restrictions proposed for the three test groups balance the interests
of different groups of market participants. For example, if during the
Pilot, the lower fee caps and no-rebate restriction induced by the
proposed Pilot cause broker-dealers to be more likely to route customer
orders to trading centers with better pricing, higher speed of
execution, or higher probability of execution, rather than to trading
centers with the largest rebates, the proposed Pilot may temporarily
improve the efficiency of capital allocation by lowering execution
costs. Efficiency of capital allocation could be reduced if, as a
response to the loss in revenue from rebates, broker-dealers increase
commissions or fees charged to customers. Higher commissions or fees
could reduce customers' willingness to trade or could lead to a lower
injection of capital into the markets by investors because a larger
fraction of each investable dollar would go to compensate broker-
dealers for the lost revenue. However, because rebates are generally
accompanied by higher access fees, the overall costs to broker-dealers
to route orders to exchanges could decline for some test groups, which
could lead to a decrease in commissions or fees and temporarily
increase the efficiency of capital allocation.
    For the duration of the proposed Transaction Fee Pilot, lower
access fees could improve liquidity of stocks and ETPs in some test
groups, by reducing the costs to execute marketable orders. As
marketable orders become less costly, these orders are likely to be
routed to exchanges with lower access fees, improving execution quality
and possibly creating a liquidity externality, whereby lower access fee
venues will become the preferred trading center for marketable and non-
marketable orders.\406\ An increase in liquidity could improve
informational efficiency by allowing securities prices to adjust more
quickly to changes in fundamentals.
---------------------------------------------------------------------------

    \406\ As discussed in detail above, improvements in execution
quality could present as better prices for execution, higher
probability of execution, and faster time to execution. See supra
note 215.
---------------------------------------------------------------------------

    As a result of the proposed Pilot, price efficiency might also
improve; quoted spreads also may more closely reflect the net cost of
trading and could temporarily increase price transparency for
securities in certain test groups. Currently, broker-dealers do not
relay information about amounts of fees paid or rebates received on
trades to their customers, thereby limiting the transparency of the
total costs incurred to execute a trade. The proposed Pilot would not
mandate disclosure by the exchanges or the broker-dealers of order-
level transaction-based fees; and therefore, will not resolve the
limitations to transparency of the total fees paid and rebates received
by broker-dealers discussed above. As fees decline or rebates are
removed in some

test groups, however, the deviation in the net cost of trading from the
quoted spread could shrink, thereby at least partially improving price
transparency for the duration of the proposed Pilot, and temporarily
improving pricing efficiency and price discovery. Therefore, as an
additional benefit of the proposed Pilot, the Commission could also
examine the temporary effect of revisions to access fees and rebates on
quoted spreads, to better inform future policy recommendations of the
effects of transaction-based fees on price efficiency.\407\
---------------------------------------------------------------------------

    \407\ See Section V.C.2.b supra.
---------------------------------------------------------------------------

    Other aspects of the proposed Pilot temporarily may impair
efficiency. The proposed Pilot is intended to reduce (and in some cases
eliminate) rebates or Linked Pricing for a substantial portion of NMS
stocks (including ETPs); however, the loss of rebates or Linked Pricing
in Test Group 3 could have a differential effect between large and
small capitalization securities.\408\ If exchanges use rebates as a
mechanism to provide broker-dealers with incentives to post non-
marketable orders to exchanges, in the absence of rebates, broker-
dealers instead may have incentives to post these orders to off-
exchange trading centers, such as ATSs. This may lead to a temporary
widening of the NBBO, which could lead to a temporary reduction of
liquidity that could be particularly severe for small or mid-cap
securities. Thus, the overall informational efficiency of prices, as a
result of widening spreads, could temporarily decline with the
implementation of the proposed Pilot.
---------------------------------------------------------------------------

    \408\ See supra note 402.
---------------------------------------------------------------------------

    Furthermore, even if broker-dealers do not use ATSs and
internalization more intensively, the proposed Pilot may temporarily
impair the efficiency of transactions in certain Test Groups, through
the impact of Pilot-induced fee and rebate changes on the NBBO. As
discussed earlier, one potentially distortive effect of transaction-
based fees on maker-taker trading centers is that they provide
incentives for market participants to post more aggressive limit orders
(e.g., limit orders close to the current market price) because they
anticipate receiving rebates if their orders are executed. To the
extent that reductions in rebates result in a wider bid-ask spread in
certain stocks and ETPs during the proposed Pilot Period, this may
increase transaction costs for internalized order flow or orders routed
to ATSs that execute based on the NBBO and for orders executing on
exchanges.\409\ For example, if an ATS offers to execute buy orders at
the average of the national best offer and midpoint, rather than at the
wider quoted spread, the ATS would execute these orders at higher
prices than those available on exchanges. Notably, the impact of less
aggressive limit orders is less likely to affect marketable orders on
maker-taker trading centers, because lower taker fees could mitigate
the impact of a wider quoted spread on total transaction costs for
liquidity takers.
---------------------------------------------------------------------------

    \409\ See Angel, Harris, and Spatt, supra note 106.
---------------------------------------------------------------------------

    Finally, the Commission acknowledges that the fee caps and
prohibition on rebates or Linked Pricing imposed on the test groups
during the proposed Pilot further constrain the exchanges' abilities to
strategically choose fee and rebate schedules and for some NMS stocks
may restrict the fees and rebates further beyond the current levels,
which could be efficient from the exchanges' perspective, incorporating
their beliefs about the trade-off between revenues and costs associated
with these transaction-based fees. The proposal could temporarily
result in more or less efficient fee and rebate schedules because the
exchanges might not be able to optimize their pricing structure for
some test groups of securities. While the Commission does not currently
have information to determine the current level of efficiency of fees
and rebates, the information that the Commission and the public receive
from the proposed Pilot could enable the analysis of market impacts
stemming from changes to fees, potentially permitting the Commission to
assess alternative requirements for transaction-based fees that may be
more efficient.
2. Competition
    While the Commission preliminarily believes that most of the
impacts of the proposed Pilot on the market for trading services would
be limited to the duration of the proposed Pilot, some effects may last
beyond the end of the proposed Pilot. Certain exchanges could be harmed
if a reduction in rebates results in consolidation of orders at other
exchanges. This could occur if the proposed Pilot attenuates the
potentially distortive impact of transaction-based fees and causes
broker-dealers to route orders to trading centers they perceive as more
liquid. To the extent that increased order flow in a security directed
to a particular venue encourages broker-dealers to route more orders
for that security to the venue, a liquidity externality may develop,
making the venue the preferred routing destination for all orders.
Although these effects would likely last only for the duration of the
proposed Pilot, depending on the extent of the liquidity externalities,
smaller exchanges could experience long-lasting competitive effects.
The proposed Transaction Fee Pilot could also temporarily discourage
entry of new exchanges that might otherwise emerge to take advantage of
the maker-taker and taker-maker pricing models.\410\ Under such
circumstances, while the consolidation of liquidity may benefit market
participants, it may also make it difficult for trading centers with
low volumes in particular securities to compete with trading centers
that represent liquidity centers in these securities. This could lead
to consolidation or exit by small exchanges as a result of the proposed
Pilot, although the Commission preliminarily believes that either of
those events is unlikely because the anticipated revenue shortfall, as
discussed above, would be for a limited duration and would not be
significant enough to cause this result.
---------------------------------------------------------------------------

    \410\ Academic studies suggest a number of new exchanges emerged
specifically to take advantage of maker-taker and taker-maker
pricing models. See, e.g., Angel, Harris, and Spatt, supra note 106.
---------------------------------------------------------------------------

    The proposed Transaction Fee Pilot may also temporarily alter
competition among exchanges that use transaction-based fee pricing
models. Exchanges that pay fees and remit rebates frequently revise
their fee schedules in order to remain competitive and to attract order
flow. The impact of the proposal on competition depends on the extent
to which the fee caps and prohibition on rebates or Linked Pricing
restrict exchanges' transaction-based fee strategies. On one hand, the
proposed Pilot, while changing either access fees or rebates on certain
subsets of securities, could leave the margins that exchanges obtain
from transaction-based pricing models unchanged and could preserve the
current state of competition among exchanges in the market for those
securities. Several earlier studies suggest that the average difference
between the access fees and rebates is approximately $0.0005; however,
the EMSAC NMS Subcommittee observed that the current typical margin per
share is $0.0002,\411\ and a recent report from 2017 suggests that the
spread between fees and rebates is approximately $0.0001.\412\ For
instance, for stocks in

Test Group 1, which limits access fees to no greater than $0.0015, it
may be possible for exchanges to modify fee structures in a way that
leaves margins unchanged and does not impact competition between
exchanges. However, this may not be true for all test groups, and some
exchanges may be unable to maintain current average margins per share
for stocks in Test Group 2.\413\ These exchanges may choose to compete
less intensively for order flow in this test group, instead focusing on
stocks and ETPs in other test groups. Some of the shortfall in the
competition for order flow for this subset of securities could be
filled by off-exchange trading centers. Alternatively, exchanges may
revise pricing strategies for stocks in other groups, choosing to
implicitly subsidize rebates for stocks in some test groups using fees
from stocks in other test groups. This may increase competition for
order flow in some test groups while reducing it in others. In the
presence of tighter restrictions on transaction-based fees during the
proposed Pilot Period, exchanges could compete in other ways to attract
trading volume (e.g., discounts on connectivity fees or increased
volume discounts), although the Commission believes that for some test
groups the ability to offer meaningful volume discounts would be
limited.\414\
---------------------------------------------------------------------------

