version of TRACE for U.S. Treasury Securities from April 1, 2021, to September 30, 2021. Bilateral trades are a
 catchall classification that may include trades conducted via bilateral negotiation, as well as trades
 conducted electronically via platforms not registered with FINRA as an ATS. Bilateral trades may include trades
 conducted on Communication Protocol Systems.
----------------------------------------------------------------------------------------------------------------
\a\ The percentage to the nearest non-zero is 0.02%.
\b\  See supra notes b and c in Table VIII.1.
\c\ FINRA reports volume as par volume, where par volume is the volume measured by the face value of the bond,
  in dollars. See relevant weekly volume files, available at https://www.finra.org/filing-reporting/trace/data/trace-treasury-aggregates.
\d\ Dealers are counted using the number of distinct MPIDs.
\e\ Total dollar volume (in par value) is calculated as the sum of dollar volume for ATSs, non-ATS interdealer
  brokers, bilateral dealer-to-dealer transactions, and bilateral dealer-to-customer transactions.
\f\ We identify ATS trades and non-ATS interdealer broker trades using MPID in the regulatory version of TRACE
  for U.S. Treasury Securities. The regulatory version of TRACE for U.S. Treasury Securities includes an
  identifier for customer and interdealer trades. Furthermore, we use MPID for non-FINRA member subscriber
  counterparties in the regulatory version of TRACE for U.S. Treasury Securities to identify PTF trades on ATSs.

    Table VIII.1 also shows that trading in the Treasury Securities
market is concentrated on a few large ATSs.\819\ The largest ATS by
Treasury dollar volume has 15.2 percent of the total Treasury
Securities market reported to TRACE. Two Government Securities ATSs
have dollar volumes that are over five percent of the total TRACE
volume figure, and four have dollar volumes over three percent.
---------------------------------------------------------------------------

    \819\ All ATSs identified in this table are determined by the
regulatory version of TRACE. TRACE data contains an identifier for
trades occurring on ATSs, identifying the MPID of the ATS.
---------------------------------------------------------------------------

    Table VIII.2 shows that the majority of trading in on-the-run
government securities reported to TRACE goes through Government
Securities ATSs. Specifically, Government Securities ATSs accounted for
nearly 50 percent of total dollar volume.
    When on-the-run securities transition to off-the-run status, their
trading activity shifts away from Government Securities ATSs, and
towards other transaction methods, including Communication Protocol
Systems.\820\ This is reflected in Table VIII.3, which shows that
Government Securities ATSs account for approximately 21 percent of the
total dollar volume of off-the-run Treasury trading reported to
TRACE.\821\ Table VIII.3 also shows that, while dealers remain a
significant contributor to ATS trading in Treasury Securities in the
off-the-run market, PTFs make up a smaller percentage of volume than
they do in the on-the-run market.
---------------------------------------------------------------------------

    \820\ One commenter referenced that market participants trading
in less liquid off-the-run securities are better able to find
liquidity in non-ATS trading methods. See Bloomberg Letter at 5 and
21-22.
    \821\ See supra note 193.

                        Table VIII.3--Off-the-Run U.S. Treasury Securities Trading Volume
----------------------------------------------------------------------------------------------------------------
                                                                     Number of                     Volume share
                                                                      venues          Volume            (%)
----------------------------------------------------------------------------------------------------------------
                               Off-the-Run U.S. Treasury Securities Trading Volume
----------------------------------------------------------------------------------------------------------------
ATSs............................................................              17         110,945            21.7
    Customer trades.............................................              10          13,304             2.1
    Dealer trades...............................................              17          83,668            13.0
    PTF trades..................................................              11          13,973             2.2
Non-ATS Interdealer Brokers.....................................              22          43,604             6.8
    Customer trades.............................................              18          15,092             2.4
    Dealer trades...............................................              21          28,451             4.4
    PTF trades..................................................              12              61         0.0 \a\
Bilateral dealer-to-dealer trades...............................             509          47,912             7.5
Bilateral dealer-to-customer trades.............................             333         437,665            68.2
Bilateral dealer-to-PTF trades..................................             114           1,415             0.2
                                                                 -----------------------------------------------
        Total...................................................  ..............         641,540           100.0
----------------------------------------------------------------------------------------------------------------

This table reports trading volume and volume share for ATSs,\b\ non-ATS interdealer brokers, bilateral dealer-to-
 dealer transactions, bilateral dealer-to-customer, and bilateral dealer-to-PTF transactions for off-the-run
 U.S. Treasury Securities. Off-the-run or ``seasoned'' U.S. Treasury Securities include TIPS, STRIPS, and
 nominal coupon securities issues that preceded the current on-the-run nominal coupon securities. Number of
 Venues is the number of different trading venues in each category and the number of distinct MPIDs for
 bilateral transactions. Volume is the average weekly dollar volume in par value (in millions of dollars) over
 the 6-month period, from April 1, 2021, to September 30, 2021. Market Share (%) is the measure of the dollar
 volume as a percent of the total dollar volume. The volumes of ATSs and non-ATS interdealer brokers are broken
 out by Customer trades, Dealer trades, and PTF trades within each group.\c\ Data is based on the regulatory
 version of TRACE for U.S. Treasury Securities from April 1, 2021, to September 30, 2021. Bilateral trades are a
 catchall classification that may include trades conducted via bilateral negotiation, as well as trades
 conducted electronically via platforms not registered with FINRA as an ATS. Bilateral trades may include trades
 conducted on Communication Protocol Systems.
----------------------------------------------------------------------------------------------------------------
\a\ The percentage to the nearest non-zero is 0.009%.
\b\ See supra notes b and c of Table VIII.1.
\c\ We identify ATS trades and non-ATS interdealer broker trades using MPID in the regulatory version of TRACE
  for U.S. Treasury Securities. The regulatory version of TRACE for U.S. Treasury Securities includes an
  identifier for customer and interdealer trades. Furthermore, we use MPID for non-FINRA member subscriber
  counterparties in the regulatory version of TRACE for U.S. Treasury Securities to identify PTF trades on ATSs.

    Government Securities ATSs also play a significant role in the
market for Agency Securities, accounting for approximately 12 percent
of the total dollar volume reported to TRACE. Like in the Treasury
market, dealers play a significant role in trading on ATSs for Agency
Securities.\822\
---------------------------------------------------------------------------

    \822\ Agency Securities are those issued by U.S. Government
sponsored enterprises (``GSEs'') such as Federal Home Loan Banks
(``FHLBs''), the Federal National Mortgage Association (``Fannie
Mae''), and the Federal Home Loan Mortgage Corporation (``Freddie
Mac'').
---------------------------------------------------------------------------

    It is the Commission's understanding that PTFs play only a small
role in the market for Agency Securities. The Commission invites
comment on the role of PTFs in trading Agency Securities. The
Commission also requests comment on the providers of liquidity in the
market for Agency Securities.

                                 Table VIII.4--Agency Securities Trading Volume
----------------------------------------------------------------------------------------------------------------
                                                                     Number of                     Volume share
                                                                      venues          Volume            (%)
----------------------------------------------------------------------------------------------------------------
                                        Agency Securities Trading Volume
----------------------------------------------------------------------------------------------------------------
ATSs............................................................               8          31,940            12.3
    1Customer trades............................................               7           6,767             2.6
    1Dealer trades..............................................               7          25,173             9.7
    PTF trades..................................................               3               1         \a\ 0.0
Non-ATS Interdealer Brokers.....................................              13           7,935             3.0
    Customer trades.............................................               9           1,096             0.4
    Dealer trades...............................................              13           6,838             2.6
    PTF trades..................................................               5               0         \b\ 0.0
Bilateral dealer-to-dealer trades...............................             470          12,170             4.7
Bilateral dealer-to-customer trades.............................             470         206,777            79.9
Bilateral dealer-to-PTF trades..................................              84               3         \c\ 0.0
                                                                 -----------------------------------------------
    Total.......................................................  ..............         264,916           100.0
----------------------------------------------------------------------------------------------------------------
This table reports trading volume and volume share for ATSs,\d\ non-ATS interdealer brokers, bilateral dealer-to-
 dealer transactions, and bilateral dealer-to-customer transactions for U.S. Agency Securities. Agency
 Securities include Agency Debentures, Agency Collateralized Mortgage Obligations, and Agency Pass-Through
 Mortgage Backed Securities. Number of Venues is the number of different trading venues in each category and the
 number of MPIDs for bilateral transactions. Volume is the average daily dollar volume in par value (in millions
 of dollars) over the 6-month period, from April 1, 2021, to September 30, 2021. Market Share (%) is the measure
 of the dollar volume as a percent of the total dollar volume. The volume of ATSs and non-ATS interdealer
 brokers are broken out by Customer trades and Dealer trades within each group.\e\ Data is based on the
 regulatory version of TRACE for Agency Securities from April 1, 2021, to September 30, 2021. Bilateral trades
 are a catchall classification that may include trades conducted via bilateral negotiation, as well as trades
 conducted electronically via platforms not registered with FINRA as an ATS. Bilateral trades may include trades
 conducted on Communication Protocol Systems.
----------------------------------------------------------------------------------------------------------------
\a\ The percentage to the nearest non-zero is 0.0003%.
\b\ The percentage to the nearest non-zero is 0.00007%.
\c\ The percentage to the nearest non-zero is 0.001%.
\d\ See supra notes b and c of Table VIII.1.
\e\ We identify ATS trades and non-ATS interdealer broker trades using MPID in the regulatory version of TRACE
  for Agency Securities. The regulatory version of TRACE for Agency Securities includes an identifier for
  customer and interdealer trades.

ii. Regulatory Environment for Government Securities ATSs
    The regulatory environment for Government Securities ATSs varies
according to whether the ATS is a Current Government Securities ATS or
a Currently Exempted Government Securities ATS, and whether the ATS is
operated by a registered broker-dealer. Differences in reporting
requirements can lead to an uneven competitive landscape for Government
Securities ATSs and leave room for regulatory arbitrage.\823\ In
addition, current regulation for Government Securities ATSs does not
require public disclosure about operations, fair access, or robust
systems.
---------------------------------------------------------------------------

    \823\ One commenter stated that the lack of a consistent
regulatory framework for entities that undertake similar activities
leads to opportunities for arbitrage and may result in market
fragmentation, which in turn may cause reduced market liquidity. See
Tradeweb Letter at 9.
---------------------------------------------------------------------------

    Much of the difference in regulatory treatment among Government
Securities ATSs comes from the fact that Current Government Securities
ATSs must comply with Regulation ATS, while Currently Exempted
Government Securities ATSs do not. For example, Currently Exempted
Government Securities ATSs are not required to file Form ATS with the
Commission, while ATSs that trade U.S. Government securities as well as
non-government securities, such as corporate or municipal securities,
must have filed Form ATS as a confidential filing with the Commission
when they began operations, and will incur the cost to do so again if
there is a material change in operations.\824\
---------------------------------------------------------------------------

    \824\ The Commission may use this information in monitoring,
examinations and enforcement.
---------------------------------------------------------------------------

    Current Government Securities ATSs are also required to
confidentially report their transaction dollar volume in government
securities to the Commission on a quarterly basis via Form ATS-R within
30 days after the end of each calendar quarter. Currently Exempted
Government Securities ATSs are not subject to this requirement.
    Unlike Current Government Securities ATSs, Currently Exempted
Government Securities ATSs are not required to establish written
safeguards and written procedures to protect subscribers' confidential
trading information.\825\ To the extent that a Currently Exempted
Government Securities ATS does not have these procedures, or has them
but the procedures are not adequate,\826\ a subscriber's confidential
trading information might be at risk of unauthorized disclosure or
subject to potential misuse.
---------------------------------------------------------------------------

    \825\ These requirements come from Rule 301(b)(10) of Regulation
ATS. Current Government Securities ATSs are currently subject to
these rules. See supra Section II.D.2.
    \826\ Currently Exempted Government Securities ATSs are not
required to file their written safeguards and written procedures
with the Commission. Therefore, absent an examination by the
Commission staff, the Commission is not able to determine which
Currently Exempted Government Securities ATSs currently have
adequate, written safeguards and written procedures to protect
subscribers' confidential trading information. At the same time,
based on the experience of the Commission, the Commission believes
that some Currently Exempted Government Securities ATSs currently
have, and maintain in writing, safeguards and procedures to protect
subscribers' confidential trading information, as well as the
oversight procedures to ensure such safeguards and procedures are
followed.
---------------------------------------------------------------------------

