with the market to provide broker-dealer services to investors, these
lower costs lead to more volume from non-members. The broker-dealer is
more able to qualify for the best tiers, further lowering costs and
exacerbating its competitive advantage over lower-volume exchange
members.
---------------------------------------------------------------------------

    \186\ For example, pricing arrangements between members and non-
members for sponsored and direct market access services can be
``cost plus,'' meaning that the sponsoring broker-dealer passes
through to the non-member customer all or a portion of the exchange
transaction fees and rebates for which it qualifies, with an
additional fee charged for connecting to an exchange. A sponsoring
member whose total volume qualifies for a high tier would have more
to offer through such arrangements than a lower-volume member. See
Daniel Aisen, ``Connecting to the Stock Market (Choosing a DMA
Partner)'' (Mar. 2021), available at https://medium.com/prooftrading/connecting-to-the-stock-market-choosing-a-dma-partner-9176ccd3ce84.
    \187\ See id.
---------------------------------------------------------------------------

c. The Dispersion of Member Broker-Dealer Size
    The fact that there are a range of different sizes by order volume
for exchange members is an assumption that enters into the analysis
that the Commission is presenting on the economic effects of the
proposed rule. In this section, the Commission presents analysis
showing the existence of such a dispersion in broker-dealer size.
    One measure of the dispersion of trading activities across members
on an exchange is the coefficient of variation, applied to shares
executed or total dollar volume. The coefficient of variation for
member-level shares summarizes the standard deviation of firm's total
monthly shares relative to the average across members on an exchange.
The coefficient of variation, or ratio of standard deviation to mean,
ranges from 1.6 to 2.45 across the 16 exchanges for the month of
January 2023. The coefficient of variation, applied to total dollar
volume defined as shares times trade price, ranges from 1.48 to 3.11
across exchanges for the same month. Both measures of dispersion
suggest that the distribution of member's trading level has
considerable variability about its exchange's mean, with the standard
deviation of dollar volume being as large as the mean across all
exchanges. Moreover, the standard deviation of dollar volume across
members can be 3 times as large as within-exchange average.
    For further evidence of the large disparities in trading activities
across broker-dealers, one can compare order volume of exchange members
at the 25th percentile and at the 75th percentile on each exchange. For
trading activities measured by shares executed in the month of January
2023, shares from exchange members at the 25th percentile can be as
little as less than 1% of the shares from members at the 75th
percentile on a single exchange. The proportion of exchange order flow
attributable to members between the 25th percentile and 75th percentile
is no more than 12 percent on each exchange. Comparable ranges apply to
trading activities measured by a member's total dollar volume defined
as shares times trade price. Comparing the ratios of the 25th
percentile to 75th percentile across exchanges, dollar volume from the
exchange member at the 25th percentile is as small as less than 1% and
no greater than 12% of dollar volume at the 75th percentile. When one
restricts the analysis of order flow to liquidity-adding activities on
maker-taker exchanges, order flow is similarly concentrated. On several
exchanges, the member from the 25th percentile of the dollar volume (or
shares) distribution executed trades that are less than 1% of the
dollar volume (or shares) of the 75th percentile member on the same
exchange. Across exchanges, the ratio of the 25th to 75th percentile
trading activities is no more than 10%. The substantial differences in
trading activities between high-volume and the tail of lower-volume
exchange members are consistent with an earlier observation that the
broker-dealer space is highly concentrated.\188\
---------------------------------------------------------------------------

    \188\ See supra section IV.B.4.a.
---------------------------------------------------------------------------

5. Lack of Tier Transparency
    There is no public transparency about the number of firms that
qualify for the different tiers across exchange transaction pricing
schedules. This lack of transparency may limit the ability of members,
other exchanges, and the public to submit informed comment on exchange
pricing proposals and draw conclusions about the effects of all
exchange transaction pricing including volume-based transaction pricing
tiers. Knowing how many exchange members qualify for different pricing
tiers would provide interested parties with insight into how the costs
and benefits afforded by volume-based tiers are distributed across
exchange members. This knowledge would allow market participants to
submit more informed comments to the Commission by allowing them to
better compare the pricing they receive to their competitors and better
ascertain if a pricing schedule disproportionately favors certain
participants.
    Exchanges are required to provide information on their websites
that detail the pricing schedules for trading on the exchange.\189\
These documents include

the various tiers that market participants might qualify for, along
with the associated fee or rebate.
---------------------------------------------------------------------------

    \189\ See supra note 7 and accompanying text.
---------------------------------------------------------------------------

    The current transaction pricing practices of the exchanges in the
market for NMS stocks is characterized by a large number of different
pricing possibilities. These possibilities arise, in part, because fees
and rebates for trades are often contingent on multiple factors
including, the order types used in the trade, and whether the trade
takes place in opening or closing auctions with additional discounts
for volume-based tiers. The combination of the large number of pricing
contingencies on many of the exchanges and the number of different
exchanges in the market creates a large number of different pricing
possibilities for market participants to consider when choosing where
to route orders.\190\
---------------------------------------------------------------------------

    \190\ See RBC Letter, supra note 19, at 8 (``Our analysis
identifies at least 1,023 pricing paths across the exchanges.'').
---------------------------------------------------------------------------

    The volume-based tiers \191\ used in many exchange pricing
schedules are generally based on a member's trading volume relative to
the market's total trading volume in the month in which the market
participant's trades take place. This means that the member faces a
degree of uncertainty during the month about the precise tier it will
be able to achieve on the exchange during the month.
---------------------------------------------------------------------------

    \191\ See supra sections I.B and IV.B.1 (discussing volume-based
pricing tiers).
---------------------------------------------------------------------------

    The complexity and number of the various tiers, along with the
frequency with which they change,\192\ creates the possibility that for
some tiers, only a few market participants qualify in a given month. It
may even be the case that some tiers only have a single market
participant that ultimately qualifies for them in a given month on a
specific exchange.\193\ If only one or a small number of members
regularly qualify for a particular pricing tier it may suggest that an
exchange's pricing schedule is structured to reserve the tier for the
benefit of particular members. Pricing tiers of this manner could serve
to entrench the dominant position of some members and contribute to the
competitive imbalances between exchange members. Because of the lack of
transparency with regards to ex-post tier qualification, the public is
unable to assess whether there are tiers for which only one or a few
market participants qualify. The Commission believes that many market
participants are not aware of whether such limited qualification for
tiers occurs.
---------------------------------------------------------------------------

    \192\ See supra section I.B (discussing changes to, and general
complexity of, pricing schedules).
    \193\ See Healthy Markets Letter, supra note 165, at 5.
---------------------------------------------------------------------------

C. Economic Effects

1. Effect of the Proposed Ban on Volume-Based Tiers for Non-Principal
Orders
a. Benefits
i. Benefits To Lower Volume Exchange Members
    We expect the proposal to yield some benefits to lower-volume
exchange members, some of which would be passed on to investors who are
their customers. In particular, to the extent that the differences in
transaction fees would be less extreme under the proposed prohibition
on volume-based pricing for agency-related volume in proposed Rule 6b-
1(a), the proposed volume-based ban would result in benefits to lower-
volume exchange members in the form of lower transaction fees and
higher rebates. In response to the proposed prohibition of volume-based
pricing for agency-related order flow, exchanges could set fees on
agency-related orders that are between the current highest fees charged
in the lowest volume tiers and the lowest fees charged in the highest
volume tiers paid by the high-volume broker-dealers. Such an outcome is
supported by results from the price discrimination and mechanism design
literatures,\194\ applied to settings where trading platforms (i.e.,
firms making pricing decisions) face heterogeneous customers and may
offer different prices depending on observable choices or observable
customer characteristics. For models where firms may potentially sort
customers based on volume, when comparing firm's optimal choices under
price discrimination and restricting to a uniform price, prohibiting
price discrimination oftentimes results in the new, flat per unit fee
falling within the current range of the lowest per unit fee and highest
per unit fee.\195\ The context of non-volume based pricing among
exchanges is more complex, as exchanges can condition prices on other
broker-dealer characteristics. However, similar findings from the price
discrimination literature may prevail, and price differentials across
broker-dealers may be diminished under a volume-based ban. The smallest
and medium-sized members, who currently pay higher transaction fees,
would likely benefit from these ``intermediate'' prices, or prices that
are less extreme relative to a setting where exchanges target low net
transaction fees to high-volume broker-dealers and high fees to lower-
volume broker-dealers.\196\
---------------------------------------------------------------------------

    \194\ ``Price discrimination'' is a term of art in economics,
meaning charging different prices to different segments of
consumers, sometimes for identical goods or services. Under price
discrimination, consumers could be segmented based on their choices
of different goods or services. The practice of price discrimination
is not equivalent to unfair discrimination in the legal sense. The
welfare consequence of price discrimination is ambiguous and can
vary across industry settings. However, a number of empirical papers
have found that when restricting to a constant price, customers
previously enjoying the lower prices are worse off and those
enjoying higher prices are better off, relative to a world where
firms can vary prices with the customers' price-sensitivity. See,
e.g., Igal Hendel, and Aviv Nevo, ``Intertemporal Price
Discrimination in Storable Goods Markets'', 103 Am. Econ. Rev. 2722
(2013); Guillermo Marshall, ``Hassel Costs and Price Discrimination:
An Empirical Welfare Analysis'', 7 Am. Econ. J.: Applied Econ. 123
(2015).
    \195\ It is worth acknowledging that while charging an
``intermediate'' price is a plausible outcome, it is by no means the
only outcome. The Commission believes an ``intermediate'' price to
be a likely outcome given the wide range of order volume across
broker-dealers, described in supra section IV.B.4.c. See W. Kip
Viscusi, Joseph E. Harrington, and David M. Sappington, Economics of
Regulation and Antitrust 365-70 (5th ed. 2018), for a simple setting
with a numerical example. Alternatively, when trading venues are
optimally setting prices in standard screening settings with private
``types'' across customers, optimal contracts for trading venues
implies price discrimination. See Patrick Bolton and Mathias
Dewatripont, Contract Theory 47-52 (2005), for a general reference.
    \196\ This benefit may be, in part, a transfer from the large-
volume broker-dealers, who would end up paying more under this
pricing arrangement. See infra section IV.C.1.b.i (discussing costs
to high-volume broker-dealers from this effect).
---------------------------------------------------------------------------

    The proposed prohibition on volume-based pricing may result in an
increase in agency order flow to medium-sized exchange members, due to
their ability to divert business from direct market access customers.
Under the current tiered pricing schemes, lower-volume broker-dealers
with limited or no ability to route directly to exchanges are most
likely to take advantage of the high-volume members' connectivity and
tiers. In particular, because direct market access (DMA) pricing tends
to be ``cost plus,'' \197\ lower transaction fees/higher rebates for
the high-volume exchange members may translate into lower fees for
sponsored broker-dealers. The proposed ban on volume-based tiers, which
would limit transaction fee differentials between the high-volume
broker-dealers and the remaining players, would also lessen the pricing
advantage of high-volume members when competing for DMA customers.
Hence one consequence of removing the high-volume exchange members'
tiered pricing advantage is that agency flow from direct market access
customers may shift from the high-volume

exchange members to the medium-sized exchange members.
---------------------------------------------------------------------------

    \197\ See Daniel Aisen, Connecting to the Stock Market (Choosing
a DMA Partner), supra note 180.
---------------------------------------------------------------------------

ii. Benefits to Investors
    Proposed Rule 6b-1(a) may benefit investors by increasing
competition among exchange members. The advantages afforded to high-
volume broker-dealers through volume-based exchange transaction pricing
may favor a more concentrated market structure in the market for
brokerage services in NMS stocks. The removal of volume-based pricing
tiers for agency-related order flow would reduce the pricing advantage
afforded to higher volume exchange members for having more customer
order flow. Having the same pricing for agency-related order flow
across differently sized members would allow lower-volume members to
more effectively compete against higher-volume members on the basis of
passing on a higher proportion of collected rebates. In contrast, the
likely changes in transaction fees and rebates, previously discussed in
section IV.C.1.a.i, suggest lower cum-rebate transaction fees for small
and medium sized broker-dealers under the proposed ban on volume-based
tiers for agency flow, which lead to higher profit margins for such
firms.\198\ Competition leading to a high proportion of rebates being
passed through may benefit investors even in the scenario in which the
proposed rule reduces the total amount of price-savings (higher
rebates/lower fees) available to be passed through to investors.
---------------------------------------------------------------------------