    \411\ See supra note 28.
    \412\ See, e.g., Laura Cardella, Jia Hao, and Ivalina Kalcheva,
``Make and Take Fees in the U.S. Equity Market,'' Working Paper,
University of Arizona (2015), available at: https://www.rhsmith.umd.edu/files/Documents/Centers/CFP/research/cardella_hao_kalcheva.pdf (``Cardella, et al. study''); Harris,
supra note 23. Each of these papers indicates the difference between
fees and rebates is approximately $0.0005 per share; the Cardella et
al. study, however, uses data from 2008 to 2010. A recent discussion
indicates that the difference between fees and rebates is $0.0001.
See, e.g., ``How to Align Broker and Customer Interests to Make
Exchanges More Competitive,'' Trillium Management, LLC (June 28,
2017), available at: https://www.trlm.com/align-broker-customer-interests-make-exchanges-competitive/.
    \413\ As discussed in Section III.C.2, if the margin between
fees and rebates exceeds $0.0005, exchanges theoretically could
assess fees to both the make and take sides of the market; however,
the Commission preliminarily believes that exchanges are unlikely to
do so.
    \414\ For NMS stocks included in Test Group 3, order flow
incentives would be substantially reduced, particularly any new
inducements that provide a discount or incentive on one side of the
market that is linked to activity on the opposite side of the
market.
---------------------------------------------------------------------------

    The proposed Transaction Fee Pilot may not only affect competition
between exchanges, but also could affect broker-dealers' decisions to
route orders to off-exchange trading centers for the duration of the
proposed Pilot, affecting how exchanges compete with other execution
venues in the market for trading services. Lower rebates during the
proposed Pilot Period may prompt broker-dealers to internalize a higher
proportion of order flow or route a higher proportion of order flow to
wholesalers and ATSs. This could alter the current competitive dynamics
among trading centers in favor of non-exchange trading centers. Lower
access fees, on the other hand, could attract marketable order flow
from the ATSs and back to the exchanges, which could tilt the
competitive equilibrium in favor of the national securities exchanges.
    The proposed Pilot could also temporarily affect the competition
for order flow for ATSs and could subsequently alter their market
share. As discussed in the baseline, the market share of trading volume
on ATSs is approximately 13%. If the prohibition of rebates or Linked
Pricing in Test Group 3 leads to increased order flow migrating to off-
exchange trading centers, this may increase the fraction of transaction
volume to ATSs or other off-exchange venues traditionally captured by
exchanges. The reduction in access fees in some of the test groups,
however, could lead to exchanges attracting more order flow away from
ATSs and other off-exchange trading centers. Similarly, if the
equilibrium access fee in Test Group 3 is below $0.0030 in the absence
of rebates, exchanges may be able to draw order flow from off-exchange
trading centers.
    The Commission recognizes that the potential temporary competitive
impacts stemming from the proposed Pilot would generally depend on the
exposure of each trading center to each test group and the control
group of NMS stocks, because the constraints on fees and rebates apply
differently to each group. For instance, if a high portion of an
exchange's volume was derived from stocks in Test Group 2, it may be at
a particular competitive disadvantage relative to an exchange that
served markets across all groups, because a substantial reduction in
the fee cap applicable to Test Group 2 would apply to a higher
proportion of its trading volume. However, the Commission preliminarily
believes that, given its aim of producing representative groups of
stocks and ETPs for the purposes of the proposed Pilot, trading centers
are not likely to be substantially more exposed to NMS stocks in any
one group.
3. Capital Formation
    The Commission preliminarily does not expect the proposed Pilot to
have a substantial permanent impact on capital formation because the
proposed Pilot is limited in duration, though many of the
implementation costs associated with the proposed Pilot would require
exchanges to expend resources related to maintaining the List of Pilot
Securities and any changes to that lists, as well as the maintenance of
the Exchange Transaction Fee Summary and the order routing data, they
may have otherwise invested elsewhere or distributed to
shareholders.\415\
---------------------------------------------------------------------------

    \415\ The costs associated with implementation and compliance
with the proposed Transaction Fee Pilot are discussed in more detail
above (Section V.C.2.a, supra).
---------------------------------------------------------------------------

    As discussed above,\416\ the Commission recognizes that the overall
temporary impact of the proposed Transaction Fee Pilot on liquidity and
total transaction costs could be positive or negative. As a result, the
impact of the proposed Pilot on capital formation is uncertain. On one
hand, the proposed Pilot could temporarily reduce total transaction
costs for many market participants by consolidating liquidity and
improving execution quality. To the extent that such cost reductions
are realized, they may, for instance, permit market participants to
more efficiently deploy financial resources by reducing the cost of
hedging financial risks. As a result, the proposed Pilot may marginally
and temporarily promote capital formation. Improvements in both
liquidity and price efficiency could make capital markets more
attractive, at least for the duration of the proposed Pilot. The
temporary reduction in rebates to certain test groups as a result of
the implementation of the proposed Pilot could widen quoted spreads,
thereby potentially leading to worse execution prices and subsequently
reducing liquidity for the duration of the proposed Pilot.\417\ This
would have similar indirect impacts on capital formation but in the
opposite direction, by increasing the cost of hedging financial risks.
---------------------------------------------------------------------------

    \416\ Section V.C.1.a.ii, supra, provides a discussion of price
transparency, which could improve liquidity and total transaction
costs, while the liquidity externality is discussed in Section
V.A.2, supra.
    \417\ See, George Chacko, Jakub Jurek, and Erik Stafford, ``The
Price of Immediacy,'' Journal of Finance 63, 1253-1290 (2008),
available at: http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2008.01357.x/full (``Chacko et al.''). According to Chacko et
al., liquidity has three important dimensions: Price, quantity, and
immediacy. A market for a security is considered ``liquid'' if an
investor can quickly execute a significant quantity at a price at or
near fundamental value.
---------------------------------------------------------------------------

    The proposed Pilot may also affect capital formation through its
impact on discretionary accounts. A number of broker-dealers have
discretionary agreements with their clients, wherein the broker can
transact in the client's account without the client's consent. For the
duration of the proposed Transaction Fee Pilot, some broker-dealers may
alter the composition of their clients' portfolios to trade and hold
greater proportions of the accounts in high-rebate NMS stocks
(including ETPs) in the Control Group and Test Group 1. Such revisions
to portfolio

composition as a result of the proposed Pilot are not necessarily
efficient from an investor's perspective and could have a detrimental
impact on capital formation insofar as they increase the riskiness of
client portfolios or decrease client portfolios' expected returns.\418\
This behavior would temporarily distort the market for high-rebate
stocks and ETPs, creating a higher demand for these securities and
potentially leading to an inefficient allocation of capital based on
signals that are unrelated to firm fundamentals.
---------------------------------------------------------------------------

    \418\ Allocative efficiency in the context of investment choice
is optimized when there are no restrictions on the set of investment
opportunities available to an investor. See, e.g., Niels Christian
Nielsen, ``The Investment Decision of the Firm under Uncertainty and
the Allocative Efficiency of Capital Markets,'' Journal of Finance
31, 587-602 (1976), available at: https://www.jstor.org/stable/2326628. If the proposed Pilot potentially leads some broker-dealers
to alter the investment opportunity set to avoid securities that do
not pay rebates, then allocative efficiency for those investors
would likely be impaired since the opportunity set is restricted.
---------------------------------------------------------------------------

    As discussed above, the proposed Pilot could lead to a temporary
reduction of liquidity that could be particularly severe for small or
mid-capitalization securities.\419\ In addition to reducing the
informational efficiency of prices, if the effects of the proposed
Pilot are severe enough, longer term, it could affect capital formation
for these securities. If the temporary impacts on liquidity acutely
impact some firms, it could lead to either the potential exit of these
issuers from the capital markets, through acquisition or delisting, as
these small issuers are those least likely to ride out negative
liquidity shocks. Further, the proposed Pilot could lead to a delay by
some issuers to enter the capital markets during the proposed Pilot's
duration.
---------------------------------------------------------------------------

    \419\ See supra note 402.
---------------------------------------------------------------------------

E. Alternatives

    Below, the Commission discusses a number of alternatives to the
proposed Transaction Fee Pilot. As explained above, the proposed Pilot
is designed to collect data on how changes to fees and rebates affect
order routing behavior and execution, which could inform the Commission
and the public as to any possible conflicts of interest between broker-
dealers and their customers. The Commission considers four sets of
alternatives: (1) Expansion of the proposed Pilot to include ATSs; (2)
inclusion of a trade-at provision; (3) prohibition of overlap with the
Tick Size Pilot; and (4) adjustments to the basic pilot structure
(e.g., the inclusion of a zero access fee test group). Where
appropriate, suggestions attributable to the EMSAC recommendation have
been identified within the scope of the alternatives presented
below.\420\
---------------------------------------------------------------------------