    Current Government Securities ATSs must also comply with certain
additional requirements, such as recordkeeping requirements pursuant to
Rule 301(b)(8). These include requirements to make and keep certain
records for an audit trail of trading activity, such as time-sequenced
order information, as well as information about current subscribers and
summaries of trading activity. The requirement to keep such records may
impose compliance costs on Current Government Securities ATSs to which
Currently Exempted Government Securities ATSs are not subjected. To the
extent that Currently Exempted Government Securities ATSs do not
voluntarily maintain records similar to those required by Rule
301(b)(8), detection and investigation of potential market
irregularities may be inhibited.
    A further disparity exists in the case of the estimated one bank-
operated Currently Exempted Government Securities ATS. All other
Currently Exempted Government Securities ATSs and all Current
Government Securities ATSs are registered broker-dealers that incur the
costs of registering with the Commission as well as the costs of SRO
membership, and face operational regulatory reporting
requirements.\827\ In contrast, the estimated one bank-operated
Currently Exempted Government Securities ATS is not required to
register as a broker-dealer with the Commission and thus, does not have
to file Form BD with the Commission or be subject to FINRA rules.
---------------------------------------------------------------------------

    \827\ See FINRA Letter at 2-3, stating that nearly all
Government Securities ATSs currently are FINRA members
---------------------------------------------------------------------------

    The estimated one bank-operated Currently Exempted Government
Securities ATS does not report government securities transactions to
TRACE. All transactions in government securities that include at least
one FINRA member are required to be reported to TRACE within 15 minutes
of the time of execution.\828\ Trades on ATSs operated by FINRA members
may be required to be reported to TRACE, by either the ATS,
counterparties to the trade, or both, depending on whether the
counterparties are FINRA members and whether the ATS holds itself out
as a party to the trade.\829\
---------------------------------------------------------------------------

    \828\ See supra note 228 and corresponding text discussing TRACE
reporting requirements for U.S. Government securities.
    \829\ FINRA Rule 6731 exempts certain ATSs from TRACE reporting
requirements as long as all of the following conditions are met: All
trades are between ATS subscribers that are both FINRA members; the
ATS demonstrates that member subscribers are fully disclosed to one
another at all times, the system does not permit automatic execution
and a member must take affirmative steps to agree to a trade, the
trade does not pass through any ATS account and the ATS does not
hold itself out as a party to the trade; and the ATS does not
exchange TRACE-Eligible Securities or funds on behalf of its
subscribers, take either side of the trade for clearing or
settlement purposes, or in any other way insert itself into the
trade; the ATS and the member subscribers acknowledge and agree in
writing that the ATS shall not be deemed a party to the trade for
purposes of trade reporting and that trades shall be reported by
each party to the transaction; and the ATS agrees to provide to
FINRA on a monthly basis data relating to the volume of trades by
security executed by the ATS's member subscribers using the ATS's
system. Furthermore, Rule 6732 exempts certain transactions on ATS
from TRACE reporting requirements as long as all of the following
conditions are met: The trade is between FINRA members; the trade
does not pass through any ATS account, and the ATS does not exchange
TRACE-Eligible Securities or funds on behalf of the subscribers,
take either side of the trade for clearing or settlement purposes,
or in any other way insert itself into the trade; the ATS agrees to
provide to FINRA on a monthly basis data relating to each exempted
trade occurring on the ATS's system pursuant to this Rule 6732; the
ATS remits to FINRA a transaction reporting fee for each exempted
sell transaction occurring on the ATS; and the ATS has entered into
a written agreement with each party to the transaction that such
trade must be reported by such party. See also FINRA Letter at 6-7,
stating that a fixed income ATS is a ``party to a transaction'' in a
TRACE-eligible security occurring through its system and has TRACE
transaction reporting obligations, unless an exception or exemption
applies.
---------------------------------------------------------------------------

    Neither Current Government Securities ATSs nor Currently Exempted
Government Securities ATSs are required to make disclosures on public
forms, and this might lead to information asymmetries amongst different
subscribers. For example, certain Government Securities ATSs might make
voluntary disclosures regarding their operations as a signal of quality
to some customers,\830\ without disclosing the same information to
other customers or market participants generally. As a result, some
subscribers have limited information which may affect their trading
decisions.
---------------------------------------------------------------------------

    \830\ For example, the ATS may disclose order execution
statistics to some customers.
---------------------------------------------------------------------------

    There is no legal mechanism to prevent Government Securities ATSs
from unreasonably denying or limiting

subscribers' access, because the Fair Access Rule does not currently
apply to any ATS that trades government securities.\831\ When a
Government Securities ATS has a significant share of trading volume in
government securities, unfairly discriminatory actions might hurt
investors because viable alternatives to trading on such a high-volume
system might be limited. To the extent this happens, it results in
higher trading costs and a reduced efficiency with which such excluded
participants achieve trading objectives, which may also lead to
concentration in the market for dealers in government securities.\832\
Furthermore, market forces alone might not be sufficient to prevent a
Government Securities ATS from unreasonably denying access to some
market participants.\833\
---------------------------------------------------------------------------

    \831\ See supra Section II.D.2, discussing the Fair Access Rule
requirements.
    \832\ One commenter stated that registered investment companies
generally are not able to directly access liquidity on most Treasury
interdealer platforms. See ICI Letter at 4.
    \833\ See MFA Letter at 3, stating that currently there is no
mechanism to prevent Government Securities ATSs from unreasonably
denying or limiting subscribers' access to an ATS that is a
significant market for government securities.
---------------------------------------------------------------------------

    The Commission preliminarily believes that Government Securities
ATSs may not fully internalize the cost of the externalities associated
with not having robust, resilient systems, as would be required by the
provisions of Regulation SCI and Rule 301(b)(6) of Regulation ATS.
Without appropriate safeguards in place for Government Securities ATSs,
technological vulnerabilities continue to exist and could lead to the
potential for costly failures, disruptions, delays, intrusions, and the
reduction in systems up-time,\834\ which could harm the price discovery
process and price efficiency of government securities. Systems issues
pose significant negative externalities on the market, in that if a
trading system of a Government Securities ATS with significant trading
volume fails, this failure will not only force the ATS to forgo revenue
but might also diminish trading in government securities during the
disruption. This would increase the trading costs of market
participants that have optimized their trading strategy under the
assumption that all Government Securities ATSs with significant volume
are fully operational, and might harm the price discovery process and
liquidity flows for government securities.\835\ In addition, price
discovery in securities that use government security transaction prices
as risk-free rate benchmarks might also be harmed.\836\
---------------------------------------------------------------------------

    \834\ Systems up-time is a measure of the time that a computer
system is running and available.
    \835\ On January 11, 2019, the largest trading platform in on-
the-run U.S. Treasury Securities, experienced a system outage
approximately from 2 p.m. to 3:30 p.m. ET. While the outage resulted
in a modest reduction in market volume, had it occurred at a time
other than late on a Friday afternoon when trading activity is
normally already low, the outage could have resulted in more adverse
consequences on the overall market. See also Elizabeth Stanton, Nick
Baker, & Matthew Leising, Treasuries Hit by One-Hour Outage on
Biggest Electronic Platform, Bloomberg, January 13, 2019, https://www.bloomberg.com/news/articles/2019-01-11/brokertec-inter-dealer-treasury-broker-suffers-outage.
    \836\ As noted in the October 15 Staff Report, price discovery
is especially important in the secondary market for on-the-run U.S.
Treasury Securities because the transaction prices are used as risk-
free rate benchmarks to price other securities transactions.
---------------------------------------------------------------------------

    One commenter on the 2020 Proposal stated that ``many Government
Securities ATSs may already align with industry standards that achieve
many of the same goals of Regulations SCI, although in slightly
different manner.'' \837\ While the Commission recognizes that
Government Securities ATSs have some incentives to maintain robust
systems to remain competitive and thereby reduce systems issues, the
Commission believes that market forces alone may not be sufficient to
significantly reduce systems issues, because some of the impact of
these systems issues represent an externality to the Government
Securities ATS.\838\
---------------------------------------------------------------------------

    \837\ See BrokerTec Letter at 6.
    \838\ A commenter on the 2020 stated ``. . . we believe that
market forces alone may be insufficient to significantly reduce
systems issues in the market for trading and execution services in
government securities.'' See MFA Letter at 6.
---------------------------------------------------------------------------

    A comment letter received in response to the Treasury Request for
Information stated that many Government Securities ATSs adopted system
testing and control procedures that followed the recommended best
practices of the Treasury Market Practices Group.\839\ However, these
best practices are meant only as useful operational guideposts rather
than binding rules, and each trading venue can choose if it wants to
comply and how to comply, which might provide weak only incentives to
internalize the externality costs associated with system failures.
---------------------------------------------------------------------------

    \839\ See Letter from Mike Zolik, Nate Kalich, and Larry
Magargal, Ronin Capital LLC, to David R. Pearl, Office of the
Executive Secretary, U.S. Department of the Treasury, dated March
19, 2016, at 31-33, available at https://www.treasurydirect.gov/instit/statreg/gsareg/RoninCapital.pdf. See also BrokerTec Letter at
6. The Treasury Market Practices Group promotes a robust control
environment for government securities trading, using internal
controls and risk management. See Treasury Market Practices Group,
Best Practices For Treasury, Agency Debt, and Agency Mortgage-Backed
Securities Markets (July 2019), available at https://www.newyorkfed.org/medialibrary/Microsites/tmpg/files/TMPG_BestPractices_071119.pdf.
---------------------------------------------------------------------------

    The Commission is aware of 1 Government Securities ATS operated by
a broker-dealer that also operates an NMS Stock ATS that is an SCI
entity and so may already comply with much of Regulation SCI.
b. Communication Protocol Systems in the Market for Government
Securities
    Communication Protocol Systems play a significant role in the
market for government securities. The Commission estimates that there
are 3 Communication Protocol Systems operating in the market for
government securities that may meet the definition of exchange under
the proposed changes to Exchange Act Rule 3b-16. The Commission
understands that these systems are a significant component of the
dealer-to-customer segment of the U.S. Treasury market and account for
approximately 30 to 40 percent of the total trading volume in U.S.
Treasuries.\840\ One of the roles of such systems is to provide a means
to communicate trading interest in the dealer-to-customer market.\841\
---------------------------------------------------------------------------

    \840\ See infra Section VIII.B.2.d, Table VIII.5. Some part of
the stream axes volume accounted for in that table may be ATS
volume.
    \841\ As described in Section III.A, the secondary market for
U.S. Treasury Securities is generally bifurcated between the dealer-
to-customer market and the interdealer market. See also Bloomberg
Letter at 5, referencing that the bifurcating of the market is due
to some extent to structural issues in clearing.
---------------------------------------------------------------------------

    The Commission understands that investors who wish to transact in
government securities generally do so with a dealer on a principal
basis. Communication Protocol Systems typically facilitate the first
step in a principal trade, namely trading between the dealer and
customer. In this capacity, the systems provide a way for customers to
obtain quotes from dealers and to select a dealer to fill their order,
in addition to the other reasons for using a Communication Protocol
System described in Section VIII.B.1. The Commission understands that
dealers and PTFs may also use Communication Protocol Systems to demand
liquidity in government securities, a decision which may be motivated
by the possibility of executing block trades with less information
leakage compared to ATSs.\842\
---------------------------------------------------------------------------

    \842\ See supra Section VIII.B.1.a, discussing information
leakage and RFQs.
---------------------------------------------------------------------------

    The Commission understands that dealer respondents on RFQ systems
in the market for government securities typically provide a continuous
stream of indicative, non-firm quotes that are aggregated into a single
quote and made

available to all participants who may wish to initiate an RFQ on the
trading system. Such quotes may also be disseminated over the internet
to the general public. These indicative quote streams are an important
service on RFQ systems for at least two reasons. First, they are a
source of price information in government securities, and the
Commission understands that some market data vendors may rely
exclusively on such quote streams for the information they provide on,
for example, the Treasury market. In providing such transparency in the
Treasury market, these quote streams may be used as a risk-free rate
benchmark, and to help price other financial instruments. Second, the
quote streams give potential participants in the RFQ a sense of what
quotes they would receive in response to a request without having to
make a request, which helps these market participants get a sense of
the market without revealing trading interest.
    Communication Protocol Systems do not meet the current definition
of an exchange and thus are not subject to regulation either as an
exchange or an ATS. This means they face a regulatory regime similar to
that of Currently Exempted Government Securities ATSs as described in
Section VIII.B.1.ii above. Furthermore, depending on how much of a role
the Communication Protocol System takes in facilitating the transaction
(e.g., acting as a counterparty to each side of the trade), and whether
the Communication Protocol System operator and/or parties to the
transaction are FINRA members, transactions taking place through the
Communication Protocol System may not be reported to TRACE at all.
    The Commission estimates that a single Communication Protocol
System trading in government securities is not currently operated by a
registered broker-dealer. This system does not currently incur the
costs of registering with the Commission as well as the costs of SRO
membership, and is not subject to FINRA operational regulatory
reporting requirements.
c. Other Methods of Trading in U.S. Government Securities
    Market participants may also transact in government securities via
bilateral voice trading. As the Commission understands, a market
participant wishing to make a purchase or sale of government securities
would phone a potential counterparty, typically a dealer in government
securities, to inquire about specific securities. The parties would
then negotiate on price and size. If there were agreement, the parties
would execute a trade. If not, the liquidity demander could repeat this
process to find a more suitable counterparty. The Commission
understands that a liquidity demander would typically contact more than
one dealer, in order to compare quotes.
    Bilateral voice trading can be attractive to traders in government
securities because this method of trading allows for flexibility,
minimizes information leakage relative to other trading protocols, and
may be conducive to maintaining relationships. The lack of information
leakage may cause bilateral voice trading to be a useful method for
traders seeking to execute large block trades of government securities.
d. Competition for U.S. Government Securities Trading Services
    Government securities are traded through a diverse set of methods,
including ATSs, Communication Protocol Systems, and bilateral
negotiation methods such as voice trading. The Commission preliminarily
believes that each type of trading method may be more prevalent in
separate segments of the government securities market.

