regressions suggested an increase in trading cost. For stocks in bins 3
and 4 (i.e., those that were not tick-constrained by the $0.05 tick),
the effect of lowering the tick size was to increase transaction costs
for larger trades. These results cohere with the idea that when stocks
are tick-constrained the pricing efficiency made possible by a smaller
tick improves liquidity, and for stocks with wider spreads a smaller
tick harms liquidity by making individuals less willing to post
displayed liquidity due to complexity and the risk of pennying.
---------------------------------------------------------------------------

    \561\ A round trip trade refers to executing an order to buy or
sell the stock and immediately reversing the position with an equal
countervailing order. We compute the cost of a round trip trade
following the methodology laid out in Griffith and Roseman (2019),
supra note 478, and Chung, et al. (2020), supra note 543. The
methodology uses MIDAS data to take snapshots of the order book at
15 minute increments throughout the trading day and calculates the
transaction costs associated with walking the book up 5 or 25 round
lots to execute a large trade.
---------------------------------------------------------------------------

    In conclusion, the analysis provided here suggests that, for stocks
that were limited to just 1-2 ticks intra-spread by the $0.05 tick, the
reduction to a $0.01 tick provided an improved trading environment.
Thus, trading in an approximate 1-10 tick range intra-spread provided a
superior environment to trading in a 1-2 ticks intra spread range.
Additionally, for stocks with spreads greater than $0.15, where a $0.01
tick implied more than 15 ticks intra-spread, a $0.05 tick where there
were only 3 ticks intra-spread, appeared to provide a superior trading
environment. For stocks with spread between $0.10 and $0.15, it is not
clear which tick size provided a superior trading environment.
    These conclusions are consistent with results in Barardehi, et al.
(2022), which more broadly examines the effect of tick size changes
under the TSP.\562\ Barardehi, et al. (2022) arrives at the same
conclusions with respect to the effects of a tick size reduction in the
context of the TSP while using different methodology. Specifically, the
Commission's analysis focuses on the end of the TSP, when the tick size
for treated stocks was reduced, because the proposal would lower the
tick size for some stocks. In addition to looking at the end of the
TSP, Barardehi, et al. (2022) also considers the effect of raising the
tick size at the initiation of the TSP. Both the Commission's analysis
and Barardehi, et al. (2022) find that stocks that either were tick-
constrained or near-tick-constrained by the $0.05 tick benefited from a
reduction in the tick size. Examining the imposition of the TSP,
Barardehi, et al. (2022) additionally found a deterioration in market
quality for stocks that became tick-constrained by the $0.05 tick. All
together, these results provide robust support for the benefits of
reducing the tick size in tick-constrained stocks.
---------------------------------------------------------------------------

    \562\ See supra note 461.
---------------------------------------------------------------------------

    Another methodological difference between the Commission's analysis
and Barardehi, et al. (2022) is in the selection of TSP stocks used in
the analyses. The Commission's analysis focuses on comparing TSP test
groups that experienced a change in both trading and quoting
increments, whereas Barardehi, et al. (2022) looked at a wider set of
TSP test group combinations, including looking at the test groups
separately.\563\ Robustness checks in Barardehi, et al. (2022) show
that analytical conclusions are similar regardless of the test groups
used, thereby showing the robustness of the Commission's results as
well. Barardehi, et al. (2022) further provide additional tests of the
effect of tick size changes on trading costs, none of which provide
results inconsistent with the Commission's analysis.\564\
---------------------------------------------------------------------------

    \563\ See supra note 551. Barardehi, et al. (2022), supra note
85 use stocks from TSP test groups 1 and 2 in their analysis. In
order to provide more statistical power the authors, in addition to
test group 1, include test group 2 stocks, citing that extant
literature had shown little statistical differences between test
group 1 and test group 2 stocks. By contrast, Table 9 analyzes test
groups 2 and 3 because these involved comparing TSP test groups that
experienced a change in both trading and quoting increment--with the
caveat that the conclusion of the tick size pilot ended the
harmonization of the quote and trade increments that had been
implemented under that program, while this proposal would introduce
it.
    \564\ Barardehi, et al. (2022), supra note 85 also included
additional analysis to demonstrate that the results were also robust
to bifurcating the TSP sample into high and low trading volume, to
the exclusion of penny stocks, and using quantile regressions at the
25th and 75th quantiles as opposed to the median.
---------------------------------------------------------------------------

    Barardehi, et al. (2022) includes an exhibit with more granular
analysis on the impact of a reduction in tick size at the end of the
TSP, from 5 cents to 1 cent, on investor transaction costs, as captured
by effective spreads. That exhibit is included below in Figure 1, and
its results are broadly consistent

with the findings reported in Table 9. Figure 1 shows how the quoted
spread of a stock during the pilot (``pre-shock dollar quoted spread'')
correlates with how effective spreads changed when the pilot ended. For
stocks with an average of fewer than two ticks intra-spread (those with
pre-shock quoted spreads of $0.10 or less), a reduction in tick size
from 5 cents to 1 cent significantly reduces effective spreads.\565\
Whereas for stocks with an average of more than three ticks intra-
spread (those stocks with pre-shock quoted spreads greater than $0.15),
a narrower tick size increases effective spreads.
---------------------------------------------------------------------------

    \565\ Barardehi, et al. (2022), supra note 85, subset their
sample into overlapping segments of TSP stocks based on their quoted
spreads and perform difference-in-difference analyses on each
segment to quantify the effect of a narrower tick size as a function
of number of intra-spread ticks. In their setting, each segment of
stocks is identified based on average quoted spreads in a period
prior to the end of the TSP (08/08/2018-11/20/2018), where tick size
decreased from 5 cents to 1 cent for pilot stocks. The stocks are
grouped into overlapping 6-cent intervals of average May and June
2018, (pre-shock) quoted spreads in cents {($0.00, $0.06), ($0.01,
$0.07), ($0.02, $0.08), . . . , ($0.15, $0.21), ($0.16,
$0.22){time} . For each intervals, the effect of a tick size change
on dollar effective spreads are estimated in a difference-in-
difference setting using quantile (median) regressions that control
for date fixed effects and double-cluster standard errors by stock
and date. Point estimates of the treatment effects along with the
corresponding 95% confidence intervals are plotted against the
median pre-shock quoted spread in the respective interval.
[GRAPHIC] [TIFF OMITTED] TP29DE22.001

    The Commission's results in Table 9 help provide guidelines for
predicting how the proposed tick size reductions may affect market
quality for stocks priced at, or greater than, $1.00 per share compared
to the current baseline. For stocks that are tick-constrained by the
current $0.01 tick, the proposal would increase the number of ticks
intra-spread from 1 to either 1-8, or 4-5 depending on whether the
stock was assigned a $0.001 or a $0.002 tick. The analysis in Table 9
suggests that 1-10 ticks intra spread provides a better trading
environment than does just one tick intra-spread.\566\ Additionally,
the results for bin 2 stocks suggest that moving from 1-2 ticks intra
spread to 5-10 ticks also generally improves market quality across most
measures. Regardless the tick size that a current tick-constrained
stock receives ($0.001 or $0.002) Table 9 suggests that across most
liquidity metrics, liquidity would likely improve for these stocks. For
stocks with a time-weighted average spread below $0.016, there are
currently an average of 1-1.6 ticks intra spread. The proposal would
increase this number to 4-8 ticks intra-spread by assigning a $0.002
tick to these stocks. The analysis of bin 2 stocks is analogous to
stocks that would be subject to the $0.002 tick in terms of the effect
of the tick size change on market quality. In both cases, the stocks
are moving from

an environment with just less than two ticks intra spread to one of 5-
10 ticks intra spread in the case of the TSP, or 4-8 ticks in the case
of the proposal. These changes are likely similar enough that
comparison of the two groups is instructive. The analysis of bin 2
stocks in Table 9 indicated that across most liquidity metrics these
stocks experienced improved liquidity with the smaller tick.
Consequently, the Commission also expects that on average, stocks
receiving the $0.002 tick size would likely experience an improvement
in market quality. The analysis is less clear about the effect of the
proposal in trading in stocks that would receive the $0.05 increment:
stocks with Time-Weighted Average Quoted Spreads between $0.016 and
$0.04. These stocks would transition from having an average 1.6-4 ticks
intra spread to having 3-8 ticks intra spread. The TSP analysis in
Table 9 suggested that, for stocks with approximately 2-3 ticks intra
spread, moving to 10-15 ticks intra spread was not clear, while for
stocks with 3 or more ticks intra spread, moving to 15 or more ticks
intra spread appears to have been harmful.\567\ None of the stocks in
the proposed $0.005 tick group would have prevailing spreads with more
than 15 ticks intra spread, so for this group the analysis does not
provide clear predictions regarding the effect of the tick size
reduction on transaction costs for these stocks.
---------------------------------------------------------------------------

    \566\ One academic theoretical paper suggests that having a two
tick spread is optimal. See Sida Li and Mao Ye, The Optimal Nominal
Price of a Stock: A Tale of Two Discretenesses, (working paper Nov.
3, 3021), available at https://ssrn.com/abstract=3763516 (retrieved
from SSRN Elsevier database). The paper suggests that stocks reach
their optimal price whenever the quoted spread is two ticks wide.
While the paper advocates for a lower tick size, particularly for
tick-constrained stocks, the two tick spread conclusion is the
result of a highly stylized trading model which does not take into
account pertinent factors from outside the model which likely affect
spreads such as considerations of time priority and pennying
concerns. Conditional on there being non-infinitesimal tick and
round-lot sizes, their model suggests that a two-tick wide spread is
optimal. Otherwise, their model suggests an optimal policy choice of
infinitesimal tick and round-lot sizes.
    \567\ Barardehi, et al. (2022), supra note 85, show that
statistical results for wider spread stocks, such stocks in bin #4
in Table 9, vary somewhat when they estimate their model separately
on data for each of the three TSP groups. When separately estimated,
the effects for lower spread stocks, bins 1 and 2, remain consistent
and statistically significant across all three TSP test groups.
---------------------------------------------------------------------------

    Quoted spreads are not static from day to day. It is possible that
a stock could have a narrow quoted spread during an evaluation month,
and thus be assigned a small tick, and then during the following month
it could experience points in time where the quoted spread is much
wider.\568\ If the spread widens sufficiently, relative to the quote,
then the stock could trade in a range of ticks intra-spread that may
harm market quality.\569\ To provide an estimate of the fraction of
trading volume that could be affected in this manner, the following
estimation is computed. March 2022 is treated as a hypothetical
evaluation month and all stocks are assigned a tick size based on their
prevailing time-weighted quoted spread during this month.\570\ No stock
is assigned a $0.001 tick in this estimation, as Time-Weighted Average
Quoted Spreads for stocks priced at, or greater than, $1.00 per share
are currently have a lower bound because of the $0.01 tick. Thus, all
stocks with Time-Weighted Average Quoted Spreads below $0.016 are
assigned a tick of $0.002. Then, for the months of April through June
2022, all trading volume during regular trading hours is evaluated for
all stocks and the Time-Weighted Average Quoted Spread is determined at
the time of trade. If the NBB for the trade is below $1.00, that trade
is assigned a tick size of $0.0001. Trading volume with an NBB greater
than $1.00 that would have received a tick size lower than $0.01 based
on March 2022 Time-Weighted Average Quoted Spreads is then analyzed.
The total trading volume within this subsample that executed at a time
when the quoted spread would have had more than 10 or 15 ticks within
the spread if it had had the lower tick size is computed and presented
in Table 10 as a fraction of total trading volume during the period.
---------------------------------------------------------------------------

    \568\ Likewise, two stocks with equal average quoted spreads may
not be equally tick-constrained. For example, one stock with a $0.02
average quoted spread could have a $0.01 quoted spread 40% of the
time while another has a $0.01 spread 10% of the time. The effect of
the proposal on market quality could differ in much the same way as
the effects described in this paragraph.
    \569\ The empirical analysis in this section suggesting that a
lower tick size benefits tick and near-tick-constrained stocks is an
``on average'' result. While the Commission expects that a lower
tick would on average decrease transaction costs for tick and near-
tick-constrained stocks, for some of these stocks, a smaller tick
could lead to wider spreads. For these stocks, if spreads increase
to a sufficient degree then the stock could be re-assigned a wider
tick after the next evaluation month.
    \570\ We use WRDS intra-day indicators for all stocks in the
database to estimate the time weighted quoted spreads for Mar. 2022.
No stock is assigned a $0.001 tick in this estimation as quoted
spreads for stocks priced $1.00 or more per share are currently
constricted by the $0.01 tick. Thus all stocks with Time-Weighted
Average Quoted Spread below $0.02 are assigned a tick of $0.002.