    \420\ See supra note 37.
---------------------------------------------------------------------------

1. Expand Proposed Transaction Fee Pilot To Include ATSs
    As proposed, the Transaction Fee Pilot would not require ATSs to
comply with the requirements on the limits to access fees or rebates
imposed by the Pilot. One alternative would be the inclusion of ATSs in
the proposed Transaction Fee Pilot proposal. Including ATSs in the
proposed Transaction Fee Pilot would increase availability of data for
an important segment of trading activity in the NMS securities, would
cover a larger portion of the order routing inducements,\421\ and could
enhance the information regarding possible conflicts of interest
available to the Commission. ATSs capture a large fraction of
transaction volume for NMS stocks (approximately 13% as of July 2017),
indicating that they are important competitors to exchanges and other
off-exchange trading centers.\422\ Some studies have noted that
transaction-based fees and rebates have likely caused some order flow
to migrate from exchanges to off-exchange trading centers, such as
ATSs, in order to avoid high access fees levied by some exchanges.\423\
---------------------------------------------------------------------------

    \421\ See supra note 268.
    \422\ See supra note 298.
    \423\ See Angel, Harris, and Spatt, supra note 216.
---------------------------------------------------------------------------

    An alternative that includes ATSs would be broader than the
proposed Pilot and would also include more inducements, besides fees
and rebates, that broker-dealers might receive for routing orders to
particular trading centers, including ATSs.\424\ The Commission has
limited information about how ATS fee structures might induce broker-
dealers to route orders to ATSs thereby creating potential conflicts of
interest between broker-dealers and their clients. If it included
trading centers beyond exchanges, the proposed Pilot would provide
information to the Commission and the public about a more complete set
of order routing decisions by broker-dealers because it would increase
the representativeness of the results obtained, and may provide a
deeper understanding of how exogenous shocks to fees and rebates affect
order routing decisions. Further, because transaction-based fees and
rebates are one possible method that exchanges and ATSs use as
inducements for order flow, a pilot that was inclusive of these other
inducements would further expand our understanding of what drives order
routing decisions and might raise possible conflicts of interest.
---------------------------------------------------------------------------

    \424\ As discussed above, the proposed rule only prohibits new
inducements that provide a discount or incentive on one side of the
market that is linked to activity on the opposite side of the market
for Test Group 3.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the inclusion of ATSs
and other inducements for order flow into the proposed Transaction Fee
Pilot is likely to substantially increase the costs relative to the
current proposal and may not be practical. Because broker-dealers that
operate ATSs could bundle fees for ATS usage with other broker-dealer
fees, the proposal might not practically be able to impose an access
fee cap or prohibition on rebates on ATS fees. Further, the Commission
currently does not require that ATSs provide periodic public
disclosures on their fees, as it does with national securities
exchanges, and these fees do not need to be filed with or approved by
the Commission. Unlike exchanges, which must report their fees
schedules publicly on their websites, and must file Form 19b-4 with the
Commission to effect any changes to those fee schedules, ATSs currently
have no reporting requirements for their fees. The costs to ATSs of
participating in the Pilot would be higher relative to the costs to the
exchanges in two ways: (1) The Pilot would require ATSs to report
information that is currently not required by regulation for the
purpose of the proposed Pilot, and (2) the Pilot would impose
significant start-up costs on the ATSs to set up systems to report
these fees. Thus, including ATSs in an alternative version of the
proposed Pilot would likely increase both the costs and the complexity
of the proposed Pilot because it would likely require a shift in the
disclosure regime for these trading centers.
    Even in the absence of including ATSs in the proposed Pilot, the
Commission would be able to obtain information on the proportion of
trades going to ATSs from several sources. First, several transaction
datasets, including trade reporting facility (TRF) data and TAQ data,
provide information on off-exchange trades, including ATS trades.
Further, FINRA produces periodic (weekly) data on the total shares of
NMS securities executed by individual ATSs.\425\ Thus, the Commission
would obtain information from the proposed Pilot to identify whether
exogenous shocks to

transaction-based fees on exchanges have an effect on order routing
decisions, including whether broker-dealers alter their routing of
order to ATSs during the proposed Pilot. The inclusion of ATSs into the
requirements of the proposed Pilot, however, would likely significantly
add to the proposed Pilot's complexity and cost a significant amount of
money to implement.
---------------------------------------------------------------------------

    \425\ Combining the FINRA volume data executed by ATSs for a
given security, with other data, such as TAQ, which would provide
total share volume for a given security, a researcher would be able
to estimate the fraction of ATS trading as a percentage of total
trading in NMS securities over the same time period.
---------------------------------------------------------------------------

2. Trade-At Test Group
    The proposed Transaction Fee Pilot could include a ``trade-at''
provision in conjunction with the changes to the fees and rebates
currently proposed in the Pilot.\426\ The trade-at provision would
require that orders be routed to a market with the best displayed price
or are executed at a materially improved price. A trade-at provision
could increase incentives to display prices, as off-exchange trading
centers would no longer be able to match the best price offered
elsewhere, but instead would have to provide significant price
improvement or start displaying their quotes at the NBBO. Including the
trade-at provision as a component of the proposed Transaction Fee Pilot
could potentially increase the level of displayed liquidity across all
venues, because off-exchange trading centers, such as ATSs, would have
increased incentives to display prices, and could have effects on the
order routing decisions of broker-dealers. Orders routed to exchanges
that are not posting the best prices could be indicative of potential
conflicts of interest between broker-dealers and their customers.
Including a trade-at subgroup could provide supplemental information to
the Commission about how a combination of trade-at provisions coupled
with revisions to transaction-based fees affect broker-dealer order
routing decisions.
---------------------------------------------------------------------------

    \426\ Because a ``trade-at'' provision is already a requirement
of the Tick Size Pilot, to the extent that there is overlap between
the two pilots and sufficient statistical power, the Commission may
be able to obtain valuable information from that pilot without the
need to include a trade-at provision in the proposed Transaction Fee
Pilot.
---------------------------------------------------------------------------

    From an implementation perspective, including a trade-at provision
would result in a pilot that is more complex than the proposed Pilot.
As proposed, the Pilot has three test groups for different exogenous
shocks to fees or rebates; adding a trade-at provision would double the
number of test groups, thereby increasing the costs of implementation
for exchanges. Such an addition would also likely increase the
difficulty of analyses. The Tick Size Pilot includes a trade-at group
because exchanges were concerned that, in the current market
environment, a larger tick size could induce order flow to go off-
exchange.\427\ However, unlike the Tick Size Pilot, the Commission
preliminarily believes that as a result of the proposed Transaction Fee
Pilot, marketable order flow would be less likely to flow to off-
exchange trading centers, because as access fees for some test groups
would decline, order flow could be drawn back to exchanges. The
Commission, therefore, preliminary believes that the inclusion of the
trade-at provision would not likely provide much additional information
to address the potential conflicts of interest between broker-dealers
and their customers beyond that afforded by the proposal.
---------------------------------------------------------------------------

    \427\ See Tick Size Pilot Approval Order, supra note 5, at
27538-42.
---------------------------------------------------------------------------

3. No Overlap With Tick Size Pilot
    As proposed, the Transaction Fee Pilot could overlap with the Tick
Size Pilot for some portion of the proposed Pilot duration, although
the length of that overlap is uncertain, and the Commission
preliminarily believes that any anticipated overlap would be minimal
and would depend on when the proposed Transaction Fee Pilot would
become effective, if adopted. Alternatively, the Commission could
consider two separate alternatives that both address the elimination of
the overlap of the proposed Transaction Fee Pilot with the Tick Size
Pilot: (1) Limiting the sample to securities with market
capitalizations of at least $3 billion or (2) delaying the
implementation of the Pilot until the Tick Size Pilot is concluded.
    The first potential alternative is similar to that recommended by
EMSAC, whereby the pilot would include only securities with market
capitalizations in excess of $3 billion, in order to avoid the
simultaneity of the Tick Size Pilot and the proposed Transaction Fee
Pilot for a subset of securities. The advantage to this approach is
that the proposed Transaction Fee Pilot could start without
consideration for the Tick Size Pilot duration, and could reduce
implementation and complexity burdens for exchanges and broker-dealers
because no subset of securities would be subject to the two pilots
simultaneously. However, this approach of only examining the effects of
changes on transaction-based fees for securities with market
capitalizations of at least $3 billion would significantly reduce the
overall sample representativeness desired by the proposed Pilot, which
would limit the usefulness of any data obtained from such a pilot. The
Commission preliminarily believes that removing these smaller issuers,
for which the potential conflicts of interest could likely be the
largest,\428\ from the proposed Transaction Fee Pilot would limit the
value of the information received, and would be less useful to the
Commission for informing future policy recommendations related to these
conflicts, as discussed in more detail in Section V.C.1.a.i.A.
---------------------------------------------------------------------------