                      Table VIII.5--U.S. Treasury Securities Trading Protocol Market Share
----------------------------------------------------------------------------------------------------------------
                                                                                Stream axes
                        Limit order book                                RFQ             \a\            Voice
----------------------------------------------------------------------------------------------------------------
26.3............................................................            29.9            10.4            33.4
----------------------------------------------------------------------------------------------------------------
This table reports volume share by trading protocol type in the market for U.S. Treasury Securities. Market
 Share (%) is the measure of the dollar volume as a percent of total dollar volume. Data is based on Coalition
 Greenwich's Greenwich MarketView data from January 2021 through September 2021. Voice protocol is calculated as
 the remainder of volume after accounting for Limit Order Book, RFQ, and Stream Axes reported directly to
 Coalition Greenwich from aggregated FINRA TRACE volume.
----------------------------------------------------------------------------------------------------------------
\a\ Coalition Greenwich's Greenwich MarketView refers to this data value as ``Stream/Click-to-Engage.''

    ATSs and Communication Protocol Systems compete with one another to
attract order flow. Table VIII.5 shows the percentage of TRACE-reported
Treasury Securities transactions that are completed using different
trading protocols, and shows that the use of ATSs and Communication
Protocol Systems to transact in Treasury Securities are roughly evenly
matched in terms of volume.\843\ LOB volume represents ATS trades, and
the Commission understands that some amount of stream axes volume may
also be from ATSs. The remaining portion of stream axes and the RFQ
volume represent Communication Protocol Systems in this market.
---------------------------------------------------------------------------

    \843\ One commenter pointed out that, at around 30 percent, U.S.
Treasury market ATS market share is at a similar level that NMS
equities ATS market share was in 1999 when Regulation ATS was
adopted. The commenter stated that the exemption of Treasury
securities from Regulation ATS gave Treasury market structure time
to develop, but the market has now matured to a point where the
exemption should be reconsidered. See Bloomberg Letter at 21.
---------------------------------------------------------------------------

    The Commission understands that the primary customers of ATSs tend
to be dealers and PTFs. The Commission understands that many of the
PTFs trading on Government Securities ATSs utilize latency-sensitive
trading strategies.\844\ Such strategies would likely not be possible
to implement when trading on a Communication Protocol System, or via
bilateral voice trading. This gives ATSs an advantage in attracting
such order flow. Because orders on LOB ATSs are generally displayed to
all participants on the ATS, ATSs with LOBs may have more price
competition among liquidity providers than alternatives. Also, ATSs,
unlike non-ATS trading services, can offer certain additional execution
protocols, such as crossing mechanisms and auctions, which generally
meet the current definition of an exchange.
---------------------------------------------------------------------------

    \844\ See supra Section VIII.B.2.a.i for additional discussion
on the role of PTFs in the Treasury market.
---------------------------------------------------------------------------

    Government Securities ATSs compete on fees, trading features, and
by attracting liquidity to their system. As described above in Section
VIII.B.2.a, a substantial amount of order flow in government securities
is concentrated on the largest Government Securities ATS.\845\
---------------------------------------------------------------------------

    \845\ See supra Section VIII.B.2.a.i.

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

    The primary customers of Communication Protocol Systems are those
market participants in the dealer-to-customer market. Customers seeking
to trade government securities may find the sophistication and
infrastructure required to trade on ATSs to not be cost-effective
relative to the type and quantity of trading they wish to undertake.
This may give the Communication Protocol Systems an advantage in
attracting such traders. In addition, Communication Protocol Systems
offer features that ATSs might not, such as the ability to trade on a
fully disclosed, non-anonymous basis; or the ability to connect trading
in Treasuries to related trades in corporate bonds.\846\
---------------------------------------------------------------------------

    \846\ See supra Sections VIII.B.1 and VIII.B.2.b for additional
details on the nature of Communication Protocol Systems. See infra
Section VIII.B.3.b for additional details on the trading of
corporate bonds on Communication Protocol Systems.
---------------------------------------------------------------------------

    Communication Protocol Systems compete with each other through the
fees they charge, and through innovation and improvement in the type
and quality of the protocols they offer. The Commission preliminarily
believes that such competition among Communication Protocol Systems may
explain the proliferation of different types of protocols.
    Both ATSs and Communication Protocol Systems compete against the
option of transacting through bilateral voice trading. Such methods of
trading in government securities have been common historically and
continue to be used today. As described above in Section VIII.B.2.c,
these methods of trading provide traders with the ability to customize
transactions on the basis of a relationship between the two parties. At
the same time, these trades may be more cumbersome and may suffer from
a lack of price competition relative to Communication Protocol Systems
and ATSs.
    The Commission preliminarily believes that the differences in
regulatory regimes among ATSs and between ATSs and Communication
Protocol Systems \847\ can lead to an uneven competitive landscape and
adversely impact the potential for robust competition in the market for
government securities.\848\
---------------------------------------------------------------------------

    \847\ See supra Section VIII.B.2.a.ii, discussing the regulatory
regime for Government Securities ATSs and Section VIIIB.2.b,
discussing the regulatory regime for Communication Protocol Systems.
    \848\ See ICE Bonds Letter II at 2, stating that the significant
regulatory burdens on fixed income ATSs puts them at a competitive
disadvantage to non-ATS trading systems that are not subject to
these same regulatory obligations. See also ICE Bonds Letter II at
5, stating that market participants are harmed when electronic
trading systems that perform market place functions in fixed income
securities are not subject to the same requirements as a fixed
income ATSs, and that if the regulatory obligations of operating a
fixed income ATS become too burdensome or impair the ability of
fixed income ATSs to compete, it may discourage the expansion of
ATSs and potentially encourage operators of fixed income ATSs to
restructure their operations to avoid being characterized as an ATS.
---------------------------------------------------------------------------

    The Commission believes that the current lack of public disclosure
about the operations and potential conflicts of interest of Government
Securities ATSs and Communication Protocol Systems that currently trade
government securities might hinder competition among these ATSs and
between Government Securities ATSs and Communication Protocol Systems
in the market for government securities. Competition among Government
Securities ATSs and between Government Securities ATSs and non-ATS
trading systems would affect the trading costs of government securities
market participants, including dealers, PTFs, hedge funds, and
institutional investors. Their trading costs include bid-ask
spreads,\849\ search costs in the selection of trading venues and
counterparties, and trading venue fees. When deciding which trading
system most suits their trading objectives, market participants
consider various operational facets of the system, such as order
handling, order types, order segmentation, trading functionalities, and
any potential conflicts of interest that might arise from the operator
of the trading service or its affiliates. Trading system fees would
also be a factor for market participants in deciding between trading
systems.
---------------------------------------------------------------------------

    \849\ The estimated average daily relative quoted spread for
interdealer transactions for on-the-run U.S. Treasury Securities is
small, approximately 0.8 bps for 2-year Treasury Securities and 2.4
bps for 10-year Treasury Securities. The estimated average daily
relative quoted spread for interdealer transactions for off-the-run
U.S. Treasury Securities, approximately 1.7 bps for 2-year Treasury
Securities and 5.4 bps for 10-year Treasury Securities, is larger
compared to that of on-the-run Treasury Securities. Spreads have
narrowed in the past couple of years with a change to a smaller
minimum trading increment of \1/8\ of 1/32 of $1. The average daily
relative quoted spread is computed as the daily average of the
difference between the intraday offer and bid prices divided by the
corresponding price mid-quote. See also Paolo Pasquariello & Clara
Vega, The On-the-Run Liquidity Phenomenon, 92 J. Fin. Econ. 1
(2009); Tobias Adria, Michael Fleming, & Or Shachar, Market
Liquidity after the Financial Crisis (June, 28, 2017), Federal
Reserve Bank of New York, Liberty Street Economics, available at
https://libertystreeteconomics.newyorkfed.org/2017/06/market-liquidity-after-the-financial-crisis.html.
---------------------------------------------------------------------------

3. Current State of Corporate Debt Market
    Although smaller than the market for government securities, the
market for corporate debt securities (``corporate bonds'') represents a
significant part of the fixed income market. In September 2021, the
average daily dollar volume of corporate bond trading was $26.4
billion, including $19.8 billion in investment-grade bonds and $6.5
billion in high-yield bonds.\850\ One commenter stated that levels of
trading in corporate debt have typically been lower than in other fixed
income markets, such as government securities: While corporate bonds
made up 20 percent of new issuances in Q4 2020, they only made up 4.4
percent of fixed income market trading.\851\ However, the commenter
pointed out that the absolute dollar volume of corporate bond trading
volume is still very significant, as is the overall size of the market:
As of January 2021, the corporate bond market is valued at $9.3
trillion in investment-grade and $2.4 trillion in high-yield debt
outstanding.\852\ Estimates put the annualized growth rate of the
corporate bond market at 5.2 percent between 2008 and 2019, a growth
rate second only to that of government securities within the fixed
income space.\853\
---------------------------------------------------------------------------

    \850\ See http://finramarkets.morningstar.com/BondCenter/TRACEMarketAggregateStats.jsp?bondType=C. While there are many types
of corporate bonds, most tend to fall within two categories:
Investment-grade bonds and high-yield bonds (also commonly referred
to as ``non-investment-grade'' or ``junk'' bonds). High-yield bonds
tend to have higher yields than both government securities and
investment-grade bonds, but are also subject to a higher degree of
risk.
    \851\ See Healthy Markets Letter at 8.
    \852\ See id.
    \853\ See https://vegaeconomics.com/trends-in-the-us-corporate-bond-market-since-the-financial-crisis.
---------------------------------------------------------------------------

    Trading in corporate bonds tends to be more illiquid than trading
in government securities, with liquidity often concentrated in the
largest and most recently issued bonds.\854\ One commenter referenced
that only 18 percent of corporate bonds trade each day, and only 8
percent have more than five trades on any given day.\855\ Several
commenters stated that this is due in part to the highly idiosyncratic
nature of corporate bond characteristics,\856\ which

can differ along many different dimensions, including issuer, tenor,
coupon rate, and covenants.\857\ One commenter stated that, compared to
the equity market, the large number of individual CUSIPs in the
corporate debt market has resulted in a meaningful subset of corporate
bonds without market makers, which in turn lowers the liquidity of
these bonds.\858\
---------------------------------------------------------------------------

    \854\ See A Financial System That Creates Economic
Opportunities: Capital Markets, U.S. Department of the Treasury,
October 2017, available at https://www.treasury.gov/press-center/press-releases/documents/a-financial-system-capital-markets-final-final.pdf (``Treasury Report'') at 85.
    \855\ See Bloomberg Letter at 9, citing Financial Times at
https://www.ft.com/content/3175772a-7ea0-3b61-ae53-063459e78c42.
Another commenter gave a similar number, estimating that only 17
percent of the more than 43,000 unique U.S. investment-grade bonds
traded on any given day in 2020. See MarketAxess Letter at 3.
    \856\ See Bloomberg Letter at 20, mentioning that the corporate
bond market is non-standard and highlighting the importance of
market-making, and MarketAxess Letter at 3, stating that liquidity
is lower for corporate bonds than for equities because, while there
are only a few thousand common stocks, there are hundreds of
thousands of CUSIPs for corporate and municipal bonds. See also ICI
Letter at 8, stating that corporate bond liquidity varies
dramatically across bonds due to their diverse nature, and that
liquidity shifts can be exacerbated during times of market stress.
    \857\ See https://fredblog.stlouisfed.org/2015/10/illiquidity-in-the-bond-market/.
    \858\ See MarketAxess Letter at 3.
---------------------------------------------------------------------------