    \198\ See supra note 194 and associated text.
---------------------------------------------------------------------------

    The lower transaction fees for small and medium sized broker-
dealers described in section IV.C.1.a.i might lead to higher profit
margins for such firms. This in turn would lead to a lower propensity
to exit the market for such firms, and a greater likelihood of new
entrants. With more firms in the market for brokerage services in NMS
stocks, competition to provide those services could increase,
benefiting investors.
    Following the proposed ban on volume-based tiers, medium-sized
exchange members may be better positioned to gain DMA customers,
compared to lower-volume exchange members who are not well-equipped
with fast connectivity and trading infrastructure. Based on staff
experience, the Commission understands that roughly 30 broker-dealers
across exchanges, including the dozen or so largest exchange members,
have functional smart order routers (``SORs''), dedicated cabinets at
data centers, and enough technical staff to support their
functionalities. Consistent with that understanding, the average
exchange has 34 members who contribute up to 99% of its dollar volume,
where the average is taken over the 16 exchanges for the month of
January 2023.\199\ This observation aligns with the fact that
substantial economies of scale are required to build expensive SORs
with significant operational and regulatory risks. Consequently, while
there is gradation in execution quality among exchange members, the
difference in capability is more pronounced between the 30 or so large
or medium-sized exchange members with both functional SORs and fast
connectivity and the remaining small players. Banning volume-based
tiers for agency-related order flow, which is expected to level
competition for direct market access would benefit investors.
---------------------------------------------------------------------------

    \199\ This calculation was performed by first tabulating the
number of members contributing up to 99% of dollar volume for each
exchange, and then takes the mean across exchanges. The counts are
based on data from the Consolidated Audit Trail, for the month of
Jan. 2023.
---------------------------------------------------------------------------

    The extent to which lower net transaction fees facilitate the
survival of lower-volume broker-dealers a wider variety of broker-
dealers may be available to investors. Some lower-volume broker-dealers
may specialize in niche areas or be better positioned to provide
personal attention to investors and the proposed rule could help
prevent the loss of such firms, benefitting investor welfare.
    The proposed prohibition on volume-based transaction pricing for
agency-related trades may also result in the benefit of improved
execution quality for some customers of broker-dealers by removing an
incentive to concentrate agency order flow. Reducing the incentive to
concentrate agency order flow may result in improved execution quality
for the direct market access customers of broker-dealers particularly
if the broker-dealer had previously routed customer orders in
accordance with that incentive. How much the customers of exchange
members would tend to benefit from reducing the conflict of interest is
uncertain as it is dependent on the preferences and practices of each
routing broker. Additionally, the proposed prohibition of volume-based
pricing for agency-related order flow will not resolve all potential
conflicts of interest between exchange members and their customers.
    Currently, when exchanges offer volume-based transaction pricing to
members in return for those members executing more orders on the
exchange, this creates a financial interest that could incentivize a
member to route orders, including customer orders, to certain exchanges
to qualify for better tiered pricing on those exchanges.\200\ A
prohibition on volume-based transaction pricing would remove this
incentive. As a consequence of the proposed rule, broker-dealers may
focus on execution quality for their customers in making routing
decisions without the influence of volume-based exchange transaction
pricing, which may result in improved execution quality.
---------------------------------------------------------------------------

    \200\ See supra section IV.B.3 (discussing this conflict of
interest in greater detail).
---------------------------------------------------------------------------

    Lower exchange transaction fees \201\ that could result from the
proposed rule and that better facilitate the survival of smaller
brokers may result in benefits to investors through increasing the
variety of broker-dealers available. Although smaller broker-dealers
may not have the scale economies of larger broker-dealers, they may
have firm-specific expertise valued by particular investors. A
brokerage's strength may lie in good research in a niche area or
personal attention which contributes to a firm's perceived service
quality. By preventing the loss of firm-specific advantages and
increasing the overall variety of broker-dealers, lower exchange
transaction fees and higher rebates for small broker-dealers may
enhance investors' overall welfare under the proposed ban on volume-
based exchange rebates for agency-related volume.
---------------------------------------------------------------------------

    \201\ See supra section IV.C.1.a.i discussing how the proposed
ban on volume-based tiers for agency orders may reduce transaction
fees paid by smaller executing brokers.
---------------------------------------------------------------------------

iii. Benefits to Lower Volume Exchanges
    Based on analysis described in section IV.D.2 below, the Commission
expects that the proposed rule may decrease the level of order flow
concentration for agency and riskless-principal orders and increase the
concentration of principal order flow, which would be likely to benefit
some exchanges. In the analysis of the changes to competition among
exchanges, the Commission considered four separate scenarios: (1)
agency order flow concentration decreases by 100%, (2) agency order
flow concentration decreases by 20%, (3) principal order flow
concentration increases by 20%, and (4) agency order flow concentration
decreases by 20% and principal order flow concentration increases by
20%.\202\
---------------------------------------------------------------------------

    \202\ See infra section IV.D.2.b and Table 9 (for detailed
discussion of the different scenarios discussed here and the
underlying assumptions made).
---------------------------------------------------------------------------

    Lower volume exchanges would be most likely to benefit from a
decrease in the concentration of agency order flow. In the upper bound
case where agency order flow was maximally dispersed

(agency order flow concentration decreases by 100%), 11 of the 16
exchanges that currently make up a combined 19.58% of the on-exchange
market would experience a 2.38 percentage point increase in market
share on average. Assuming that both volume and average net captures
remain the same as those of January 2023, this would translate to a
combined overall increase of $26,382,403 in net transaction fee revenue
across the 11 venues.\203\ In the less extreme scenario in which
concentration of agency order flow decreases by 20%, the same smaller
exchanges would still benefit, but with an average increase in market
share of 0.47 percentage points and a combined overall increase of
$5,276,481.
---------------------------------------------------------------------------

    \203\ See supra note 123 and the accompanying text (for a
description of how net transaction fee revenue is estimated and the
assumed average net capture rates).
---------------------------------------------------------------------------

    The Commission's competition analysis \204\ also considers the
possibility of an increase in the concentration of principal order
flow. That analysis concludes that the highest volume exchanges would
be more likely to benefit from an increase in the concentration of
principal order flow. Using January 2023 market shares, the 5 largest
exchanges would experience an average 0.50% percentage point increase
in market share given a 20% increase in principal order flow
concentration. Assuming that both volume and average net capture rates
remain the same as those of January 2023, the increase in market share
would translate to a combined overall increase of $2,900,853 in net
transaction fee revenue across the 5 venues.
---------------------------------------------------------------------------

    \204\ See infra section IV.D.2.b.
---------------------------------------------------------------------------

    The Commission also considered a case in its competition analysis
\205\ where a 20% increase in principal order flow concentration is
coupled with a 20% decrease in the concentration of agency order flow
would result in increased market shares for the 12 smallest exchanges
by trading volume, with the exception of a single exchange, which would
lose market share. In this case, the eleven positively affected
exchanges would experience an average percentage point increase in
market share of 0.26% and a combined increase in net transaction fee
revenues of $2,574,733. That exchanges could be negatively or
positively affected when only one kind of order flow concentration
changes, indicates that exchanges have different sensitivities to
changes in order-flow concentration.
---------------------------------------------------------------------------

    \205\ See infra section IV.D.2.b.
---------------------------------------------------------------------------

b. Costs
i. Cost to High-Volume Exchange Members
    To the extent that average exchange per unit trading fees become
more expensive than the lowest per unit (i.e., top tier) fees currently
offered, the proposed banning of volume-based exchange transaction
pricing for agency-related volume would result in costs for the high-
volume exchange members and possibly the smaller non-members routing
through them if they receive pass-through exchange transaction pricing.
This increase in costs may in turn cause the commissions charged by
such broker-dealers to increase, resulting in costs for their customers
as well.
    The proposed ban on volume-based exchange transaction tiers might
impose costs on a handful of the high-volume members in the form of
lower rebates/higher transaction fees for agency order flow, along with
loss of customer flow due to the large members' reduced price advantage
when competing for customers. Various sources suggest that lower-volume
exchange members may be effectively subsidizing a handful of the high-
volume members receiving net payments.\206\ A ban on volume-based
exchange transaction tiers that dampens the extent of cross-
subsidization across broker-dealers may cost the large members their
forgone net payments. A second source of cost is the loss of potential
customer flow, order flow that may have otherwise streamed to the top
broker-dealers. Under volume-based pricing, the top broker-dealers'
lower trading costs may give them a price advantage when competing for
customers against smaller members. As the high-volume broker-dealers
can better afford lower commission fees, they attract greater order
flow from investing customers and non-members, which enhances their
ability to attain more favorable pricing tiers. The proposed ban on
volume-based discounts removes the competitive advantage that the high-
volume broker-dealers otherwise gain through this self-reinforcing
cycle.
---------------------------------------------------------------------------

    \206\ See Healthy Markets 2018 Letter, supra note 165, at 5;
Chester Spatt, ``Is Equity Market Exchange Structure Anti-
Competitive?'', supra note 166, at 7.
---------------------------------------------------------------------------

    Tiered rebates that aid in the concentration of order flow among
high-volume exchange members may be desirable from an allocative
efficiency perspective. Due to their scale economies, the high-volume
exchange members may be most efficient at executing. Alternatively, the
high-volume exchange members may have technology, capital or service
strengths arising from their scale economies. Directing order flow to
the high-volume exchange members may better ensure that resources are
utilized in a cost-effective manner. Conversely, under the proposed ban
on volume-based pricing, dispersing order flow across broker-dealers
may reduce allocative efficiency.
    An indirect, negative effect on the high-volume broker-dealers
would arise from removing direct market access services and sponsored
access from the tier qualifications for the high-volume members. If
exchanges did not adjust their pricing levels in response to the
proposed ban on volume-based exchange transaction pricing for agency-
related volume, then removing the sponsored customers' order flow from
the tiers calculation would weaken their ability to obtain more
favorable pricing on principal orders compared to lower-volume members,
thus eroding this competitive advantage.
    Exchange members with large principal order flow also tend to have
large agency order flow which is consistent with greater liquidity
provision of either kind encouraging liquidity provision from the other
order type. The majority of exchange members with principal order flow
also route agency orders to the same exchange. There are over a
thousand exchange-member firm pairs from January 2023 across 16
exchanges, with a majority of exchange members engaged in principal
trading. Among exchange members that handle both principal and agency
trades, 79% of members with principal trading also routed agency
orders. One can compare a firm's position within the distribution of
principal volume against its rank among agency trading firms on the
same exchange. Conditional on executing both agency and principal
orders on the same exchange, 83% of members whose principal trading was
above an exchange's median dollar volume also ranked in the top half of
agency trading dollar volume. Again, among members routing both types
of orders, approximately 61% of members that ranked in the top quarter
in terms of principal dollar volume also qualified for the top quarter
of agency dollar volume on the same exchange. Thus, high relative
principal flow is imperfectly associated with high relative agency
flow. One plausible underlying force is that top-tier exchange
transaction pricing (notably, rebates) earned from large principal flow
provide incentives for non-members to direct their agency-related order
flow through high-volume members to take advantage of a portion of that
better exchange transaction

pricing that may not otherwise be available to them. For these
sponsoring members that already are rewarded preferred pricing for
their principal flow, orders routed through them from non-members
further contributes to the firm's larger agency and overall presence.
    While the direct effect of the proposed banning of volume-based
exchange transaction fee tiers could raise transaction costs on the
high-volume broker-dealers' agency orders, the overall effect on the
high-volume broker-dealers' trading activities and total welfare \207\
depends on how exchanges respond to the proposed ban, especially
through adjusting volume-based tiers for principal order flow. Offering
a steeper volume-based pricing discount, or lower per-unit prices for
greater utilization, has been documented as a means to attract demand
to platforms in other market settings.\208\ Likewise it is conceivable
that while a ban on agency-related volume discounts could weaken the
incentive to extract increasing levels of agency order flows if
exchanges chose not to offer their best transaction pricing to all
members equally, exchanges might respond with an increased rate of
discounting for principal order flows. More generally, with the
proposed ban on agency-related price tiers, the exchanges might re-
adjust pricing schedules within each family of affiliated exchanges.
Enhancing principal order flow enhances the liquidity externality
across exchanges within a family, thereby increasing the value of
keeping agency order flow on exchanges.
---------------------------------------------------------------------------