    \428\ See Battalio Equity Market Study, supra note 22; Harris,
supra note 23. The negative relationship between access fees and
execution quality (realized spreads) increases for low-priced
securities, suggesting that low-priced or small capitalization
stocks are more likely to have potential conflicts of interest
related to transaction-based fees than large capitalization stocks.
---------------------------------------------------------------------------

    Alternatively, the Commission could delay full implementation of
the proposed Transaction Fee Pilot until six months after the Tick Size
pilot concludes, to the extent that such overlap between the pilots
exists. By implementing each pilot sequentially, the Commission would
obtain distinct information generated by each pilot, and would reduce
the potential costs incurred by exchanges and broker-dealers in
implementing simultaneous pilots, as well as the temporary other costs
borne by small issuers and other market participants, discussed in
detail in Section V.C.2.b. On the other hand, running sequential pilots
could delay the benefits of the information the Commission anticipates
realizing from the pilot.
    The Commission preliminarily believes that the alternative to delay
implementing the proposed Transaction Fee Pilot to avoid any overlap
(to the extent that such an overlap would otherwise occur) with the
Tick Size Pilot would provide minimal cost savings relative to the
proposal. As discussed in Section V.C.2.b, the Commission anticipates
that the costs associated with overlapping the proposed Transaction Fee
Pilot with the Tick Size Pilot could be small. Further, as discussed
above, the Commission preliminarily believes the Pilot's design would
prevent any overlap, to the extent that overlap between the proposed
Transaction Fee Pilot and the Tick Size Pilot occurs, from compromising
the Pilot results.
4. Adjustments to the Proposed Transaction Fee Pilot Structure
    The alternatives described above provide significant revisions to
the approach or the representativeness of the proposed Transaction Fee
Pilot. This section discusses a number of alternatives that detail
other

adjustments to the basic structure of the Pilot as proposed. These
include an alternative time frame for the Pilot duration or the pre-
and post-Pilot Periods, a zero access fee test group, alternative
access fee caps, and the inclusion of non-displayed liquidity or depth-
of-book provisions in Test Groups 1 and 2.
    As currently proposed, the Transaction Fee Pilot would be
implemented for two years with an automatic sunset at the end of the
first year, unless the Commission publishes a notice determining that
the proposed Pilot shall continue for up to another year.
Alternatively, the Commission could recommend an earlier or later Pilot
sunset or a longer or shorter Pilot duration. An earlier Pilot sunset
would shorten the anticipated proposed Pilot duration, reducing the
time period during which potential negative temporary effects resulting
from the proposed Pilot could occur. However, if the anticipated
duration of the proposed Pilot were sufficiently short, some broker-
dealers could either choose to not alter their current order routing
behavior and wait out the length of the Pilot, which would limit the
usefulness of the information obtained by the Pilot.\429\ A shorter
anticipated duration also could reduce the usefulness of the
information and the benefits provided by the proposed Pilot, if it
reduced the statistical power of any analyses, because it would make it
more difficult for researchers to detect whether an effect actually
exists.\430\
---------------------------------------------------------------------------

    \429\ See Section V.C.1.a.iii, which discusses the potential
limitations associated with pilots, including a discussion that some
market participants could choose to not alter their behavior if the
proposed Pilot had a short duration.
    \430\ The Commission staff estimates that it would require a
minimum Pilot duration of six months to achieve sufficient
statistical power to detect whether an effect is actually present;
therefore, any Pilot duration shorter than six months would have
limited benefits for detecting the effect of transaction-based fees
and rebates on order routing decisions, execution quality, and
market quality.
---------------------------------------------------------------------------

    Conversely, as the anticipated Pilot duration increases so too
would the costs for exchanges, as this would extend the duration of the
changes to their revenue models and the costs of compliance with the
proposed Pilot requirements. However, increasing the duration beyond
two years is unlikely to provide any significant increases in the
benefits identified above. As discussed in Section V.C.1.a.i, the
Commission preliminarily believes that the proposed Pilot duration,
even with a one-year sunset would make it economically worthwhile for
broker-dealers to alter their order-routing decisions, because it would
likely be costly for broker-dealers to sit out the full duration of the
proposed Pilot or retain pre-Pilot order routing decisions for its
duration. Further, a longer Pilot duration would increase the costs
associated with a longer time period in which temporary negative
externalities arising from the proposed Pilot would exist. These
externalities could have longer-term implications on efficiency,
competition, and capital formation, and could reduce overall levels of
investor protection.
    The Commission could alternatively propose a pilot with a fixed
two-year duration. A two-year pilot without the possibility of an
automatic sunset at the end of the first year would have the same
maximum costs as a pilot with a sunset, but would not have the
potential to reduce costs in the event that the sunset occurs. The
alternative would also not provide the Commission with the flexibility
to efficiently end the proposed Pilot early once the Pilot produced
sufficient data to obtain representative results. On the other hand,
broker-dealers could perceive higher expected costs of not adapting to
the Pilot under the alternative because they could expect the sunset to
reduce the anticipated duration of the Pilot. However, the Commission
preliminarily believes that broker-dealers that base their order
routing decisions on transaction-based fees and rebates will incur
sufficient costs from not enacting changes to their order routing
decisions in response to the Pilot with an expected one-year sunset
such that they are not likely to sit out the Pilot Period; therefore, a
mandatory two-year pilot would not likely provide any additional
behavioral change that would not already be obtainable from the
proposed Pilot.
    As currently proposed, the Pilot requires a six-month pre-Pilot
Period and a six-month post-Pilot Period, which would allow the
Commission and the public to compare order routing decisions in the
same stocks both with and without the proposed Pilot restrictions as
well as across stocks in different test groups. Alternatively, the
Commission could propose shorter pre-Pilot and post-Pilot Periods.
Shorter pre- and post-Pilot Periods would reduce costs to exchanges of
having to provide the Exchange Transaction Fee Summary and order
routing data. These reduced costs come at the trade-off of shorter
horizons for data collection that could lead to reduced statistical
power and reduce the ability of the proposed Pilot to produce
representative results.\431\
---------------------------------------------------------------------------

    \431\ The Commission staff estimates the pilot would need to
produce approximately six months of data to detect changes unique to
ETPs, and between 60 and 69 days of data to detect changes unique to
small and large NMS stocks, respectively. The methodology employed
provided power tests on the distributions of average daily dollar
volume data for ETPs and small and large capitalization NMS common
stocks obtained from the CRSP U.S. Stock Database. The power tests
determined the number of days of data that would be required to
detect a 10% change in the daily volume of various subgroups of
securities.
---------------------------------------------------------------------------

    If the proposed Pilot included a zero access fee test group, this
would effectively serve to temporarily remove a source of revenue for
exchanges entirely from a subset of securities. This approach could
produce additional information, such as how order routing behavior and
execution quality changes in the absence of transaction-based fees (and
likely rebates), that could be useful to the Commission to facilitate
future policy decisions regarding the transaction-based pricing
structures of exchanges. However, any new revenue model created during
the proposed Pilot could provide additional incentives for broker-
dealers to route order flow from customers in a manner that could make
possible conflicts of interest more or less pervasive, complicating
analysis of the pilot. If a zero access fee test group were included,
exchanges would be unable to charge access fees to market participants
that take liquidity from maker-taker markets or make liquidity on
taker-maker exchanges. The inclusion of a zero access fee test group
would thus completely eliminate the transaction-based fee model for a
subset of securities, which could force exchanges to create entirely
new revenue models for securities in this test group. Although
inclusion of a zero access fee test group could potentially provide
expanded information to the Commission and the public about possible
conflicts of interest, the Commission notes that these would come at
the cost of lost revenue to exchanges for eliminating transaction-based
fees entirely or costs associated with the creation of new revenue
models only for the duration of the Pilot.
    The Pilot, as currently proposed, would have three test groups: (1)
One that caps access fees at $0.0015; (2) one that caps access fees at
$0.0005; and (3) one that prohibits rebates or Linked Pricing for
displayed and non-displayed liquidity and along the entire depth of the
limit order book. Alternatively, the Commission could have proposed
other test groups with different caps on access fees. For example, the
Commission could have proposed only caps to access fees, similar to
those in the EMSAC

recommendation,\432\ or could have increased the number of test groups.
Only studying exogenous shocks to access fees would have limited the
amount and type of information available to the Commission, given that
the theoretical literature suggests that potential conflicts of
interest are linked to rebates more than to access fees. Any
alternative would likely replace the zero rebate test group with
another access fee cap group. Thus, without a test group that
specifically focuses on the removal of rebates and the corresponding
impact on conflicts of interest, the Commission and the public would
have a set of information of lower value than it would otherwise. An
alternative to increase the number of test groups could produce more
gradation in the caps to access fees, this alternative would likely
increase the complexity of the proposed Pilot, and would increase the
implementations costs to account for the additional test groups. These
costs would be borne with little incremental benefit to the quality of
information produced from these additional test groups, because these
additional groups would only provide minor variations in access fees
from those already proposed.
---------------------------------------------------------------------------

    \432\ The maximum access fee caps under the EMSAC recommendation
would be $0.0020 (Test Group 1), $0.0010 (Test Group 2), and $0.0002
(Test Group 3).
---------------------------------------------------------------------------

