sufficient statistical power, both of which would increase the costs
and complexity of the Pilot--a result viewed unfavorably by most
commenters. Finally, grouping similar ETPs also could negatively impact
the stratification of the different treatment groups, particularly if
all of the similar ETPs are similar in volume, price, and market
capitalization. In turn, this could reduce the quality and usefulness
of Pilot's results by inhibiting the ability of researchers to compare
treatment groups. In order to ensure that the Pilot Securities are
selected in a way that permits researchers to investigate causal
connections, it is imperative to stratify the Test Groups so that
researchers can study the effects of changes in fees and rebates within
each Test Group, between Test Groups, and between a Test Group and the
Control Group. In permitting this type of analysis, the Pilot should be
better able to inform future policy considerations to improve the
operation of the national market system to the benefit of investors and
issuers alike. Accordingly, the Commission is adopting the stratified
sampling construct as proposed.
5. Number of NMS Stocks Included in Each Test Group
    The Commission proposed to include 1,000 Pilot Securities in each
Test Group (i.e., 3,000 total across three Test Groups) with the
remainder to be included in the Control Group in order to be
representative of the overall population of NMS stocks and provide
sufficient statistical power to identify differences between the Test
Groups with respect to common stocks and ETPs.\173\
---------------------------------------------------------------------------

    \173\ See Proposing Release, supra note 2, at 13019-20.
---------------------------------------------------------------------------

    Several commenters supported including 1,000 stocks in each Test
Group, believing that including 1,000 stocks in each Test Group would
facilitate analysis of transaction fees and rebates on a broad cross
section of different types of NMS stocks and generate statistically
significant conclusions.\174\
---------------------------------------------------------------------------

    \174\ See Brandes Letter, at 2; Themis Trading Letter I, at 3;
Oppenheimer Letter, at 2; Spatt Letter, at 2; IEX Letter I, at 5;
Verret Letter I, at 4; AGF Letter, at 2; MFA Letter, at 3.
---------------------------------------------------------------------------

    Many commenters, however, thought that the Pilot should include
fewer

securities in each Test Group.\175\ Several of these commenters
believed the Pilot could obtain statistically significant data even
with fewer stocks in each Test Group.\176\ Other commenters urged the
Commission to reduce the number of securities included in the Test
Groups in order to reduce costs associated with the Pilot.\177\ Several
commenters argued that the Pilot was effectively a large scale change
to the current equity market structure and that it would be more
appropriate for a pilot program to apply to a smaller percentage of the
universe of NMS stocks.\178\ Further to this point, several commenters
believed that a large Pilot may be difficult to unwind, with one
commenter stating that an immediate return to current transaction fee
and rebate dynamics for stocks included in the Test Groups ``could
prove to be more disruptive to market participants and overall market
quality than the actual implementation of the Pilot.'' \179\ Some
commenters also believed the Pilot would negatively impact trading in
the stocks placed in certain Test Groups, such as by adversely
impacting spreads, and accordingly recommended including fewer stocks
so as to limit potential negative consequences.\180\ Of the commenters
that advocated for reducing the number of Pilot Securities in each Test
Group, some suggested alternative amounts to be included. Several
commenters recommended including 100 stocks in each Test Group.\181\ A
few others suggested that each Test Group include 500 stocks.\182\ One
commenter recommended ``a more tailored Pilot that includes the 225
most heavily traded names, 225 mid-cap stocks, 225 small caps and 225
ETFs would provide statistically significant data without burdening a
material portion of the market.'' \183\ The Commission has carefully
considered the concerns expressed by commenters regarding the size of
the Pilot's Test Groups.\184\ As previously discussed, the Commission
cannot know in advance the full effects of the Pilot, whether they be
positive or negative. Indeed, commenters expressed a variety of
contradicting viewpoints and estimations about the potential impacts of
the Pilot on the execution quality and market quality of NMS stocks
that would be included in the Test Groups.\185\
---------------------------------------------------------------------------