    \207\ Here ``total welfare'' is defined as profitability summed
across exchanges and broker-dealers with trading activities
facilitated by exchange members.
    \208\ Meghan Busse and Marc Rysman, ``Competition and Price
Discrimination in Yellow Pages Advertising'', 36 RAND J. Econs. 378
(2005).
---------------------------------------------------------------------------

    For high-volume broker-dealers trading in a principal capacity, the
exchanges might re-adjust price schedules in a way that leaves the
current high-volume firms with no substantial drop in profitability.
While the proposed ban on agency-related volume transaction pricing
tiers would weaken the competitive advantage of high-volume broker-
dealers over smaller ones, the exchanges may attempt to offset the
potential loss of agency order flow by either lowering the agency base
fee or offering even steeper volume-based discounts for principal order
flow. Deeper discounts for high principal volume may even enhance the
profitability of these high-volume members with high amounts of
principal trading. In addition, many high-volume broker-dealers engage
in both proprietary trading and in a customer brokerage business. As
discussed earlier in this section many firms with high levels of
principal order flows also tend to achieve high levels of agency order
flow on the same exchange. In the scenario with a ban on volume-based
exchange transaction pricing for agency-related flow, better pricing
for principal order flow may favor many of the same high-volume members
as are favored under current volume-based pricing schedules. If deeper
discounts on principal order flow for high-volume players helped to
retain substantial principal order flow, then agency order flow may
also tend to coalesce on the same exchange due to the order flow
externality. Changes in volume discount transaction rates for principal
order flow, combined with possible fee cuts on agency order flow, may
counter the profit losses from forgoing previous subsidies on agency-
related order flow for the high-volume broker-dealers.
ii. Cost to Investors With Trades Intermediated by High-Volume Exchange
Members
    Investors and other market participants that send exchange orders
through large exchange members, which currently likely benefit from the
volume-based transaction tiers of their sponsors, may experience costs
in the form of higher fees from their executing broker-dealers under
the proposed rule. In the absence of the ability of exchanges to use
volume-based transaction pricing for agency-related flow, investors
which rely on high-volume exchange members for market access may be
left with relatively more expensive exchange transaction fee options.
The transition from volume-based tiers to a flat fee that could result
from the proposed rule is expected to lead to fees and rebates that are
between the current values for the highest and lowest tiers.\209\ This
would lead to large-volume broker-dealers who qualify for the best
tiers to be worse off, and low-volume broker-dealers to be better off.
Because the changes for these broker-dealers would be to the marginal
costs of their trading, the Commission expects this to impact the
prices charged to their investor customers in the same direction. That
is, when considered in isolation, this effect would tend to make
customers of large broker-dealers worse off and customers of small
broker-dealers better off. One potential response to limiting volume-
based pricing for agency-related order flow would be for the exchanges
to set intermediate transaction pricing for agency-related orders that
are between the current highest fees charged in the lowest volume tiers
and the lowest fees charged in the top-tiers.\210\ To the extent that
average exchange pricing on agency-related orders become more expensive
than the previous top-tier pricing, investors and any intermediating
broker-dealers who previously benefitted from the high-volume broker-
dealers' passing through the volume-based exchange transaction pricing
may be worse off.
---------------------------------------------------------------------------

    \209\ See supra section IV.C.1.a.i for discussion of this point.
    \210\ See supra section IV.C.1 for additional discussion on
effect of the tiering ban on transaction pricing.
---------------------------------------------------------------------------

    Another category of trading activity that would no longer benefit
from the tiered pricing advantages of high-volume broker-dealers would
be sponsored and direct market access. Because proprietary traders
using such access trade through the exchange member's connectivity to
the exchange, orders directly routed to a trading center through
sponsored access are marked as agency orders. These orders would no
longer count towards volume-based tiers of the sponsoring member.
Consequently, some sponsored traders may face higher net fees, compared
to a setting where (1) the sponsored traders benefit from being the
customers of top-tiered broker-dealers and (2) incorporating orders
from sponsored traders reinforces the broker-dealers' ability to
achieve higher rebates. The proposed ban on volume-based tiers may have
a particularly adverse effect on the smaller traders that use these
arrangements. Without the ability to tailor agency-related transaction
fees to trading volume, some exchanges may not find it worthwhile to
lower average fees in order to retain the order flows of the smallest
traders.
    The Commission also believes that the proposed banning of volume
discounts, when considered in isolation, may have the effect of
reducing efficiency if high-volume exchange members reduce the amount
of order flow which they execute on the exchanges, something which
could harm investor welfare.\211\ As high-volume exchange members
likely contribute substantially more to the depth of book on an
exchange, a withdrawal of agency order flow on exchanges by these
members may lower the overall displayed liquidity provision

imposing a negative externality on other exchange members.\212\
---------------------------------------------------------------------------

    \211\ See section IV.C.1.b.iii for a discussion of the costs to
high-volume exchange members.
    \212\ See section IV.D.1 for additional discussion of the
effects of lower agency order flow on investor welfare and of the
effects on efficiency that the costs to high-volume broker-dealers
could have.
---------------------------------------------------------------------------

iii. Costs to Higher-Volume Exchanges
    Based on the analysis described in section IV.D.2 below, the
Commission expects that the proposed rule may decrease the level of
order flow concentration for agency and riskless-principal orders and
increase the concentration of principal order flow, which would result
in costs for some exchanges. The Commission considers four separate
scenarios: (1) agency order flow concentration decreases by 100%, (2)
agency order flow concentration decreases by 20%, (3) principal order
flow concentration increases by 20%, and (4) agency order flow
concentration decreases by 20% and principal order flow concentration
increases by 20%.\213\
---------------------------------------------------------------------------

    \213\ See section IV.D.2.b and Table 9 (for detailed discussion
of the different scenarios discussed here and the underlying
assumptions made).
---------------------------------------------------------------------------

    Larger exchanges would be most likely to bear a cost in the form of
lost market share and net transaction cost revenue from an expected
increase in the dispersion of agency order flow across more competing
exchanges. Per Table 9, in the extreme case where broker-dealers
decrease their agency order flow concentration by 100%, 5 of the 16
exchanges that currently make up a combined 80.42% of the on-exchange
market would experience a 5.24 percentage point decrease in market
share on average. Assuming that both volume and average net captures
remain the same as those of January 2023, this would translate to a
combined overall decrease of $32,720,244 in net transaction fee revenue
across the 5 venues. In the scenario under which agency order flow
concentration decreases by 20%, these 5 exchanges would also be
adversely affected, though not as much as in the case of even re-
distribution of agency flow across exchanges, with an average decrease
in market share of 1.05 percentage points and a combined overall
decrease in trading revenues of $6,544,049.
    Smaller exchanges may lose market share from a given increase in
the concentration of principal order flow. Using January 2023 market
shares, the 11 smallest exchanges by trading volume would experience an
average 0.23% percentage point decrease in market share given a 20%
increase in principal order flow concentration. Assuming that both
volume and average net capture rates remain the same as those of
January 2023, the decrease in market share would translate to a
combined overall decrease of $3,356,751 in net transaction fee revenue
across the 11 venues.
    In the case where a 20% increase in principal order flow
concentration is coupled with a 20% decrease in the concentration of
agency order flow, it could result in decreased market shares for the
four largest exchanges. In addition, one smaller exchange could also
lose market share in this case. In this case the five negatively
affected exchanges would experience an average percentage point drop in
market share of 0.58% and a combined decrease in net transaction fee
revenues of $4,298,199.
iv. Increase in Principal Trades
    The Commission recognizes that the proposed prohibition of volume-
based pricing for only agency and riskless-principal orders would
likely increase the benefits of principal trading which may increase
systemic risk across broker-dealers. Without being able to count on
agency order flow to help qualify for a volume-based tier exchange
members may have to increase the concentration of their principal order
flow in order to qualify for a preferred pricing tier. This effect
likely would be exacerbated should exchanges adopt pricing schedules
with more attractive volume-based pricing tiers for principal
orders.\214\
---------------------------------------------------------------------------

    \214\ See section IV.D.2.a.
---------------------------------------------------------------------------

    One way market participants could increase their principal order
flow would be to increase proprietary trading operations. Proprietary
trading can increase market instability if the positions of different
traders are correlated as correlated trading can amplify price
movements and quickly deplete available liquidity.\215\
---------------------------------------------------------------------------

    \215\ See Malceniece, Laura, K[amacr]rlis Malcenieks, and
T[amacr]lis J. Putni[ncedil][scaron]. ``High frequency trading and
comovement in financial markets.'' Journal of Financial Economics
134.2 (2019): 381-399.
---------------------------------------------------------------------------

    Some exchange members might adopt an inventory-based model to
manage to effectively substitute what would have been agency or
riskless principal orders with principal orders. Under an inventory
model the broker dealer would aim to uphold a target inventory level in
its traded securities which they could thereby use to internalize their
customer trades. After internalizing the customer trade the broker-
dealer could offset any changes in their inventory by executing an
identical order on an exchange. The offsetting order, since it would be
to manage the broker-dealer's inventory, would be a principal order. If
the off-setting principal order is executed on exchange at the same
price at which the customer order was previously internalized at, then
the internalize-then-offset process would effectively transform what
would have otherwise been an agency or riskless-principal order into
principal order. The member broker-dealer would however risk that the
offsetting principal trade would be executed at a worse price than what
it had internalized the customer order at.
    Maintaining an inventory position is both costly and risky. Holding
inventory involves the investment of capital, broker-dealers have to
purchase the shares needed to have a sufficient supply of stock in
order to fill marketable buy orders as well as sufficient cash to
handle marketable sell orders. Exchange members looking to transition
to an inventory model may also have to maintain specific net capital
levels as required by regulations to maintain solvency.\216\ It is
risky because holding non-zero inventory exposes the member broker-
dealer to losses due to price fluctuation. This risk could lead to
correlated trading among inventory-holding broker-dealers if price
changes cause some to liquidate their inventory positions. This kind of
correlated trading can exacerbate systemic risk among broker-dealers,
as the liquidation of inventory by some can trigger further
liquidations by others forming a self-reinforcing cycle. In the case
that following this proposed rule exchanges would adopt pricing
schedules that would make the transition to an inventory model
worthwhile, larger broker-dealers would likely have a competitive
advantage in absorbing the costs and managing risk given their greater
resources. The Commission expects the costs associated with a shift in
business model to limit the increase in principal trading due to
broker-dealers taking on inventory for internalization.
---------------------------------------------------------------------------