    Corporate bondholders, who are mainly institutional investors such
as mutual funds, pension funds, insurance companies, and banks,\859\
have traditionally facilitated their trades through broker-dealers on a
principal basis.\860\ The past decade has seen an increasing shift
towards trading arrangements in which dealers quickly arrange
offsetting trades when intermediating between buyers and sellers so as
to avoid taking on significant inventory risk for extended periods of
time. A more recent trend has seen a rise in the direct participation
of institutional investors as corporate bond liquidity providers: In
April 2020, one corporate bond RFQ platform reported a record 900 firms
providing liquidity, including 700 asset managers.\861\
---------------------------------------------------------------------------

    \859\ One commenter stated that registered investment companies
(``funds'') held 21 percent of bonds issued by both U.S. corporate
issuers and foreign bonds held by U.S. residents as of year-end
2019. See ICI Letter at 1-2.
    \860\ See, e.g., https://www.marketwatch.com/story/u-s-corporate-debt-soars-to-record-10-5-trillion-11598921886.
(Retrieved from Factiva database); O'Hara, M., & Zhou, X.A. (2021).
Anatomy of a liquidity crisis: Corporate bonds in the COVID-19
crisis. Journal of Financial Economics.
    \861\ See McDowell, Hayley. (2020, April 30). ``MarketAxess
reveals record number of buy-side acted as liquidity providers in
COVID-19 crisis,'' THETRADE, available at https://www.thetradenews.com/marketaxess-reveals-record-buy-side-acted-liquidity-providers-covid-19-crisis/.
---------------------------------------------------------------------------

a. ATSs in the Market for Corporate Debt
    In September 2021, corporate bond trading on ATSs accounted for 7.7
percent of total TRACE-reported corporate bond trading volume in terms
of dollar volume.\862\ Currently, the Commission understands that there
are 12 ATSs with a Form ATS on file trading corporate bonds.\863\
Protocols in corporate bond ATSs include limit order books (LOBs),
displayed and non-displayed venues, and auctions, among others.
According to Table VIII.6, the most commonly reported protocol used for
trading corporate bonds via ATSs is an auction. Typically, auctions
operate by periodically crossing at prices that maximizes the amount of
buy and sell trading interest that can be executing at that price.
---------------------------------------------------------------------------

    \862\ See TRACE Monthly Volume Files, available at https://www.finra.org/finra-data/browse-catalog/trace-volume-reports/trace-monthly-volume-files. One commenter referenced similar numbers for
2020, stating that corporate bond trades (including both investment-
grade and high-yield bonds) on all ATSs represented 6.4 percent of
the trade volume and 18.7 percent of the trade count reported to
TRACE. See MarketAxess Letter at 1.
    \863\ In addition, a small percentage of corporate bonds are
exchange-traded on trading systems such as NYSE Bonds and the Nasdaq
Bond Exchange. See, e.g., https://www.nyse.com/markets/bonds and
https://www.nasdaq.com/solutions/nasdaq-bond-exchange. Trading
volume in exchange-traded bonds was reported to be around $19
billion as of January 2020. See Uhlfelder, Eric, (Jan. 2020), A
Forgotten Investment Worth Considering: Exchange-Traded Bonds, The
Wall Street Journal, available at https://www.wsj.com/articles/a-forgotten-investment-worth-considering-exchange-traded-bonds-11578279781. (Retrieved from Factiva database).
---------------------------------------------------------------------------

    Corporate bond ATSs are mostly used by dealers, who may be either
using them to trade on behalf of retail investors or to rebalance
excess inventories.\864\ A Division of Economic Risk and Analysis
(``DERA'') white paper on corporate bond ATSs finds that large dealers
(i.e., those in the highest quartile of trading volume and number of
bonds traded) are more likely to provide corporate bond quotes on ATSs
than smaller dealers.\865\
---------------------------------------------------------------------------

    \864\ See Kozora, M., Mizrach, B., Peppe, M., Shachar, O., &
Sokobin, J.S. (2020). Alternative Trading Systems in the Corporate
Bond Market. FRB of New York Staff Report, (938).
    \865\ See Craig, L., Kim, A., & Woo, S.W. (2020). Pre-trade
Information in the Corporate Bond Market. U.S. Securities and
Exchange Commission, Division of Economic and Risk Analysis White
Paper. White papers and analyses are prepared by SEC staff in the
course of rulemaking and other Commission initiatives. The U.S.
Securities and Exchange Commission disclaims responsibility for any
private publication or statement of any employee or Commissioner.
White papers express the authors' views and do not necessarily
reflect those of the Commission, the Commissioners, or other members
of the staff.
---------------------------------------------------------------------------

    Similar to Current Government Securities ATSs, an ATS that trades
in corporate debt securities must comply with the requirements of
Regulation ATS, including registering as a broker-dealer.\866\ Also,
similar to Current Government Securities ATSs, corporate bond ATSs are
not required to make public disclosures, and, as discussed above, this
lack of disclosure requirements might lead to information asymmetries
amongst different subscribers.\867\ Further, corporate bond ATSs with
significant volume \868\ are required to comply with the requirements
of the Fair Access Rule.\869\ Moreover, ATSs that trade in corporate
debt must also comply with Rule 301(b)(6) of Regulation ATS
(``Capacity, Integrity, and Security Rule'') if they meet certain
volume thresholds.\870\ The requirements of Rule 301(b)(6), while
similar, are less rigorous and less costly than the requirements of
Regulation SCI.
---------------------------------------------------------------------------

    \866\ See supra Section II.D.2. See also supra Section
VIII.B.2.a.ii for a discussion about the effects of these
regulations and the costs to comply.
    \867\ See supra Section VIII.B.2.b.ii for additional discussion
on the effects of a lack of public disclosure.
    \868\ An ATS trading in corporate debt securities is subject to
the Fair Access Rule if, during at least four of the preceding six
months, the ATS had five percent or more of the average daily volume
in corporate debt securities traded in the United States. See 17 CFR
242.301(b)(5)(i) and https://www.sec.gov/tm/faq-regulation-ats-fair-access-rule.
    \869\ See supra Section II.D.2. Also, see supra Section
VIII.B.2.b.ii describing the impact of the Fair Access Rule.
    \870\ See 17 CFR 242.301(b)(6) and supra note 157 and
corresponding text. Rule 301(b)(6) currently applies to an ATS that
trades only corporate debt securities with 20 percent or more of the
average daily volume traded in the United States during at least
four of the preceding six calendar months. One commenter stated
that, given current aggregate ATS volumes, it is unlikely that any
single ATS will approach 20 percent of overall corporate debt market
volume. See MarketAxess Letter at 10.
---------------------------------------------------------------------------

    All transactions in corporate bonds that include at least one FINRA
member are required to be reported to TRACE within 15 minutes of the
time of execution.\871\ Furthermore, trades on ATSs operated by FINRA
members may be required to be reported to TRACE, by either the ATS,
counterparties to the trade, or both, depending on whether the
counterparties are FINRA members and whether the ATS holds itself out
as a party to the trade.\872\ Academic studies have shown that TRACE
reporting requirements have reduced overall trading costs in corporate
bond markets,\873\ but may increase the cost of

trading through large dealers, who previously were able to offer lower
transaction costs due to their information advantages.\874\
---------------------------------------------------------------------------

    \871\ See FINRA Rule 6730(a)(1) requiring FINRA members to
report transactions in TRACE-Eligible Securities, which FINRA Rule
6710 defines to include corporate debt securities. For each
transaction in corporate debt securities, a FINRA member would be
required to report the CUSIP number or similar numeric identifier or
FINRA symbol; size (volume) of the transaction; price of the
transaction (or elements necessary to calculate price); symbol
indicating whether transaction is a buy or sell; date of trade
execution (``as/of'' trades only); contra-party's identifier;
capacity (principal or agent); time of execution; reporting side
executing broker as ``give-up'' (if any); contra side introducing
broker (in case of ``give-up'' trade); the commission (total dollar
amount), if applicable; date of settlement; if the member is
reporting a transaction that occurred on an ATS pursuant to FINRA
Rule 6732, the ATS's separate Market Participant Identifier
(``MPID''); and trade modifiers as required. See FINRA Rule 6730(c).
    \872\ See supra note 829 describing exemptions for ATS
transaction reporting to TRACE.
    \873\ See, e.g., Edwards, A.K., Harris, L.E., & Piwowar, M.S.
(2007). Corporate bond market transaction costs and transparency.
The Journal of Finance, 62(3), 1421-1451.
    \874\ See Bessembinder, H., Maxwell, W., & Venkataraman, K.
(2006). Market transparency, liquidity externalities, and
institutional trading costs in corporate bonds. Journal of Financial
Economics, 82(2), 251-288.
---------------------------------------------------------------------------

b. Communication Protocol Systems in the Market for Corporate Debt
    Communication Protocol Systems play a significant role in the
market for corporate debt. Table VIII.6, which breaks down corporate
bond dollar volumes according to different trading protocols, shows
that corporate bond trading on Communication Protocol Systems
(including anonymous and disclosed RFQs, portfolio trading, and stream
axes), accounted for 23.1 percent of total corporate bond trading
volume during the first half of 2021. Currently, the Commission
estimates that there are 8 Communication Protocol Systems trading
corporate bonds that may meet the definition of exchange under the
proposed changes to Exchange Act Rule 3b-16.
    One commenter stated that protocols such as electronic RFQs in the
fixed income market evolved from single dealer order routing and the
use of the ``three quote rule,'' in which institutional investors would
seek three quotes from three dealers in order to assist them in getting
the best prices. According to the commenter, in more liquid securities,
electronification has allowed traders to better organize pre-trade
data, allowing for new Communication Protocol Systems that enable
functionalities such as RFQ Lists and other multiple-security trade
messaging inquiries.\875\
---------------------------------------------------------------------------

    \875\ See Bloomberg Letter at 12.
---------------------------------------------------------------------------

    ``Portfolio trading'' is a multi-security protocol that may be
particularly useful for corporate bond market participants. This
protocol is similar to RFQ Lists as defined in Section II.B.2 and
discussed in Section VIII.B.1.b; however, while RFQ Lists permit users
to respond with quotes for only some of the securities listed,
securities that are listed in a portfolio trading protocol are executed
for the entire portfolio at a single price with a single
counterparty.\876\ One industry report estimates that two to five
percent of TRACE trading volume in investment-grade bonds is executed
via portfolio trading protocols.\877\ Furthermore, one report estimates
that portfolio trading volume increased by 159 percent between 2019 and
2021.\878\ The ``all-or-none'' nature of portfolio trading can be
especially beneficial for corporate bond market participants who wish
to trade baskets of securities that include some difficult-to-trade
bonds. Specifically, market participants may be able to receive better
prices for more illiquid bonds, which may or may not be balanced out by
receiving worse prices on more liquid bonds.\879\ Additionally,
portfolio trading also tends to be faster than list trading, as there
is less of a need to look at each individual security. However, these
trades tend to be complex and may be more difficult to automate, as
they often require extensive negotiations.\880\
---------------------------------------------------------------------------

    \876\ See Husveth, Ted (2021) ``Electronic Portfolio Trading
Rewrites the Corporate Bond Liquidity Playbook,'' Tradeweb,
available at https://www.tradeweb.com/newsroom/media-center/insights/blog/electronic-portfolio-trading-rewrites-the-corporate-bond-liquidity-playbook/.
    \877\ See McPartland, Kevin (2020), ``All Electronic Trading is
Not Created Equal,'' Greenwich Associates, available at https://www.greenwich.com/fixed-income/all-electronic-trading-not-created-equal.
    \878\ See McPartland, Kevin (2021), ``Making the Case for
Portfolio Trading,'' Greenwich Associates, available at https://www.greenwich.com/fixed-income/making-case-portfolio-trading.
    \879\ One commenter stated that submitting multiple securities
as a portfolio of liquid and less-liquid securities enables a
liquidity provider to potentially offer better prices than trading
each security individually. See Bloomberg Letter at 13.
    \880\ See McPartland, Kevin (2020), ``All Electronic Trading is
Not Created Equal,'' Greenwich Associates, available at https://www.greenwich.com/fixed-income/all-electronic-trading-not-created-equal; and Husveth, Ted (2021) ``Electronic Portfolio Trading
Rewrites the Corporate Bond Liquidity Playbook,'' Tradeweb,
available at https://www.tradeweb.com/newsroom/media-center/insights/blog/electronic-portfolio-trading-rewrites-the-corporate-bond-liquidity-playbook/.
---------------------------------------------------------------------------