    \175\ See Magma Letter, at 3; FIA Letter, at 4; SIFMA Letter, at
4; Schwab Letter, at 2; Fidelity Letter, at 8-9; Citadel Letter, at
2; State Street Letter, at 3; Citi Letter, at 5; Clearpool Letter,
at 7; TD Ameritrade Letter, at 1; STA Letter, at 3-4; STANY Letter,
at 3; Nasdaq Letter I, at 10; Cboe Letter I, at 27; T. Rowe Price
Letter, at 4; Mastercard Letter, at 2; NorthWestern Letter, at 1;
Energizer Letter, at 1; Era Letter, at 1; Knight-Swift Letter, at 2;
ASA Letter, at 4-5.
    \176\ See Magma Letter, at 3; Schwab Letter, at 2; Fidelity
Letter, at 8-9; Clearpool Letter, at 7; STA Letter, at 3-4; Cboe
Letter I, at 27.
    \177\ See SIFMA Letter, at 4; Schwab Letter, at 2; Citadel
Letter, at 6; Citi Letter, at 5.
    \178\ See Magma Letter, at 3; FIA Letter, at 4; Citi Letter, at
5; Clearpool Letter, at 7; Nasdaq Letter I, at 10.
    \179\ See Citadel Letter, at 6. See also SIFMA Letter, at 4;
Citi Letter, at 5.
    \180\ See STA Letter, at 3; STANY Letter, at 3; State Street
Letter, at 3; TD Ameritrade Letter, at 1, 3; Mastercard Letter, at
2.
    \181\ See FIA Letter, at 4; Schwab Letter, at 2; State Street
Letter, at 3; STANY Letter, at 3; Era Letter, at 1; Cboe Letter I,
at 27.
    \182\ See SIFMA Letter, at 4; Citi Letter, at 5; STA Letter, at
3.
    \183\ See T. Rowe Price Letter, at 4.
    \184\ See supra notes 175-183 and accompanying text.
    \185\ See, e.g., supra notes 75-93 and accompanying text.
---------------------------------------------------------------------------

    Given this uncertainty, it is crucial that the Pilot be able to
produce results that are capable of facilitating an empirical review of
the effect of the prevailing fee structures on the equities markets. To
achieve this purpose, the Pilot needs to generate a sufficient number
of observations over its one-year duration to obtain sufficient
statistical power to identify differences among the Test Groups with
respect to common stocks and ETPs, thereby permitting researchers to
investigate causal connections using economic analysis capable of
finding statistical significance. Statistical power refers to the
ability for statistical tests to identify differences across samples
when those differences are indeed significant and broadly is derived
from the number of observations during a study. In other words,
statistical power can be present when observing a limited number of
subjects over a long period of time or a large number of subjects over
a shorter period of time. Because the Commission desires a shorter
duration for the Pilot, it therefore needs to have sufficient
observable data points over the shorter pilot duration. Accordingly, if
the Pilot does not contain enough securities, it may be incapable of
producing statistically sound results and will not allow researchers to
analyze differences in securities.
    With statistical power and a sufficiently large sample size,
researchers can conduct analysis of what impact (1) reductions in fees
and (2) reductions in or prohibitions on rebates might have, if any, on
stocks depending on their trading volume or market capitalization. A
pilot design that would not provide this meaningful data about the
impact that billions of dollars of exchange fees and rebates may have
on the markets and market structure, would not achieve the Commission's
goal of conducting a pilot capable of facilitating an objective
empirical view to advance that debate.
    To achieve these aims, using econometric methods designed to allow
researchers to detect a 10% change with a standard confidence level of
95%, the Commission has determined that 730 securities in each Test
Group are needed to enable the Pilot to produce statistically
meaningful results capable of informing the Commission's future
policymaking efforts. The Commission believes that a 10% change in
behavior represents an economically meaningful change that will
facilitate analysis of the Pilot's results, and therefore is an
appropriate standard for the Pilot.\186\ The determination to include
730 securities in each Test Group accounted for the need to obtain
statistically significant results among stocks of various liquidity
profiles as well as ETPs. While the number of NMS stocks that will be
included in each Test Group will be larger than what was recommended by
some commenters, the Commission believes that a smaller number of
stocks may not have sufficient statistical power given the Pilot's
proposed duration.\187\
---------------------------------------------------------------------------

    \186\ A confidence level of 95% is a standard accepted
confidence level in statistical analyses. See, e.g., William H.
Greene, Econometric Analysis 1033 (Appendix C.6) (6th ed. 2007)
(discussing standard confidence levels in academic research).
    \187\ See also note 695 infra.
---------------------------------------------------------------------------

    Furthermore, in response to comments questioning why the Pilot
included more securities than did the Tick Size Pilot, the Commission
notes that the Tick Size Pilot featured 400 corporate stocks for each
of its Test Groups.\188\ Importantly, the Tick Size Pilot did not
contain ETPs or large-cap stocks. In comparison, the Transaction Fee
Pilot will contain ETPs and large-cap stocks. Accordingly, in light of
the significantly higher number of securities eligible for inclusion,
the Transaction Fee Pilot needs to include considerably more Pilot
Securities than did the Tick Size Pilot, while continuing to achieve
the same statistical power for each of those groups of securities.
---------------------------------------------------------------------------

    \188\ See, e.g., Citadel Letter, at 6; TD Ameritrade Letter, at
2; Cboe Letter I, at 27. See also Securities Exchange Act Release
No. 74892 (May 6, 2015), 80 FR 27514, 27517 (May 13, 2015) (File No.
4-657) (order approving the National Market System Plan to Implement
a Tick Size Pilot Program).
---------------------------------------------------------------------------