 Table 10--Volume Receiving a Tick Reduction Executing During Periods of
                            Wide Spreads \a\
------------------------------------------------------------------------
                                                       10 +       15 +
                                                      ticks      ticks
                                                       (%)        (%)
------------------------------------------------------------------------
Share Volume......................................        3.4        1.1
Dollar Volume.....................................        7.4        2.2
------------------------------------------------------------------------
\a\ This table provides estimates of the amount of share and dollar
  trading volume in stocks that meet the following conditions. The NBB
  is greater than $1.00 per share at the time of trade. The stock had a
  time-weighted quoted spread of less than $0.04 in Mar. 2022, and the
  stock's quoted spread was greater than 10 or 15 times its hypothetical
  tick size based on Mar. 2022 time-weighted quoted spreads computed
  from the WRDS Intra-day indicators. The universe of securities in the
  WRDS intra-day indicators dataset is used. Only trading volume
  associated with normal trades during regular trading hours is
  considered. Normal trades are identified in TAQ data by sale
  conditions ``blank, @, E, F, I, S, Y'' which correspond to regular
  trades, intermarket sweep orders, odd lot trades, split trades, and
  yellow flag regular trades. We exclude these trades because they are
  not typically representative: for example the codes include trades
  that result from an acquisition, trades reported out of sequence, and
  extended hour trades.

    Table 10 provides an estimate that approximately 3.4% of total
share trading volume met the following conditions. It would have been
associated with a stock receiving a lower tick size and would have
executed when spreads were wider than 10 ticks based on the estimated
tick size. Table 10 also provides an estimate that 1.1% of total share
volume would have executed when spreads were more than 15 ticks wide.
For this fraction of trading volume, it is possible that the reduction
in the tick size could lead to a worse trading environment for the
period of time that spreads remain significantly higher than the
evaluation period compared to what the trading environment could have
been had the stock retained a $0.01 tick. This effect would not be
indefinite because, if a stock's spread remains elevated, then at the
end of the next evaluation period, the stocks would be assigned a wider
tick--mitigating the negative consequences of having a tick size that
is too narrow relative to the quoted spread.
2. Minimum Pricing Increment for Trading
    The proposal would require all trades that are not midpoint or
benchmark trades, including trades executed by OTC market makers,
including wholesalers, to execute in increments determined by the
minimum pricing increment for trading, which would be harmonized with
the minimum pricing increment for quoting. Applying a minimum pricing
increment to trading, coupled with reducing the minimum pricing
increment for quoting, could affect measures of the frequency and
magnitude of price improvement either

positively, negatively or insignificantly, on average. The Commission
recognizes that any changes to these measures could affect transaction
costs paid by investors or could affect where broker-dealers route
customer order flow, or both, potentially leveling the playing field
between exchanges/ATSs and off-exchange dealers in attracting retail
order flow. Because of this competitive pressure, the Commission
expects that trading venues will continue to compete on providing price
improvement and that the harmonization of trading and quoting
increments will not mitigate the execution quality improvements from a
reduction in the minimum pricing increment.
    Requiring trades to occur at the minimum pricing increment would
have uncertain net effects on total price improvement, which is the
primary mechanism for the economic effects of a trading increment. The
Commission expects that for most trading volume receiving a smaller
tick, quoted spreads would likely narrow, on average. While narrower
spreads mean less opportunity for further price improvement, investors
would not be getting worse trade prices under the proposed rules,
because the narrower spreads imply better prices for most trades. While
price improvement is a measure of execution quality, lower price
improvement does not necessarily translate into worse outcomes for
investors, particularly when quoted spreads are narrowing. Because
price improvement is measured relative to the quoted spreads, price
improvement is a more meaningful measure of execution quality when
quoted spreads are held constant. Therefore, an increase in the
frequency and level of price improvement in conjunction with an
expected narrowing of quotes does not inform on overall investor
execution quality from the proposal, though it may inform on whether
the harmonization furthers or mitigates the expected improvements from
narrower quotes in execution quality for investors.
    The Commission does not anticipate that the proposal for a minimum
trading increment would affect most current price improvement. In
particular, Table 3 indicates that most price improvement in stocks
with prices greater than $1 currently occurs as a result of midpoint
trades or in increments of $0.01, neither of which would be affected by
the proposed trading increment.\571\
---------------------------------------------------------------------------

    \571\ Here, price improvement is defined as any trade that
transacts inside the NBBO and includes midpoint and intra-spread
trades executed on ATSs and exchanges in addition to OTC market
maker internalized trades. A $0.01 price improvement would be
feasible with any of the tick sizes considered in this proposal.
---------------------------------------------------------------------------

    From Panel B of Table 3, we observe that 82.5% of the dollar value
of price improvement fits this description. The remaining 17.5% of
price improvement ($12 million per day) \572\ occurred in sub-penny
increments and were not associated with midpoint trades and, therefore,
could potentially be affected by the rule. In addition, the
harmonization of tick sizes across venues will likely have very little
impact on trades for stocks priced less than $1.00. The designated
increment of $0.0001 already appears to be the minimum pricing
increment for wholesaler price improvement.\573\
---------------------------------------------------------------------------

    \572\ This figure does not represent the potential harm to
retail investors. The discussion later in this section explains that
these trades could be positively or negatively affected. Further,
trades that do not have an opportunity for price improvement
currently, could have an opportunity for price improvement under the
proposed rules.
    \573\ See, e.g., Boehmer, et al. (2021), supra note 469. For
this reason, the remainder of the discussion in this section focuses
on the effects of harmonization on stocks priced equal to, or
greater than, $1.00 per share.
---------------------------------------------------------------------------

    The proposed pricing increment for quoting and the proposed
acceleration of the round lot definition would have an effect on price
improvement that alters the basis by which the isolated effects of the
trading increment are compared. However, the Commission is uncertain of
the effect these proposals would have on the magnitude of price
improvement, but anticipates they could increase the frequency of price
improvement and change the basis for the effects of the trading
increment. Because price improvement is benchmarked to the NBBO, the
magnitude of price improvement available could decline as a result of
reductions in the NBBO from the change in the round lot definition,
which would narrow the spread in stocks priced more than $250, or from
a smaller tick, which could narrow the spread in tick-constrained
stocks. Conversely, the frequency and magnitude of price improvement
could also increase for stocks that are currently tick-constrained
because, for tick-constrained stocks, the only way to offer price
improvement on an exchange or ATS is with a midpoint trade. If the
reduction in tick sizes results in tick-constrained stocks no longer
being tick-constrained, then exchanges and ATSs could accept odd-lot
orders inside the NBBO that offer price improvement relative to the
NBBO. It is unclear which effect would dominate: the decline in the
NBBO spread leading mechanically to less reported price improvement or
the increased ability to offer price improvement on stocks that are
currently tick-constrained.
    For currently price improved trades the effect of the proposal
would depend on a few factors. Consistent with the analysis in Table 3,
one study also reports that common price improvement levels are
$0.0001, $0.001 and $0.002.\574\ For stocks priced equal to or greater
than $1.00, price improvement of $0.0001 would no longer be achievable.
However, for a stock priced at $20, price improvement of $0.0001
represents only 0.05 bps of price improvement, which is not
economically meaningful. The Commission expects that on such trades the
wholesaler would likely round down to the price improvement that it
offers in the majority of cases to the nearest permissible increment
reducing price improvement by $0.0001 per share traded by retail
investors, which could mitigate some of the benefits of the proposal as
a whole. This is because the cost to an OTC market maker of rounding up
almost an entire tick could be high. For price improvement that occurs
in increments of $0.001 or $0.002 the effect of the rule would be
dependent on the stock's designated tick size. For the estimated
approximately half of trading volume that would likely receive a $0.001
tick, price improvement of either $0.001 or $0.002 would still be
possible because both increments align with the $0.001 tick size. For
the fraction of trading volume receiving a $0.002 tick, price
improvement of $0.001 would not be possible but price improvement of
$0.002 would still be possible. For the subset of retail trades in
stocks that would have a $0.002 tick and would have received price
improvement of $0.001 absent harmonization, the OTC market maker could
offer greater price improvement on these trades to $0.002, or it could
choose to not offer price improvement. Both options come with costs to
the OTC market maker, so the decision depends on the margins earned by
OTC market makers when internalizing trades. If it chooses to price
improve from $0.001 to $0.002 it would earn $0.001 less per share
transacted. However, if it fails to price improve then both the total
price improvement offered to retail investors and the fraction of
trades receiving price improvement would decline, potentially making
the OTC market maker appear less competitive in terms of attracting
retail order flow. Additionally, the less price improvement that OTC
market makers in sum offer to retail traders, the less attractive they
might appear to the broker-dealers who handle retail traders. This
coupled with the fact that OTC

market makers would be restricted to the same minimum trading increment
as exchanges and ATSs would put competitive pressure on OTC market
makers to price improve trades because exchanges and other ATSs would
have an increased ability to potentially innovate and compete for
retail order with OTC market makers, including wholesalers.\575\
---------------------------------------------------------------------------

    \574\ See Boehmer, et al. (2021), supra note 469.
    \575\ See infra sectionV.E.2.a. for further discussion on these
competitive effects.
---------------------------------------------------------------------------

    Similar arguments follow for stocks that receive a tick size of
$0.005 or $0.01. A wholesaler would not be able to offer price
improvement at common levels and could thus offer less or no price
improvement--which might harm its competitive standing in terms of
competing for retail order flow. To offset this consequence the OTC
market makers, including wholesalers, could instead increase the amount
of price improvement that it offers.
    To the extent that OTC market makers choose to not offer as much
price improvement, total price improvement received by retail investors
might decrease. But, to the extent that OTC market makers choose to
increase the levels of price improvement to match the tick, then retail
price improvement might increase. If OTC market makers increase price
improvement in some instances to match the tick and decrease it in
others, the net effect for retail price improvement could be positive,
negative, or neutral.\576\ The Commission believes that investors may
benefit overall from harmonizing trading and quoting increments
regardless of the effect on price improvement because of the potential
long-term competitive effects.\577\
---------------------------------------------------------------------------

    \576\ Market participants have also expressed similar
uncertainty. NYSE, providing an analysis of the potential effect of
a $0.0025 tick increment that applies in all settings, stated, ``We
expect the reaction to [harmonizing the tick increment] will be some
mix of favorable and unfavorable changes for marketable orders. For
example, some buy orders will pay higher prices, but some will also
pay lower prices as additional market participants can effectively
use price points previously available only on bilateral trades.''
See NYSE Tick Harmonization Paper, supra note 126 at 6. Given the
uncertainty regarding how OTC market makers, including wholesalers
could react to applying the tick size to trading situations, the
Commission is not providing quantitative estimates of the effect of
the proposal on retail price improvement.
    \577\ See infra section V.E.2.a. for further discussion on these
competitive effects.
---------------------------------------------------------------------------

3. Lower Access Fee Cap
    The proposal would lower the access fee cap from $0.003 per share
(30 mils) to $0.001 per share (10 mils) for NMS stocks priced $1.00 or
greater and having a minimum pricing increment greater than $0.001,
from $0.003 (30 mils) to $0.0005 (5 mils) for NMS stocks priced $1.00
or greater and a minimum pricing increment of $0.001, and from 0.3% to
0.05% of the share price for stocks with prices less than $1.00.
    Most exchanges currently charge the maximum access fee allowed
under the cap. For stocks with narrow spreads such as tick-constrained
stocks, a 30 mil access fee can increase the cost of demanding
liquidity by as much as 60%.\578\ The direct economic effect of a lower
access fee cap is therefore likely to be a lower price to take
liquidity, and thereby lowering the cost of trading for many investors.
Moreover, to avoid increasing distortions in order routing, a reduction
in the tick size must be accompanied by a reduction in the access fee
cap in the presence of the NBBO. Because the NBBO offers quote
protection, a liquidity taker must go to the best quote regardless of
the fee, limiting the ability for market forces alone to lower access
fees. Some reduction in the access fee cap would be necessary to
prevent a situation in which the access fee exceeds the quoted spread.
---------------------------------------------------------------------------