    As the Pilot is currently proposed, only Test Group 3, which
eliminates rebates or Linked Pricing, would restrict fees or rebates or
Linked Pricing in non-displayed liquidity and depth-of-book. As
discussed in Section III.C.3, under the proposed Pilot, perverse
incentives to move liquidity away from the displayed liquidity or the
top-of-book could be created if rebates are not eliminated along the
entire book and for displayed and non-displayed liquidity. As an
alternative to the current Pilot proposal, the Transaction Fee Pilot
could also revise access fees in Test Groups 1 and 2 to cover both non-
displayed liquidity and the depth-of-book. Unlike the problem
associated with moving away from displayed liquidity that could emerge
if rebates or Linked Pricing were not removed from the entire depth of
the limit order book, the Commission does not believe that under the
proposed Pilot incentives would emerge for exchanges to charge more to
access non-displayed interest or depth-of-book quotes. Such differing
fees across displayed and non-displayed liquidity as well as the depth
of the limit order book would lead to increased uncertainty for market
participants that take liquidity, as they would not be able to control
whether their executions are with displayed or non-displayed liquidity.
If the fees differed between displayed and non-displayed liquidity,
broker-dealers would face cost uncertainty when making routing
decisions over what access fees they would incur. From the exchanges'
perspective, having differing fees for posting or interacting with
displayed and non-displayed liquidity would be burdensome to track and
more costly to administer and, to the extent the uncertainty it creates
dissuades market participants from routing to their market, could
ultimately cause them to lose order flow. Accordingly, the Commission
preliminarily believes that it is unnecessary to mandate transaction-
based fee caps for the non-displayed liquidity.
    Under the current proposal, Test Group 3 would prohibit rebates or
Linked Pricing on NMS stocks (including ETPs). Alternatively, the
Commission could instead prohibit only rebates, without any extension
to other similar inducements that an exchange might use to attract
order flow. The Commission, however, believes that an alternative that
excludes like inducements from Test Group 3 would provide opportunities
for exchanges to work around the rebate prohibition, which would likely
reduce the effectiveness of the information received about NMS stocks
(including ETPs) in Test Group 3.
    The Commission alternatively could propose a limitation on Linked
Pricing across all Test Groups, not just Test Group 3. Given that Test
Groups 1 and 2 would undergo a reduction in fees due to the lower caps
in each of those groups, which likely would lead to a corresponding
reduction in rebates, exchanges may choose to alter other like
incentives, which would allow them to supplement the incentive they
provide for activity in securities in Test Groups 1 and 2, and could
distort the information obtained from the Pilot. However, from the
exchanges' perspective, enhancing like inducements would further erode
margins related to transaction activity. Therefore, the Commission
preliminarily believes that it is unnecessary to prohibit like
inducements for Test Groups 1 and 2.
    As currently proposed, the Transaction Fee Pilot does not require
the exchanges to produce much additional information on order execution
quality statistics. As an alternative, the Commission could require
that the exchanges produce daily Rule 605 data similar to that required
in Appendix B.1 of the Tick Size Pilot Plan. Providing daily order
execution quality statistics are important for the Tick Size Pilot,
because order size is influenced by tick size, and is an important
determinant of execution quality. As a result, trade-based measures of
the effect of the Tick Size Pilot might not yield the same results as
order-based measures of the Tick Size Pilot, such as that in data
required in Appendix B.1 of the Tick Size Pilot Plan. However, the
proposed Transaction Fee Pilot might not alter order sizes nearly as
dramatically as in the Tick Size Pilot, or might not alter them at all.
Therefore, the Commission preliminarily does not expect that results of
the proposed Transaction Fee Pilot using trade-based execution quality
measures to differ from results using order-based execution quality
measures. Even though exchanges have systems in place to capture some
elements of daily data as required by the Tick Size Pilot, including
this data could be costly for the exchanges to provide with limited
benefit for the proposed Transaction Fee Pilot. As currently proposed,
the Transaction Fee Pilot would provide daily information on shares
submitted, executed, and cancelled to an exchange, and would provide
some limit order execution quality information, such as time to
execution and likelihood of execution, that are not currently available
from other existing data sources.\433\
---------------------------------------------------------------------------

    \433\ For example, existing studies often incorporate execution
quality statistics estimated from TAQ data. See, e.g., Battalio
Equity Market Study, supra note 22.
---------------------------------------------------------------------------

    As the Pilot is currently proposed, downloadable files containing
the Exchange Transaction Fee Summary would need to be publicly posted
on each exchange's website using an XML schema to be published on the
Commission's website. Alternatively, similar to the List of Pilot
Securities, the Exchange Transaction Fee Summary could be reported in
pipe-delimited ASCII format. However, the pipe-delimited ASCII format
does not support validations. As discussed earlier, validations help
ensure that comparable data are formatted consistently and reported
completely. Validations also help the exchanges to test whether the
data are complete and formatted correctly before posting the data.
Because the pipe-delimited ASCII format does not support validations,
exchanges have to manually review data completeness and correct
formatting. In the case that an exchange was to post incorrectly
formatted or incomplete data, the exchange would have to incur the
burden of reviewing the data again to identify the problem and
reposting

the data. Validations help ensure that any inconsistencies in data
completeness or formatting can be automatically tested for and
identified before posting. And because some fields in the data may be
manually entered (i.e., the Exchange Transaction Fee Summary), having
validations would help ensure the quality of this data. Requiring a
format that incorporates validations would also best enhance data
users' abilities to normalize, aggregate, compare, and analyze the
Exchange Transaction Fee Summary data because the data is assured to be
complete and consistently formatted. Therefore, the Commission does not
believe that the Exchange Transaction Fee Summary should be reported in
pipe-delimited ASCII format as that would limit both the data's
accessibility and ease of use.

F. Request for Comment

    The Commission seeks commenters' views and suggestions on all
aspects of its economic analysis of the proposed rule. In particular,
the Commission asks commenters to consider the following questions:
    71. Is the proposed Pilot, in the form of a temporary Commission
rule, necessary to achieve the objectives of this Pilot? Are there
other approaches that would achieve these objectives? Has the
Commission appropriately evaluated the benefits and costs of conducting
successive (or potentially simultaneous) pilots?
    72. Is there existing data that could yield the same information,
with respect to sample representativeness and causality, on the
relation between transaction-based fees and rebates on order routing
behavior, execution quality and market quality that could be obtained
by the Commission in place of the proposed Transaction Fee Pilot?
Please explain in detail.
    73. Is there additional data that the Commission should gather from
the proposed Pilot? Please be specific as to what this data would be
and how it could inform the Commission about possible conflicts of
interest related to access fees and rebates.
    74. Do you believe the Commission's assessment of the baseline for
economic analysis is reasonable? Why or why not? Please explain in
detail.
    75. Do you believe that the proposing release accurately describes
the baseline and how those current practices could change under the
proposed Pilot? Why or why not? Please explain in detail.
    76. Do you believe that the Commission has accurately described how
market participants would be affected by the proposed Transaction Fee
Pilot? Why or why not? Please explain in detail.
    77. Do you believe that the Commission has accurately described the
benefits of the information that would be received from the proposed
Transaction Fee Pilot? Why or why not? Please explain in detail.
    78. Is the Commission's analysis of the costs and benefits of the
proposed Transaction Fee Pilot accurate and complete? Why or why not?
Please explain in detail.
    79. Do you believe that there are costs or benefits that would
accrue to investors likely as a result of the proposed Pilot? If so,
please explain in detail.
    80. Do you believe that there are additional costs that may arise
from the proposed Transaction Fee Pilot? If so, do you believe there
are methods by which the Commission could reduce the costs imposed by
the proposed Pilot while still achieving its goals? Please explain in
detail.
    81. Do you believe that the order routing data could facilitate the
reverse engineering of proprietary order routing strategies despite the
daily aggregation and anonymization of the data at the broker-dealer
level? Why or why not? If so, do you believe that there are
alternative, safer methods of providing the order routing data that
would still allow the Pilot to achieve its goals? Please explain in
detail.
    82. Do you believe that there are additional benefits or costs that
could be quantified or otherwise monetized? Why or why not? If so,
please identify the categories, and if possible, provide specific
estimates or data.
    a. Given that the Tick Size Pilot requires exchanges to compile a
daily list of pilot securities and to identify changes to those pilot
securities due to name changes, mergers, and other corporate events,
are the costs estimated for compliance with reporting of the daily
pilot list for the proposed Transaction Fee Pilot reasonable?
    b. Given that exchanges submit Form 19b-4 fee filings to the
Commission regularly, are the costs estimated for Form 19b-4 fee
filings associated with the commencement of the proposed Pilot or for
periodic revisions to transaction-based fees and rebates reasonable?
    c. As exchanges frequently update their transaction-based fees and
rebates, can market participants provide estimates of the costs
associated with updating order routing systems as a result of fee
changes?
    83. Are there any effects on efficiency, competition, and capital
formation that are not identified or are misidentified in the above
analysis? Please be specific and provide data and analysis to support
your views.
    84. Do you believe that the Commission has accurately described how
the competitive landscape for the market for trading services for NMS
securities would be temporarily affected by the proposed Transaction
Fee Pilot? Why or why not? Please explain in detail. Does the release
discuss all relevant forms of competition and whether the proposal
could alter them? If not, which additional forms of competition could
the proposed Pilot impact and how? Please explain in detail.
    85. Are there alternative approaches to reporting fee data in XML
format that would facilitate ease of use? What are the likely costs of
compliance of the proposed requirements? Please explain in detail.
    86. Would any alternative approaches outlined above better achieve
the objectives articulated by the Commission? Which approach and why?
What would be the costs and benefits of these approaches? Please
explain in detail.
    87. Would the inclusion of ATSs in the proposed Transaction Fee
Pilot better achieve the objectives articulated by the Commission? What
would be the costs and benefits of including these venues? Please
explain in detail.
    88. What should be the appropriate length of the pre-Pilot Period
and post-Pilot Period in terms of achieving sufficient statistical
power?
    89. What other economic effects are likely to be associated with
the proposed Transaction Fee Pilot?