    While not necessarily its own protocol, one functionality that is
increasingly being added to corporate bond Communication Protocol
Systems involves so-called ``net spotting.'' Spotting is the practice
of hedging corporate bond transactions through offsetting government
security transactions, which is useful for participants as corporate
bonds--investment-grade bonds in particular--are typically traded ``on
spread,'' i.e., quoted relative to a benchmark government bond yield.
This practice has led to interlinkages between the corporate bond and
government securities markets.\881\ However, the Commission understands
that manual spotting can suffer from inefficiencies resulting from time
delays in completing trades in the two markets.
---------------------------------------------------------------------------

    \881\ See Bloomberg Letter at 8, referencing the Joint Staff
Report on the U.S. Treasury Market on October 15, 2014, available at
https://www.treasury.gov/press-center/pressreleases/Documents/Joint_Staff_Report_Treasury_10-15-2014.pdf, stating that markets,
including the U.S. Treasury market, are connected through
``automated trading strategies that involve a nearly instantaneous
response to common trading signals or that seek to arbitrage short-
lived opportunities across related interest-rate products.''
---------------------------------------------------------------------------

    ``Net spotting,'' which incorporates automated spotting
functionalities into corporate bond Communication Protocol Systems, may
reduce these inefficiencies. This practice calculates a net interest
rate exposure resulting from a spot trade, producing a net position
that can be traded as a single transaction.\882\ Net spotting may help
to reduce transaction costs of spot trades. A growth in the popularity
of this practice is also likely to increase interlinkages between
trading protocols in the corporate bond and government securities
markets. One trading system operator estimates that, only six months
after adding net spotting functionality to its trading system, almost
10 percent of the corporate bond trading volume on its trading system
was using this functionality.\883\
---------------------------------------------------------------------------

    \882\ See ``Net Spotting: Reducing Trading Costs for U.S.
Corporate Bonds,'' (2021), Tradeweb, available at https://www.tradeweb.com/newsroom/media-center/insights/commentary/net-spotting-reducing-trading-costs-for-u.s.-corporate-bonds/.
    \883\ See id.
---------------------------------------------------------------------------

    In recent years, driven in part by an increase in the popularity of
corporate bond exchange-traded funds (ETFs), there is some evidence
that PTFs have begun to enter the corporate bond market.\884\ One
factor that may correlate with the entry of these firms is the ability
to use portfolio trading protocols to more efficiently trade in the
bonds underlying corporate bond ETFs.\885\ Therefore, unlike in the
market for government securities, in which PTFs prefer to trade on
Government Securities ATSs, PTFs may have a more active presence on
corporate bond Communication Protocol Systems than on corporate bond
ATSs.\886\
---------------------------------------------------------------------------

    \884\ See https://www.greenwich.com/blog/what%E2%80%99s-next-high-frequency-traders, which mentions that one PTF has begun to
trade using corporate bond RFQs.
    \885\ See, e.g., Rennison, Joe, Armstrong, Robert, and
Wigglesworth, Robin, January 22, 2020, ``The new kings of the bond
market,'' Financial Times, available at https://www.ft.com/content/9d6e520e-3ba8-11ea-b232-000f4477fbca.
    \886\ See supra Section VIII.B.2.b for a discussion of PTFs'
role in government securities ATSs.
---------------------------------------------------------------------------

    Corporate bond Communication Protocol Systems do not meet the
current definition of an exchange and thus are not subject to exchange
registration or the requirements of Regulation ATS, such as
requirements for robust systems.\887\ The Commission

estimates that there are currently 2 Communication Protocol Systems
with sufficient corporate bond trading volume such that they would
otherwise be over the threshold for the Capacity, Integrity, and
Security Rule 301(b)(6).\888\ Several commenters stated that the
resiliency of the fixed income market during the COVID crisis showed
that the current structure of the fixed income market, and of the
electronic trading market in particular, is already resilient and
robust.\889\
---------------------------------------------------------------------------

    \887\ See supra Section VIII.B.2.b for discussion of the effects
of not being subject to such regulations. One commenter stated that,
given the lack of a central clearing party for corporate and
municipal bond trades, each participant has the discretion over
which other participants they wish to extend credit to and trade;
therefore, fair access to a corporate bond Communication Protocol
System may not have the same meaning given to it in the equity ATS
context as the system does not have the ability to ensure that all
participant have the same access to liquidity. See MarketAxess
Letter at 10. Another commenter stated that Communication Protocol
Systems such as RFQs do not pose the same technological risks as,
e.g., fully automated central limit order books (CLOBs) because
trading is slower, there are fewer algorithms that may malfunction,
and, if RFQ systems are unavailable, parties can continue to
negotiate and execute transactions bilaterally away from the trading
system. See Tradeweb Letter at 6.
    \888\ See supra notes 157 and 870. One commenter stated that,
other than Rule 301(b)(6)(ii)(F) and (G), it expects that nearly all
existing platforms already meet or are trying to meet the
requirements of Rule 301(b)(6). See MarketAxess Letter at 11.
Another commenter that runs a fixed-income Communication Protocol
System stated that it invested in proper contingency planning,
disaster recovery, robustness, and resiliency to ensure there is no
disruption in service. See FlexTrade Systems Letter at 3.
    \889\ See, e.g., Bloomberg Letter at 18 and 23 and MarketAxess
Letter at 12.
---------------------------------------------------------------------------

    The Commission estimates that 6 Communication Protocol Systems for
corporate bonds are not currently operated by registered broker-
dealers. These systems do not currently incur the costs of registering
with the Commission as well as the costs of SRO membership, and are not
subject to FINRA operational regulatory reporting requirements.\890\
---------------------------------------------------------------------------

    \890\ One commenter stated that, even if Communication Protocol
System providers do not meet the standard of brokerage activity,
since registered broker-dealers are using these trading systems,
they are supervised under FINRA standards for brokers relying on
outsourced technology. The commenter states that these systems are
also monitored by broker-dealer, who are incentivized to do so. See
Bloomberg Letter at 30-31.
---------------------------------------------------------------------------

    A corporate bond transaction on a Communication Protocol System is
reported to TRACE if at least one party to the transaction is a FINRA
member, and/or if the Communication Protocol System itself is a member
of FINRA.\891\ Depending on how much of a role the Communication
Protocol System takes in facilitating the transaction (e.g., acting as
a counterparty to each side of the trade), and whether the
Communication Protocol System operator and/or parties to the
transaction are FINRA members, transactions taking place through the
Communication Protocol System may not be reported to TRACE at all.\892\
---------------------------------------------------------------------------

    \891\ One commenter pointed out that FINRA has recently proposed
changes to TRACE reporting of portfolio trades. See Bloomberg Letter
at 14, citing FINRA request for comment, Regulatory Notice 20-24,
September 15, 2020, available at https://www.finra.org/sites/default/files/2020-07/Regulatory-Notice-20-24.pdf.
    \892\ See FINRA Rule 6730(a)(1) requiring FINRA members to
report transactions in TRACE-Eligible Securities. See also supra
note 228 and https://www.finra.org/rules-guidance/notices/14-53.
---------------------------------------------------------------------------

c. Other Methods of Trading in the Market for Corporate Debt Securities
    While the electronic trading of corporate bonds through ATSs and
Communication Protocol Systems has grown over time,\893\ traditionally
corporate bonds trading has taken place bilaterally through either
dealer-to-dealer or dealer-to-customer negotiations, often using
telephone calls. There is evidence that such manual transactions
methods remain an important part of the corporate bond market: Table
VIII.6 shows that 71.4 percent of trading in corporate bonds was
facilitated via bilateral voice trading during the first half of 2021.
---------------------------------------------------------------------------

    \893\ One commenter stated that approximately 32 percent of
investment-grade and 23 percent of high-yield corporate bond daily
dollar volumes are executed electronically. See BDA Letter at 1.
---------------------------------------------------------------------------

    Transactions in corporate bonds that do not take place on
electronic platforms will be reported to TRACE if at least one party to
the trade is a member of FINRA.\894\
---------------------------------------------------------------------------

    \894\ See FINRA Rule 6730(a)(1) requiring FINRA members to
report transactions in TRACE-Eligible Securities. See also supra
note 228 and https://www.finra.org/rules-guidance/notices/14-53 and
https://www.finra.org/filing-reporting/market-transparency-reporting/trace/faq/reporting-corporate-and-agencies-debt.
---------------------------------------------------------------------------

d. Competition for Corporate Debt Securities Trading Services
    The trading of corporate debt securities takes place through a
variety of different methods, including ATSs, Communication Protocol
Systems, and informal bilateral trading methods such as voice trading.
These different methods compete with each other for customers, and may
appeal to different segments of the corporate market depending on that
segment's preferences and trading needs. Trading systems within the ATS
and Communication Protocol System spaces also compete with one another
on the basis of fees, trading features, and their ability to attract
liquidity.
    One commenter stated that the choice of trading method is driven
largely by liquidity considerations, with less liquid securities
trading via manual protocols such as voice trading, more liquid
securities using protocols such as RFQs, and the most liquid securities
trading electronically on ATSs using protocols such as LOBs and call
auctions.\895\ Other commenters stated that the majority of corporate
bonds are not liquid enough to support order book trading,\896\ which
may be one reason why there is not much corporate bond trading volume
in ATSs as compared to Communication Protocol Systems, and why there is
less ATS trading in corporate bonds as compared to other securities,
such as government securities. As discussed in Section VIII.B.1,
customers who want to trade electronically but are concerned about
information leakage may be more likely to use Communication Protocol
Systems, particularly RFQs, as opposed to ATSs. One study finds that
corporate bond ATSs may be most utilized for smaller transactions in
investment-grade bonds, which are less vulnerable to information
asymmetry, and transaction in bonds that have (all else being equal)
experienced a recent decrease in secondary market trading volume, for
which search costs may be high.\897\
---------------------------------------------------------------------------

    \895\ See Bloomberg Letter, Figure 2. See also Bloomberg Letter
at 14. See also MarketAxess Letter at 2, stating that institutional
investors in credit markets prefer RFQs because they have found that
liquidity on demand results in the best pricing for illiquid
securities.
    \896\ See, e.g., ICI Letter at 6 and MarketAxess Letter at 3.
    \897\ See Kozora, M., Mizrach, B., Peppe, M., Shachar, O., &
Sokobin, J.S. (2020). Alternative Trading Systems in the Corporate
Bond Market. FRB of New York Staff Report, (938).
---------------------------------------------------------------------------

    As shown in Table VIII.6, the majority (65.4 percent) of non-voice
trading in corporate bonds is conducted on RFQs. About one fourth of
RFQ volume is anonymous, and, while the majority of corporate bond
trading volume on RFQs is disclosed, even participants on disclosed
RFQs often have greater flexibility over the extent to which they
reveal their trading interest, for example by limiting how many
entities can view their trading interest or by refraining from
responding to a quote request.\898\ RFQs may also help facilitate a
wider variety of functionalities that market bond participants find
particularly useful, such as portfolio trading and net spotting.
Automated executions and limited negotiation possibilities may make
these functionalities more difficult to implement on many ATSs.
---------------------------------------------------------------------------

    \898\ See Section VIII.B.1 for a discussion on the difference
between disclosed and anonymous RFQs.

                                   Table VIII.6--Corporate Debt Securities and Dollar Volume Share by Trading Protocol
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                            Limit order    Non-displayed     Portfolio      Stream axes
              Anonymous RFQ                Disclosed RFQ      Auction          book          venue \a\        trading           \b\            Voice
--------------------------------------------------------------------------------------------------------------------------------------------------------
4.8.....................................            13.9             3.0             2.4             0.1             2.2             2.2            71.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
This table reports volume share by trading protocol type in the market for corporate debt securities. Market Share (%) is the measure of the dollar
 volume as a percent of total par dollar volume. Data is based on Coalition Greenwich's Greenwich MarketView data from April 2021 through September
 2021. Voice market share is calculated as a remainder of total market volume after accounting for electronic protocols volume reported to Coalition
 Greenwich.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Non-displayed venues are referred to as ``dark pools'' in the Coalition Greenwich's Greenwich MarketView data.
\b\ Coalition Greenwich's Greenwich MarketView refers to this data value as ``Stream/Click-to-Engage.''