    \216\ See 17 CFR 240.15c3-1.
---------------------------------------------------------------------------

v. Migration to Off-Exchange Venues
    The proposed prohibition of volume-based pricing for agency-related
order flow by exchanges would risk exchanges losing market share to
off-exchange venues. In addition to competing with other exchanges,
exchanges also use volume-based pricing tiers as a means of competition
for order flow with off-exchange market centers such as wholesalers and
ATSs. Lacking the ability to offer volume discounts on agency-related
order flow may make exchanges less competitive. Not being able to
realize preferential pricing offered by the highest volume-based tiers
for the agency portion of their

order flow higher volume exchange members may instead face less
attractive pricing thereby making off-exchange venues relatively more
attractive.
    Freeing up agency flow from the effects of volume-based tiers could
result in fewer agency orders routed to exchanges. This view is
manifested by both standard screening games from the mechanism design
literature and price discrimination models, which suggest that volume-
based price discrimination, particularly those based on absolute
pricing tiers, can increase total demand for the platforms.\217\ On the
other hand, shutting down quantity discount schemes would remove a way
for individual exchanges to better retain order flow from migrating to
competing venues. This may lead to both greater dispersion of order
flow across exchanges and a decline in trade volume among exchanges.
Either (1) total order flow across exchanges may decrease or (2) a
portion of that flow moves off-exchange, which in turn would harm on-
exchange liquidity and increase trading costs.
---------------------------------------------------------------------------

    \217\ See Hall R. Varian, ``Price Discrimination and Social
Welfare,'' 75 Am. Econ. Rev. 870-75 (1985).
    See W. Kip Viscusi, Joseph E. Harrington, and David M.
Sappington, Economics of Regulation and Antitrust 365-70 (5th ed.
2018), Chapter 8 ``Monopolization and Price Discrimination'', pp
365-370 for a simple setting with a numerical example. See also Hall
R. Varian, ``Price Discrimination and Social Welfare,'' 75 Am. Econ.
Rev. 870-75 (1985).
---------------------------------------------------------------------------

    Applying the insights from the price discrimination literature to
the exchange setting suggests that the proposed ban on volume-based
pricing may decrease both overall order flow across exchanges and
overall efficiency, defined in terms of profit summed across broker-
dealers and the exchanges. Standard theoretic models suggest that price
discrimination can be a natural consequence of the trading venues'
profit-maximizing incentive schemes (i.e., contracts with customers),
in setting with incomplete information present. Incomplete information
could denote a setting with variation in valuation for execution/gains
to trade across broker-dealers. Because the exchanges cannot perfectly
ascertain each broker-dealer's intrinsic preference for trades,
exchanges cannot condition transaction fees on broker-dealers'
(private) valuations for order execution. Offering volume-based price
discounts, compared to a regime prohibiting pricing tiers, can
encourage broker-dealers with the most to gain from trade to better
express their higher willingness to participating on an exchange.
Tiered pricing can heighten the incentive to add liquidity to
exchanges, enhancing not only total order flow and profit summed across
the exchanges but also total broker-dealers' welfare. Prohibiting
tiered pricing may shrink exchanges' overall profitability, to the
detriment of broker-dealers as well.
    Effectiveness of using price discrimination to increase total
surplus, relative to a world absent of volume-based discounts, depends
on sufficient heterogeneity across exchange members. Higher valuation,
or greater gains from execution, could originate from the lower cost of
operating broker-dealer businesses for high-volume exchange members.
While the range of data products and co-location services offered by
exchanges present substantial fixed costs for exchange participants,
fees for proprietary data and connectivity do not increase
proportionally with trading activity. As the per-share cost falls with
increases in the exchange's trading volume, high-volume broker-dealers
may find the value of trading greater than lower-volume exchange
members. Another feature of standard screening models is that the
participant's intrinsic value is revealed by the exchange member's
self-selected quantity. The broad range of trading quantities across
agency broker-dealers suggests a large degree of heterogeneity across
agency broker-dealers. Across the 16 exchanges in January 2023, the
coefficient of variation for dollar volume among exchange members'
agency order flow ranges from 1.3 to over 3.3. Fixing an exchange, the
exchange member at the 25th percentile has agency dollar volume that is
as little as less than 0.1% and no more than 12.5% of the dollar volume
coming from the 75th percentile exchange member.
    One difference between the conventional nonlinear pricing/screening
framework and the exchanges' price tiering setting is the use of
relative volumes in the rebate formulae. Broker-dealers have an
incentive to commit volume to an exchange so that their accumulated
liquidity outcompetes rivals' liquidity and satisfies the threshold for
higher rebates. The use of relative volumes in the rebate formulae may
further reinforce the exchanges' ability to concentrate volume on their
venue.
    Market shrinkage and fragmentation of agency orders may have
negative effects on transaction costs and undercut the internalization
of the liquidity externality, potentially resulting in further loss of
both principal and agency order flow. Coalescence on the larger
exchanges is not only desirable for the exchanges but also increases
the value of participating on each exchange, as trades are easiest to
arrange on good terms in liquid markets. Having more consolidated
markets under volume-based price tiers makes it easier for liquidity
demand to meet liquidity supply on the same platform, lowering
transaction costs. Conversely, loss of agency order flow from shutting
down volume-based pricing could make the search for best price more
costly for the remaining participants (both agency and principal) on an
exchange, who might in turn decide to redirect orders away from
dominant exchanges. Order flow externality reinforces the initial loss
of surplus from shutting down volume-based price discrimination,
resulting in further loss in efficiency, for dominant exchanges and
their participants alike. Finally, as off-exchange market centers such
as wholesalers often benchmark trades (and price improvement) to the
NBBO, the withdrawal of a portion of on-exchange order flow may
potentially result in wider (NBBO) spreads thereby harming execution
quality in the market as a whole.\218\
---------------------------------------------------------------------------

    \218\ This is assuming that volume-based rebates to liquidity
providers contribute to narrowing the NBBO, this particular increase
in transaction costs may be limited to the extent to which such
rebates do not influence the NBBO.
---------------------------------------------------------------------------

    Following the proposed ban, exchanges might adjust so as to
ameliorate the loss of order flow and efficiency from reduced
participation across exchange venues. In particular, one predicted
response of the proposed ban is that some exchanges might try to retain
agency order flows by offering steeper volume-based tiers for principal
order flows. Deeper discounts that attract the largest proprietary
traders and increase principal order flow on exchanges also benefit
agency traders due to liquidity externality. More generally, exchanges
might attempt to price discriminate along other dimensions not directly
related to agency trading volume. As one source reports at least 3,762
separate pricing variables across exchanges, fees charged and rebates
offered are based on an intricate array of other quality metrics, some
of which are likely correlated with trading volume.\219\ It is
conceivable that exchanges might continue to ``lock in'' order flow by
offering discounts for broker-dealers' percentage of time spent at the
NBBO, among other measures of trading activities.
---------------------------------------------------------------------------

    \219\ See RBC Letter, supra note 19, at 1 (``In total, we found
at least 3,762 separate pricing variables across the exchanges--that
is, 3,762 factors that ultimately determine the fees charged and
rebates offered by exchanges'').

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

2. Effects of Proposed Requirement of Rules and Policies and Procedures
To Prevent Evasion
a. Benefits
    Proposed Rule 6b-1(b)(1) would require national securities
exchanges offering volume-based transaction pricing in connection with
the execution of proprietary orders in NMS stocks for the account of a
member to impose rules to require members to engage in practices that
facilitate the ability of the exchange to comply with the prohibition
in proposed Rule 6b-1(a). Proposed Rule 6b-1(b)(2) would require
national securities exchanges offering such volume-based pricing for
NMS stocks to establish, maintain, and enforce written policies and
procedures reasonably designed to detect and deter members from
receiving volume-based transaction pricing in connection with the
execution of agency or riskless principal orders in NMS stocks. These
requirements would increase the likelihood that the benefits of Rule
6b-1(a) would materialize. It is possible that exchange members would
attempt to recover volume discounts for their agency-based order flow
by trying to obtain volume discounts offered for principal-based order
flow for their agency-based order flow. To the extent this happens, the
benefits associated with prohibiting volume discounts for agency-based
flow \220\ would be less likely to materialize. Exchange rules
requiring members to engage in practices that facilitate the exchange's
ability to comply with proposed Rule 6b-1(a) and exchange policies and
procedures reasonably designed to detect and deter members from
receiving volume-based transaction pricing in connection with the
execution of agency-related orders would reduce the likelihood that
such attempts would happen, or would be successful if they did happen.
The Commission is unable to quantify the size of this benefit because
it is not feasible to determine the propensity of exchange members to
attempt evasion without such measures in place.
---------------------------------------------------------------------------

    \220\ See supra section IV.C.1.a (discussing the benefits
associated with the prohibition on volume-based transaction pricing
in agency-related volume for NMS stocks).
---------------------------------------------------------------------------

b. Costs
    The requirements of proposed Rules 6b-1(b)(1) and 6b-1(b)(2) would
result in costs for those national securities exchanges for NMS stocks
that choose to offer volume-based transaction pricing for a member's
proprietary order flow after the implementation of the prohibition in
proposed Rule 6b-1(a). Specifically, any national securities exchanges
for NMS stocks that offers such volume-based transaction pricing would
incur the legal and administrative costs to revise its rules to include
the rules required by proposed Rule 6b-1(b)(1), and to develop and
implement the policies and procedures required by proposed Rule 6b-
1(b)(2), as well as the costs to maintain and enforce these rules and
policies.
    Table 8 provides the Commission's estimates of the PRA costs
associated with developing the required written policies and
procedures. The Commission estimates that there would be 13 \221\
exchanges that would incur these costs.
---------------------------------------------------------------------------

    \221\ This estimate is based on the assumption that the 13
national securities exchanges for NMS stocks currently offering
volume-based tiers would continue to offer such tiers for principal
related order flow after the implementation of proposed Rule 6b-
1(a). See supra section III.D.
    \222\ The Commission derived the total estimated burdens from
the following estimates: (Attorney at 30 hours * $462 per hour) +
(Compliance Counsel at 10 hours * $406 per hour) + (Chief Compliance
Officer at 5 hours * $542 per hour) + (General Counsel at 5 hours *
$663 per hour) = $23,945 per exchange in initial costs. $23,945 per
exchange x 13 respondents = $311,285 total initial costs. See supra
note 84. The Commission derived the hourly rate figures from SIFMA's
Management & Professional Earnings in the Securities Industry 2013,
modified to account for an 1,800-hour work-year and inflation, and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits, and overhead.
    \223\ The Commission derived the total estimated burdens from
the following estimates: (Compliance Attorney at 12 hours * $406 per
hour) + (Compliance Manager at 8 hours * $344 per hour) + (Business
analyst at 5 hours * $265 per hour) = $8,949 per exchange in ongoing
annual costs. $8,949 per exchange x 13 respondents = $116,337. See
supra note 85.
    \224\ The Commission derived the total estimated burdens from
the following estimates: (Sr. Programmer at 25 hours * $368 per
hour) + (Sr. Systems Analyst at 10 hours * $316 per hour) +
(Compliance Manager at 10 hours * $344 per hour) + (Director of
Compliance at 5 hour * $542 per hour) + (Compliance Attorney at 8
hours * $406) = $21,758 per exchange in initial costs. $21,758 per
exchange x 13 respondents = $282,854. See supra notes 85, 106, and
accompanying text.
    \225\ The Commission derived the total estimated burdens from
the following estimates: (Compliance Attorney at 6 hours * $406 per
hour) + (Compliance Manager at 2 hours * $344 per hour) = $3,124 per
monthly filing. $3,124 x 12 months = $37,488 per respondent. $37,488
per exchange x 13 respondents = $487,344. See supra note 89.

