers? Why or why not? If not please provide
analysis describing how and when fees and rebates are passed through to
end customers.
    67. Has the Commission accurately described the baseline of the MDI
implementation? Why or why not? Is two years a reasonable estimate of
when the round lot definition and the odd lot information will be
implemented in the absence of this proposal? If not, what is a
reasonable estimate?
    68. Has the Commission accurately assessed the economic effects of
lowering the tick size for some stocks? Why or why not? Are there
significant economic effects that are not discussed? If so please
explain and describe these effects.
    69. The proposal would allow for stocks to potentially transition
across multiple tick sizes, skipping one or more tick size tiers, in
one evaluation period. Are there economic effects associated with
transitioning across multiple tick sizes that are not discussed? If so,
what are they? Please provide quantitative estimates of the effects and
how frequently stocks might transition across multiple tick size tiers.
    70. Has the Commission accurately assessed the economic effects of
increased market complexity caused by the dynamic tiered structure of
the proposed changes to rule 612? Why or why not? Are there significant
economic effects that are not discussed? If so, please explain and
describe these effects.
    71. Has the Commission accurately assessed the economic effect of
having an evaluation month for the tick size be once every three months
with the associated tick size applying for the next three months? Why
or why not? Are there other evaluation periods that may be more
appropriate? If so please provide analysis supporting an alternative
evaluation period.
    72. Has the Commission accurately assessed the effect of the
proposal to harmonize quoting and trading increments? Specifically, has
the Commission correctly assessed the effect the proposed harmonization
on retail price improvement and the resulting impact on execution
quality? If not, then please provide a detailed explanation along with
quantitative estimates, if possible. How would harmonization affect
execution quality through it effect on competition for order flow
between exchanges/ATSs and off-exchange dealers? Please explain.
    73. Has the Commission accurately assessed the economic effects of
lowering the access fee cap? Why or why not? Are there significant
economic effects that are not discussed? If so please explain and
describe these effects.
    74. Based on the baseline, the Commission assumes that the
prevailing maker-taker structure of fees and rebates has average
rebates approximately 2 mils lower than average access fees on most
exchanges. Is this assumption reasonable? Please explain. If not
reasonable, how would a different assumed net capture affect the
conclusions of the analysis? Please provide additional analysis and
describe the market environment likely to result from the reduction in
the access fee cap.
    75. Has the Commission accurately assessed the economic effects of
requiring access fees and rebates to be determinable at the time of
execution? Why or why not? Are there significant economic effects that
are not discussed? If so, please explain and describe these effects.
    76. Has the Commission accurately assessed the economic effects of
accelerating the implementation of the MDI round lot definitions? Why
or why not? Is there a cost to accelerating the redefinition of a round
lot, in the absence of depth of book data, resulting from a loss of
information about liquidity? Are there significant economic effects
that are not discussed? If so please explain and describe these
effects.
    77. Has the Commission accurately assessed the economic effects of
accelerating the MDI implementation with respect to adding odd-lot
information in NMS data? Why or why not? Are there significant economic
effects that are not discussed? If so please explain and describe these
effects.
    78. Has the Commission accurately described the uncertainties
associated with costs of data users making system changes at two times
rather than once? Why or why not? Are there other sources of
uncertainty? If so please provide such data and analysis with
quantitative estimates of the costs if possible.
    79. Has the Commission accurately described the uncertainties
associated with potential costs for data users moving from two data
providers (the exclusive SIPs) to one competing consolidator? Why or
why not? Is there data or analysis that could help mitigate any of the
cost uncertainties? If so please provide such data and analysis with
quantitative estimates of the costs if possible.
    80. Has the Commission accurately assessed the economic effects of
requiring SIPs to disseminate odd lot information in NMS data? Why or
why not? Are there significant economic effects that are not discussed?
If so please explain and describe these effects.