    Customers may prefer other methods such as bilateral voice trading
because they wish to transact in less liquid bonds that may require
more intermediation to find a counterparty, despite the possibility
that the lack of price competition may lead to higher trading costs.
One academic study shows that the movement of corporate bond trading
volume from voice trading to an RFQ-type protocol system mainly reduced
transaction costs for the most liquid securities.\899\ However, one
commenter referenced that the electronification of manual trading
methods, while improving operational efficiencies, does not
fundamentally change liquidity in the corporate bond market as the same
intermediaries and interactions between dealers and customers are still
involved.\900\
---------------------------------------------------------------------------

    \899\ See Hendershott, T., & Madhavan, A. (2015). Click or call?
Auction versus search in the over-the[hyphen]counter market. The
Journal of Finance, 70(1), 419-447.
    \900\ See Bloomberg Letter at 9 and10, citing Treasury Report.
---------------------------------------------------------------------------

    Similarly to the market for government securities, the Commission
preliminarily believes that the differences in regulatory regime
between ATSs and other trading methods, including Communication
Protocol Systems such as RFQs and others, can lead to an uneven
competitive landscape and adversely impact the potential for robust
competition in the market for corporate debt securities.\901\
Specifically, the lack of public disclosure about the operations and
potential conflicts of interest of Communication Protocol Systems
trading in corporate bonds might hinder competition among these trading
systems and between Communication Protocol Systems and ATSs in the
market for corporate bond trading services.
---------------------------------------------------------------------------

    \901\ See supra Section VIII.B.2.d.
---------------------------------------------------------------------------

    The fact that ATSs are subject to numerous regulatory requirements
that Communication Protocol Systems, which may perform a similar market
place function, are not subject to may place ATSs at competitive
disadvantage compared to Communication Protocol Systems as a result of
the associated compliance costs and potentially higher barriers to
entry. Furthermore, one commenter stated that the different regulatory
treatment of fixed income trading platforms, with some platforms
regulated as ATSs, some regulated as broker-dealers, and others not
regulated at all, leaves room for regulatory arbitrage.\902\
---------------------------------------------------------------------------

    \902\ See Tradeweb Letter at 6.
---------------------------------------------------------------------------

4. Current State of the Municipal Securities Market
    The market for municipal securities (``municipal bonds'')
represents another important part of the fixed income market. Daily
trading volumes in the municipal bond market averaged around $12.4
billion during the 2020 calendar year.\903\ Average trade sizes in this
market tend to be smaller than in other fixed income markets: In
September 2021, 81 percent of trades were for $100,000 or less,
reflecting the higher presence of retail investors in this market.\904\
---------------------------------------------------------------------------

    \903\ See Municipal Securities Rulemaking Board, Muni Facts,
available at https://www.msrb.org/News-and-Events/Muni-Facts.
    \904\ See Municipal Securities Rulemaking Board, Municipal Trade
Statistics, available at https://emma.msrb.org/MunicipalTradeStatistics/ByTradeCharacteristic.aspx.
---------------------------------------------------------------------------

    The relatively large role of retail investors in the market for
municipal bonds represents one important way in which this market
differs from the markets for government securities and corporate bonds.
Unlike in the markets for other fixed income securities, which are
mostly owned by institutional investors, retail investors play a
prominent role in the ownership of municipal bonds, with 45.2 percent
of municipal bonds held by households and nonprofits as of 2020.\905\
This is largely due to the tax-exempt status of most municipal bonds,
which makes them attractive to households but less attractive to
institutional investors such as pension funds, whose holdings are
already tax-deferred or tax exempt. Municipal bond markets also tend to
be highly localized, as investors that are located in geographic
proximity to an issuer are more likely to be informed about that
issuer, and tax benefits are often conferred on investors that are
located in the same state as the issuer.\906\
---------------------------------------------------------------------------

    \905\ See ``Trends in Municipal Bond Ownership'' (2021),
Municipal Securities Rulemaking Board, available at https://www.msrb.org/Market-Topics/Other-Market-Topics. Note that this
source groups together households and nonprofit organizations. One
commenter pointed out the role of registered investment companies
(``funds'') in this market, stating that funds held 29 percent of
municipal bonds outstanding as of year-end 2019. See ICI Letter at
1-2.
    \906\ See Schultz, P. (2012). The market for new issues of
municipal bonds: The roles of transparency and limited access to
retail investors. Journal of Financial Economics, 106(3), 492-512.
---------------------------------------------------------------------------

    Households tend to be buy-and-hold investors, which may contribute
to overall low liquidity levels in the secondary market for municipal
bonds. In 2018, less than one percent of outstanding municipal bonds
traded on a typical day, and, as in the corporate bond market,
liquidity is mostly concentrated in newly-issued bonds.\907\
Furthermore, there is evidence that trading in municipal bonds has
declined in recent years, as secondary market trading volume declined
by about 19 percent between 2019 and 2021.\908\
---------------------------------------------------------------------------

    \907\ See Bessembinder, H., Spatt, C., & Venkataraman, K.
(2020). A survey of the microstructure of fixed-income markets.
Journal of Financial and Quantitative Analysis, 55(1), 1-45.
    \908\ See ``2021 Municipal Market Trading Update,'' (2021),
Municipal Securities Rulemaking Board, available at https://www.msrb.org/Market-Topics/Reports.
---------------------------------------------------------------------------

    The market for municipal bonds is highly heterogeneous, and perhaps
even more fragmented than the market for corporate bonds. In addition
to a wide diversity of bond characteristics, including maturity, tax
status, and coupon type, there are more than 50,000 different issuers
in the municipal bond market, including state and local governments,
towns, cities, and counties, who as of 2020 have issued

around one million unique bonds valuing $3.9 trillion.\909\
---------------------------------------------------------------------------

    \909\ See Municipal Securities Rulemaking Board, Muni Facts,
available at https://www.msrb.org/News-and-Events/Muni-Facts. This
is compared to the corporate bond market, in which there are around
43,000 unique securities with a total market size around $10.6
trillion. See also SIFMA letter at 9 (stating that there are 50,000
issuers of municipal securities and one million unique municipal
bonds, compared to 30,000 unique corporate bonds).
---------------------------------------------------------------------------

    The market for municipal bonds is largely an OTC market, in which
investors place orders with dealers who execute these orders by either
committing their own capital (via principal trades) or by searching the
market for counterparties (via riskless principal trades or agency
trades).\910\ Academic research of regulatory data has shown that the
interdealer market in municipal bonds has a decentralized network
structure composed of between 10 to 30 central dealers and more than
2,000 periphery dealers.\911\ Further research shows that the highly
geographically localized nature of this market can limit competition
between dealers.\912\
---------------------------------------------------------------------------

    \910\ See ``Analysis of Municipal Securities Pre-Trade Data from
Alternative Trading Systems'' (2018), Municipal Securities
Rulemaking Board, available at https://www.sec.gov/spotlight/fixed-income-advisory-committee/msrb-staff-analysis-of-municipal-securities-pre-trade-data.pdf.
    \911\ See Li, D., & Sch[uuml]rhoff, N. (2019). Dealer networks.
The Journal of Finance, 74(1), 91-144.
    \912\ See Schultz, P. (2013). State taxes, limits to arbitrage
and differences in municipal bond yields across states. Unpublished
working paper. University of Notre Dame.
---------------------------------------------------------------------------

a. ATSs in the Market for Municipal Securities
    ATSs play an increasingly important role in the municipal bond
market. Between August 2016 and April 2021, an estimated 56.4 percent
of municipal bond interdealer trades (26 percent in terms of dollar
volume) were conducted via ATSs.\913\ One commenter stated that, in
2020, more than 1.7 million trades were reported to the MSRB as being
executed on an ATS, 1.55 million of which were for $100,000 or less,
showing that ATSs are of particular significance for individual
investors.\914\ The Commission understands that there are currently 6
reporting ATSs trading in municipal securities. One commenter stated
that tremendous consolidation in the municipal securities ATS market
has occurred over time, such that there are only a few remaining ATSs
with significant trading in municipal bonds.\915\
---------------------------------------------------------------------------

    \913\ See ``Characteristics of Municipal Securities Trading on
Alternative Trading Systems and Broker's Broker Platforms'' (2021),
Municipal Securities Rulemaking Board, available at https://www.msrb.org/Market-Topics/Reports. See also Letter from Edward J.
Sisk, Chair, Municipal Securities Rulemaking Board, dated March 1,
2021 (``MSRB Letter''), stating that MSRB trade data shows that ATSs
were involved in 21 percent of all trades and 55 percent of all
inter-dealer trades in the municipal bond market.
    \914\ The commenter also stated that the median size of trades
reported as occurring on an ATS was $25,000 and that, for trades of
$100,000 or less, ATSs accounted for 24 percent of all trades and 59
percent of all inter-dealer trades. See MSRB Letter at 2-3.
    \915\ See SIFMA letter at 11.
---------------------------------------------------------------------------

    As mentioned in the introduction to Section VIII.B.4 above,
municipal bond owners are typically retail investors. Retail investors
are unlikely to subscribe directly to ATSs, and so almost all trades
executed on ATSs are from dealer quotes.\916\ A DERA white paper found
that, during a three-month period in 2014, 62 percent of trades on ATSs
were between dealers and customers, including both retail and
institutional investors, while the remainder were interdealer
trades.\917\ The white paper also found that large broker-dealers are
more likely to post quotes on ATSs than small broker-dealers.\918\
---------------------------------------------------------------------------

    \916\ See ``Characteristics of Municipal Securities Trading on
Alternative Trading Systems and Broker's Broker Platforms'' (2021),
Municipal Securities Rulemaking Board, available at https://www.msrb.org/Market-Topics/Reports.
    \917\ See Craig, L., Kim, A., & Woo, S.W. (2018). Pre-Trade
Information in the Municipal Bond Market. DERA White Paper,
available at https://www.sec.gov/files/DERA_WP_Pre-trade_Information_in_the_Municipal_Bond_Market.pdf.
    \918\ See id.
---------------------------------------------------------------------------

    In terms of available protocols, municipal bond ATSs offer LOB-
based protocols, but many also offer protocols similar to RFQs. For the
latter, quote information is only available to a limited subset of ATS
participants. This shortage of public pre-trade information may make it
more difficult for retail investors in this market, who may not have
access to quote information, to ensure that they are getting the best
prices; in fact, the DERA white paper found that smaller retail-sized
municipal bond trades tend to receive worse prices than large
trades.\919\
---------------------------------------------------------------------------

    \919\ See id. The paper defines institutional-size trades as
trades greater than $100,000, and retail-size trades as trades less
than $100,000, citing Harris and Piwowar (2006), who use trade size
of $100,000 to distinguish retail- and institutional-size customer
trades. See Harris, L.E., & Piwowar, M.S. (2006). Secondary trading
costs in the municipal bond market. The Journal of Finance, 61(3),
1361-1397.
---------------------------------------------------------------------------

    80 percent of all quoted municipal bonds have only a single quote
offered by a single broker at any given point in time, which
corresponds to the heterogeneous nature of this market.\920\ Another
reason why municipal bonds tend to be thinly quoted may be the
difficulty in shorting municipal bonds, as Internal Revenue Service
(IRS) rules regulating the shorting of tax-exempt securities and
difficulties in locating securities to borrow makes shorting in this
market costly.\921\ A dealer likely will not quote in a bond unless it
already owns that bond.
---------------------------------------------------------------------------

    \920\ See ``Characteristics of Municipal Securities Trading on
Alternative Trading Systems and Broker's Broker Platforms'' (2021),
Municipal Securities Rulemaking Board, available at https://www.msrb.org/Market-Topics/Reports.
    \921\ See ``Municipal Securities Pre-Trade Market Activity: What
Has Changed Since 2015?'' (2020), Municipal Securities Rulemaking
Board, available at https://www.msrb.org/Market-Topics/~/
link.aspx?_id=9089AC4BA1F144B388D090177FADCDD6&_z=z.
---------------------------------------------------------------------------

    ATSs that trade in municipal bonds face many of the same regulatory
requirements as those that trade in corporate bonds, including
complying with Regulation ATS.\922\ This includes requirements that
ATSs with significant volume in municipal securities markets must
comply with the Fair Access Rule \923\ and with Rule 301(b)(6) of
Regulation ATS (``Capacity, Integrity, and Security Rule'').\924\
---------------------------------------------------------------------------

    \922\ See supra note 866 and Section VIII.B.2.a.ii for a
discussion of the impact of some of the elements of Regulation ATS.
    \923\ An ATS trading in municipal debt securities is subject to
the Fair Access Rule if, during at least four of the preceding six
months, the ATS had five percent or more of the average daily volume
in municipal debt securities traded in the United States. See 17 CFR
242.301(b)(5)(i) and https://www.sec.gov/tm/faq-regulation-ats-fair-access-rule. See supra Section VIII.B.2.a.ii for a discussion of the
impact of the Fair Access Rule.
    \924\ See 17 CFR 242.301(b)(6) and supra note 157 and
corresponding text. Rule 301(b)(6) currently applies to an ATS that
trades only municipal debt securities with 20 percent or more of the
average daily volume traded in the United States during at least
four of the preceding six calendar months. See supra Section
VIII.B.3.a for a discussion of the current impact of being subjected
to Rule 301(b)(6).
---------------------------------------------------------------------------