                   Table 8--Compliance Costs Estimates
------------------------------------------------------------------------
                                      Initial (one-
            Description                   time)         Ongoing (annual)
------------------------------------------------------------------------
Review & revise price schedule +     \222\ $23,945.00    \223\ $8,949.00
 supplement anti-evasion rules....
Collect, compile, and submit          \224\ 21,758.00    \225\ 37,488.00
 required disclosures to the
 Commission.......................
                                   -------------------------------------
    Total (per exchange)..........          45,703.00          46,437.00
x 13 Exchanges with volume-based           594,139.00         603,681.00
 pricing..........................
------------------------------------------------------------------------

    The requirements of proposed Rules 6b-1(b)(1) and 6b-1(b)(2) to
revise exchange rules and implement anti-evasion policies and
procedures would also impose costs by increasing the likelihood that
the effects of Rule 6b-1(a), the prohibition of volume-based pricing to
agency-related order flow, are realized. The Commission believes the
proposed prohibition on volume-based transaction pricing for agency-
based order flow would result in costs.\226\
---------------------------------------------------------------------------

    \226\ See supra section IV.C.2.b (discussing costs associated
with proposed Rule 6b-1(a)).
---------------------------------------------------------------------------

3. Effects of the Transparency Provisions
a. Benefits
i. Increased Transparency
    Proposed Rule 6b-1(c) would require equities exchanges to make
monthly submissions to the Commission concerning how many members
qualify for their volume-based pricing in connection with the execution
of proprietary volume in NMS stocks, among other things.\227\
---------------------------------------------------------------------------

    \227\ See supra section II.D, discussing the full requirements
of proposed Rule 6b-1(c).
---------------------------------------------------------------------------

    Knowing the number of exchange members that qualify for the
different tiers will provide additional information to exchange members
who would be concerned with which tiers they qualify for per their
principal trading. While exchange members already know the tier
qualification criteria or many volume-based tiers knowing the tier
qualification criteria does not mean that

an exchange member can with certainty know which tier it would qualify
for a given absolute amount of trading volume. For example, many
volume-based pricing tiers set the volume threshold needed for tier
qualification as a percentage of aggregate measures such as the total
consolidated trading volume \228\ which is dependent on the trading of
other market participants and not just that of the member itself. The
disclosures of how many members qualify for their volume-based pricing
in connection with the execution of principal flow would help resolve
uncertainty regarding the distribution of tier qualification.
---------------------------------------------------------------------------

    \228\ For example, one exchange defines total consolidated
volume as ``the total consolidated volume reported to all
consolidated transaction reporting plans by all exchanges and trade
reporting facilities during a month in equity securities, excluding
executed orders with a size of less than one round lot.'' See
https://listingcenter.nasdaq.com/rulebook/nasdaq/rules/nasdaq-equity-7.
---------------------------------------------------------------------------

    The Commission expects that the main benefit from the disclosure
provisions of the proposed rule would be to improve the comments
provided by members and other interested parties by providing
information on the distribution of member tier qualification. As
previously mentioned,\229\ the monthly disclosures would identify the
different transaction pricing tiers at each exchange and provide a
breakdown of how many members qualified for the various tiers each
month. The enhanced transparency would increase the ability of the
exchange members, other exchanges, and other interested parties to
assess how many members qualify for specific transaction pricing on an
exchange and better understand the effect of exchange fee tiers which
may enable more detailed comment. The Commission expects that by
helping interested parties in providing more detailed comment on future
fee filings the required disclosures would enhance the information
available to the Commission and improve regulatory efficiency.
---------------------------------------------------------------------------

    \229\ See supra section II.D.
---------------------------------------------------------------------------

    Disclosure of the number broker-dealers qualifying for each tier
across all NMS stock exchanges would enable investors to learn the
distribution of transaction fee-related costs across broker-dealers.
    The proposed rule would also require the exchanges to disclose the
number of members that executed principal orders in NMS stocks for each
month as well as provide a table enumerating each volume-based tier
along with basic information regarding the tier and its qualification
criteria. While the Commission does not expect these other items to
provide new benefits, since total membership numbers and detailed
pricing schedules are already publicly accessible, the proposed rule
would also require that these data be submitted to EDGAR in Inline
XBRL, which would be a benefit as we discuss below.
ii. Benefits of EDGAR and Inline XBRL Requirements
    Under proposed Rule 6b-1(c)(3), exchanges would provide the monthly
disclosures in EDGAR in Inline XBRL. Requiring equities exchanges to
present this information in a machine-readable, structured data
language--namely, Inline XBRL--rather than an unstructured format
(e.g., HTML, ASCII, PDF) would further heighten transparency around
exchange fee tier structures by facilitating more efficient retrieval,
comparison, aggregation, and other analysis of fee tiers data on
specific exchanges as well as across different exchanges and time
periods. The use of Inline XBRL tags for proprietary volume-based
pricing disclosures would thus make the disclosures more easily
accessible to, and usable by, the Commission, exchange members, and the
public, which in turn should allow for more efficient review of the
impact of volume-based exchange transaction pricing.
    Inline XBRL is an open, nonproprietary standard overseen by a not
for profit consortium that includes a community of service providers
and software tools.\230\ Exchange members and market participants could
leverage this existing infrastructure to readily compile, compare, and
analyze the number of tiers at different exchanges, the number of
members in various tiers at different exchanges, and the financial
benefits attributable to different tiers within and across exchanges.
Thus, the Inline XBRL standard could help the public more efficiently
assess the effects and application of exchanges' volume-based pricing
for NMS stocks for proprietary volume.
---------------------------------------------------------------------------

    \230\ See About, XBRL.org, available at https://www.xbrl.org/the-consortium/about; Tools and Services, available at https://www.xbrl.org/the-standard/how/tools-and-services/.
---------------------------------------------------------------------------

    In addition, requiring exchanges to file the disclosures with the
Commission would allow the Commission, the public, or exchange members
to access the disclosures directly from a central, publicly accessible
location, thus enabling efficient access and retention of the number of
exchange members that qualify for each volume-based pricing tier on
their proprietary volume. Centralized filing of the proposed
disclosures would assist members, other exchanges, and the public in
analyzing and commenting on volume-based exchange transaction pricing
schedules that apply to proprietary volume. Additionally, centralized
filing of the tiers disclosures with the Commission could, by making it
easier for the Commission and the public to retrieve the exchange fee
tiers disclosures over time from a single source, facilitate assessment
of the level of competition and the impact of pricing tiers on
intermarket competition.\231\ The EDGAR system also would enable
technical validations (i.e., programmatic data error checks) on the
disclosures, thus potentially improving data quality by reducing the
incidence of non-discretionary errors (e.g., including text for a
disclosure that should contain only numbers).
---------------------------------------------------------------------------

    \231\ See supra section II.D (establishing the more effective
assessment of whether pricing tier changes are reasonable, equitably
allocated, not unfairly discriminatory, and do not impose a burden
on competition as an objective of proposed Rule 6b-1(c)).
---------------------------------------------------------------------------

iii. Impact on Exchange Price Schedules
    The proposed transparency provisions would publicly reveal the
number of exchange members which qualify for different pricing tiers on
each exchange. If publicized, this information could prompt exchanges
to reconsider their pricing structures, especially if they could give
the appearance of disproportionately favoring a small number of
exchange members. A possible effect of this kind of disclosure could be
for exchanges to voluntarily adopt price schedules with fewer pricing
tiers that end up applying to a few select exchange members in order to
not give the appearance of disproportionately favoring a small number
of exchange members. If exchanges adopt pricing schedules which result
in a more even distribution of tier qualification as opposed to pricing
schedules where more members qualify for lower volume tiers and few
qualify the top tiers it could result in a benefit to the small to
medium-sized exchange members who, under the current price schedules,
may struggle to qualify for the best pricing tiers.
    Such a shift in pricing structure would enable a broader range of
members to qualify for improved pricing terms which in turn could help
level the competitive field in the market between exchange members to
provide direct market access to non-member customers insofar as members
subsidize the terms

offered to their agency customers with the savings realized from
hitting higher pricing tiers with their principal order flow.
b. Costs
i. Implementation Costs
    With respect to the Inline XBRL requirement for the proposed fee
tiers disclosures, equities exchanges would incur both initial Inline
XBRL compliance costs, such as the cost of training in-house staff to
prepare filings in Inline XBRL, and the cost to license Inline XBRL
preparation software from vendors, and ongoing Inline XBRL compliance
burdens that would result from the proposed tagging requirements. The
proposed Inline XBRL requirements for the proposed fee tiers
disclosures would result in compliance costs for equities exchanges
relative to the current baseline, because equities exchanges would be
newly required to apply Inline XBRL tags to the proposed disclosures
before filing the fee tiers disclosures with the Commission (or pay a
third-party tagging service provider to do so).
    Because Inline XBRL tagging compliance software has already been
developed and is already in use by public reporting companies to
fulfill Inline XBRL requirements, the Commission expects that vendors
would update their tagging software to accommodate the proposed Inline
XBRL requirement for the proposed fee tiers disclosures if such a
requirement is adopted. Equities exchanges currently are not subject to
Inline XBRL requirements to comply with their legal requirements as
exchanges. That said, most equities exchanges are affiliated with
public reporting companies that are subject to existing Inline XBRL
requirements. For example, 12 of the 16 equities exchanges are
affiliated with public companies that are required to file financial
statements and other disclosures in EDGAR in Inline XBRL.\232\ To the
extent that an equities exchange shares compliance systems with an
affiliated entity that is required to submit Inline XBRL structured
filings in EDGAR, or could otherwise leverage the affiliated entity's
processes, licenses, service agreements, and expertise in complying
with Inline XBRL requirements, the exchange's compliance costs could be
partially mitigated.
---------------------------------------------------------------------------

    \232\ See, e.g., Cboe Global Holdings, Inc. 2022 Form 10-K,
available at https://www.sec.gov/ix?doc=/Archives/edgar/data/0001374310/000155837023008202/cboe-20230331x10q.htm;
Intercontinental Exchange, Inc. 2022 Form 10-K, available at https://www.sec.gov/ix?doc=/Archives/edgar/data/1571949/000157194923000006/ice-20221231.htm; NASDAQ, Inc. 2022 Form 10-K; available at https://www.sec.gov/ix?doc=/Archives/edgar/data/0001120193/000112019323000014/ndaq-20221231.htm.
---------------------------------------------------------------------------

    The Commission believes the compliance costs associated with the
proposed requirement to structure the proposed fee tiers disclosures in
Inline XBRL likely would decrease over time because equities exchanges
likely would comply with structuring requirements more efficiently
after gaining experience over repeated filings, although such an effect
could be diminished for equities exchanges affiliated with public
reporting companies that already have experience structuring filings in
Inline XBRL.
    Because national securities exchanges are not currently subject to
EDGAR filing requirements,\233\ equities exchanges would incur a one-
time compliance burden of submitting Form ID to access EDGAR as a
result of the proposed requirement to submit the fee tiers disclosure
via EDGAR.\234\ While there are no fees associated with registering as
an EDGAR filer, the Commission recognizes that the proposed requirement
to submit the proposed fee tiers disclosures in EDGAR would impose
compliance costs on equities exchanges in order to make limited changes
to their systems, policies, and procedures to comply with the EDGAR
filing requirement. These costs could be mitigated by the fact that
many equities exchanges have affiliated entities that provide
disclosures in EDGAR in Inline XBRL, and therefore employees of the
equities exchanges could leverage the knowledge and experience about
EDGAR and Inline XBRL possessed by staff within those affiliates.
---------------------------------------------------------------------------