    \578\ For a tick-constrained stock, the cost of demanding
liquidity is one half the spread ($0.005) plus the access fee. An
increase of $0.005 to $0.008 is a 60% increase.
---------------------------------------------------------------------------

    At present, many exchanges offer rebates for liquidity providers
and charge fees for liquidity takers (Section V.C.2), with a net
capture rate of 2 mils for stocks with prices greater than or equal to
$1.00. Table 11 estimates the rebates exchanges would pay, should this
2 mil capture fee prevail; that is, for stocks with a 10 mil access
fee, the rebate would on average be 8 mils per share, for example. The
analysis also assumes that the behavior of inverted exchanges and off-
exchange venues changes proportionally, though the proposal would not
require this. As shown in Table 11 below, the Commission estimates that
the reduction in the access fee cap would lead to a decrease in the
total access fees collected and rebates distributed of approximately
$3.8 billion per year, amounting to a 73% reduction in access fees paid
or an 80% reduction in rebates distributed.\579\ Balancing out expected
rebates paid on make-take, inverted, and flat fee venues, the
Commission expects that liquidity demanders would pay $3.2 billion per
year less in access fees netted across all venues under the proposal
and liquidity providers would receive $3.2 billion per year less in
rebates netted across all venues. These numbers represent an 80%
reduction in rebates received by liquidity providers and a 73%
reduction in access fees paid by liquidity demanders. Additionally, the
Commission estimates that the reduction in the access fee cap could
decrease the net capture of the exchanges by $89 million per year with
the decline in net capture coming almost exclusively from a lower net
capture for trading in stocks priced less than $1.00 (see below).\580\
---------------------------------------------------------------------------

    \579\ Estimates in this paragraph are computed by multiplying by
two the estimates in Table 11.
    \580\ The exception is IEX, which the Commission estimates might
experience a reduction in access fees collected on trading in tick-
constrained stocks greater than $1.00. This is because the 5 mil
access fee cap for these stocks is lower than the estimated 6 mils
that IEX currently charges to access protected quotes. Thus the
Commission estimates that the IEX might lose approximately $3
million per year in transaction revenue on trading in these
securities.
---------------------------------------------------------------------------

    The analysis in this section assumes that exchanges would maintain
the practice of financing rebates through access fees, and thus for
transactions in stocks priced $1.00 or more the Commission expects the
average access fee to be near the 10 or 5 mil access fee cap and the
rebate to be approximately 2 mils lower on average.\581\ There are
several reasons for this assumption to hold, at least approximately.
First, on inverted venues, there is currently no restriction on the
level of fees for taking liquidity or rebates for posting, yet as shown
in Table 5 inverted venues generally have fee and rebate levels similar
to maker-taker venues and approximately a 2 mil capture rate. Second,
this proposal does not directly alter the ability or the incentives for
an exchange to subsidize rebates. Additionally, if exchanges were to
subsidize rebates by taking a net loss per share transacted, they would
be vulnerable to experiencing extreme and unpredictable losses if
volumes spike. Trading volumes can vary significantly through time with
very little ability to predict the timing and magnitude of changes in
trading volume. For example, in January 2021 volume spiked dramatically
for certain stocks relative to pre-January 2021 levels.\582\ The
Commission nonetheless acknowledges uncertainty over whether this 2 mil
capture rate would persist or be lower. The capture rate could be lower
should exchanges choose to subsidize rebates on stocks priced $1.00 or
more to a greater extent, choose to subsidize trading on stocks with
prices less than $1.00, or choose to alter their business model in
response to the changes.
---------------------------------------------------------------------------

    \581\ At certain pricing tiers rebates may exceed the access fee
cap. However, because total overall fees exceed the total rebates
paid out, the average rebate would remain lower than the average
access fee.
    \582\ See Staff Report on Equity and Options Market Structure,
supra note 20.
---------------------------------------------------------------------------

    Table 11 uses volume estimates from Table 6 to provide estimates of
the fees

and rebates that would have been collected and disbursed in the first
six months of 2022 if the proposed access fees were implemented.\583\
Annualized estimates are simply these estimates multiplied by two.
Panel A shows that under the current system with a 30 mil access fee
cap for quotations priced $1.00 or more and a 0.3% access fee cap for
transactions less than $1.00 the exchanges collected an estimated $2.55
billion in access fees and distributed $2.31 billion in rebates in the
first six months of 2022, providing an estimated net capture of $240
million for the exchanges in that time period.\584\ Under the proposed
amendment to rule 610 the Commission estimates that the exchanges would
collect $652 million in access fees and distribute $455 million in
rebates, providing the exchanges a net capture of $197 million over the
same time period. Thus total access fees collected would be expected to
decline by $1.91 billion ($3.82 billion annually) and rebates
distributed by $1.86 ($3.72 billion annually) billion in the first six
months of 2022. This amounts to an estimated decline in net capture of
$44.5 million ($89 million annually) across all exchanges.
---------------------------------------------------------------------------

    \583\ This assumes that exchanges continue the practice of
funding rebates through access fees, that trading volumes are
unchanged relative to the first six months of 2022, that the
distribution of trading volume across exchanges is unchanged, and
that the distribution of trading volume priced below $1.00 and at or
above $1.00 remains unchanged.
    \584\ See Table 7 for additional analysis on current estimates
of exchange net capture.
---------------------------------------------------------------------------

    Panel B provides estimates of the effect of the proposal on access
fees paid and rebates received by liquidity demanders and providers
separately under the proposed rule. The Commission estimates that under
the proposed rule liquidity demanders would pay $1.56 billion ($3.12
billion annually) less in access fees and liquidity providers would
receive $1.52 billion ($3.04 billion annually) less in rebates over the
same time period. Thus, the current estimated $1.9 billion transfer
facilitated by access fees and rebates from liquidity demanders to
liquidity providers in the first six months of 2022 would be decreased
by 80% under the proposal.

        Table 11--Estimated Access Fees and Rebates Collected Current and Proposed Jan. to June 2022 \a\
----------------------------------------------------------------------------------------------------------------
                                                              Current            Proposed          Difference
----------------------------------------------------------------------------------------------------------------
                  Panel A: Estimated Access Fees Collected and Rebates Distributed Jan-Jun 2022
----------------------------------------------------------------------------------------------------------------
Fees Collected.........................................     $2,554,250,000       $652,318,000    -$1,901,932,000
Rebates Distributed....................................      2,312,561,000        455,081,000     -1,857,480,000
Exchange Capture.......................................        241,688,000        197,237,000        -44,451,000
----------------------------------------------------------------------------------------------------------------
                                    Panel B: Estimated Fees by Liquidity Type
----------------------------------------------------------------------------------------------------------------
Liquidity Demander.....................................      2,135,292,000        568,631,616     -1,566,668,000
Liquidity Provider.....................................     -1,893,604,000       -371,394,303      1,522,210,000
Exchange Capture.......................................        241,688,000        197,237,312        -44,451,000
----------------------------------------------------------------------------------------------------------------
\a\ This table takes trading volumes presented in Table 6 to calculate aggregate fee and rebate estimates under
  the proposal. It separately accounts for volume priced less than $1.00 as well as trading that occurred in
  stocks that had time weighted quoted spreads less than or equal to $0.011--i.e., stocks that would likely have
  received a $0.001 tick under the proposed changes to rule 612. These stocks are determined using Dec. 2021
  time weighted quoted spreads for all trading volume in Jan. through Mar. and Mar. 2022 time weighted quoted
  spreads for volume Apr. through June. Current estimates are drawn from Table 7 while proposed estimates are
  computed assuming that non-tick-constrained volume priced equal to or greater than $1.00 on maker-taker or
  inverted exchanges pay a 10 mil access fee and receive an 8 mil rebate. For tick-constrained volume the
  assumption is 5 mil access fee and 3 mil rebate. For IEX we assume a 6 mill access fee for non-tick-
  constrained volume and a 5 mil access fee for tick-constrained volume. For volume priced less than $1.00 we
  assume that no exchange offers a rebate and that all exchanges charge 0.05% to take liquidity except for IEX
  whom we assume charges both sides 0.05%. Computations are made at the exchange and then aggregated as shown
  above.

    Table 11 presents analysis suggesting that the exchanges could lose
approximately $89 million per year in net capture. This estimated
decline in transaction revenue comes almost exclusively from the
reduction in the access fee cap for transactions in securities below
$1.00. This is because for transactions priced equal to or greater than
$1.00 the Commission expects that, except for exchanges that choose to
rely mostly on transaction fee revenue which tend to have a higher net
capture, the exchanges would largely maintain their current net
capture.\585\ Thus the decline in exchange net capture would be driven
almost exclusively by an anticipated decline in the net capture on
transactions below $1.00. For these transactions most exchanges
currently charge the maximum 0.3% but offer no rebates.\586\ Because
very few exchanges offer rebates on stocks priced below $1.00, the
access fee represents the exchange's net capture. Lowering the access
fee from 0.3% to 0.05% on these transactions would represent a decrease
in net capture of 83% for many exchanges. This decline would not be
expected to be uniform. Some exchanges do not charge any fees for
trading in sub $1.00 securities while others charge a fee to both sides
of a sub $1.00 transactions. Additionally, the exchanges differ in the
fraction of sub $1.00 trading volume that they handle. Table 12
provides annualized estimates of the effect of lowering the access fee
on exchange net capture given realized volumes in the first 6 months of
2022.
---------------------------------------------------------------------------

    \585\ As discussed in section III.C.2, the Commission believes
that most exchanges have a net capture of approximately 2 mils on
transactions priced greater than $1.00. For reasons discussed in
this section the Commission believes that it is reasonable to assume
that exchanges with a current 2 mil net capture would be able to
continue to earn a 2 mil net capture. The Commission expects one
exception to its general belief that all exchanges would likely be
able to maintain their net capture on transactions priced greater
than $1. The Commission believes that IEX might receive a lower net
capture for transactions associated with volume assigned the 5 mil
access fee cap. The Commission estimates, based on Table 5 that IEX
has estimated net capture of 6 mils per transaction priced equal to,
or greater than, $1.00 per share. Under the assumption IEX would not
begin charging access fees to liquidity providers, its maximum net
capture per transaction on stocks with a 5 mil access fee cap would
be 5 mils. Thus our estimates assume that IEX would lose 1 mil of
net capture on estimated volume that IEX executed that would have
received the 5 mil access fee cap. The Commission estimates that
this loss would account to approximately $1.5 million in lost
transaction fee revenue in the first six months of 2022, or $3
million annualized.
    \586\ See Table 5.

Table 12--Estimated Effect of Policy on Exchange Transaction Capture \a\
------------------------------------------------------------------------
                                           Revenues  ($)   Revenues  (%)
------------------------------------------------------------------------
Nasdaq..................................    -$33,527,000             -21
NYSE....................................     -24,676,000             -20
Cboe....................................     -22,356,000             -20
MEMX....................................      -1,960,000              -7
IEX.....................................      -5,378,000             -10
MIAX....................................      -1,005,000             -14
LTSE....................................               0               0
                                         -------------------------------
    Total...............................     -88,902,000             -18
------------------------------------------------------------------------
\a\ To compute the variable Revenue ($) which provides an annualized
  estimate of the effect of the proposed amendment to rule 612 on
  exchange net capture, we assume that IEX loses 1 mil on transactions
  that are priced equal to, or greater than, $1.00 per share and are
  tick-constrained and (and thus may receive the $0.001 tick and 5 mil
  access fee). For all other exchanges the net capture on transaction
  priced equal to, or greater than, $1.00 per share is expected to
  remain unaffected by the proposal. For transaction volume below $1.00
  per share estimates for the decline in transaction revenue is computed
  by assuming that under the proposal all exchanges would charge 0.05%
  to one side of the transaction and nothing to the other side of the
  transaction. Sub $1.00 dollar volume estimates for each exchange are
  taken from Table 6. This revenue is then compared to the estimated
  transaction revenue in the current environment that is estimated using
  the sub $1.00 transaction fees/rebates for each exchange presented in
  Table 5 Panel B and multiplying them by volume estimates for each
  exchange from Table 6. The difference is presented in the table. To
  estimate the impact on total transaction fee revenues the Commission
  assumes that all make-take and inverted exchanges would earn 2 mils on
  all transactions priced equal to or greater than $1.00 per share and
  Flat fee venues earn 6 mils. This revenue is added to the sub $1.00
  transaction revenue estimated as stated earlier in this footnote. The
  variable Revenue (%) is computed as the Revenue ($) divided by the
  revenue total revenue converted to a percent. To annualize, all totals
  are multiplied by 2.