    Broker-dealers operating in the municipal bond market must be
registered with the Municipal Securities Rulemaking Board (MSRB), which
creates rules governing their conduct and transparency.\925\ Since
2005, all MSRB-registered dealers must report municipal bond trades
within 15 minutes of the time of execution to the MSRB's Real-Time
Transaction Reporting System (RTRS).\926\ Since

2016, dealer-reported trades to the MSRB have been required to include
an indicator to identify trades that have been executed on an ATS.\927\
Trades that take place on an ATS are required to be reported both by
the member dealers that transact with the ATS, as well as by the ATS if
that ATS has taken a principal position between the buyer and seller.
If the ATS only facilitates the connection between the buyer and seller
but does not take a principal or agency position, it has no reporting
requirement under MSRB rules.\928\
---------------------------------------------------------------------------

    \925\ The MSRB is an SRO that is overseen by the SEC. See
Municipal Securities Rulemaking Board, The Role and Jurisdiction of
the MSRB, available at https://www.msrb.org/About-MSRB/About-the-MSRB.
    \926\ See MSRB Rule G-14 requiring brokers, dealers and
municipal securities dealers (``dealers'') to report transactions in
municipal securities. The following transactions in municipal debt
securities are exempt from reporting requirements: Transactions in
securities without assigned CUSIP numbers; transactions in Municipal
Fund Securities; and inter-dealer transactions for principal
movement of securities between dealers that are not inter-dealer
transactions eligible for comparison in a clearing agency registered
with the Commission. Dealers are exempt from reporting if they do
not affect any transactions in municipal securities or if they only
deal in exempt transactions.
    \927\ See MSRB Letter at 3. One commenter stated that a
difference between ATS trade reporting requirements between FINRA
and MSRB is that, while the MSRB, like FINRA, requires an ATS flag
for reports to their Real-time Trade Reporting System, this only
applies to interdealer trades conducted on ATSs, not trades with
customers. See BDA Letter at 3.
    \928\ See Regulatory Notice 2015-07, Municipal Securities
Rulemaking Board, May 26, 2015, available at https://www.msrb.org/Rules-and-Interpretations/Regulatory-Notices?type=All&filter=2015.
---------------------------------------------------------------------------

b. Communication Protocol Systems in the Market for Municipal
Securities
    At least 43.6 percent of interdealer trades (74.1 percent in terms
of dollar volume) in the municipal bond market take place via trading
methods that are not ATSs, including 38.3 percent direct dealer-to-
dealer and 5.3 percent on broker's broker platforms.\929\ At least some
of these transaction are likely to take place via Communication
Protocol Systems. The Commission estimates that there are currently 3
Communication Protocol Systems operating in the municipal debt market
that may meet the definition of exchange under the proposed changes to
Exchange Act Rule 3b-16.
---------------------------------------------------------------------------

    \929\ See id.
---------------------------------------------------------------------------

    Of particular interest in this context are broker's broker
platforms. A broker's broker is defined by the MSRB as a dealer that
principally effects transactions for other dealers or that holds itself
out as a broker's broker.\930\ The broker's broker does not participate
in the decision to buy or sell and does not exercise discretion as to
the price at which a transaction is executed or determine the timing of
a trade.\931\ While broker's brokers traditionally conducted their
activities via bilateral means such as voice trading, they have
increasingly made use of electronic systems.\932\ Most electronic
broker's broker platforms use only quote solicitation protocols and do
not post quotes; those that do post quotes typically are registered as
an ATS with the SEC.\933\ However, only about 1.6 percent of all inter-
dealer trades take place on broker's broker platforms that are
registered as ATSs.
---------------------------------------------------------------------------

    \930\ See Municipal Securities Rulemaking Board, MSRB Rule G-43.
    \931\ See SIFMA, ``The Role of Municipal Securities Broker's
Brokers in the Municipal Markets,'' 2017.
    \932\ See ``Characteristics of Municipal Securities Trading on
Alternative Trading Systems and Broker's Broker Platforms'' (2021),
Municipal Securities Rulemaking Board, available at https://www.msrb.org/Market-Topics/Reports.
    \933\ See ``Characteristics of Municipal Securities Trading on
Alternative Trading Systems and Broker's Broker Platforms'' (2021),
Municipal Securities Rulemaking Board, available at https://www.msrb.org/Market-Topics/Reports.
---------------------------------------------------------------------------

    The Commission estimates that 1 Communication Protocol System
trading in municipal bonds is not currently operated by a registered
broker-dealer. This system is not subject to exchange registration or
the requirements of Regulation ATS, and is not subject to FINRA
operational regulatory reporting requirements.\934\
---------------------------------------------------------------------------

    \934\ In this respect they are similar to Communication Protocol
Systems in the market for corporate debt. See supra Sections
VIII.B.3.b and VIII.B.3.d for a discussion of the impact of not
being subject to these regulations.
---------------------------------------------------------------------------

    If the Communication Protocol System only facilitates the
connection between the buyer and seller but does not take a principal
or agency position to the transaction, the Communication Protocol
System may not currently be required to report post-trade data under
MSRB rules.\935\ However, trades that take place on a Communication
Protocol System will currently be reported to MSRB's RTRS if at least
one party to the transaction is a municipal bond dealer.
---------------------------------------------------------------------------

    \935\ See Regulatory Notice 2015-07, Municipal Securities
Rulemaking Board, May 26, 2015, available at https://www.msrb.org/Rules-and-Interpretations/Regulatory-Notices?type=All&filter=2015.
---------------------------------------------------------------------------

c. Other Methods of Trading in the Market for Municipal Securities
    Similar to other fixed income markets, the market for municipal
securities has traditionally relied on bilateral voice trading.\936\ As
mentioned above in the introduction to Section VIII.B.4, due to the
particularly fragmented and localized nature of the municipal bond
market, competition between individual dealers may be limited.\937\
Therefore, it is likely that the lack of pre-trade price transparency
in a market traditionally dominated by bilateral voice trading has been
particularly costly for municipal bond customers, who lack both price
information and bargaining power when negotiating prices with their
dealers over the phone. In fact, transaction costs in the municipal
bond market have typically been large compared to other markets, and
academic studies have indeed attributed these large transaction costs
to a lack of price transparency and subsequent information asymmetry
between dealers and customers.\938\ One MSRB report found that
technological advancements in this market and the movement away from
voice trading and towards electronic trading have helped reduce
transaction costs for dealer-customer trades by 51 percent between 2005
and 2018.\939\
---------------------------------------------------------------------------

    \936\ One commenter estimated only 15 percent of daily dollar
trading volume in municipal bonds is executed electronically. See
BDA Letter at 1.
    \937\ See Schultz, P. (2012). The market for new issues of
municipal bonds: The roles of transparency and limited access to
retail investors. Journal of Financial Economics, 106(3), 492-512.
    \938\ See Harris, L.E., & Piwowar, M.S. (2006). Secondary
trading costs in the municipal bond market. The Journal of Finance,
61(3), 1361-1397.
    \939\ See ``Transaction Costs for Customer Trades in the
Municipal Bond Market: What is Driving the Decline?'' (2018),
Municipal Securities Rulemaking Board, available at https://
www.msrb.org/Market-Topics/~/
link.aspx?_id=9089AC4BA1F144B388D090177FADCDD6&_z=z.
---------------------------------------------------------------------------

    Transactions that take place via bilateral negotiations will only
be reported to MSRB's RTRS if at least one party to the transaction is
a MSRB-member dealer.
d. Competition for Municipal Securities Trading Services
    The trading of municipal debt securities takes place through a
variety of different methods, including electronic protocols through
ATSs and Communication Protocol Systems, as well as more traditional
methods such as telephone calls. These various methods compete with one
another in attracting order flow.
    Due to the buy-and-hold nature of municipal bond trading, usually
brokers' main task is to locate investors that are willing to buy new
issues.\940\ ATSs may help to reduce search costs. Indeed, one study
finds that dealers are more likely access ATS systems for trades that
are more difficult to price and that face substantial search costs,
such as smaller-sized trades and trades involving municipal bonds with
complex features.\941\ Accordingly, 90 percent of quotes on municipal
bond ATSs are offer quotes.\942\ On the other hand, the vast majority
of RFQs on municipal bond ATSs are requests for

bids, reflecting that RFQ protocols are more likely to be used when
customers want to sell.\943\
---------------------------------------------------------------------------

    \940\ See Schultz, P. (2012). The market for new issues of
municipal bonds: The roles of transparency and limited access to
retail investors. Journal of Financial Economics, 106(3), 492-512.
    \941\ See ``Characteristics of Municipal Securities Trading on
Alternative Trading Systems and Broker's Broker Platforms'' (2021),
Municipal Securities Rulemaking Board, available at https://www.msrb.org/Market-Topics/Reports.
    \942\ See ``Municipal Securities Pre-Trade Market Activity: What
Has Changed Since 2015?'' (2020), Municipal Securities Rulemaking
Board, available at https://www.msrb.org/Market-Topics/~/
link.aspx?_id=9089AC4BA1F144B388D090177FADCDD6&_z=z.
    \943\ See id.
---------------------------------------------------------------------------

    Meanwhile, empirical results show that broker's broker platforms,
which may have functionalities similar to Communication Protocol
Systems, are more likely to be used for large-sized trades, and less
likely to be used for municipal bonds with complex features.\944\ The
study implied that this is because the lower price transparency on many
broker's broker platforms, which do not post quotes, makes these
systems less useful for trading securities that are difficult to price.
---------------------------------------------------------------------------

    \944\ See id.
---------------------------------------------------------------------------

    Meanwhile, similar to the case of corporate bond markets, RFQs may
instead be preferred by traders that want to limit information leakage,
such as in case of large-sized trades.\945\ Furthermore, as in the
market for corporate bonds, one commenter stated that the majority of
municipal bonds are not liquid enough to support order book
trading.\946\
---------------------------------------------------------------------------

    \945\ See Section VIII.B.3.
    \946\ See ICI Letter at 6-7.
---------------------------------------------------------------------------

    More generally, for the reasons described in Section VIII.B.4.c,
the movement of municipal bond trading onto electronic platforms has
helped to reduce transaction costs. Specifically, an increase in
transparency in this market has particularly been beneficial for retail
investors who otherwise have little access to municipal bond
information.\947\
---------------------------------------------------------------------------

    \947\ See Craig, L., Kim, A., & Woo, S.W. (2018). Pre-Trade
Information in the Municipal Bond Market. DERA White Paper,
available at https://www.sec.gov/files/DERA_WP_Pre-trade_Information_in_the_Municipal_Bond_Market.pdf.
---------------------------------------------------------------------------

    The Commission preliminarily believes that, as in other fixed
income markets, the differences in regulatory regime between ATSs and
other trading methods can lead to an uneven competitive landscape and
adversely impact the potential for robust competition in the market for
municipal debt securities.
5. Current State of the Equity Market
    The market for U.S. equity securities represents one of the largest
U.S. and global financial markets. As of 2020, the capitalization of
the U.S. equity market was estimated to be more than $40 trillion.\948\
The market for equity trading services is served by exchanges, ATSs,
other trading systems, such as OTC systems, and other liquidity
providers (such as internalizers). The type of trading system on which
an equity security is eligible to trade will depend on the equity
security's characteristics, including whether the issuing company
periodically reports its financial information and whether the security
is exchange-listed and/or registered with the SEC. U.S. equity
securities contain NMS stocks (including ETFs), OTC securities, and
restricted stocks, in addition to other types of securities.
---------------------------------------------------------------------------