    \233\ The Commission recently proposed that national securities
exchanges and exempt exchanges, including the equities exchanges
that would be covered by proposed Rule 6b-1(c), file certain forms
in EDGAR in structured data languages. See Electronic Submission of
Certain Materials Under the Securities Exchange Act of 1934;
Amendments Regarding the FOCUS Report, Securities Act Release No.
11176; Exchange Act Release No. 97182; Investment Company Release
No. 34864 (Mar. 22, 2023) 88 FR 23920 (Apr. 18, 2023).
    \234\ Form ID must be completed and filed with the Commission by
all individuals, companies, and other organizations who seek access
to file electronically in EDGAR. See 17 CFR 232.10(b); 17 CFR
249.446. Accordingly, a filer that does not already have access to
EDGAR must submit a Form ID along with the notarized signature of an
authorized individual to obtain an EDGAR central index key and
access codes to file on EDGAR.
---------------------------------------------------------------------------

ii. Reputation Costs & Changes in Exchange Price Schedules
    The proposed transparency provisions which require the monthly
public disclosure of the number of exchange members which qualify for
different pricing tiers with their principal order flow has the
potential to impose reputational costs on the exchanges. As the
proposed rule would prohibit the application of volume-based tiers to
agency-related order flow any qualification to a volume-based tier
would have to be a function of non-agency related volume and the
pricing of those tiers would only apply to non-agency related orders.
The fact that the disclosure would only apply to principal trades
limits the extent to which the information would be useful for market
participants other than proprietary traders.
    While exchanges currently are required to disclose their pricing
schedules by publishing them online,\235\ the number of members which
qualify for each tier is not known to the public.\236\ Some exchanges
could suffer reputational costs if the distribution of members over the
tiers for which they qualified for is perceived to be unfair. For
instance, if only a few exchange members qualify for the most
advantageous pricing tiers, the potential perception that these select
few members receive advantages not available to a wider group could
harm the reputation of the relevant exchange, especially if it appears
as if the exchange is subsidizing the top pricing tiers at the expense
of lower tiers.
---------------------------------------------------------------------------

    \235\ See supra note 7 and accompanying text.
    \236\ See supra section IV.B.5 (discussing the current state of
price tier transparency).
---------------------------------------------------------------------------

    The Commission believes that the risk of such reputational costs
may induce exchanges to change their price schedules. Such changes
would result in costs for those exchanges who undertake them, in the
form of costs to alter existing price schedules, and through the
possibility that such changes in price may reduce the incentive for
their members to concentrate their principal order flow. Having to
adopt a pricing schedule with a more even distribution of tier
qualification, one where more members qualify for the different tiers,
may only be possible by offering less attractive pricing across the top
tiers. Trading off the pricing terms of high volume tiers in order to
adopt a pricing schedule which may be perceived as more equitable could
cause the exchange to lose trading volume or liquidity provided as high
volume members may find other venues as more attractive following the
change. As discussed in sections IV.D.2 and IV.D.1 the Commission
cannot establish a reliable estimated range for the extent of these
costs and which exchanges would be affected given that exchanges

may modify their pricing schedules in response to many factors,
including the proposed rule.

D. Effect on Efficiency, Competition, and Capital Formation

1. Efficiency
    The Commission anticipates that the proposed rule would result in
most exchanges that trade NMS stocks significantly adjusting their
transaction pricing schedules. By prohibiting one form of transaction
pricing (volume-based) for trades of agency and riskless principal, the
proposed rule would allow exchanges to apply different fees or rebates
to principal trades. An example of one such case could entail offering
fixed transaction fees and rebates to agency and riskless-principal
trades but offering volume-based tiered prices to principal trades.
While current pricing tiers may effectively differentiate between
agency-related and principal trades it is often as a by-product of the
tier categorization rather than an explicit condition of the
application of the tier. An example of such an instance would be
pricing tiers reserved for exchange members that are registered with
the exchange as a market-maker and whose market-making orders would all
be principal trades. However, this pricing would not apply to other
exchange members that exclusively trade in a principal capacity if they
are not registered market makers; so while all orders in such a tier
may be of the same capacity categorization, qualification to such a
market-maker tier does not universally apply to all principal capacity
trades. The proposed rule would not prohibit exchanges from proposing
transaction pricing where qualification is predicated on the capacity
of the order as long as they are not based on volume to any extent.
    The potential for exchanges to offer distinct pricing to principal
and agency-related order flow introduces the possibility for greater
market segmentation. This could arise if exchanges chose to tailor
their transaction pricing schedule to favor one type of order flow over
another.\237\ Such segmentation could negatively impact overall
transaction costs by resulting in wider spreads being quoted on the
exchanges. By their very nature agency orders have to be handled by an
intermediary before being able to reach one of the exchanges, which
leaves agency traders with a latency disadvantage relative to principal
traders that can access the exchanges directly.\238\ If such a
concentration of agency orders on certain exchanges occurs it would
result in traders having a higher degree of certainty as to whether
they are trading against an agency order or not based on which exchange
the transaction is occurring. Understanding that their orders are more
likely to be routed to some exchanges over others and hence more
readily identified as an agency order, agency traders could elect to
provide liquidity at a wider spread as a means of compensation for the
increased risk of being adversely selected by a principal trader. While
the latency disadvantage exists in current markets, exchanges that have
a mix of agency and principal orders may see less likely adverse
selection for agency orders because principal orders face more
uncertainty about the capacity of their counterparty. The relative
scarcity of agency order flow on exchanges that become dominated by
principal trading following the implementation of the proposed rules
could also result in wider spreads on those exchanges. These dynamics
could be even more pronounced in the presence of additional
discrepancies between the informativeness or adverse selection risk of
agency and principal orders. This phenomenon further underscores the
potential implications of distinct pricing mechanisms for different
types of order flow on market efficiency and transaction costs.
---------------------------------------------------------------------------

    \237\ A broker-dealer solely looking to minimize transaction
fees and maximize transaction rebates would concentrate their
principal order flow on the exchange(s) with the most attractive
principal volume tiers and concentrate their agency flow on the
exchange(s) with the best agency order pricing. Markets are more
likely to fragment if the set of exchanges with the best agency
order pricing differ from the set with the best principal order
pricing.
    \238\ With the exception of sponsored access trades under which
the exchange member's sponsored customer can directly access the
exchanges using the member's infrastructure, although sponsored
access trades comprise a small portion of total agency flow.
---------------------------------------------------------------------------

    The effects of the proposed elimination of volume-based transaction
pricing tiers for agency-related trades could improve transaction
quality and market efficiency by alleviating an impediment to switching
the routing of orders from one exchange to another. As previously
discussed, volume-based transaction price tiering effectively makes it
more difficult for market participants to justify partially switching
trading venues by increasing the opportunity costs of doing so, because
switching the venue to which agency orders are routed to makes it less
likely that the market participant will end up qualifying for a
preferential pricing tier. The elimination of volume-based transaction
price tiering for agency-related trades would alleviate this worry of
missing out on preferential pricing and allow broker-dealers to route
orders more readily to a variety of exchanges on the basis of execution
quality. While variation in rebates and fees across exchanges would
likely continue to exist and be one factor that influenced the routing
decisions of brokers, the lack of volume-based transaction tiering
would mean that brokers could route agency orders to a different
exchange without jeopardizing the average net per-share costs of their
overall trading.
    While welfare for different customer segments may increase or
decrease under the proposed ban, the overall welfare effects of banning
price discrimination are ambiguous and can vary across market
settings.\239\ Nevertheless, standard intuition derived from economic
theory suggests that when heterogeneity across customers exists, price
discrimination may increase total welfare (i.e., welfare summed across
firm(s) and their customers who derive utility from the purchased
goods) if the quantity sold increases under discrimination.\240\ The
analog of ``customers'' in the exchange setting is a combination of
broker-dealers and their customers. Broker-dealers and the end
investors share in gains from executing trades. As the intermediaries,
to the extent the broker-dealers share the rebates with their
investors, the end investors benefit from both the fulfilled trades and
rebate pass-through. To the extent that broker-dealers' responsiveness
to volume-based discounts is driven by the end investors'
responsiveness to cost savings, volume-based discounts may expand
overall liquidity across exchanges. Not only might volume-based
discounts help the dominant exchange extract more order flow and
revenue, but the pricing schemes could also increase broker-dealers'
and their customers' total surplus.
---------------------------------------------------------------------------

    \239\ Igal Hendel and Aviv Nevo, ``Intertemporal Price
Discrimination in Storable Goods Markets,'' 103 Am. Econ. Rev. 2722
(2013); Guillermo Marshall, ``Hassel Costs and Price Discrimination:
An Empirical Welfare Analysis,'' 7 Am. Econ. J.: Applied Econ. 123
(2015); Sofia Berto Villas-Boas, ``An empirical investigation of the
welfare effects of banning wholesale price discrimination.'' 40 RAND
J. Econ. 20 (2009).
    \240\ See Hall R. Varian, ``Price Discrimination and Social
Welfare,'' 75 Am. Econ. Rev. 870-75 (1985).
---------------------------------------------------------------------------

    Evaluation of price discrimination from other market settings
provides the insight that volume-based pricing that attracts more
agency business from high-volume exchange members may benefit both the
high-volume exchange members and the exchanges, possibly at the cost of
lower-volume exchange members. However, in the context of

trading platforms with liquidity externality, additional order flow
from high-volume exchange members may ultimately be beneficial to
lower-volume broker-dealers. High-volume exchange members likely
contribute substantially more to the depth of book on an exchange. When
volume-based discounts induce additional order flow from high-volume
broker-dealers to convene on a dominant exchange, more liquidity
reduces the cost of searching for the best execution and benefits the
lower-volume broker-dealers. This order flow externality, which is
absent in many traditional price discrimination settings, provides a
benefit that partially countervails the potential negative impact of
volume-based tiers on the lower-volume broker-dealers.
2. Competition
a. Broker-Dealer Competition
    To the extent that such increased costs for investors caused them
to send order flow to other, lower-volume exchange members, allocative
efficiency in the market for NMS stock brokerage services might be
reduced. The high-volume exchange members might be most efficient at
executing trades due technology, capital or service strength arising
from their scale economies. Directing more order flow to the lower-
volume exchange members might result in resources being inefficiently
utilized. The effects of the proposed rule on the competition among
broker-dealers are discussed in sections IV.C.1.a.i and IV.C.2.b.i.
b. Changes in Order Flow Concentration
    The Commission expects that the proposed prohibition for volume-
based exchange transaction pricing on agency-related order flow would
be likely to increase the dispersion of agency flow and increase the
concentration of principal order flow across exchanges.
    The reason that agency-related volume might be impacted in this way
is that volume-based transaction pricing incentivizes the concentration
of order flow and, all else being equal, the removal of this incentive
should result in less concentration of that flow. Under the assumption
that some variant of volume-based transaction pricing remains in place
for principal orders, the concentration of principal order flow on
exchanges that previously used tiered transaction pricing would be
expected to increase since the absence of agency volume counting
towards tier qualification could lead to a higher degree of
concentration of principal flow that would be needed to qualify for
pricing similar to what they realized prior to the proposed rule. As
reported in Table 5 the members of exchanges with more price tiering
are more likely to concentrate their order flow onto those exchanges as
illustrated by higher average share of member trading volume and a
greater proportion of members executing a plurality of their order flow
on the exchange. This suggests that exchanges might adjust their
pricing schedules to confer greater rewards to the execution of
principal trading volume as a means of competing for principal trading
flows. This effect would not be present if exchanges instead offered
their best transaction pricing to all members equally.
    The extent to which the different order flows become more or less
dispersed under the proposed prohibition is uncertain as it depends on
the changes of a multitude of other factors and their interactions
which are infeasible for the Commission to reliably forecast. For
instance, many exchange transaction pricing schedules would be likely
to significantly change as a result of the proposed rule, which would
likely affect broker-dealer routing decisions and could possibly
increase principal trading.\241\ In light of these difficulties, rather
than providing a single point estimate, the following analysis will
present expected effects on the exchanges that a variety of
hypothetical changes in order flow concentration are likely to have.
---------------------------------------------------------------------------

    \241\ See supra section IV.C.2.b.iii (discussing how the
proposed rule is expected to increase the incentive to increase the
concentration of principal order flow).
---------------------------------------------------------------------------

    Table 9 reports the expected trading volumes and market shares for
the 16 exchanges under different changes in order flow concentration.
The analysis uses the January 2023 on-exchange trading volume as a
baseline. Implicit in the analysis is the assumption that the various
exchange members execute the same trading volume on-exchange as they
did in January 2023 baseline.\242\
---------------------------------------------------------------------------

    \242\ See supra section IV.C.1.b.v (discussing how the proposed
rule may increase the amount of trading which may migrate to off-
exchange market centers).