    The estimated $3 billion annual reduction in rebates received by
liquidity providers under the proposal could impact market
participants, specifically algorithmic and high-frequency traders,
which specialize in liquidity provision and rebate capture strategies.
Holding the spread constant, a rebate of 28 mils provides a significant
fraction of the total revenue earned by liquidity providers on each
share transacted.\587\ Even absent a reduction in the tick increment,
the reduction in rebates from an estimated 28 mils average to either 8
or 3 mils would significantly decrease the revenue earned per share
transacted by a liquidity provider.\588\ Any additional reduction in
the spread due to the reduction in the tick size for tick-constrained
stocks would further reduce the revenue earned by liquidity providers.
---------------------------------------------------------------------------

    \587\ See supra section V.C.2
    \588\ For example, on a stock with a $0.01 spread the liquidity
demander would earn half the spread ($0.005) plus the rebate
($0.0028), or $0.0078 per share in the current market. Under the
current regime if this stock was assessed a 5 mil access fee cap the
expected rebate would decline to $0.0003 for a total profit of
$0.0053, or a 32% reduction in total revenue to the liquidity
provider on the transaction. This reduction would occur before any
tick size reduction in the spread is taken into account.
---------------------------------------------------------------------------

    The primary likely effect of the decline in rebates disbursed and
access fees collected would be to reduce the amount of liquidity
provision--particularly among stocks with narrow spreads. This
reduction in liquidity provision may not be harmful to trading quality
for these stocks, under the reasoning that the reduction in rebates
would alleviate currently existing distortions that lead to an
oversupply of liquidity relative to the demand of liquidity, and would
better allow the forces of supply and demand to determine market prices
and lower overall transaction costs for liquidity demanders.
    If tick sizes were infinitely small, and absent other distortions,
then fees and rebates would not affect the cost of trading because
markets would simply adjust quotes by the amount of the rebate such
that the spread with rebates included is the same.\589\ However,
current U.S. equity markets differ from this frictionless construct
because there is a finite tick. In this environment, and particularly
for stocks with narrower spreads, high access fees and rebates can
distort liquidity supply and demand by artificially increasing the cost
of taking liquidity and the revenue to providing liquidity. This
dynamic creates an environment with too much liquidity supply relative
to liquidity demand.
---------------------------------------------------------------------------

    \589\ See, e.g., Colliard and Foucault (2012), supra note 277;
James Angel, Lawrence Harris, and Chester Spatt, Equity Trading in
the 21st Century, 1 Q. J. Fin. 1 (2011).
---------------------------------------------------------------------------

    Consider a stock with a $0.01 spread. In this case, a liquidity
provider offering a protected quote at a maker-taker venue under the
current system with a 30 mil access fee and a 28 mil rebate will earn
one half the spread ($0.005) plus the rebate ($0.0028) yielding a
profit of $0.005+$0.0028=$0.0078 per share traded. In this case a
rebate of 28 mils increases the liquidity provider's profit on the
transaction by approximately 50%. For liquidity demanders, the 30 mil
access fee produces the exact opposite effect, increasing transaction
costs by approximately 50%. The existence of a $0.01 tick prevents
spreads from adjusting to levels that can equate liquidity supply and
demand, leading to an oversupply of liquidity relative to demand.
    Reducing the access fee cap to 10 or 5 mils significantly reduces
the effect that access fees have on the incentive to demand and provide
liquidity and would allow markets to realize prices that better reflect
the underlying economics of liquidity supply and demand. For example,
consider a stock with a prevailing spread of approximately $0.01, an
access fee cap of 5 mils, and an average rebate of 3 mils. In this case
a liquidity provider on a maker-taker exchange will earn half the
spread plus a 3 mil rebate for a total of ($0.005+$0.0003=) $0.0053. In
this case the total cost to demanding liquidity falls by approximately
50% and the access fee is just 5.7% of the total transaction costs. For
a stock with a $0.03 spread and a $0.005 tick, a 10 mil access fee, and
an 8 mil rebate the liquidity provider in this case earns half the
spread plus the rebate for a total of ($0.0150+$0.0008=) $0.0158. In
this case the rebate is only 5% of the total revenue for providing
liquidity. The effect of rebates diminishes as an economic incentive as
spreads widen. For example, consider a stock with a $0.10 spread. Even
in the baseline case with a 28 mil rebate. A liquidity provider will
earn half the spread plus a 28 mil rebate for a total revenue of
($0.0500+$0.0028=) $0.0528 per share. In this case the rebate is 5.6%
of the total cost, a fraction that drops to 1.5% with an 8 mil rebate
under the proposal.

    Standard supply and demand arguments suggest that if the revenue
earned per share transacted decreases--i.e., the price of liquidity
decreases--the amount of liquidity supply will also decrease, reducing
the oversupply of liquidity. This reduction in liquidity provision
likely means that some proprietary trading desks and firms that
currently specialize in providing liquidity and capturing rebates would
cease operation as the market adjusts from one with significant
liquidity subsidization to one with less subsidization and where the
ask and bid prices are more reflective of the forces of supply and
demand for liquidity.\590\
---------------------------------------------------------------------------

    \590\ Market participants sometimes refer to the oversupply of
liquidity relative to demand as excessive intermediation (see supra
note 100). Thus reducing the access fee would reduce excessive
intermediation.
---------------------------------------------------------------------------

    The primary beneficiaries of the reduction in the access fee cap
would be liquidity demanders. For stocks with narrow spreads such as
tick-constrained stocks, a 30 mil access fee can increase the cost of
demanding liquidity by as much as 60%.\591\ Consequently, reducing the
access fee significantly reduces the cost of demanding liquidity in the
predominant maker-taker trading environment. This effect coupled with
the expected decrease of liquidity suppliers can be expected to
decrease competition to provide liquidity. Less competition to provide
liquidity means that queue lengths could decrease and fill rates
increase because it would be easier to get to the front of the order
book. This effect could allow non high-frequency traders -more
opportunity to fill orders using liquidity-providing instead of
liquidity-demanding transactions.
---------------------------------------------------------------------------

    \591\ For a tick-constrained stock, the cost of demanding
liquidity is one half the spread ($0.005) plus the access fee. An
increase of $0.005 to $0.008 is a 60% increase.
---------------------------------------------------------------------------

    The Commission expects the decline in the access fee to have
opposing effects on trading volume. If more investors end up
interacting with one another without the intermediation of a
specialized liquidity provider or high frequency market makers the
total number of transactions and trading volume may decrease. However,
the basic forces of supply and demand suggest that as the price of a
good decreases, the demand for that good increases. Thus, if the cost
of demanding liquidity decreases, more investors will seek to trade
which would increase trading volume. This could occur as market
participants take advantage of the lower cost of demanding liquidity to
more actively manage their portfolios--generating more trading.\592\
Taken alone, a reduction in the access fee could lead to wider spreads
in some cases by reducing the ability to use rebates as a form of
intra-tick pricing. However, the reduction in tick size also reduces
the need for intra-tick pricing. For instance if the ask price that
equates supply and demand is equal to $10.0015 then absent a rebate and
with a $0.01 tick, the prevailing ask price would be $10.01--the next
feasible price. This price would indicate a distortion of $0.0085.
However, with a 28 mil rebate, the prevailing ask price will be $10.00
because once the rebate is taken into account, the net price including
the rebate would be $10.0028 which is greater than $10.0015. While
still a distortion, the distortion in this case would be smaller at
$0.0015. Thus, in this case the existence of a 28 mil rebate can narrow
the spread by allowing a form of intra-tick pricing. In this example
with a rebate of either 3 or 8 mils the prevailing price would still be
$10.01 because the net price including rebates on a maker-taker venue
would still be less than $10.0015. However, because the reduction in
the access fee is also accompanied by a reduction in the tick size,
markets would be able to more naturally find prices that equate supply
and demand without needing rebates to minimize the distortion. In the
example, where the ask price that equates liquidity supply and demand
is $10.0015, and if the stock were assigned a tick of $0.001 under the
proposed changes, the prevailing ask price would be $10.002 and the
distortion would be $0.005. Thus because of the reduced tick, the need
for intra-tick pricing via rebates is significantly reduced.
---------------------------------------------------------------------------

    \592\ See, e.g., Roni Michaely, Jean-Luc Vila, and Jiang Wang, A
Model of Trading Volume with Tax-induced Heterogeneous Valuation and
Transaction Costs, 5 J. Fin. Intermediation 340 (Oct. 1996) for an
empirical analysis of the relation between trading volume and
transaction costs.
---------------------------------------------------------------------------

    The reduction of the access fee cap, as well as relaxing of the
tick constraint, could also simplify markets by reducing the need for
complex order types that are designed to take advantage of the system
of fees and rebates. The reduction would also likely simplify the
overall system of fees by compressing the fees that are possible to
charge and thereby also constraining the ability for exchanges to offer
multiple pricing tiers with economically meaningful differences. This
simpler market structure could reduce the cost associated with
designing and executing an order routing strategy and could thus
decrease transaction costs. Simpler fees and rebates could also
translate into a reduced frequency and complexity of amendments to
exchange access fees and rebates. If so, the proposal could result in
cost savings to exchanges associated with fewer Rule 19b-4 filings.
    A lower access fee cap could induce some trading volume that
currently transacts on ATSs to revert to exchanges. This would occur to
the extent that traders who may route orders to ATSs in order to avoid
high access fees instead route orders to exchanges due to lower access
fees.\593\ More trading volume on exchanges could improve overall price
efficiency.\594\ However, these effects could be lessened or reversed
due to the reduction in rebates, since rebates incentivize trading on
exchanges versus off-exchange.
---------------------------------------------------------------------------

    \593\ See Menkveld, et al. (2017), supra note 275.
    \594\ See Foley, et al. (2016), supra note 465.
---------------------------------------------------------------------------

    Finally, for stocks priced less than $1.00 the effect of lowering
the access fee will primarily be to lower the transaction costs
associated with trading in these securities. Most exchanges do not
offer rebates for stocks priced less than $1.00, or if they do the
rebates are quite small. Therefore, the effect of the proposal on such
rebates is likely to be minimal. Lower transaction costs for these
securities may improve liquidity for stocks with prices less than
$1.00. However, given the relatively low natural trading interest, the
Commission does not expect a significant improvement in the trading
environment for these securities.
4. Exchange Fees and Rebates Determinable at the Time of Execution
    The proposal requires that exchange fees and rebates be
determinable at the time of execution. In the current environment, the
prices adjusted for the fees and rebates that investors pay can vary by
as much as 60 mils (0.6c) per share for orders with the same nominal
execution price.\595\ Thus, allowing market participants to determine
the applicable fees and rebates at the time of execution could help
improve investor execution quality by providing certainty as to the net
fee and rebate price applicable at a given exchange at the time that an
order is routed to that exchange.
---------------------------------------------------------------------------

    \595\ If rebates and transaction fees are both approximately 30
mils on both maker-taker and inverted venues, then the realized
price difference for an order with the same nominal value can be as
much as 60 mils depending on where the order is submitted.
---------------------------------------------------------------------------

    Having fees and rebates determinable at the time of execution could
make it easier for broker-dealers to pass such fees and rebates on to
the end customer. Currently, it is difficult for a broker-

dealer to pass on fees and rebates to individual customers because the
level of fees and rebates is not determinable at the time of execution
and the tier into which a broker-dealer falls, which determines total
fees and rebates, is based on total broker-dealer activity and not an
individual trade.
    Access fees create potential conflicts of interest. Passing on fees
and rebates to end customers could eliminate such distortions and lead
to improved overall order execution for end customers. Additionally,
the ability to pass on the fees and rebates to end customers might also
make customers more aware of these fees and rebates so that they can
better inform their broker-dealers how to route with respect to fees
and rebates which could also lead to better execution for end
customers.
    While the ability to determine fees and rebates at the time of
execution would make passing fees and rebates on to the end customer
more feasible, it is not clear in practice how much this would occur as
there are significant uncertainties regarding how much demand currently
exists for rebates to be passed through by end investors. Academic
research shows that execution skill can have a significant impact on an
investor's portfolio returns.\596\ It is possible that more
sophisticated market participants with high trading volumes, and thus
higher transaction costs, might welcome the opportunity to better
manage access fees and rebates for their trades. On the other hand,
less sophisticated traders with low trading volumes might be less
inclined to request that their broker-dealers pass through access fees
and rebates.
---------------------------------------------------------------------------