    81. Has the Commission accurately described the uncertainties
associated with determining whether or not the exclusive SIPs would
charge more for the data including odd-lot data? Why or why not? Is
there data or analysis that could help mitigate any of the cost
uncertainties? If so please provide such data and analysis with
quantitative estimates of the costs if possible.
    82. Has the Commission accurately assessed the economic effects of
providing the best odd-lot order in NMS data? Why or why not? Are there
significant economic effects that are not discussed? If so, please
explain and describe these effects.
    83. Has the Commission accurately quantified the compliance costs
that the proposed Rule imposes on various market participants? If not,
please provide alternative estimates. Are there any sources of
compliance costs not included in the Commission's estimates? If so,
please describe the activity that generates the cost and provide
estimates.
    84. Has the Commission accurately quantified the compliance costs
associated with the proposal in terms of updating systems to adapt to
the change in the tick size, specifically that compliance costs would
likely be similar for large and small market-participants? Why or why
not? Please provide a quantitative discussion if possible.
    85. Has the Commission accurately described the uncertainties
associated with the compliance costs of the proposal? Why or why not?
Are there other sources of uncertainty? Is there data or analysis that
could help mitigate any of the cost uncertainties? If so, please
provide such data and analysis with quantitative estimates of the costs
if possible.
    86. How does the assumption on whether the SIPs will otherwise
become competing consolidators affect SIP

compliance costs? How accurate are the Commission's estimates of
compliance costs assuming the SIPs will become competing consolidators
and how accurate are the costs assuming instead that SIPs will
otherwise not become competing consolidators? Please explain and
provide alternative estimates, if available.
    87. Has the Commission accurately described the uncertainties
associated with costs of SIPs who become competing consolidators and
exchanges making system changes at two times rather than once? Why or
why not? Are there other sources of uncertainty? If so, please provide
such data and analysis with quantitative estimates of the costs if
possible.
    88. Has the Commission accurately described the uncertainties
associated with the implementation date for the MDI Rules? Why or why
not? Is there data or analysis that could help mitigate any of the cost
uncertainties? If so, please provide such data and analysis with
quantitative estimates of the costs if possible.
    89. Do you believe that the proposal would significantly increase
the amount of message data? In particular would an increase in the
amount of odd-lot quotes resulting from the smaller tick size increase
the anticipated implementation costs under the MDI Rules? Please
explain.
    90. Has the Commission accurately assessed the likely impacts of
the proposal on efficiency, competition and capital formation? Why or
why not?
    91. Has the Commission accurately assessed the likely effects of
the reduction in tick size for some NMS stocks and the reduction in the
access fee cap for all NMS stocks on price efficiency through impacts
on liquidity? Has the Commission accurately assessed the likely effects
of the reduction in the access fee cap for all NMS stocks and on making
fees and rebates determinable at the time of execution on price
efficiency through impacts on conflicts of interest? Has the Commission
accurately assessed the likely effects of the proposal on the
efficiency of broker-dealers' best-execution assessment? Has the
Commission accurately assessed the likely effects of the acceleration
of the round lot definition and the inclusion of odd lot information
proposal on efficiency? Please explain.
    92. Has the Commission accurately assessed the likely effects of
the proposal on the competitive landscape in trading services? Please
explain. Would the proposal likely change the number of competitors in
trading services and, if so, how would the change in the number of
competitors affect the level competition? Please explain.
    93. Has the Commission accurately assessed the likely effects of
the proposal on the competitive landscape in liquidity provision?
Please explain. Would the proposal change the playing field among
different types of competitors? If so, how would this affect the level
of competition? Please explain.
    94. Has the Commission accurately assessed the likely effects of
the proposal on the competitive landscape in broker-dealer services?
Please explain.
    95. Has the Commission accurately assessed the likely effects of
the proposal on the competitive landscape in market data? Please
explain. Would the proposal affect the number of eventual competing
consolidators? If so, would this affect the level of competition among
competing consolidators? Why or why not? What would be the resulting
economic effects of any changes in competing consolidator competition?
    96. Has the Commission accurately assessed the likely impact of the
proposal on capital formation? Please explain.