  Table 9--Exchange Positions Given Changes in Order-Flow Concentration
------------------------------------------------------------------------

-------------------------------------------------------------------------
The following table reports the total amount of executed orders (panel
 A) and the changes in executed orders (panel B), measured in number of
 shares, that were executed during regular trading hours across the 16
 national stock exchanges under different scenarios using the total buy
 and sell executed order flow from all exchange members using a sample
 of CAT data for the month of Jan. 2023 from Table 4 as a baseline.
 Exchange members are identified as the set of unique CRD IDs in CAT
 which have directly routed orders to any of the national equities
 exchanges in the month. Exchange member CRDs are also verified in the
 CAT Industry Member Identifier List daily reference data. For each
 exchange the number of shares executed under the CAT allowable trade
 capacities of Agency, Principal, and Riskless Principal are reported.
 Trade capacity in CAT is defined by the exchange member for its side of
 a trade and represents the capacity in which the exchange member acted
 at trade time. Trades with the sale-condition codes-M--Market Center
 Official Close, -Q--Market Center Official Open, -V--Contingent Trade,-
 7--Qualified Contingent Trade (QCT), -8--Placeholder for 611 Exempt,
 and -9--Corrected Consolidated Close (per listing market) were
 excluded. ``Agency -100% Concentration'' corresponds to the scenario
 under which every exchange member sends an equal proportion of its
 agency-related order flow (orders of capacity code of agency or
 riskless principal) across all the exchanges they are a member of.
 ``Agency -20% Concentration'' corresponds to the case where the
 proportion of agency-related order flow executed by each exchange
 member is adjusted to be 20% closer to the equal proportion levels.
 ``Principal +20% Concentration'' corresponds to the case where the
 proportion principal order flow executed by each exchange member is
 adjusted to be 20% further from the equal proportion levels. ``Agency -
 20% Concentration & Principal +20% Concentration'' corresponds to the
 case where the proportion of principal order flow executed by each
 exchange member is adjusted to be 20% further from the equal proportion
 levels and the proportion of agency-related order flow executed by each
 exchange member is adjusted to be 20% closer to the equal proportion
 levels. See note 243 and the associated text for a detailed description
 of the calculations.
Panel A: Trading Volume and Market Share Levels. Below the total order
 flow, measured in number of shares, for each of the four scenarios and
 the baseline for each exchange is reported. The percentage share of
 total trading volume between each of the four scenarios and the
 baseline for each exchange are reported under the trading volume.
------------------------------------------------------------------------

                                                                                Agency -100%       Agency -20%       Principal +20%     Agency -20% &
                         Exchange                               Baseline        concentration      concentration      concentration      principal +20%
--------------------------------------------------------------------------------------------------------------------------------------------------------
NYSE American............................................      1,545,083,370      9,014,311,364      3,038,928,968        925,779,162      2,419,624,761
                                                                       0.64%              3.74%              1.26%              0.38%              1.00%
NYSE Arca................................................     39,311,251,528     28,194,801,883     37,087,961,599     40,979,313,252     38,756,023,323
                                                                      16.30%             11.69%             15.38%             16.99%             16.07%
BX.......................................................      1,712,065,584     10,202,384,309      3,410,129,329        954,950,476      2,653,014,221
                                                                       0.71%              4.23%              1.41%              0.40%              1.10%
Cboe BYX.................................................      4,664,774,940     10,767,820,881      5,885,384,128      3,996,852,852      5,217,462,040
                                                                       1.93%              4.47%              2.44%              1.66%              2.16%
Cboe BZX.................................................     19,855,374,396     18,464,904,008     19,577,280,318     20,177,425,112     19,899,331,035
                                                                       8.23%              7.66%              8.12%              8.37%              8.25%
NYSE Chicago.............................................        432,565,797      6,732,028,311      1,692,458,299        271,874,586      1,531,767,089
                                                                       0.18%              2.79%              0.70%              0.11%              0.64%
Cboe EDGA................................................      5,800,545,730     10,492,471,510      6,738,930,886      5,050,458,361      5,988,843,517
                                                                       2.41%              4.35%              2.79%              2.09%              2.48%
Cboe EDGX................................................     26,669,251,824     21,126,143,742     25,560,630,207     27,337,564,263     26,228,942,646
                                                                      11.06%              8.76%             10.60%             11.34%             10.88%
IEX......................................................     10,772,940,184     12,475,034,616     11,113,359,070     10,073,270,498     10,413,689,385
                                                                       4.47%              5.17%              4.61%              4.18%              4.32%
LTSE.....................................................         12,160,554      6,380,358,525      1,285,800,148         10,749,491      1,284,389,085
                                                                       0.01%              2.65%              0.53%              0.00%              0.53%
MEMX.....................................................     13,241,685,902     14,925,744,644     13,578,497,650     12,975,451,264     13,312,263,013
                                                                       5.49%              6.19%              5.63%              5.38%              5.52%
Nasdaq...................................................     68,721,861,666     36,597,959,759     62,297,081,284     71,138,284,292     64,713,503,911
                                                                      28.50%             15.18%             25.83%             29.50%             26.84%
NYSE National............................................      2,317,954,540      9,158,405,160      3,686,044,664      1,708,621,212      3,076,711,336
                                                                       0.96%              3.80%              1.53%              0.71%              1.28%
NYSE.....................................................     39,387,052,205     26,406,685,490     36,790,978,862     40,310,486,972     37,714,413,629
                                                                      16.33%             10.95%             15.26%             16.72%             15.64%
MAX Pearl................................................      4,485,360,802      9,986,884,064      5,585,665,454      3,863,443,029      4,963,747,682
                                                                       1.86%              4.14%              2.32%              1.60%              2.06%
Phlx (PSX)...............................................      2,220,543,164     10,224,533,912      3,821,341,313      1,375,947,356      2,976,745,506
                                                                       0.92%              4.24%              1.58%              0.57%              1.23%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Panel B: Changes in Trading Volume and Market Share. Below the difference in total order flow, measured in number of shares, across each of the four
 scenarios and the baseline for each exchange is reported. Differences in the percentage share of total trading volume across each of the four scenarios
 and the baseline for each exchange are reported under the trading volume. The number of tiers for each exchange from Table 5 are also reported for each
 exchange.
--------------------------------------------------------------------------------------------------------------------------------------------------------
NYSE American............................................                 10      7,469,227,994      1,493,845,598       -619,304,208        874,541,391
                                                                                3.10%              0.62%             -0.26%              0.36%
NYSE Arca................................................                 72    -11,116,449,645     -2,223,289,929      1,668,061,724       -555,228,205
                                                                                -4.61%             -0.92%              0.69%             -0.23%
BX.......................................................                 20      8,490,318,725      1,698,063,745       -757,115,108        940,948,637
                                                                                3.52%              0.70%             -0.31%              0.39%
Cboe BYX.................................................                 11      6,103,045,941      1,220,609,188       -667,922,088        552,687,100
                                                                                2.54%              0.51%             -0.27%              0.23%
Cboe BZX.................................................                 26     -1,390,470,388       -278,094,078        322,050,716         43,956,639
                                                                                -0.57%             -0.11%              0.14%              0.02%
NYSE Chicago.............................................                  0      6,299,462,514      1,259,892,502       -160,691,211      1,099,201,292
                                                                                2.61%              0.52%             -0.07%              0.46%
Cboe EDGA................................................                  8      4,691,925,780        938,385,156       -750,087,369        188,297,787
                                                                                1.94%              0.38%             -0.32%              0.07%
Cboe EDGX................................................                 19     -5,543,108,082     -1,108,621,617        668,312,439       -440,309,178
                                                                                -2.30%             -0.46%              0.28%             -0.18%
IEX......................................................                  0      1,702,094,432        340,418,886       -699,669,686       -359,250,799
                                                                                0.70%              0.14%             -0.29%             -0.15%
LTSE.....................................................                  0      6,368,197,971      1,273,639,594         -1,411,063      1,272,228,531
                                                                                2.64%              0.52%             -0.01%              0.52%
MEMX.....................................................                 13      1,684,058,742        336,811,748       -266,234,638         70,577,111
                                                                                0.70%              0.14%             -0.11%              0.03%
Nasdaq...................................................                 74    -32,123,901,907     -6,424,780,382      2,416,422,626     -4,008,357,755
                                                                                -13.32%             -2.67%              1.00%             -1.66%
NYSE National............................................                 11      6,840,450,620      1,368,090,124       -609,333,328        758,756,796
                                                                                2.84%              0.57%             -0.25%              0.32%
NYSE.....................................................                 93    -12,980,366,715     -2,596,073,343        923,434,767     -1,672,638,576
                                                                                -5.38%             -1.07%              0.39%             -0.69%
MIAX Pearl...............................................                  8      5,501,523,262      1,100,304,652       -621,917,773        478,386,880
                                                                                2.28%              0.46%             -0.26%              0.20%
Phlx (PSX)...............................................                  4      8,003,990,748      1,600,798,149       -844,595,808        756,202,342
                                                                                3.32%              0.66%             -0.35%              0.31%
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Changes in concentration are calculated by either increasing or
decreasing the distance between the proportions of order flow
individual broker-dealers allocate to the different exchanges and an
even split. For a given percentage increase in concentration, the
distance between the relative share of a broker-dealer's order flow
sent to an exchange and 1/N, where N denotes the number of exchanges it
is a member of, is increased by that percentage amount.\243\ The effect
of this is to increase a member's HHI measure by reducing the share of
order flow sent to exchanges for which the exchange member allocated a
smaller proportion of its original order flow and increase the share
sent to those exchanges for which it was already allocating larger
shares of its order flow. Similarly, a percentage decrease in
concentration would manifest in a lower HHI value.\244\ A 100% decrease
in concentration corresponding to the case when an exchange member
evenly splits its order flow and the member HHI is equal to the minimum
achievable value.\245\
---------------------------------------------------------------------------

    \243\ Suppose that a broker-dealer allocates, for each exchange
i, a share si such that the sum of si's across
exchanges indexed by i (``sum of shares'') equals one. Given a
percentage change p in concentration, the broker-dealer shares are
transformed to an updated
si*=max[si+p(si-1/N),0], where N
denotes the count of exchanges over which the broker-dealer
allocates order flow. When p0, member HHI increases,
since the sum of the updated (si*)\2\'s is greater than
the sum of the (si)\2\'s. In cases where
si+p(si-1/N) < 0, the updated sum of shares
would be greater than 1. In these cases the new shares are
recalculated as the ratio of si* to the updated sum of
shares, in order to ensure that the shares sum to one; whenever this
occurs the number of exchanges receiving non-zero order flow
decreases.
    \244\ To illustrate, if a broker-dealer distributed their order
flow 70%/30% across two exchanges a 50% increase in concentration
would result in a 80%/20% split (0.8 = 0.7 + p(0.7-0.5), and 0.2 =
0.3+p(0.3-0.5) for p = 50%). A 50% decrease in concentration would
result in a 60%/40% split (0.6 = 0.7--p(0.7-0.5), and 0.4 = 0.3-
p(0.3-0.5) fir p = 50%).
    \245\ This is the case when p=-1, and si=(1/N) for
each exchange i.
---------------------------------------------------------------------------

    The first non-baseline column of Table 9 shows what the on-exchange
market would look like if all exchange members evenly split their
agency flow across the exchanges they are member of while not changing
the distribution of principal order flow. This case serves as an upper
limit of the potential effect of the proposed rule's effect on agency-
related order flow concentration. The reason why this case reflects an
upper bound is because while the Commission expects agency order flow
concentration to decrease as a result of the proposed rule, it believes
that it is highly unlikely that the resulting market landscape would
result in individual broker-dealers evenly distributing their agency-
related order flow.\246\ The case of an even distribution of agency-
related order flow across exchanges would result in a more fragmented
market with the overall pro-rata HHI falling from 0.16 to 0.08.\247\
---------------------------------------------------------------------------