    \948\ See ``Market capitalization of listed domestic companies
(current US$)--United States,'' The World Bank, available at https://data.worldbank.org/indicator/CM.MKT.LCAP.CD?locations=US.
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a. Categorization and Trading Characteristics of U.S. Equity Securities
    The largest and most liquid part of the U.S. equity market consists
of national market system (NMS) stocks. In general, NMS stocks are
exchange-listed equity securities for which transactions are reported
pursuant to an effective transaction reporting plan.\949\ As of August
2021, there were around 5,669 equities listed across five
exchanges.\950\ In September 2021, the average daily trading volume in
NMS stocks across all market centers was $545 billion.\951\ The market
for trading services in NMS stocks consists of 16 national securities
exchanges, and 34 ATSs, as well as other off-exchange trading venues,
including broker-dealer internalizers and wholesalers.\952\
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    \949\ See Regulation NMS Rules 600(b)(46) and (47) (17 CFR
242.600(b)(46) and (47)).
    \950\ See https://www.finra.org/filing-reporting/oats/oats-reportable-securities-list. This includes NYSE Arca, NYSE MKT, BZX
Exchange (BATS), NASDAQ, and New York Stock Exchange (NYSE).
    \951\ See CBOE Historical Market Volume Data, available at
https://www.cboe.com/us/equities/market_statistics/historical_market_volume/market_history_monthly_2019.csv. The
statistic is calculated by summing the ``Total Notional'' value for
all entries in September 2021, and then dividing this sum by the
number of trading days in September 2021 (21).
    \952\ There are 34 NMS Stock ATSs operating with a Form ATS-N on
file. See Form ATS-N Filings and Information, available at https://www.sec.gov/divisions/marketreg/form-ats-n-filings.htm. Wholesalers
are broker-dealers to whom retail brokers send their clients' orders
to be filled internally (as opposed to sending the trade orders to
an exchange). Typically, a wholesaler promises to provide price
improvement relative to the NBBO for filled orders. Wholesalers
often pay retail brokers for sending their clients' orders to the
wholesaler.
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    One subset of NMS stocks that has been increasing in popularity in
recent years includes exchange-traded funds (ETFs). ETFs are securities
that are registered as open-end investment companies or unit investment
trusts under the Investment Company Act of 1940 (the ``1940
Act''),\953\ that typically track financial instruments or bundles of
financial instruments (such as an index), and are listed on national
securities exchanges. ETFs are investment vehicles that issue shares
that can be bought or sold throughout the day on securities exchanges
in the secondary market at a market-determined price. The ETF market
has seen significant growth in the past decade, as the number of ETFs
nearly doubled from 1,134 to 2,204 and net assets more than quintupled,
from $939 billion to more than $5.3 trillion.\954\ ETF secondary market
trading made up 26 percent of total daily U.S. stock market trading on
average in 2020.\955\ At the same time, ETF liquidity may be highly
concentrated, with studies estimating that more than 85 percent of all
ETF value traded is concentrated in around 150 ETFs, or around five
percent of all ETFs.\956\ As with other NMS securities, ETFs can be
traded on exchanges and at off-exchange venues.
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    \953\ This discussion does not address other types of exchange-
traded products that are not registered under the 1940 Act, such as
exchange-traded commodity funds or exchange-traded notes. See
https://www.sec.gov/investor/alerts/etfs.pdf. It is estimated that
at year-end 2020, less than 3% of net assets were held in ETFs that
are not registered with or regulated by the SEC under the Investment
Company Act of 1940; see https://www.icifactbook.org/21_fb_ch4.html.
    \954\ See https://www.icifactbook.org/21_fb_ch4.html.
    \955\ See id.
    \956\ See id.
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    There is also a significant market for stocks that are not listed
on a national securities exchange, which are often referred to as over-
the-counter (OTC) equities.\957\ As of August 2021, there were 8,777
unlisted stocks that fell under FINRA reporting requirements.\958\
Unlike NMS stocks, which may trade on- or off-exchange, OTC equities
may only trade off-exchange, on ATSs or through Communication Protocol
Systems for example.\959\ Liquidity in OTC equities can be limited: A
2019 Commission analysis estimated that only 44 percent of quoted OTC
equities are traded per day, and two percent did not trade at all
during the 2019 calendar year.\960\
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    \957\ The Commission estimates that quoted OTC securities were
valued at approximately $32.3 trillion in 2019, with 94.7 percent of
the total market capitalization coming from companies that also have
securities listed on public foreign exchanges.
    \958\ See https://www.finra.org/filing-reporting/oats/oats-reportable-securities-list/.
    \959\ See ``Unraveling the Mystery of Over-the-Counter Trading''
(2016), FINRA, available at https://www.finra.org/investors/insights/unraveling-mystery-over-counter-trading.
    \960\ See SEC Release No. 34-87115, ``Publication or Submission
of Quotations Without Specified Information'' Proposed Rule and
Concept Release, available at https://www.sec.gov/rules/proposed/2019/34-87115.pdf.
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    OTC equities tend to be held by small investors. One academic study
found that institutions only held about 26 percent of OTC stocks, as
compared to 71 percent of listed stocks, implying

that most owners of OTC stocks are retail investors.\961\ A study found
that retail investors may be attracted to the low price of OTC
equities, which include equities that trade under $5 per share (so-
called ``penny stocks'').\962\
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    \961\ See Andrew Ang et al., Asset Pricing in the Dark: The
Cross-Section of OTC Stocks, 26 Rev. Fin. Studs. 2985-3028 (2013).
    \962\ See ``Unraveling the Mystery of Over-the-Counter Trading''
(2016), FINRA, available at https://www.finra.org/investors/insights/unraveling-mystery-over-counter-trading.
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    Transparency in the market for OTC securities can be limited. While
some OTC equity trading systems require issuers to register their
securities with the SEC and/or periodically file their financial
statements (either with the SEC or with the trading venue), other
systems may trade in OTC equities without any reporting standards or
eligibility requirements.\963\ The market for OTC equities is largely
regulated by FINRA under Section 15A of the Securities Exchange Act of
1934, which requires FINRA to, among other things, establish rules
governing the form and content of quotations for securities sold
otherwise than on an exchange.
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    \963\ See https://www.sec.gov/reportspubs/investor-publications/investorpubsmicrocapstockhtm.html. Note that, as discussed in infra
Section VIII.5.d, recent amendments to 17 CFR 240.15c2-11 (Rule
15c2-11 of the Exchange Act) adopted in September 2020 limit public
quoting in OTC equities for which current financial statement
information is not publically available.
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    One particular type of unlisted securities is referred to as
restricted (or sometimes ``control'') stocks. Restricted stocks are
either unregistered shares issued by public companies in private
placements \964\ or shares (both registered and unregistered) held by
an issuer or its affiliates (such as insiders and large shareholders).
The secondary market for restricted stocks is governed by SEC Rule 144,
and allows restricted stocks to be sold to the public if several
conditions are met.\965\ While investments in restricted stocks are
typically limited to only accredited investors, new SEC rules adopted
in 2015 under Section 401 of the Jumpstart Our Business Startups (JOBS)
Act, often referred to as ``Regulation A+,'' expanded the ability for
non-accredited investors to trade in certain unregistered equities.
Eligible restricted stocks can be traded on a number of electronic
platforms that specialize in the secondary market for restricted
shares, as well as through broker-dealers.\966\
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    \964\ Unregistered securities typically avoid SEC registration
through one of two exemptions: Regulation D offerings, which are
mostly limited to accredited (i.e., institutional or high-net-worth)
investors, and Regulation A offerings, which are open to
unaccredited investors.
    \965\ See https://www.sec.gov/reportspubs/investor-publications/investorpubsrule144htm.html. These conditions include a minimum
holding period, the availability of up-to-date information about the
issuing company, and certain limits to the size of the trade. In
addition, notice of trades by affiliates are required to be filed
with the SEC, and the trades themselves must be handled by a broker
as a routine transaction (e.g., no special commissions).
    \966\ See, e.g., Private Equity Exchange (http://peqx.com/);
Nasdaq Private Market (https://www.nasdaq.com/secondmarket).
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b. ATSs in the Equity Market
    As mentioned above, NMS stocks that are listed on national
securities exchanges may trade both on exchanges and at off-exchange
trading venues, including on ATSs. Currently there are 34 NMS Stock
ATSs, collectively handling an average of around 453 million trades
during Q3 2021.\967\ Since the adoption of Regulation NMS in 2005, the
market for trading services has become more fragmented, and the
proportion of NMS stocks trading off-exchange has increased. For
example, as of July 2020, NMS Stock ATSs comprised approximately 10
percent of consolidated dollar volume, and other off-exchange volume
totaled approximately 23 percent of consolidated dollar volume.\968\
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    \967\ See https://www.finra.org/filing-reporting/otc-transparency/ats-quarterly-statistics.
    \968\ See Market Data Infrastructure Final Rule, Release No.
90610 (Dec. 9, 2020), available at https://www.sec.gov/rules/final/2020/34-90610.pdf.
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    NMS Stock ATSs generally operate as non-displayed venues, which do
not display quotes. Traditionally, market participants that used non-
displayed venues to trade listed stocks have been large institutional
investors seeking to execute block trades. However, average trade sizes
in many ATSs have shrunk from block-size trades to smaller trade sizes
that match those of traditional exchanges. In 2018, the Commission
found that, while eight NMS Stock ATSs had average trade sizes larger
than 10,000 shares, the vast majority had average trade sizes between
100 and 460 shares, which is similar to average trade sizes on the
national securities exchanges.\969\ One feature, among others, that may
attract some market participants to non-displayed venues is their lower
information leakage as compared to trades on exchanges.
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    \969\ See SEC Release No. 34-83663, ``Regulation of NMS Stock
Alternative Trading Systems,'' available at https://www.sec.gov/rules/final/2018/34-83663.pdf.
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    NMS Stock ATSs are subject to Regulation ATS and are also required
to file and publicly disclose Form ATS-N. Furthermore, those with
significant volume are required to comply with the requirements of
Regulation SCI \970\ and the Fair Access Rule.\971\ Trades in NMS
stocks that are transacted off-exchange, which includes transactions on
ATSs, are required to be reported to one of three FINRA Trade Reporting
Facilities (TRF).\972\ If the execution is handled by an ATS, then in
most cases the ATS has the reporting obligation and must report itself
as a counterparty to both sides of the trade.\973\
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    \970\ An ATS trading in NMS stock is subject to Regulation SCI
if, during at least four of the preceding six months, the ATS had
five percent or more in any single NMS stock, and 0.25 percent or
more in all NMS stocks, of the average daily dollar volume reported
by applicable effective transaction reporting plans, or one percent
or more, in all NMS stocks, of the average daily dollar volume
reported by applicable effective transaction reporting plans. See
https://www.sec.gov/divisions/marketreg/regulation-sci-faq.shtml.
See supra Section VIII.B.2.a.ii for a discussion of the impact of
Regulation SCI.
    \971\ An ATS trading in NMS stock is subject to the Fair Access
Rule if, during at least four of the preceding six months, the ATS
had five percent or more of the average daily volume in an NMS stock
reported by an effective transaction reporting plan. See 17 CFR
242.301(b)(5)(i) and https://www.sec.gov/tm/faq-regulation-ats-fair-access-rule. See supra Section VIII.B.2.a.ii for a discussion of the
impact of the Fair Access Rule.
    \972\ These include FINRA/Nasdaq TRF Carteret, FINRA/Nasdaq TRF
Chicago, and FINRA/NYSE TRF. See https://www.finra.org/filing-reporting/trf/trf-exchange-participants.
    \973\ See https://www.finra.org/filing-reporting/market-transparency-reporting/trade-reporting-faq. Certain transactions are
exempt from FINRA TRF reporting requirements; see https://www.finra.org/filing-reporting/market-transparency-reporting/trade-reporting-faq#500 and FINRA Rules 6282(f)(1), 6380A(e)(1),
6380B(e)(1), and 6622(e)(1).
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    Furthermore, national securities exchanges, national securities
associations and Industry Members \974\ that receive or originate
orders \975\ in Eligible Securities \976\ are required to

report any Reportable Event \977\ to the Consolidated Audit Trail
(CAT), which is designed to capture customer and order event
information from the time of order inception through routing,
cancellation, modification, or execution in a single, consolidated data
source. The Participants \978\ have issued guidance stating that
trading interest must be ``firm'' to fall within the definition of an
``order,'' and thus be reportable to CAT, and so certain trading
interest (e.g., conditional orders) that may be available on some ATSs
is not reportable to the CAT until it is ``firmed up''/confirmed.\979\
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    \974\ The National Market System Plan Governing the Consolidated
Audit Trail (CAT NMS Plan) is a national market system plan approved
by the Commission pursuant to Section 11A of the Exchange Act and
the rules and regulations thereunder. See Securities Exchange Act
Release No. 79318 (November 15, 2016), 81 FR 84696 (November 23,
2016). The CAT NMS Plan and subsequent amendments to the Plan are
available at https://catnmsplan.com/about-cat/cat-nms-plan. Section
1.1 of the CAT NMS Plan defines an Industry Member as a member of a
national securities exchange or a member of a national securities
association. ``CAT Reporters'' include national securities
exchanges, national securities associations and Industry Members
that are required to record and report information to the Central
Repository pursuant to SEC Rule 613(c).
    \975\ Section 1.1 of the CAT NMS Plan defines the term
``order,'' with respect to Eligible Securities, as having the
meaning set forth in 17 CFR 242.613(j)(8) (SEC Rule 613(j)(8)). SEC
Rule 613(j)(8) defines an ``order'' as any order received by a
member of a national securities exchange or national securities
association from any person; any order originated by a member of a
national securities exchange or national securities association; or
any bid or offer.
    \976\ Section 1.1 of the CAT NMS Plan defines Eligible
Securities as'' (a) all NMS Securities and (b) all OTC Equity
Securities,'' where OTC Equity Securities are defined as any equity
security, other than an NMS Security, subject to prompt last sale