    \596\ See Amber Anand, et al., Performance of Institutional
Trading Desks: An Analysis of Persistence in Trading Costs, 25 Rev.
Fin. Stud. 557 (2012).
---------------------------------------------------------------------------

    Making fees and rebates determinable at the time of execution could
also enable the customers of broker-dealers to better discuss
transaction fees and rebates with their broker-dealers, and potentially
request data on such fees. Doing so could improve broker-dealer
accountability and lead to better outcomes for customers.\597\
---------------------------------------------------------------------------

    \597\ See infra section V.E.2.c.
---------------------------------------------------------------------------

5. Acceleration of the MDI Rules and Addition of Information About Best
Odd-Lot Orders
    The proposal would result in four changes to NMS data. Two of the
changes would accelerate the implementation of specific aspects of MDI,
namely the round lot definition and the inclusion of odd-lot quotations
priced better than the NBBO in NMS data, and would, therefore, result
in realizing the economic effects of these MDI Rules sooner. The
Commission acknowledges that the economic effects of the proposed
acceleration would be temporary only until the accelerated aspects of
the MDI Rules would otherwise have been implemented. The proposal would
impose a new requirement on the exclusive SIPs to disseminate the
accelerated odd-lot information until the exclusive SIPs are retired,
the effect of which is to guarantee that the odd-lot information would
be disseminated.\598\ The proposal does however present the possibility
that the new requirements on the SIPs could reduce competing
consolidator competition, which could reduce the expected benefits of
the MDI Rules.\599\ The proposal would also require the dissemination
of a standardized best odd-lot order or BOLO. The primary economic
effect of this would be to provide a standard benchmark that market
participants could use to gauge execution quality--particularly for
smaller or odd-lot orders.
---------------------------------------------------------------------------

    \598\ See infra Section V.D.5.c. for additional discussion of
this effect. 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.
    \599\ See infra section V.E.2.c for additional discussion of MDI
acceleration and the potential effect on competitive consolidator
competition.
---------------------------------------------------------------------------

a. Round Lot Definition
    The round lot definition in the MDI Rules will result in numerous
economic effects and the proposal would result in realizing these
effects sooner. The primary effects stem from the MDI Rules round lot
definition mechanically shrinking the NBBO for stocks priced greater
than $250.\600\ Other effects of changing the round lot definition
include increased transparency and better order execution,\601\ as well
as any effects from potentially having more orders routed to exchanges
instead of ATSs.\602\ The costs of changing the round lot definition
derive from upgrading systems to account for additional message traffic
and modifying and reprogramming systems.\603\ The Commission also
expects that changing the round lot definition will impact the
mechanics of other rules and regulations.\604\ These economic effects
would be realized earlier than is currently estimated under the
existing MDI timeline because this portion of the MDI Rules is not set
to be implemented until the end of the implementation timeline.
Further, because the first steps of the timeline have not been
accomplished,\605\ and the Commission is uncertain when exactly the
round lot definition otherwise will be implemented, the degree of the
effect of the acceleration, is unknown.\606\
---------------------------------------------------------------------------

    \600\ See MDI Adopting Release, supra note 5, section
V.C.1.(b).(i), for the full discussion of the effect of changing the
round lot size on the NBBO.
    \601\ See MDI Adopting Release, supra note 5, sections
V.C.1.b.(ii) and V.C.1.b.(iii), for the full discussion of the
effect of changing the round lot size on transparency and execution
quality.
    \602\ See MDI Adopting Release, supra note 5, sections
V.C.1.b.(iv) for the full discussion of the effect of changing the
round lot size on exchange competition and order routing.
    \603\ See MDI Adopting Release, supra note 5, section
V.C.1.b.(vi) for the full discussion of the expected costs of
changing the round lot size. See also infra section V.D.6. for an
estimation and discussion of these compliance costs as they pertain
to the proposed acceleration.
    \604\ See MDI Adopting Release, supra note 5, section
V.C.1.b.(vii), for the full discussion of the effect of changing the
round lot size on other rules and regulations.
    \605\ See supra section IV.A.1 for a discussion of the delays.
    \606\ See supra section II.B. for a discussion of the factors
that affect when MDI will be implemented and a discussion of an
estimate of the proposed acceleration of at least two years after
the Commission's approval of the plan amendment(s) required by rule
614(e).
---------------------------------------------------------------------------

    The Commission recognizes that the earlier implementation of the
round lot definition could affect the proposed tiered tick structure by
sooner increasing the number of stocks subject to a minimum pricing
increment of less than $0.01, but does not expect this effect to be
substantial. Specifically, a mechanically tighter NBBO would reduce the
Time-Weighted Average Quoted Spread used to determine the appropriate
tick increment for stocks priced greater than $250. However, higher-
priced stocks also tend to have higher spreads that are unlikely to
narrow enough for the proposal to result in a smaller minimum pricing
increment.\607\
---------------------------------------------------------------------------

    \607\ See supra Table 8 note a, for a discussion of the impact
of the round lot definition on the estimates of which stocks would
receive a reduced tick size. In the MDI Rules the Commission
estimated an average reduction in quoted spreads, conditional on the
round lot definition resulting in a reduction of roughly 15% for
stocks priced $250-$1,000 and 28% for stocks priced $1,000-$10,000.
Given the average quoted spread of $0.35 for stocks priced $250-
1,000 and $2.90 for stocks priced $1,000-$10,000 the expected
mechanical reductions are likely not sufficient to reduce the
spreads of many of these stocks to the point where they would
qualify for a lower tick size in this proposal. See MDI Adopting
Release, supra note 5, section V.C.1.b.(i).
---------------------------------------------------------------------------

    The Commission also recognizes that both the reduction in tick size
and accelerating the definition of round lot would reduce the depth of
liquidity at the NBBO. These effects might amplify each other in a
small set of stocks. A

reduction in tick size would spread liquidity across more price levels
while the implementation of the round lot definition would result in
displaying smaller quotes at the NBBO. The proposal could result in
this effect being amplified for stocks that trade above $250 with
spreads narrower than $0.04 as these stocks would receive both smaller
tick and smaller round lot sizes, which is likely only a small number
of stocks. This reduction in depth at the NBBO would temporarily reduce
the information about liquidity available in the market for market
participants who do not receive depth of book information from
proprietary data feeds. However, the eventual implementation of
including the depth of book information in consolidated market data due
to the implementation of the MDI rules would render this effect
temporary. At that point in time, consolidated market data is expected
to contain depth information at many more price points, which would
largely counteract the effects of a reduction in displayed depth from
the implementation of the round lot definition and even from a
reduction in tick size.
b. Including Odd-Lots in NMS Data
    The proposed acceleration of the implementation of the MDI Rules
that expands the NMS data to include odd-lot information inside the
NBBO would result in sooner realizing some, but not all economic
effects of this aspect of the MDI Rules.\608\ The Commission believes
that this odd-lot information could be useful to consumers of SIP data
who could use it to make inferences about market conditions and, thus,
could lead to better investment decisions and increased market
efficiency. It could also lessen the effect of a reduction in displayed
depth at the NBBO resulting from either a smaller tick size or a
smaller round lot. Specifically, the proposal to expedite
implementation of inclusion of odd-lot data would sooner allow
individual investors whose broker-dealers subscribe to the data to
visually monitor the market environment and determine profitable
trading opportunities. In addition, the proposal would change the
timing and magnitude of compliance costs and other costs.\609\ These
costs would include: the cost for exclusive SIPs to upgrade existing
infrastructure and software to handle the dissemination of additional
message traffic, the cost to SROs to implement system changes required
in order to make the data needed to generate odd-lot information
available to exclusive SIPs, and the cost of technological investments
market participants might have to make in order to receive the proposed
SIP data.\610\
---------------------------------------------------------------------------

    \608\ See MDI Adopting Release, supra note 5, section
V.C.1.c.(i), for the full discussion of the effects of including
odd-lot information inside the NBBO in its definition of core data.
Also, the MDI Rules do not require that the competing consolidators
to disseminate odd-lot information, but the Commission anticipated
in the MDI Adopting Release that at least one would do so. The
proposed requirement that the exclusive SIPs disseminate odd-lot
information helps ensure that the economic effects of the proposed
acceleration of the MDI Rules occur. See infra section V.D.6. for a
discussion of the costs to the exclusive SIPs.
    \609\ See MDI Adopting Release, supra note 5, at section
V.C.1.c.(iv) for the full discussion of the costs associated with
expanding core data to include odd-lot information inside the NBBO.
See also infra section V.D.6 for further discussion of compliance
costs.
    \610\ Id.
---------------------------------------------------------------------------

    While these economic effects would be realized sooner, the
Commission does not expect that the proposal would accelerate all the
effects described in the MDI Rules related to adding to NMS data odd-
lot information inside the NBBO. The proposal would not accelerate the
benefits from allowing some market participants to reduce data expenses
required for trading by providing a reasonable alternative to some
market participants to proprietary data.\611\ As such, the proposal
would also not accelerate the cost to users of propriety data whose
information advantage would dissipate somewhat. In particular, the
Commission does not believe that adding the specified odd-lot
information to the exclusive SIPs would result in low-latency traders
substituting the exclusive SIPs for their current proprietary data
usage. This is because a key component of the MDI Rules for this
functionality is an expected reduction in latency of NMS data
anticipated from the competing consolidator model of NMS data
distribution.\612\ The exclusive SIPs are not expected to be fast
enough to replace proprietary data because existing SIP latency would
not be reduced or affected by this proposal. Thus, the proposal would
not accelerate the benefits anticipated in the MDI Rules that pertain
to using low-latency odd-lot information. Instead, the Commission
expects these effects after the implementation of all MDI Rules.
---------------------------------------------------------------------------

    \611\ Id.
    \612\ See MDI Adopting Release, supra note 5, at n.1939.
---------------------------------------------------------------------------

    Market participants who receive and use odd-lot information from
the exclusive SIPs would also incur costs if the acceleration results
in additional systems changes. Specifically, if the exclusive SIPs
changed data specifications to add odd-lot information, market
participants receiving odd-lot information from exclusive SIPs would
need to make systems changes upon implementation of the proposal.
Because the data specifications of the competing consolidators are
unknown and could differ from the data specification of the exclusive
SIPs, market participants receiving SIP data could need to make systems
changes again to receive the additional data from a competing
consolidator upon full implementation of the MDI Rules. If there are
significant fixed costs associated with system changes that are
incurred on each change, then multiple system changes would be
inefficient and could increase costs. Because market participants who
receive odd-lot information from the exclusive SIPs would need to make
an extra systems change stemming from this proposal, they could be
discouraged from making systems changes to make use of the odd-lot
information and, instead, wait until MDI implementation. This could
dampen some of the benefits of the proposal.
    To the extent that some market participants store SIP data for
various purposes (such as transaction cost analysis) the storage costs
could increase with the proposal as the amount of SIP data increases
with the inclusion of odd-lot data. Many factors affect these costs,
such as the number of market participants storing SIP data, the data
structures they use to store SIP data, whether these market
participants would choose to store all or just some of the SIP data
provided by the proposal, and the period over which the proposal would
affect these storage costs. Based on the nature of several of these
factors, the Commission is unable to estimate these costs.

c. Dissemination of Odd-Lots in SIP Data
    The proposed requirement for the exclusive SIPs to disseminate odd-
lot data would ensure realizing the benefits of accelerating the
implementation of including odd-lot information in NMS data while
imposing costs on exclusive SIPs and potentially market
participants.\613\ The MDI Rules do not require the competing
consolidators to disseminate odd-lot data. However, the Commission
estimated that at least one competing consolidator will do so because
there would be demand for the data.\614\ Unlike competing
consolidators, each exclusive SIP is the only distributor of the
entirety of its data and may lack the incentive to disseminate the
data. As a result, the Commission is not certain whether the exclusive
SIPs would disseminate odd-lot information absent a requirement to do
so, the benefits of the acceleration could be at risk without the
requirement to disseminate.\615\
---------------------------------------------------------------------------

    \613\ See infra section V.D.6 for additional discussion of the
costs the exclusive SIPs are expected to incur.
    \614\ See supra note 518.
    \615\ The Commission recognizes that the exclusive SIPs have
some incentive to offer odd-lots as indicated by the exclusive SIPs
seeking comment on doing so. See, e.g., 2022 SIP Odd-Lot Request for
Comment, supra note 371.
---------------------------------------------------------------------------