VI. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA''),\434\ the Commission requests comment on the
potential effect of the proposed rule on the United States economy on
an annual basis. The Commission also requests comment on any potential
increases in costs or prices for consumers or individual industries,
and any potential effect on competition, investment, or innovation.
Commenters are requested to provide empirical data and other factual
support for their views to the extent possible.
---------------------------------------------------------------------------

    \434\ Public Law 104-121, Title II, 110 Stat. 857 (1996)
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note
to 5 U.S.C. 601).
---------------------------------------------------------------------------

VII. Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (``RFA'') \435\ requires Federal
agencies, in

promulgating rules, to consider the impact of those rules on small
entities. Section 603(a) \436\ of the Administrative Procedure
Act,\437\ as amended by the RFA, generally requires the Commission to
undertake a regulatory flexibility analysis of all proposed rules, or
proposed rule amendments, to determine the impact of such rulemaking on
``small entities.'' \438\ Section 605(b) of the RFA states that this
requirement shall not apply ``to any proposed or final rule if the head
of the agency certifies that the rule will not, if promulgated, have a
significant economic impact on a substantial number of small entities
'' \439\
---------------------------------------------------------------------------

    \435\ 5 U.S.C. 601 et seq.
    \436\ 5 U.S.C. 603(a).
    \437\ 5 U.S.C. 551 et seq.
    \438\ The Commission has adopted definitions for the term
``small entity'' for purposes of Commission rulemaking in accordance
with the RFA. Those definitions, as relevant to this proposed
rulemaking, are set forth in Rule 0-10, 17 CFR 240.0-10. See
Securities Exchange Act Release No. 18451 (January 28, 1982), 47 FR
5215 (February 4, 1982) (File No. AS-305).
    \439\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    The proposed rule would apply to national securities exchanges
registered with the Commission under Section 6 of the Exchange
Act.\440\ With regard to a national securities exchange, the
Commission's definition of a small entity is an exchange that has been
exempt from the reporting requirements of Rule 601 of Regulation NMS,
and is not affiliated with any person (other than a natural person)
that is not a small business or small organization.\441\ None of the
national securities exchanges registered under Section 6 of the
Exchange Act that would be subject to the proposed Pilot are ``small
entities'' for purposes of the RFA. In particular, none of the equities
exchanges are exempt from Rule 601 of Regulation NMS.
---------------------------------------------------------------------------

    \440\ See supra Sections IV (Paperwork Reduction Act) and V
(Economic Analysis) (discussing, among other things, the current
market environment and compliance obligations for national
securities exchanges).
    \441\ See 17 CFR 240.0-10(e).
---------------------------------------------------------------------------

    As discussed above, the proposed rule will not apply to any ``small
entities.'' Therefore, for the purposes of the RFA, the Commission
certifies that the proposed rule would not have a significant economic
impact on a substantial number of small entities.
    The Commission requests comment regarding this certification. In
particular, the Commission solicits comment on the following:
    90. Do commenters agree with the Commission's certification? If
not, please describe the nature of any impact on small entities and
provide empirical data to illustrate the extent of the impact.

VIII. Statutory Authority and Text of the Proposed Rule

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

List of Subjects

17 CFR Part 200

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

17 CFR Part 242

    Brokers, Reporting and recordkeeping requirements, Securities.

    For the reasons set out in the preamble, the Commission is
proposing to amend Title 17, Chapter II of the Code of Federal
Regulations as follows:

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

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

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

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

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

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

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

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

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

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

Sec.  242. 610T   Equity transaction fee pilot.

    (a) Pilot Pricing Restrictions. Notwithstanding Rule 610(c), on a
pilot basis for the period specified in paragraph (c) of this section,
in connection with a transaction in an NMS stock, a national securities
exchange may not:
    (1) For Test Group 1, impose, or permit to be imposed, any fee or
fees for the display of, or execution against, the displayed best bid
or offer of such market that exceed or accumulate to more than $0.0015
per share;
    (2) For Test Group 2, impose, or permit to be imposed, any fee or
fees for the display of, or execution against, the displayed best bid
or offer of such market that exceed or accumulate to more than $0.0005
per share;
    (3) For Test Group 3, provide to any person, or permit to be
provided to any person, a rebate or other remuneration in connection
with an execution, or offer, or permit to be offered, any linked
pricing that provides a discount or incentive on transaction fees
applicable to removing (providing) liquidity that is linked to
providing (removing) liquidity, except to the extent the exchange has a
rule to provide non-rebate linked pricing to its registered market
makers in consideration for meeting market quality metrics; and
    (4) For the Control Group, impose, or permit to be imposed, any fee
or fees in contravention of the limits specified in 17 CFR 242.610(c).
    (b) Pilot Securities.
    (1) Initial List of Pilot Securities.
    (i) The Commission shall designate by notice the initial List of
Pilot Securities, and shall assign each Pilot Security to one Test
Group or the Control Group.
    (ii) For purposes of Rule 610T, ``Pilot Securities'' means the NMS
stocks designated by the Commission on the initial List of Pilot
Securities pursuant to paragraph (b)(1)(i) and any successors to such
NMS stocks. At the time of selection by the Commission, an NMS stock
must have a minimum initial share price of at least $2 to be included
in the Pilot and must have an unlimited duration or a duration beyond
the end of the post-Pilot Period. If the share price of a Pilot
Security in one of the Test Groups or the Control Group closes below $1
at the end of a trading day, it shall be removed from the Test Group or
the Control Group and will no longer be subject to the pricing
restrictions set forth in (a)(1)-(3) of this section.
    (iii) For purposes of Rule 610T, ``primary listing exchange'' means
the national securities exchange on which the NMS stock is listed. If
an NMS stock is listed on more than one national securities exchange,
the national securities exchange upon which the NMS stock has been
listed the longest shall be the primary listing exchange.
    (2) Pilot Securities Exchange Lists.
    (i) After the Commission selects the initial List of Pilot
Securities and prior