    97. Has the Commission accurately assessed the economic tradeoffs
associated with reasonable alternatives contained in this economic
analysis? Please explain. Has the Commission accurately assessed the
compliance costs associated with the various alternatives? Why or why
not? If not, please provide as much analysis as possible. Are there
other costs associated with any of the alternatives which are not
discussed? If so please provide a detailed analysis including
quantitative estimates if possible. Should the Commission implement any
other reasonable alternatives? If so, please describe such alternatives
and how the potential costs and benefits of the alternative would
compare to the proposal? Please provide quantification, if possible.
    98. The Commission has discussed an alternative whereby trading
would be required to occur on an increment no less than a minimum
increment of $0.001 regardless of the tick size assigned. Has the
Commission adequately described the economic effects of this
alternative? Why or why not? Please explain and provide as much
analysis and discussion as possible.
    99. The Commission has discussed an alternative whereby rule 612 is
not extended to apply to trades. Has the Commission adequately
described the economic effects of this alternative? Why or why not?
Please explain and provide as much analysis and discussion as possible.
    100. The Commission has discussed alternatives whereby the tick
size would not apply to segmented trades or that segmented trades would
be subject to a tick size of $0.001. Has the Commission adequately
described the economic effects of these alternatives? Why or why not?
Please explain and provide as much analysis and discussion as possible.
    101. The Commission has discussed a number of alternative quoted
spread-based tick size structures. Has the Commission adequately
described the economic effects of these alternatives? Why or why not?
Please explain and provide as much analysis and discussion as possible.
    102. Has the Commission accurately assessed the effect on
compliance costs of alternatives that keep the overall structure of the
proposal but change the number of tick sizes? Specifically, is the
Commission's assumption that adding or removing additional tiers is
likely to have a small effect on overall compliance costs reasonable?
Why or why not? If not, please provide additional analysis with
detailed costs estimates if possible.
    103. The Commission has discussed alternative quoted-spread based
tick size structures with different thresholds for tick levels and
fewer tiers of tick sizes. Has the Commission adequately described the
economic effects of these alternatives? Why or why not? Please explain
and provide as much analysis and discussion as possible.
    104. The Commission has discussed an alternative quoted spread-
based tick size structure that would result in an increased tick size
for some stocks. Has the Commission adequately described the economic
effects of this alternative? Why or why not? Please explain and provide
as much analysis and discussion as possible.
    105. The Commission has discussed an alternative quoted spread-
based tick size structure that mirror a structure from a NASDAQ white
paper. Has the Commission adequately described the economic effects of
this alternative? Why or why not? Please explain and provide as much
analysis and discussion as possible.
    106. The Commission has discussed an alternative that would add
``step-up/step-down'' mechanism to the proposal or to any of the quoted
spread-based alternatives. Has the Commission adequately described the
economic effects of this alternative? Why or why not? Please explain
and provide as much analysis and discussion as possible.

    107. The Commission discussed an alternative that would reduce the
minimum tick size to $0.005 for all NMS stocks. Has the Commission
adequately described the economic effects of this alternative? Why or
why not? Please explain and provide as much analysis and discussion as
possible.
    108. The Commission discussed an alternative that would set tick
sizes based on share price. Has the Commission adequately described the
economic effects of this alternative? Why or why not? Please explain
and provide as much analysis and discussion as possible.
    109. The Commission has discussed an alternative put forth by Cboe
for determining the tick size. Has the Commission adequately described
the economic effects of this alternative? Why or why not? Please
explain and provide as much analysis and discussion as possible.
    110. The Commission has discussed a number of alternative access
fee regimes to the proposal. Has the Commission adequately described
the economic effects of this alternative? Why or why not? Please
explain and provide as much analysis and discussion as possible.
    111. Has the Commission accurately assessed the effect of
alternatives that raise the access fee cap for stocks prices less than
$1.00? Why or why not? If not please provide detailed additional
analysis.