    While the inclusion of the odd-lot data could impose costs on those
who receive and use exclusive SIP odd-lot data, the requirement that
exclusive SIPs disseminate the data could impose costs on those who
receive but do not have an interest in using odd-lot information
provided in SIP data. In particular, depending on the SIP data
specifications, such SIP data users might need to alter their systems
to remove odd-lot information. Further, such SIP data users could incur
the cost of any SIP data fee increases intended to offset the costs to
exchanges and exclusive SIPs. However, the Commission notes that SIP
data fees did not increase when the exclusive SIPs started to include
odd-lot trades.
d. Best Odd-Lot Order Definition
    The proposal goes beyond the MDI Rules by proposing that NMS data
also include information on the best priced odd-lot orders across all
markets. Including the best odd-lot order in a standardized form would
offer market participants a standard benchmark, like the NBBO, to use
to measure execution quality. Currently, this information is only
available to market participants who have proprietary data feeds, and
even then there could be differences across market participants with
this data in how exactly market participants calculate the best odd-lot
order (or how many proprietary feeds they include). The best odd-lot
information in the NMS data would provide a standardized benchmark.
This benchmark may allow market participants to better monitor the
execution quality of their broker-dealers and send more trading volume
to broker-dealers with better performance.\616\ Thus, including the
best odd-lot information could enhance competition among broker-dealers
leading to better trade execution and perhaps a lower cost to customers
for execution services.
---------------------------------------------------------------------------

    \616\ While the Commission does not expect most retail traders
would engage in this sort of benchmarking due to a lack of technical
capacity to do so among most retail traders, institutional traders
likely have such capacity and so would engage in this type of
monitoring. Institutional traders have strong incentives to monitor
all aspects of transaction costs as these costs can significantly
affect portfolio performance. See Anand, et al. (2012), supra note
596.
    \617\ This is consistent with the expectations that exclusive
SIPs would likely become competing consolidators expressed in the
MDI Adopting Release, supra note 5, at section V.C.2.(a)(ii).
---------------------------------------------------------------------------

6. Compliance Costs
    The Commission believes that various market participants would
incur implementation and ongoing costs to comply with the proposal.
These costs are presented in Table 13 and discussed below. Some costs
presented in Table 13 represent costs that might not be new but rather
were anticipated in the MDI Rules. Specifically, those costs are
associated with the acceleration of aspects of the MDI Rules. These
include an estimated $1.1 million of one-time costs and $340 thousand
in annual ongoing costs to exclusive SIPs. If we assume that exclusive
SIPs will become competing consolidators absent this proposal and that
the cost of estimating and disseminating the best odd-lot order is
minimal,\617\ the cost of the proposal would be approximately $57.3
million in one-time costs and $158,000 per year in ongoing costs.
However, the Commission recognizes some uncertainty in the assumption
that exclusive SIPs will be competing consolidators and recognizes that
exclusive SIPs would incur costs to estimate and disseminate the best
odd-lot order. Therefore, the Commission estimates that total costs of
the proposal if exclusive SIPs will otherwise not be competing
consolidators would be approximately $58.4 million in initial one-time
costs and $500 thousand in annual ongoing costs. Further, the ongoing
costs for exchanges and exclusive SIPs to comply with proposed rules
600 and 603 would be incurred only until the exclusive SIPs are
retired, after which time these costs were previously accounted for in
the MDI Adopting Release.

                                       Table 13--Compliance Cost Estimates
----------------------------------------------------------------------------------------------------------------
                                                                     Number of
    Rule #/incurring entities         Initial         Ongoing        entities      Total initial   Total ongoing
----------------------------------------------------------------------------------------------------------------
612/All Trading Venues..........        $140,000  ..............             286     $40,040,000  ..............
612/Listing Exchanges...........          19,000          $9,000               5          95,000         $45,000
612/Order Entry Systems.........          11,000  ..............           1,192      13,112,000  ..............
612/Smart Order Routers.........          11,000  ..............             282       3,102,000  ..............
610/Exchanges...................          57,000  ..............              15         855,000  ..............
603, 600/Exchanges..............           4,000           7,000              16          62,864         112,800
603, 600/SIPs...................         567,000         170,000               2       1,134,000         340,000
                                 -------------------------------------------------------------------------------
    Total.......................  ..............  ..............  ..............      58,401,000         498,000
----------------------------------------------------------------------------------------------------------------

a. Estimates for Proposed Rule 612
    According to Table 13, the primary driver of costs for the proposed
tiered tick structure would be the costs to all trading venues of $40
million. The $40 million comes from an estimated $140,000 \618\ in one-
time costs incurred by each trading venue to update systems to comply
with rule 612 \619\ aggregated across an estimated 286 trading venues.
The estimate of 286 trading venues comes from the number of entities
who report rule 605 statistics. Therefore, if additional trading venues
incur compliance costs, the costs to trading venues of the proposal
could be greater than $40 million.
---------------------------------------------------------------------------

    \618\ An exchange commenting on the tick size pilot estimated
$140,000 as its expected expense to comply with the tick size
pilot's requirement to change the tick size for some stocks. The
Commission views this estimate as reasonable, but also notes that
the proposal is simpler in some aspects than the tick size pilot and
more complex in others. Specifically, although the proposal would
have more tick levels than the tick size pilot, it would not impose
any variation in ``trade at'' requirements. Thus, the Commission
expects the estimate of $140,000 per exchange to be a reasonable
estimate of the cost associated with the tick size change for
exchanges and ATSs. See James G. Ongena, Chicago Stock Exchange
(CHX), Comment Letter Re: File No. 4-657; Notice of Filing of the
Proposed National Market System Plan to Implement a Tick Size Pilot
Program On a One-Year Pilot Basis (Dec. 2014), available at https://www.sec.gov/comments/4-657/4657-67.pdf.
    \619\ The technical aspect of a wholesaler updating its system
to reflect the tiered tick regime is likely similar to that of an
exchange or an ATS. Thus the Commission is applying the same
estimate to wholesalers and other to update systems as exchanges and
ATSs. There were 16 registered exchanges, 32 ATSs, 6 wholesalers,
and 232 other FINRA members. See ATS Transparency Data Quarterly
Statistics, 2022 Quarterly Tables, 1st Quarter, NMS Stocks, FINRA
(2002), available at https://www.finra.org/filing-reporting/otc-transparency/ats-quarterly-statistics for the number of ATSs. In the
first quarter of 2022, there were 286 total entities affected.
---------------------------------------------------------------------------

    The estimated one-time cost of $19,000 \620\ and $9,000 per year in
ongoing costs \621\ for listing exchanges is to calculate Time-Weighted
Average Quoted Spreads and to transmit the associated tick size to the
exclusive SIPs under the proposal. This estimate is based on the
Commission's belief that the listing exchanges currently have access to
the data needed to calculate the Time-Weighted Average Quoted Spreads
because such data, specifically the NBBO, is needed for the exchanges
to compile 605 reports. Thus, the Commission does not believe that the
exchanges would incur additional costs associated with gathering data.
Additionally, the listing exchanges have experience computing
statistics conceptually similar to Time-Weighted Average Quoted Spreads
for their 605 reports.\622\ The listing exchanges also already have
connections to the exclusive SIPs, and thus the listing exchanges would
need to modify rather than build new systems to transmit tick sizes to
the exclusive SIPs. Further, once competing consolidators replace the
exclusive SIPs, it is the competing consolidators that have the
responsibility to connect to the exchanges in order to receive data and
thus, under the MDI Rules the exchanges would not incur additional
costs in terms of connecting to the competing consolidators.\623\
Consequently, the compliance cost estimates provided here represent
costs associated with modifying existing systems rather than building
systems from scratch. The Commission does not believe that having the
listing exchange compute Time-Weighted Average Quoted Spreads and
transmit the associated tick to the exclusive SIPs currently, or to the
competing consolidators once the exclusive SIPs are discontinued, would
require listing exchanges to acquire new hardware or systems.
---------------------------------------------------------------------------

    \620\ Salaries are derived from SIFMA's Management &
Professional Earnings in the Securities Industry 2013, modified to
account for an 1,800-hour work-year and inflation, and multiplied by
5.35 to account for bonuses, firm size, employee benefits and
overhead: [(Sr. Programmer at $368 for 25 hours) + (Sr. Systems
Analyst at $316 for 10 hours) + (Compliance Manager at $344 for 10
hours) + (Director of Compliance at $542 for 5 hour)] [ap] $19,000
per listing exchange).
    \621\ [((Compliance Attorney at $406 for 6 hours) + (Compliance
Manager at $344 for 2 hours)) x 4 tick size revisions per year] [ap]
$9,000 per listing exchange for a total annual monetized burden of
$45,000 ($9,000 x 5 listing exchanges).
    \622\ Current rule 605 reports require trading centers to
compute and report share-weighted average time to execution
statistics among others. Additionally, some listing exchanges have
issued white papers that include statistics based on Time-Weighted
Average Quoted Spreads. See, e.g., Nasdaq Intelligent Tick, supra
note 180 at Chart 3 and Cboe Proposal, supra note 104 at Exhibit 1.
    \623\ See MDI Adopting Release, supra note 5, at n.1133 and
surrounding text. The costs for the competing consolidators to
connect to the exchanges is accounted for in the MDI Rules and thus
would not represent costs associated with this proposal.
---------------------------------------------------------------------------

    The estimated $11,000 \624\ in one-time costs to all broker-dealers
with order entry systems assumes that broker-dealers with order entry
systems would not need to acquire new hardware or develop new systems
but rather they would modify existing systems. This assumption is based
on the fact that broker-dealers with order entry systems must already
have order entry systems that account for multiple tick sizes that can
dynamically switch between the $0.01 tick for stocks priced equal to or
greater than $1.00 and the $0.0001 tick for stocks priced less than
$1.00. These systems would need to be expanded to incorporate data from
the exclusive SIPs or the competing consolidators on the tick size and
to allow for additional tick sizes for stocks priced equal to or
greater than $1.00. The Commission believes that all broker-dealers
with order entry systems currently subscribe to SIP data and will
subscribe to data from competing consolidators and thus, would not
incur additional data expenses to receive regulatory data as a result
of the tick size change. The $11,000 cost also depends on an assumption
that the costs to modify existing systems to accommodate the proposed
tick size regime would be similar for both larger and smaller

broker-dealers with order entry systems because the specific code to
manage existing systems likely does not depend on the size of the
market participant. The Commission estimates that there are 1,192
broker-dealers with order entry systems.\625\ Thus, the Commission
estimates that the proposal would lead to a one-time aggregate cost of
($11,000*1,192) [ap] $13 million across broker-dealers with order entry
systems to update their systems to account for the new tick sizes.
---------------------------------------------------------------------------

    \624\ This estimate reflects the Commission's experiences with
and burden estimates for broker-dealer systems changes: [(Attorney
(5 hours) x $401) + (Compliance Manager (10 hours) x $298) +
(Programmer Analyst (20 hours) x $232) + (Senior Business Analyst (5
hours) x $265)] [ap] $11,000. See also Transaction Fee Pilot
Adopting Release, supra note 267 at n.770.
    \625\ This estimate is obtained using consolidated audit trail
data ``CAT'' data from the month of June 2022. The Commission
calculated the total unique number of Central Registration
Depository Numeric Identifier ``CRDs'' that originated an order in
the month of June 2022 as an estimate of the number of entities with
an order entry system.
---------------------------------------------------------------------------

    The $11,000 \626\ estimated one-time cost to broker-dealers
operating smart order routers assumes that broker-dealers operating
smart order routers would not need to acquire new hardware or build new
systems to comply with the proposed tick size changes. These broker-
dealers already have systems that can adjust for tick sizes that change
around the $1.00 threshold. Thus, the Commission expects that they
would modify existing systems rather than build new systems. Any
broker-dealers that would need to build new systems would likely incur
more than $11,000 to do so. On the other hand, any broker-dealers that
use vendors for their smart order routers could incur lower costs.
---------------------------------------------------------------------------

    \626\ This estimate reflects the Commission's experiences with
and burden estimates for broker-dealer systems changes: [(Attorney
(5 hours) x $401) + (Compliance Manager (10 hours) x $298) +
(Programmer Analyst (20 hours) x $232) + (Senior Business Analyst (5
hours) x $265)] [ap] $11,000. See also Transaction Fee Pilot
Adopting Release, supra note 267 at n.796 where the cost to broker
dealers to update systems for the TSP was estimated to be $9,000,
here we are allowing for an additional 10 hours of Programmer
Analyst time.
---------------------------------------------------------------------------