to the beginning of trading on the first day of the Pilot Period each
primary listing exchange shall publicly post on its website
downloadable files containing a list, in pipe-delimited ASCII format,
of the Pilot Securities for which the exchange serves as the primary
listing exchange. Each primary listing exchange shall maintain and
update this list as necessary prior to the beginning of trading on each
business day that the U.S. equities markets are open for trading
through the end of the post-Pilot Period.
    (ii) The Pilot Securities Exchange Lists shall contain the
following fields:
    (A) Ticker Symbol;
    (B) Security Name;
    (C) Primary Listing Exchange;
    (D) Security Type:
    (1) Common Stock;
    (2) ETP;
    (3) Preferred Stock;
    (4) Warrant;
    (5) Closed-End Fund;
    (6) Structured Product;
    (7) ADR;
    (8) Other;
    (E) Test Group:
    (1) Control Group;
    (2) Test Group 1;
    (3) Test Group 2;
    (4) Test Group 3;
    (F) Date the Entry Was Last Updated.
    (3) Pilot Securities Change Lists.
    (i) Prior to the beginning of trading on each trading day the U.S.
equities markets are open for trading throughout the duration of the
Pilot, including the post-Pilot Period, each primary listing exchange
shall publicly post on its website downloadable files containing a
Pilot Securities Change List, in pipe-delimited ASCII format, that
lists each separate change applicable to any Pilot Securities for which
it serves or has served as the primary listing exchange. The Pilot
Securities Change List will provide a cumulative list of all changes to
the Pilot Securities that the primary listing exchange has made to the
Pilot Securities Exchange List published pursuant to (b)(2).
    (ii) In addition to the fields required for the Pilot Securities
Exchange List, the Pilot Securities Change Lists shall contain the
following fields:
    (A) New Ticker Symbol (if applicable);
    (B) New Security Name (if applicable);
    (C) Deleted Date (if applicable);
    (D) Date Security Closed Below $1 (if applicable);
    (E) Effective Date of Change; and
    (F) Reason for the Change.
    (4) Posting Requirement. All information publicly posted in
downloadable files pursuant to 610T(b)(2) and (3) shall be and remain
freely and persistently available and easily accessible by the general
public on the primary listing exchange's website for a period of not
less than five years from the conclusion of the post-Pilot Period. In
addition, the information shall be presented in a manner that
facilitates access by machines without encumbrance, and shall not be
subject to any restrictions, including restrictions on access,
retrieval, distribution and reuse.
    (c) Pilot Duration.
    (1) The Pilot shall include a six-month ``pre-Pilot Period;''
    (2) A two-year ``Pilot Period'' with an automatic sunset at the end
of the first year unless, no later than thirty days prior to that time,
the Commission publishes a notice that the Pilot shall continue for up
to another year; and
    (3) A six-month ``post-Pilot Period.''
    (4) The Commission shall designate by notice the commencement and
termination dates of the pre-Pilot Period, Pilot Period, and post-Pilot
Period, including any suspension of the one-year sunset of the Pilot
Period.
    (d) Order Routing Datasets. Throughout the duration of the Pilot,
including the pre-Pilot Period and post-Pilot Period, each national
securities exchange that trades NMS stocks shall publicly post on its
website downloadable files, in pipe-delimited ASCII format, no later
than the last day of each month, containing sets of order routing data,
for the prior month, in accordance with the specifications below. For
the pre-Pilot Period, order routing datasets shall include each NMS
stock. For the Pilot Period and post-Pilot Period, order routing
datasets shall include each Pilot Security. All information publicly
posted pursuant to this paragraph (d) shall be and remain freely and
persistently available and easily accessible by the general public on
the national securities exchange's website for a period of not less
than five years from the conclusion of the post-Pilot Period. In
addition, the information shall be presented in a manner that
facilitates access by machines without encumbrance, and shall not be
subject to any restrictions, including restrictions on access,
retrieval, distribution, and reuse. Each national securities exchange
shall treat the identities of broker-dealers contained in the Order
Routing Datasets, including the broker-dealer anonymization key, as
regulatory information and shall not access or use that information for
any commercial or non-regulatory purpose.
    (1) Dataset of daily volume statistics include the following
specifications of liquidity-providing orders by security and separating
held and not-held orders in pipe-delimited ASCII format with field
names as the first record and a consistent naming convention that
indicates the exchange and date of the file:
    (i) Code identifying the submitting exchange.
    (ii) Eight-digit code identifying the date of the calendar day of
trading in the format ``yyyymmdd.''
    (iii) Symbol assigned to an NMS stock (including ETPs) under the
national market system plan to which the consolidated best bid and
offer for such a security are disseminated.
    (iv) Unique, anonymized broker-dealer identification code.
    (v) Order type code
    (A) Inside-the-quote orders;
    (B) At-the-quote limit orders; and
    (C) Near-the-quote limit orders.
    (vi) Order size codes
    (A) <100 share bucket;
    (B) 100-499 share bucket;
    (C) 500-1,999 share bucket;
    (D) 2,000-4,999 share bucket;
    (E) 5,000-9,999 share bucket; and
    (F) > 10,000 share bucket.
    (vii) Number of orders received.
    (viii) Cumulative number of shares of orders received.
    (ix) Cumulative number of shares of orders cancelled prior to
execution.
    (x) Cumulative number of shares of orders executed at receiving
market center.
    (xi) Cumulative number of shares of orders routed to another
execution venue.
    (xii) Cumulative number of shares of orders executed within
    (A) 0 to <100 microseconds of order receipt;
    (B) 100 microseconds to <100 milliseconds of order receipt;
    (C) 100 milliseconds to <1 second of order receipt;
    (D) 1 second to <30 seconds of order receipt;
    (E) 30 seconds to <60 seconds of order receipt;
    (F) 60 seconds to <5 minutes of order receipt;
    (G) 5 minutes to <30 minutes of order receipt; and
    (H) >30 minutes of order receipt.
    (2) Dataset of daily volume statistics include the following
specifications of liquidity-taking orders by security and separating
held and not-held orders in pipe-delimited ASCII format with field
names as the first record and a consistent naming convention that
indicates the exchange and date of the file:
    (i) Code identifying the submitting exchange.

    (ii) Eight-digit code identifying the date of the calendar day of
trading in the format ``yyyymmdd.''
    (iii) Symbol assigned to an NMS stock (including ETPs) under the
national market system plan to which the consolidated best bid and
offer for such a security are disseminated.
    (iv) Unique, anonymized broker-dealer identification code.
    (v) Order type code
    (A) Market orders; and
    (B) Marketable limit orders.
    (vi) Order size codes
    (A) <100 share bucket;
    (B) 100-499 share bucket;
    (C) 500-1,999 share bucket;
    (D) 2,000-4,999 share bucket;
    (E) 5,000-9,999 share bucket; and
    (F) >10,000 share bucket.
    (vii) Number of orders received.
    (viii) Cumulative number of shares of orders received.
    (ix) Cumulative number of shares of orders cancelled prior to
execution.
    (x) Cumulative number of shares of orders executed at receiving
market center.
    (xi) Cumulative number of shares of orders routed to another
execution venue.
    (e) Exchange Transaction Fee Summary. Throughout the duration of
the Pilot, including the pre-Pilot Period and post-Pilot Period, each
national securities exchange that trades NMS stocks shall publicly post
on its website downloadable files containing information relating to
transaction fees and rebates and changes thereto (applicable to
securities having a price greater than $1). Each national securities
exchange shall post its initial Exchange Transaction Fee Summary prior
to the start of trading on the first day of the pre-Pilot Period and
update its Exchange Transaction Fee Summary on a monthly basis within
10 business days of the first day of each calendar month, to reflect
data collected for the prior month. The information prescribed by this
section shall be made available using the most recent version of the
XML schema published on the Commission's website. All information
publicly posted pursuant to this paragraph (e) shall be and remain
freely and persistently available and easily accessible on the national
securities exchange's website for a period of not less than five years
from the conclusion of the post-Pilot Period. In addition, the
information shall be presented in a manner that facilitates access by
machines without encumbrance, and shall not be subject to any
restrictions, including restrictions on access, retrieval,
distribution, and reuse. The Exchange Transaction Fee Summary shall
contain the following fields:
    (1) SRO Name;
    (2) Record Type Indicator:
    (i) Reported Fee is the Monthly Average;
    (ii) Reported Fee is the Median;
    (iii) Reported Fee is the Spot Monthly;
    (3) Participant Type:
    (i) Registered Market Maker;
    (ii) All Others;
    (4) Test Group:
    (i) Control Group;
    (ii) Test Group 1;
    (iii) Test Group 2;
    (iv) Test Group 3;
    (5) Applicability to Displayed and Non-Displayed Interest:
    (i) Displayed only;
    (ii) Non-displayed only;
    (iii) Both displayed and non-displayed;
    (6) Applicability to Top and Depth of Book Interest:
    (i) Top of book only;
    (ii) Depth of book only;
    (iii) Both top and depth of book;
    (7) Effective Date of Fee or Rebate;
    (8) End Date of Currently Reported Fee or Rebate (if applicable);
    (9) Month and Year of the monthly realized reported average and
median per share fees;
    (10) Pre/Post Fee Changes Indicator (if applicable) denoting
implementation of a new fee or rebate on a day other than the first day
of the month;
    (11) Base and Top Tier Fee or Rebate:
    (i) Take (to remove):
    (A) Base Fee/Rebate reflecting the standard amount assessed or
rebated before any applicable discounts, tiers, caps, or other
incentives are applied;
    (B) Top Tier Fee/Rebate reflecting the amount assessed or rebated
after any applicable discounts, tiers, caps, or other incentives are
applied;
    (ii) Make (to provide):
    (A) Base Fee/Rebate reflecting the standard amount assessed or
rebated before any applicable discounts, tiers, caps, or other
incentives are applied;
    (B) Top Tier Fee/Rebate reflecting the amount assessed or rebated
after any applicable discounts, tiers, caps, or other incentives are
applied;
    (12) Average Take Fee (Rebate)/Average Make Rebate (Fee), by
Participant Type, Test Group, Displayed/Non-Displayed, and Top/Depth of
Book; and
    (13) Median Take Fee (Rebate)/Median Make Fee (Rebate), by
Participant Type, Test Group, Displayed/Non-Displayed, and Top/Depth of
Book.
    The following will not appear in the Code of Federal Regulations.
Exhibit 1: Data Definitions for the Exchange Transaction Fee Summary
    The table below represents the data model for the reporting
requirements of an Exchange Transaction Fee Summary. This data model
reflects the disclosures required by proposed 17 CFR 242.610T(e) and
the logical representation of those disclosures to a corresponding XML
element. The Commission's proposed XML schema is the formal electronic
representation of this data model.
     Concept--the information content as described in proposed
17 CFR 242.610T(e) items 1 through 12.
     Element--a name for the XML element.
     Type--the XML data type, either a list of possible values
or a general type such as ``number''.
     Spot, Monthly--How the element appears in a record of that
type.
    [cir] R--Required. The XML file is not valid unless this element is
present.
    [cir] NA--Not applicable. The element may appear in the record but
its value is not to be used.
    [cir] O--Optional. The XML file is valid without that element;
whether it appears for a particular SRO, record type, test group, etc.,
depends on the actual fee being described. XML validation by itself
cannot determine this.
     When Absent--If the element is absent, its value is
interpreted as if it had been present with the value shown.
     Definition--Text to be included in the XML definition file
(``schema'').