    \246\ See section IV.B.2 (discussing non-tier factors that may
influence order routing decisions).
    \247\ Overall pro-rata HHI is calculated as the sum of squared
market shares reported in Table 6.
---------------------------------------------------------------------------

    Aside from the upper bound case of an even distribution of agency
flow, a case where there would be a 20% reduction in agency flow
concentration, a case where there would be a 20% increase in principal
flow concentration, and a case with the combination of the two are also
reported Table 9. While the case of a 100% reduction in agency-related
flow concentration serves as an upper bound of the potential effects on
order flow, other scenarios serve as an exercise in comparative
statistics to illustrate the effects of more modest changes in
concentration. For the cases of a 20% decrease in concentration of
agency-related order flow and a 20% increase in principal order flow
concentration, the overall pro-rata HHI would be 0.14 and 0.17,
respectively. For the combined case of both a 20% decrease in agency-
related flow concentration and 20% increase in principal flow
concentration the resulting pro-rata HHI would be 0.15. Compared to the
January 2023 HHI of 0.16, these changes suggest that the distribution
of trading volume across the market is slightly more sensitive to
decreases in agency-related order flow concentration than to similar
increases in principal order flow concentration. As a result, a
reasonable expectation for the likely effect of the proposed rule would
be to result in a marginally more even distribution of market share
across stock exchanges, which may be representative of a more
competitive market.\248\
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    \248\ It is important to note that the basis for the statement
relies on the assumption that agency-related order flow
concentration would decrease at least as much as principal order
flow concentration increases. More importantly the analysis assumes
that exchange membership and exchange pricing schedules do not
change (outside of the prohibition of applying volume-based pricing
on agency or riskless principal order flow).
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c. Tying Closing Auction Fees to Consolidated Volume
    As discussed in section IV.B.1.c, tying closing auction fees to
broker-dealers' overall volume helps the primary listing exchanges
extend their market power and softens inter-exchange competition. For
listing companies and index funds with strong interests in closing
auctions, the current pricing structure heightens their incentive to
divert order flow to the primary exchanges in order to qualify for
lower fees during the closing auctions. The proposal would prohibit
exchanges from offering volume-based pricing in connection with the
execution of agency-related order flow in NMS stocks. The proposal
would thus prohibit exchanges from offering transaction pricing on any
orders if that pricing is determined, in part, by the execution of
agency-related trading volume. Accordingly, the proposal would prohibit
exchanges from tying transaction pricing on orders executed during
closing or opening auctions to a member's agency-related trading volume
in NMS stocks during regular trading hours. Limiting the listing
exchanges' ability to tie prices for the closing auctions to intraday
agency-related trading volume may benefit smaller exchanges without
listing capabilities.
    A more level playing field for intraday trading across exchanges
will likely benefit broker-dealers for two reasons. First, the absence
of tying that protects the primary listing exchanges may result in more
intense competition for order flow across exchanges during the regular
hours. This may in turn result in lower transaction fees/more generous
terms for broker-dealers for order executed. Second, the primary
exchanges' closing auction pricing structure tends to partially
foreclose broker-dealers' order flow that may have otherwise gone to
whichever exchange offering the best execution quality or more generous
rebates. Broker-dealers' welfare may be higher under ``unbundling'', if
changes in choice sets result in broker-dealers choosing superior
products.
3. Capital Formation
    The Commission believes the proposed rules would have a modest
impact on capital formation. The proposed rules may lower transaction
costs for investors through their effect on exchange transaction
pricing schedules,\249\ broker-dealer competition,\250\ and the broker-
dealer conflict of interest.\251\ However, the net effect is difficult
to determine. For example, some broker-dealers' transaction costs may
increase,\252\ which could then increase the transaction costs of
investors to the extent these increases are passed through to them.
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    \249\ See supra section IV.C.1.a.ii.
    \250\ See supra section IV.C.2.a.i.
    \251\ See supra section IV.C.2.a.iii.
    \252\ See supra section IV.C.2.b.ii.
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    To the extent the proposed rules reduce transaction costs, they
would increase the efficiency of trading, which may lead to better
capital allocation.

E. Reasonable Alternatives

1. Ban Volume-Based Pricing for All Orders
    As an alternative to the proposed prohibition of volume-based
transaction pricing for agency-related orders in NMS stocks, the
Commission might instead prohibit exchanges from offering volume-based
transaction pricing for all volume in NMS stocks.
    The Commission believes that much of the baseline regarding the
effects of volume-based transaction pricing on agency-related volume is
relevant to principal-based volume. One difference in the baseline for
principal order flow from proprietary trading is that such order flow
does not have the potential for a conflict of interest between members
and customers with respect to routing. Because the member trades for
its own account when routing in a principal capacity, only its own
interests are at stake in the routing decisions. Currently, the
transaction fees that a member pays and the rebates that it receives
apply to both the member's agency-related volume and its proprietary
volume, as exchanges generally do not distinguish their pricing tiers
for orders solely on the basis of whether the order was filled in a
principal or agency capacity. However, some tiers, such as those
reserved for registered market makers, effectively only apply to
principal orders. In addition, the incentives, in the form of lower
transaction pricing, that volume-based exchange transaction pricing
create to attract members to route their orders to particular exchanges
also apply to principal orders in the same way that they do for agency-
related orders.\253\ Further, the potential for burdens on competition
between members associated with volume-based exchange transaction
pricing exist for proprietary volume in a similar manner as for agency-
related volume. Even though unlike for agency-related volume there are
no third-party customers involved in or directly impacted by exchange
transaction pricing for principal orders, volume-based pricing tiers
still present issues related to competition by granting those exchange
members with a high degree of principal trading a competitive advantage
in attracting customer order flow.\254\
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    \253\ See section IV.B.3 for a discussion of the additional
incentives introduced by volume-based pricing tiers to order routing
decisions.
    \254\ Exchange members compete for the agency-related order flow
of non-exchange member customers. Volume-based pricing tiers present
a network effect, or positive feed-back loop, in that exchange
members with large amount of trading volume find it easier to
qualify for higher volume tiers which in turn allows them to attract
more customer volume by offering more attractive terms than lower
volume competitors.
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    High-volume exchange members' current tiered pricing advantage also
helps them attract customer order flow from non-members and other
members. The same pricing advantage applies to members engaged in both
agency and principal trading because a member's combined agency-related
and principal activity is counted towards its total volume to qualify
it for higher tiers, which benefits the member when competing for
customers in the market to provide exchange access to others. To the
extent that broker-dealers engage in principal bidding to fill customer
orders,\255\ principal trading may still be related to the market to
provide exchange access to investors, albeit in an indirect manner. In
this case, the barriers to entry in the brokerage business, including
the contribution of volume-based transaction pricing, would continue to
apply to principal-based trading.
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    \255\ For example, a broker, instead of working a sell order as
an agent for the customer, might just offer the customer a price to
buy the shares outright from the customer.
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    Whether or not exchange members compete for customer orders or
primarily trade in a principal capacity, they face the same fixed costs
described in section IV.B.4 for data, hardware, connectivity including
co-location services, and other inputs. While these fixed costs may
create a substantial barrier-to-entry, volume-based discounts that
lower variable costs for trades may increase trading activities and
variable profits for the high-volume members. Higher variable profits
for high-volume members help to offset the fixed costs of trading.
Hence volume-based transaction pricing that lowers trading costs for
higher volume exchange members may amplify the market shares of those
higher volume exchange members. Unlike the proposal which is more
likely to adversely affect exchange members with a high volume of
agency-related order flow, a ban on volume-based pricing for all orders
may also affect exchange members with a high volume of principal order
flow.\256\ Prohibiting volume-based pricing for principal order flow
could lead to a more level competitive environment between exchange
members which primarily trade in a principal capacity, including
amongst market makers, as differences in fees paid and rebates
collected may meaningfully affect the competitive position of the
higher volume firms which qualify for more preferential pricing
tiers.\257\ Moreover, conditional on the extent to which volume-based
pricing increases trading volumes, the prohibition of volume-based
pricing under this alternative may decrease the investment in faster
connectivity and technological prowess (e.g., trading algorithms) that
contribute to the competitive edge of principal traders by lowering the
value of such investments.
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    \256\ See section IV.C.1.b.i for a discussion of how the
proposed rule could adversely affect exchange members with a high
volume of agency-related order flow.
    \257\ See Letter from John Ramsay, Chief Market Policy Officer,
Investors Exchange LLC to Vanessa Countryman, Secretary, Commission
(Sept. 20, 2023) (``IEX Letter'') (comment letter on File No. S7-30-
22), available at https://www.sec.gov/comments/s7-30-22/s73022-262059-619382.pdf.
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    A full ban on volume-based transaction pricing would result in a
number of differences in benefits and costs.
    Under a full ban on volume-based transaction pricing, there would
be no need, and therefore no requirement, for disclosures regarding the
number of exchange members qualifying for volume-based tiers, as there
would be no volume-based tiers left. Therefore, under this alternative
there would be no need for the disclosures required under proposed Rule
6b-1(c) nor would the anti-evasion provision in proposed Rule 6b-1(b)
be needed because members would not be able to evade a broad
prohibition through activity such as mismarking orders to qualify for
tiered pricing because volume-based tiered transaction pricing would no
longer be permitted. As described in sections IV.B.1 and IV.B.5 volume-
based pricing tiers contribute to a highly complex trading environment
and by banning volume-based pricing for all orders, this alternative
may result in simpler markets. Volume-based pricing tiers allow for
significant variation across exchanges in the volume-based tiers
offered to principal orders, and a prohibition of volume-based price
tiering would greatly limit the degree of variation in pricing
schedules across exchanges. This lack of variation would make the
various trading venues look more similar in terms of the fees charged
facilitating the comparison of transaction pricing across exchanges and
could lead trading to increasingly congregate on a smaller number of
exchanges, those with the highest rebates and lowest fees. Relative to
this alternative, the proposal would still allow for a greater
variation between exchange pricing schedules since it would continue to
allow the application of volume-based pricing tiers to principal order
flow. On the other hand, contrary to the proposal, this alternative
would be simpler for exchanges to

implement than a ban on only tiered transaction pricing for agency-
related volume in at least one sense: exchanges would not have to
ascertain order capacity codes to separate agency-related orders from
proprietary orders when computing member transaction invoices.
    The Commission believes that the benefits to lower-volume exchange
members described in section IV.C.1.a.i could be increased and
extended. In that section, the Commission describes how, consistent
with the relevant economic literature, exchanges could set new prices
that are between the current lowest and highest prices offered for
transactions, benefiting those broker-dealers that currently pay the
highest prices. To the extent that these broker-dealers have principal
order flow, the change in transaction pricing would apply to that order
flow as well, further reducing these broker-dealers' transaction costs.
    Similarly, the costs to broker-dealers that currently qualify for
the highest tiers, described in section IV.C.1.b.ii would be increased
and extended. Banning volume-based exchange transaction tiers would
likely impose costs on high-volume exchange members in the form of
lower rebates/higher transaction fees. The expanded ban may also
contribute to a loss in the competitive advantage of the high-volume
members in competing for customers, particularly if the member would
have otherwise leveraged discounts on principal volume to attract
customers and qualify for higher volume tiers. The number of broker-
dealers affected would be greater under this alternative relative to
the proposal.\258\ If exchanges set transaction fees and rebates for
all orders that are between those offered at the highest and lowest
volume tiers then exchange members, including those which primarily
trade with principal orders would be affected. If exchanges respond to
the full ban by offering a new price schedule in which rebates of the
lowest tier are increased or transaction fees are decreased, those
broker-dealers whose principal-related volume would have continued to
qualify for discounts would be subject to higher trading costs for this
principal volume.
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    \258\ Exchange members which currently qualify for the best
volume-based pricing tiers may be worse off whilst those which fail
to do so may be better off.
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    A broad ban on the application of volume-based transaction pricing
might also reduce excessive intermediation, i.e., excessive quoting