    The Commission estimates an upper bound of 282 broker-dealers
operating smart order routers.\627\ This number provides an upper bound
as it assumes that all entities with direct connections to exchanges or
ATSs use a smart order router, which the Commission believes is an
over-estimate. Thus, the Commission estimates a one-time upper bound
cost of ($11,000*282) = $3.1 million for market participants to update
smart order routers.\628\ If fewer than 282 broker-dealers operate
their own smart order routers, then the $3.1 million estimate is likely
higher than the aggregate cost for broker-dealers to adjust their order
routing systems to comply with the proposal.
---------------------------------------------------------------------------

    \627\ This number is estimated by counting the number of unique
CRDs that submitted an order directly to an exchange or ATS in the
month of June 2022.
    \628\ The Commission also expects there may be other costs
associated with updating systems to account for an increase in
message traffic resulting from the new tick sizes. However, absent
an estimate in the change in message traffic or existing bandwidth
capacities it would be impractical for the Commission to attempt to
place a reliable estimate on these costs. Estimating the change in
message traffic would involve predicting how various types market
participants would change their trading behavior and how those
changes would interact with each other. Such an estimation would
depend heavily on tenuous assumptions.
---------------------------------------------------------------------------

    Further, the Commission believes that these broker-dealers
operating smart order routers also already subscribe to SIP data and
will subscribe to consolidated market data products once the competing
consolidators become operative and thus would not incur additional data
expense to receive the regulatory messages necessary to comply with
rule 612. The Commission also assumes that system updates would impose
a similar cost on larger and smaller entities given that once code is
written, scaling it up is relatively inexpensive.
    Lastly, the Commission recognizes that proposed rule 612 could
increase the overall implementation costs of the MDI Rules. In
particular, in stocks for which the proposal would result in a smaller
tick size and that would become less tick-constrained as a result, such
stocks could have more odd-lot quotes inside the NBBO than anticipated
when the Commission adopted the MDI Rules. As a result, the costs to
SROs and competing consolidators of collecting, transmitting,
consolidating, and disseminating odd-lot information would be greater
than those described in the MDI rules. The Commission is unable to
estimate this cost increase with any degree of precision because an
estimation would require predicting a complex interaction between
behavior changes from multiple types of market participants and the
resulting effect on the number of ticks inside the NBBO and the volume
of odd-lots submitted inside the NBBO. However, any such increase is
unlikely to be of a greater magnitude than the other compliance costs
discussed here.
b. Estimates for Proposed Rule 610
    In Table 13, the $57,000 in estimated cost to exchanges to comply
with proposed changes to rule 610 relate to the cost of preparing a
rule 19b-4 filing to amend access fees and rebates and to make fees and
rebates determinable at the time of execution.\629\ This estimate
assumes that exchanges will combine their proposals to include both
amendments to fees and rebates and making fees and rebates determinable
at the time of execution in the same rule 19b-4 filing and that this
combination would not increase the cost of those filings. The
Commission recognizes that if these filings would not be efficiently
combined, the costs to exchanges could be higher than $57,000. The
Commission estimates assume that LTSE would not file a rule 19b-4
filing with the Commission because it does not currently charge access
fees or offer rebates, but that the other 15 exchanges would file rule
19b-4s. If so, the proposal would lead to an estimated one-time total
cost of $855,000 for the exchanges to comply with the proposed rule
610.\630\
---------------------------------------------------------------------------

    \629\ The Transaction Fee Pilot was expected to impose a similar
requirement for exchanges to file rule 19b-4 filings with the
Commission to bring access fees into compliance with the TFP. The
Commission estimated in the TFP proposing release that each filing
would cost the exchanges approximately $48,400 [(Attorney (40 hours)
x $401) + (Compliance Attorney (40 hours) x $352) + (Assistant
General Counsel (25 hours) x $449) + (Director of Compliance (15
hours) x $470)] = $48,395 [ap] $48,400. See OMB Control No. 3235-
0045 (Aug. 19, 2016), 81 FR 57946 (Aug. 24, 2016) (Request to OMB
for Extension of rule 19b-4 and Form 19b-4 Filings). See Transaction
Fee Pilot Adopting Release, supra note 267 at section IV.C.2(a)(v).
To account for inflation the Commission multiplies this amount by
18% (derived from BLS inflation estimates from 2018 to 2022) to
arrive at an estimate of approximately $57,000. See CPI Inflation
Calculator, U.S. Bureau Lab. Stats., available at https://www.bls.gov/data/inflation_calculator.htm, for BLS inflation
estimates.
    \630\ The Commission does not expect other market participants
to incur significant incremental costs associated with the proposed
change in the access fees and rebates. As shown in Table 5, market
participants deal with over 100 fee changes per year across all
exchanges and thus the Commission believes it reasonable to expect
that one fee change by the exchanges to bring their fees into
compliance with the proposal would represent an economically trivial
incremental cost to these market participants.
---------------------------------------------------------------------------

c. Estimates for Proposed Rules 600 and 603
    The exclusive SIPs and exchanges would also face compliance costs
associated with including the odd-lot information in SIP data to
include the best priced odd-lot order, and to update the round lot
definitions. The adoption of updated round lot definitions and the
inclusion of odd-lot data inside the NBBO are both parts of the MDI
Rules. Thus, the proposal would accelerate the compliance costs
associated with these aspects of the MDI Rules. One difference is that
the MDI Adopting Release anticipated that these changes to NMS data
will occur after the competing consolidator model was up and running.
Thus, the MDI Adopting Release did not anticipate that the current
exclusive SIPs would incur such costs unless they chose to become
competing consolidators. The addition of the best odd-lot order to the
SIP data was not

part of the MDI Rules and would thus be a new cost under this proposal.
The discussion below distinguishes costs to the exclusive SIPs
accordingly as those included in the MDI Rules and new costs from this
proposal.
    The estimated initial one-time cost of $4,000 and $7,000 in ongoing
costs for at least two years for exchanges to comply with the proposed
amendments to rule 603 and 600 \631\ account for the proposed
acceleration of the necessary data to generate the odd-lot information,
including the best odd-lot order, and transmit to the exclusive SIPs.
The costs reported here account for an increase in the costs associated
with the MDI Rules that will require the exchanges to transmit all of
the data necessary to generate consolidated market data to competing
consolidators.\632\
---------------------------------------------------------------------------

    \631\ In the MDI Adopting Release, supra note 5, section
V.C.2(d)(ii), the Commission estimated costs to the exchanges of
collecting and transmitting the necessary information to the
competing consolidators to be approximately $70,000 in one-time
costs and approximately $130,000 in ongoing costs. The additional
$4,000 in one-time costs and $7,000 in ongoing costs here represent
a 5% addition over the costs in the MDI release to account for the
proposed new requirement to send the necessary data to generate odd-
lot information to the exclusive SIPs ($70,000 x 0.05 = $3,929 [ap]
$4,000 and $130,000 x 005 = $7,050 [ap] $7,000). See infra note 739
and accompanying text.
    \632\ Supra note 404 and accompanying text.
---------------------------------------------------------------------------

    Consequently, for the exchanges, the costs associated with
providing the exclusive SIPs with odd-lot information would represent
an acceleration of costs anticipated in the MDI release rather than new
costs--with a few differences. First, the odd-lot information would be
transmitted to the exclusive SIPs as opposed to the competing
consolidators. Second, the ongoing costs of the proposal would be
incurred only until the exclusive SIPs are retired, which the
Commission estimates will be at least two years after the Commission's
approval of the plan amendment(s) required by rule 614(e).
    The estimated one-time cost of $567,000 and ongoing costs of
$170,000 imposed on the exclusive SIPs to comply with the proposed
amendments to Rules 603 and 600 relate to the requirement for the
exclusive SIPs to develop, operate, and maintain systems to collect and
disseminate the odd-lot information inside the NBBO as required by the
proposal.\633\ The exclusive SIPs would incur these costs to receive
and disseminate odd-lot information inside the NBBO and to estimate and
disseminate the best odd-lot order. The Commission expects these costs
are primarily made up of costs an exclusive SIP would incur to convert
to become a competing consolidator. Thus, for exclusive SIPs that will
become competing consolidators in the absence of the proposal, the
initial costs represent an acceleration of costs articulated from the
MDI Rules more than they do new costs. Further, the ongoing costs for
exclusive SIPs to comply with proposed rules 600 and 603 would be
incurred only until the exclusive SIPs are retired, after which time
these costs were previously accounted for in the MDI Adopting Release.
---------------------------------------------------------------------------

    \633\ See infra notes 728, 730, 732, and 733 and accompanying
text for a breakdown of these cost estimates.
---------------------------------------------------------------------------

    If one or both exclusive SIPs will not become competing
consolidators in the absence of the proposal, the initial and ongoing
costs in Table 13 would represent new costs associated with the
proposal. However, the MDI Adopting Release expressed an expectation
that exclusive SIPs would likely become competing consolidators.
    Likewise, the Commission recognizes that requiring the exclusive
SIPs to build out the capacity to disseminate aspects of the data
required by the MDI Rules increases the likelihood that the exclusive
SIPs would choose to become competing consolidators because they would
already have even more of the technology implemented in order to comply
with the requirements of a competing consolidator--lowering the
relative cost of becoming a competing consolidator.\634\ The Commission
recognizes that if the proposal results in one or both exclusive SIPs
becoming competing consolidators, the costs in Table 13 could
underestimate the full costs of exclusive SIPs because it does not
account for the full costs of becoming a competing consolidator.
However, as expressed in the MDI Adopting Release, the Commission
expects that exclusive SIPs would likely become competing consolidators
and therefore, believes that the costs in Table 13 are not
underestimated.
---------------------------------------------------------------------------

    \634\ 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).
---------------------------------------------------------------------------

    The Commission recognizes that proposed rule 600 could increase the
initial costs of becoming a competing consolidator and would increase
the ongoing costs of competing consolidators, but believes that such
costs are already accounted for in the MDI Adopting Release.\635\ In
particular, competing consolidators could incur additional compliance
costs to estimate and disseminate the best odd-lot order. To the extent
such costs are not accounted for in the MDI Adopting Release, they
would likely be a small fraction of the compliance costs of including
odd-lot information in SIP data noted above because the competing
consolidators would already have the information necessary to calculate
the BOLO, so most of the cost would be the initial cost of coding the
information and the cost of processing that code in real time.
---------------------------------------------------------------------------

    \635\ See supra section V.D.6 for further discussion of how or
whether this requirement would alter the compliance costs of
competing consolidators.
---------------------------------------------------------------------------