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                When
            Concept                          Element                          Type                 Spot     Monthly    absent          Definition
--------------------------------------------------------------------------------------------------------------------------------------------------------
SRO............................  sro...........................  Non-empty Text................        R          R   ........  A required unique code
                                                                                to identify each SRO in
                                                                                the Transaction Fee
                                                                                Pilot.
Record Type....................  rt............................  S or M........................        R          R   ........  A required record type
                                                                                indicator. M, if the
                                                                                fee type reported is
                                                                                the monthly realized
                                                                                fee (average or median
                                                                                fee); S, if the fee
                                                                                type reported is a spot
                                                                                fee schedule (base or
                                                                                top tier fee).

Participant Type...............  ptcpt.........................  MM, Other or Blank............        O          O     Blank   MM, if the fees are for
                                                                                market makers, or else
                                                                                Other. Required for
                                                                                spot records if the
                                                                                exchange charged market
                                                                                makers and others
                                                                                different base and top
                                                                                tier fees. Required for
                                                                                monthly fee records if
                                                                                the exchange charged
                                                                                different average or
                                                                                median fees or pays
                                                                                different average or
                                                                                median fees. Otherwise
                                                                                blank or absent.
Test Group.....................  grp...........................  1, 2, 3, or C.................        R          R   ........  A required indicator
                                                                                that identifies the
                                                                                test or control group
                                                                                during the Pilot and
                                                                                post-Pilot Period. 1,
                                                                                2, 3--Test Groups 1, 2,
                                                                                3; C--Control group.
Displayed......................  disp..........................  D, N, or B....................        R          R   ........  D--Displayed, N--Not
                                                                                displayed, B--Both. For
                                                                                spot fee type records,
                                                                                if the fees are the
                                                                                same between displayed
                                                                                and non-displayed
                                                                                liquidity, then the
                                                                                exchange may report
                                                                                both in a single ``B''
                                                                                record. For monthly
                                                                                records, this should be
                                                                                segmented into the
                                                                                average and median fee
                                                                                per share for displayed
                                                                                liquidity, and the
                                                                                average and median fee
                                                                                for non-displayed
                                                                                liquidity unless there
                                                                                are no differences
                                                                                between the average and
                                                                                median fees for
                                                                                displayed and non-
                                                                                displayed liquidity, in
                                                                                which case the exchange
                                                                                can report the average
                                                                                and median fee in a
                                                                                single ``B'' record.
Top/Depth......................  topOrDepth....................  T, D, or B....................        R          R   ........  T--Fees for top-of-book
                                                                                liquidity; D--Fees for
                                                                                depth-of-book
                                                                                liquidity; B--Both. For
                                                                                spot records, if the
                                                                                fees are the same
                                                                                between top-of-book and
                                                                                depth-of-book
                                                                                liquidity, then the
                                                                                exchange may report
                                                                                both fees in a single
                                                                                ``B'' record. For
                                                                                monthly records, if
                                                                                there are no
                                                                                differences between the
                                                                                fees for top-of-book
                                                                                and depth-of-book
                                                                                liquidity, then the
                                                                                exchange may include
                                                                                only the average and
                                                                                median fees in a single
                                                                                ``B'' record.
Start Date.....................  start.........................  YYYY-MM-DD....................        R          O   ........  The start date element
                                                                                must be present for a
                                                                                spot fee record, and
                                                                                the end element cannot
                                                                                appear alone. The
                                                                                effective date for any
                                                                                fee changes. This
                                                                                should correspond to
                                                                                the effective date
                                                                                referenced in the Form
                                                                                19b-4 fee filings
                                                                                submitted to the
                                                                                Commission. This is
                                                                                needed in a monthly
                                                                                record only if fees
                                                                                changed on a day other
                                                                                than the first of the
                                                                                month; otherwise blank
                                                                                or absent.
End Date.......................  end...........................  YYYY-MM-DD or Blank...........        O          O     Blank   The last date that a
                                                                                given fee is viable
                                                                                prior to any fee
                                                                                changes. This column
                                                                                will be blank unless a
                                                                                mid-month change to
                                                                                fees is made. This
                                                                                should correspond to
                                                                                the last date that a
                                                                                given fee is applicable
                                                                                prior to the effective
                                                                                date of the new fee
                                                                                reflected in Form 19b-4
                                                                                fee filings submitted
                                                                                to the Commission to
                                                                                capture any revisions
                                                                                to transaction-based
                                                                                fees and rebates. This
                                                                                is needed in a monthly
                                                                                record only if fees
                                                                                changed on a day other
                                                                                than the first of the
                                                                                month.
Month and Year.................  YearMonth.....................  YYYY-MM.......................       NA          R   ........  The year and month of
                                                                                the monthly realized
                                                                                reported average and
                                                                                median per share fees.
Pre/Post.......................  preOrPost.....................  1, 2, or Blank................        O          O     Blank   An indicator variable
                                                                                needed only if the
                                                                                exchange changed fees
                                                                                on a day other than the
                                                                                first day of the month.
                                                                                Blank--there were no
                                                                                fee changes other than
                                                                                on the first day of the
                                                                                month. 1--The average
                                                                                and median are the pre-
                                                                                change average and
                                                                                median for the part of
                                                                                the month prior to the
                                                                                change. 2--The average
                                                                                and median are the post-
                                                                                change average and
                                                                                median for the part of
                                                                                the month after the
                                                                                change.
Base Taker Fee.................  baseTakeFee...................  Number........................        R         NA   ........  The Base Taker Fee is
                                                                                the standard per share
                                                                                fee assessed or rebate
                                                                                offered before any
                                                                                applicable discounts,
                                                                                tiers, caps, or other
                                                                                incentives are applied.
                                                                                Fees have a positive
                                                                                sign; rebates have a
                                                                                negative sign.
Top Tier Taker Fee.............  topTierTakeFee................  Number........................        R         NA   ........  The Top Tier Taker Fee
                                                                                is the per share fee
                                                                                assessed or rebate
                                                                                offered after all
                                                                                applicable discounts,
                                                                                tiers, caps, or other
                                                                                incentives are applied.
                                                                                Fees have a positive
                                                                                sign; rebates have a
                                                                                negative sign.
Average Taker Fee..............  avgTakeFee....................  Number........................       NA          R   ........  The monthly average
                                                                                realized Taker fee
                                                                                assessed or rebate
                                                                                offered per share by
                                                                                category (i.e., test
                                                                                group, participant
                                                                                type, displayed vs. non-
                                                                                displayed, and top-of-
                                                                                book vs. depth-of-
                                                                                book). Fees have a
                                                                                positive sign; rebates
                                                                                have a negative sign.

Median Taker Fee...............  medianTakeFee.................  Number........................       NA          R   ........  The monthly median
                                                                                realized Taker fee
                                                                                assessed or rebate
                                                                                offered per share by
                                                                                category (i.e., test
                                                                                group, participant
                                                                                type, displayed vs. non-
                                                                                displayed, and top-of-
                                                                                book vs. depth-of-
                                                                                book), across broker-
                                                                                dealers. Fees have a
                                                                                positive sign; rebates
                                                                                have a negative sign.
Base Maker Fee.................  baseMakeFee...................  Number........................        R         NA   ........  The Base Maker Fee is
                                                                                the standard per share
                                                                                fee assessed or rebate
                                                                                offered before any
                                                                                applicable discounts,
                                                                                tiers, caps, or other
                                                                                incentives are applied.
                                                                                Fees have a positive
                                                                                sign; rebates have a
                                                                                negative sign.
Top Tier Maker Fee.............  topTierMakeFee................  Number........................        R         NA   ........  The Top Tier Maker Fee
                                                                                is the per share fee
                                                                                assessed or rebate
                                                                                offered all applicable
                                                                                discounts, tiers, caps,
                                                                                or other incentives are
                                                                                applied per share. Fees
                                                                                have a positive sign;
                                                                                rebates have a negative
                                                                                sign.
Average Maker Fee..............  avgMakeFee....................  Number........................       NA          R   ........  The monthly average
                                                                                realized Maker fee
                                                                                assessed or rebate
                                                                                offered per share by
                                                                                category (i.e., test
                                                                                group, participant
                                                                                type, displayed vs. non-
                                                                                displayed, and top-of-
                                                                                book vs. depth-of-
                                                                                book). Fees have a
                                                                                positive sign; rebates
                                                                                have a negative sign.
Median Maker Fee...............  medianMakeFee.................  Number........................       NA          R   ........  The monthly median
                                                                                realized Maker fee
                                                                                assessed or rebate
                                                                                offered per share by
                                                                                category (i.e., test
                                                                                group, participant
                                                                                type, displayed vs. non-
                                                                                displayed, or top-of-
                                                                                book vs. depth-of-
                                                                                book), across broker-
                                                                                dealers. Fees have a
                                                                                positive sign; rebates
                                                                                have a negative sign.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    By the Commission.

     Dated: March 14, 2018.
Brent J. Fields,
Secretary.
[FR Doc. 2018-05545 Filed 3-23-18; 8:45 am]
 BILLING CODE 8011-01-P