E. Effect on Efficiency, Competition, and Capital Formation

1. Efficiency
    The Commission believes that the proposals would improve price
efficiency relative to the baseline. The improvement in price
efficiency is expected largely to come through the reduction in the
tick size and the reduction of the access fee cap. The acceleration of
portions of the MDI Rules could also increase price efficiency, but
those effects are largely to accelerate the economic impact already
anticipated in the MDI Rules.
    The Commission expects that lowering the tick size for some NMS
stocks with prices equal to or greater than $1.00, as well as lowering
the access fee cap for all stocks to either 5 or 10 mils for stocks
with prices equal to or greater than $1.00, or to 0.05% for stocks with
prices lower than $1.00, would increase price efficiency. The
Commission expects the reduction in the tick size for some stocks along
with the reduction of the access fee cap for all stocks would improve
liquidity for many stocks while causing little to no harm. This
reduction is expected because research suggests that when trading
becomes less costly, market participants have an increased incentive to
gather more information because doing so is more profitable.\636\
Gathering more information and trading on that information means that
prices are more reflective of the fundamental value of the firm.
Consequently, for stocks that receive an improvement in liquidity due
to the lower tick size or the reduction in the access fee the
Commission expects an improvement in price efficiency.\637\
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    \636\ See, e.g., Dixon, supra note 556 for a discussion of this
concept in the context of short selling.
    \637\ Id.
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    Making fees and rebates determinable at the time of execution,
along with the reduction of the access fee cap could also increase
price efficiency by helping minimize potential conflicts of interest.
The inability for broker-dealers to determine access fees and rebates
at the

time of execution makes it difficult to effectively pass them on to
their customers.\638\ To the extent that order routing decisions are
affected by potential conflicts of interest, these potentially
conflicted decisions could harm efficiency by leading to inefficient
trading decisions and thus an inefficient incorporation of information
into stock prices.\639\ Lowering the access fee and decreasing the tick
size will, for tick-constrained stocks at least, lower overall
transaction costs for demanding liquidity and diminish the role that
access fees and rebates might play in order routing decisions. Further,
making access fees determinable at the time of execution would further
enhance efficiency by allowing market participants certainty concerning
the fees that they will be charged per transaction. This certainty
could also allow broker-dealers to more efficiently examine their own
best-execution performance. Additionally, to the extent that this
feature allows broker-dealers to pass fees on to end customers they
could help eliminate entirely distortions that might occur due to
potential conflicts of interest. Greater certainty about fees and
rebates in advance of routing an order could also increase the
efficiency of the broker-dealers' best execution assessments by
providing them with greater certainty about the full cost of a
transaction prior to placing the order.
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    \638\ See section V.C.2 describing how transaction fees and
rebates are currently determined.
    \639\ If order routing decisions are not significantly affected
by access fees then the effect on efficiency would be negligible.
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    The acceleration of adding odd-lot information to NMS data and the
inclusion of information relating to the best odd-lot quote would
realize many of the price efficiency benefits to this data articulated
in the MDI Rules at a sooner date, providing improved price efficiency
earlier than anticipated in the MDI Rules. Not all efficiency-related
benefits articulated in the MDI Rules associated with the inclusion of
odd-lot information will be realized sooner because the Commission
acknowledges that the proposal would not reduce the latency of SIP
data.\640\ Specifically, research suggests that adding information on
the shares available at price levels inside the NBBO may improve price
efficiency.\641\ Currently only market participants who subscribe to
proprietary data feeds can view the odd-lot information and thus can
adjust trading strategies and decisions based on the information
contained therein. Expanding the exclusive SIP feeds to include odd-lot
information will sooner provide new information to those investors who
subscribe to the SIP data but do not subscribe to proprietary data
feeds. The extent to which investors can quickly incorporate this
information into stock prices before the full implementation of the MDI
Rules and increase efficiency is limited.\642\
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    \640\ See supra section V.D.5.b for additional discussion.
    \641\ See Bartlett, et al. (2022), supra note 365.
    \642\ The MDI Rules do not require the competing consolidators
to distribute odd-lot information. Thus, it is possible that
competing consolidators may not choose to distribute odd-lot
information, in which case the positive effect on price efficiency
will be lost. The Commission believes that this outcome is unlikely
because the odd-lot information appears to be valuable in terms of
having information relevant to stock prices (see Bartlett, et al.
(2022), supra note 365), and the alternative to odd-lot information
from the competing consolidators would be to subscribe to all of the
proprietary data feeds, which is expensive. Thus, the Commission
believes that there will be significant demand for the odd-lot
information and that the competing consolidators will therefore
offer the data.
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2. Competition
a. Trading
i. Modification of Rule 612 To Create a Tiered Tick Structure
    A smaller tick could lead to greater competition on pricing, which
more effectively balances liquidity supply and demand. This greater
competition on pricing comes with a reduced importance on time priority
and discourages liquidity oversupply thereby allowing slower traders to
better compete with faster traders to provide liquidity and earn the
spread.
    Reducing the tick size for tick-constrained stocks could induce
some order flow onto the exchanges. Academic and industry research
suggests that tick size constraints create a competitive disadvantage
for exchanges because they create long queues for limit order execution
and increase the incentives to internalize, leading to more off-
exchange trading.\643\ The disadvantage comes because in stocks that
are tick-constrained, queues are longer, fill rates lower, and the
relative cost of crossing the spread higher. If a narrower tick
alleviates these disadvantages, then more order flow in these
securities could be routed to the exchanges.
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    \643\ See Kwan, Masulis, and McInish (2015), supra note 99, see
also MEMX Report, supra note 105.
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ii. Minimum Pricing Increment for Trading
    Applying a minimum pricing increment to trading, coupled with
reducing the minimum pricing increment for quoting, could affect
measures of the frequency and magnitude of price improvement, as
previously explained in Section V.D.2. The Commission recognizes that
changes to these measures could affect transaction costs paid by
investors as well as where broker-dealers route customer order flow.
For example, the less price improvement that OTC market makers offer to
retail traders, the less attractive they might be to broker-dealers who
handle retail traders. This coupled with the fact that OTC market
makers would be restricted to the same minimum trading increment as
exchanges and ATSs would help level the competitive playing field
between exchanges/ATSs and off-exchange dealers when it comes to
attracting retail order flow. Such a development would put competitive
pressure on OTC market makers to price improve trades because exchanges
and other ATSs would have an increased ability to potentially innovate
and compete for retail orders with wholesalers. Accordingly, the
Commission expects that trading venues would further compete on
providing price improvement and that the harmonization of trading and
quoting increments would not mitigate the execution quality
improvements from a reduction in the minimum pricing increment.\644\
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    \644\ One industry study suggests that it is not the presence of
on-exchange quoting restrictions that drives off-exchange price
improvement. This study shows, using Rule 605 data, that stocks with
very wide spreads have more price improvement than otherwise. See
Market Lens: Unlevel Playing Field? What 605s Can Tell Us About Tick
Sizes, Citadel Sec. (Sept. 8, 2022), available at https://www.citadelsecurities.com/news/market-lens-unlevel-playing-field-what-605s-can-tell-us-about-tick-sizes/ (``Citadel Paper'').
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    In the longer term, the proposed modification of rule 612 to
require the tick size to apply to trading could make exchanges and ATSs
more competitive in terms of their ability to attract retail order
flow. This stems from the fact that currently one reason retail broker-
dealers route orders to wholesalers is to take advantage of sub-penny
price improvement that exchanges and ATSs do not offer. By harmonizing
the trading increment the proposal would create a more level playing
field for exchanges and ATSs to innovate to attract retail order flow.
Certainly, the exchanges and ATSs face obstacles to more effectively
compete for order flow, but requiring all trade to occur in units of
the tick size makes it more likely that the exchanges and ATSs could
find a way to innovate. While the Commission cannot predict the type of
innovation that that exchanges and ATSs may design to attract retail
order flow, a more level playing field increases the likelihood that
such innovation could occur.

However, if such innovation by exchanges were to occur, it could
increase the fraction of retail trading volume on the exchanges.
iii. Access fees
    The lower access fees under this proposal could affect certain
exchanges' business models. For instance, as discussed in Section
V.D.3, lowering the access fee cap is expected to lower the total
amount of access fees collected and rebates distributed by certain
exchanges, and the Commission estimates that exchanges could lose
approximately $89 million per year in net capture under their current
business models. Exchanges might respond, in part, by adjusting the
rebates they offer, which could affect order routing. For instance,
exchanges for which high rebates are currently the means of attracting
certain flows could have to adjust their business model or find
revenues sources, other than access fees collected, to fund rebates.
    These effects could impact competition between trading venues.
First, since the proposal would make the exchanges more similar in
terms of fee structures (i.e., fee/rebate levels and tiers),\645\
competition in other key dimensions of trading--such as execution
quality like fill rates, transaction costs, and speed of execution--
could increase and spur innovations, ultimately to the benefit of
investors. Second, some exchanges' profitability, and accordingly their
operations, could be impacted, especially in the short run as these
exchanges adapt their business models. In an extreme case, some
existing exchanges could ultimately shut down, though the Commission
notes that exchanges derive revenues from other sources, such as data
and connectivity fees, which also impact their viability.\646\ Third,
certain exchanges' competitiveness could be affected relative to other
exchanges as well as relative to other trading venues.
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    \645\ Currently, as explained in Section V.C.2, exchanges can
differentiate themselves by offering different fee schedules--e.g.,
inverted, flat fee, or maker-taker with numerous price strata and
volume based pricing tiers. That said, the Commission also noted
(Table 5 in SectionV.C.2) that the data do not show a high variation
in the highest fees charged, which would suggest that the reduction
in variation of fee and rebate levels under this proposal would
primarily make different exchange fee models more similar.
    \646\ This effect considers the impact of MDI implementation on
proprietary data feed revenues. Exchanges are expected to collect
these data and connectivity fees from competing consolidators and
self-aggregators in addition to revenue from proprietary feeds,
which may supply information beyond the core data that would be
distributed. The MDI Adopting Release anticipated that data revenue
for the exchanges is likely to diminish after the full
implementation of the MDI Rules. This effect will decrease the
likelihood that a new exchange or a low volume exchange could gather
sufficient revenue from market data to become or remain viable. See
MDI Adopting Release, supra note 5, section V.C.2.(ii).(d), for the
full discussion of the effect of the competing consolidator model on
exchange data fees.
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iv. Acceleration of the MDI Rules and Addition of Information About
Best Odd-Lot Orders
    The acceleration of the inclusion of odd-lot information in the NMS
data along with the implementation of the MDI Rules round lot
definition might lead to increased competition between exchanges and
ATSs and OTC market makers, including wholesalers. NMS stocks priced
greater than $250.00 would be expected to benefit sooner from a tighter
NBBO, thereby increasing the competiveness of the best displayed
protected quotes, following the proposed accelerated implementation of
the round lot definition. A greater visibility of more competitively
priced odd-lot orders with the NBBO could increase the competitive
position of exchanges and ATSs and attract greater order-flow. This
effect would be temporary, only lasting until the full implementation
of the MDI Rules. After the full implementation of the MDI Rules the
effect on competition is accounted for by the MDI Rules.
b. Broker-Dealer Services
    The Commission believes that the proposal could affect certain
broker-dealers' current business model to the extent that they rely on
rebates for revenues. This could affect these broker-dealers'
operations as they adjust to the new competitive environment. Making
fees and rebates determinable at the time of execution could enable the
customers of broker-dealers to better discuss transaction fees and
rebates with their broker-dealers, and potentially request data on such
fees, which could increase competition between broker-dealers along
this dimension, leading to better order execution and lower costs. In
particular, while there is currently no requirement to either pass on
the fees and rebates, or account for them when assessing execution
quality, the Commission believes that there could be competitive
pressure to do so as it would be straightforward for a competing
broker-dealer to include fees and rebates in its transaction cost
analysis, or to simply pass them through to the customer.
    The Commission also believes that including odd-lot information in
the exclusive SIPs and providing the best odd-lot order information, as
well as making fees and rebates determinable at the time of execution,
would enhance competition for broker-dealer services. First, making the
best odd-lot order information accessible through the exclusive SIPs
would facilitate better analysis of a broker-dealer's execution quality
than is currently available with just NBBO data.\647\ Thus, it could be
easier for some customers to monitor the performance of their broker-
dealers.\648\ Additionally, making the fees and rebates determinable at
the time of execution would further allow customers to monitor the
performance of their broker-dealers as it would increase the ability
for a customer to request more detailed information on the fees and
rebates that the broker-dealer pays and to have them either passed on
to the customer or to have them accounted for when evaluating execution
costs.\649\
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    \647\ While the Commission does not expect most retail traders
would engage in this sort of benchmarking due to most retail traders
lacking the technical capacity to do so, some institutional traders
likely have this capacity and so would likely engage in such
benchmarking. Institutional traders have strong incentives to
monitor all aspects of transaction costs as these costs can
significantly affect portfolio performance. See Anand, et al.
(2012), supra note 596.
    \648\ It is possible that some institutional traders have access
to proprietary data feeds that provide the ability to benchmark
trades against odd-lot orders. Or they could contract with
specialized firms that have access to the data and provide
transaction cost analysis.
    \649\ Under the baseline it would be difficult in many cases for
a broker-dealer to allocate specific rebates received or fees paid
to one customer's trade because the fees or rebates in a given month
are based, in many instances, on that broker-dealer's total trading
volume across all customer accounts (see section V.C.2.b.iv).
However, if the fees and rebates are determinable at the time of
execution the broker-dealer could feasibly track a specific fee or
rebate to a specific trade making it possible for a customer to
request such information.
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    Additionally, the Commission does not believe that the proposal
initially would alter the competition to provide market access to
retail brokers. Many retail broker-dealers find it economically
beneficial to rely on OTC market makers, including wholesalers, who
maintain access to multiple trading venues, to facilitate market access
rather than becoming a member or subscriber to an exchange or ATS
themselves and directly route orders to the venues.\650\ The benefits
from being able to selectively choose what order-flow to internalize
helps OTC market makers support payment for order flow to retail
broker-dealers, which further incentivizes broker-dealers to continue