    Moreover, while several commenters either implicitly or explicitly
referenced the EMSAC recommendation to include 100 stocks in each Test
Group, EMSAC's recommendation differs substantially from the
Commission's proposal. Notably, the EMSAC recommendation was limited to
common stocks with a

market capitalization above $3 billion and did not include ETPs, mid-
and small-cap stocks, or other types of NMS stocks. In order for the
Pilot to permit a broader empirical review of the impact of transaction
fees and rebates on order routing, execution quality, and market
quality, it is critical that the sample size be representative of the
population of NMS stocks for which exchange transaction fees and
rebates are economically meaningful. The Pilot must contain enough
securities to achieve the statistical power necessary to permit closer
analysis of the Pilot's results in order to identify differences in
order routing behavior, market quality, and execution quality among
subgroups of NMS stocks (e.g., ETPs, or tiers of common stock).
6. Reduction to the Pilot Size
    To respond to commenters' concerns with the size of the Pilot,
including a recommendation from the SEC's Investor Advisory Committee,
the Commission has determined to eliminate one Test Group and reduce
the number of stocks in each Test Group to 730.
    In order to materially reduce the size of the Pilot without
sacrificing statistical power, the Commission has determined to: (1)
Only place Pilot Securities in a Test Group if, at the time of
selection, they trade 30,000 shares or more per day on average and (2)
eliminate a Test Group.
    With respect to securities that trade fewer than 30,000 shares per
day, assuming, at an extreme, that such security trades 100% of its
volume on a maker-taker exchange paying a $0.0030 rebate, then it would
generate $100 in rebates per day. In addition, for thinly-traded stocks
with wider spreads, the rebate would be less impactful as it would
represent a smaller percentage of the quoted spread. This amount of
rebates would be economically insignificant and would be unlikely to
impact order routing behaviors of broker-dealers. In addition, this
level of trade volume makes it unlikely to produce sufficient
statistical power to analyze the securities in isolation because the
variability in their quoting and trading characteristics renders it
unlikely the Pilot would generate a sufficient number of observations
given the Pilot's proposed duration. In addition, for commenters that
believe that thinly-traded stocks need rebates to narrow their quoted
spreads, excluding these securities from the Pilot will allow exchanges
to continue to apply their current fee schedules to them, which will
provide another point of reference to analyze when comparing these
securities to those with slightly higher trading volumes.
    Finally, the Commission believes that eliminating one Test Group
and functionally combining proposed Test Group 1 and Test Group 2 into
a new Test Group with a $0.0010 cap will result in decreasing the
number of NMS stocks included in a Test Group in the Pilot by one-
third, which is integral in reducing the overall size of the Pilot by
more than one-half. The Commission believes this material reduction
directly responds to commenters' concerns, while still providing the
Pilot with a meaningful group in which to test a reduced fee cap and a
prohibition on rebates and Linked Pricing.
    Accordingly, the Commission believes that the Pilot's design of 730
NMS stocks per Test Group strikes an appropriate balance by reducing
the number of stocks in each Test Group and thus mitigating the
concerns of commenters about potential detrimental impacts that could
be caused by the proposed larger size of the Pilot,\189\ without
undermining the ability to obtain useful data to study the impact of
changes to transaction fees and rebates on order routing behavior,
execution quality, and market quality for a broad spectrum of stocks.
It also is large enough to accommodate drop offs among Pilot Securities
(e.g., due to mergers, bankruptcies, or stocks closing below $1).\190\
---------------------------------------------------------------------------

    \189\ See supra notes 175-180 and accompanying text.
    \190\ See Proposing Release, supra note 2, at n. 102.
---------------------------------------------------------------------------

7. Fee Cap Test Groups
    The Commission proposed that for Pilot Securities in Test Group 1,
equities exchanges could neither impose, nor permit to be imposed, any
fee or fees for the display of, or execution against, the displayed
best bid or offer of such market in NMS stocks that exceeds or
accumulates to more than $0.0015 per share.\191\ The level proposed for
Test Group 2 was $0.0005 per share.\192\
---------------------------------------------------------------------------

    \191\ See Proposed Rule 610T(a)(1). See also Proposing Release,
supra note 2, at 13021-22.
    \192\ See Proposed Rule 610T(a)(2). See also Proposing Release,
supra note 2, at 13022.
---------------------------------------------------------------------------

    After careful consideration of the comments received, which are
discussed below, the Commission is eliminating Test Group 2 and
adopting a revised Test Group 1 with a $0.0010 cap.
a. Fee Cap Level
    Commenters disagreed about the appropriateness or justification for
the proposed fee cap levels.\193\ For example, one commenter stated
that ``exchanges currently compete on fees by offering a range of
access fees and rebates within the confines of the current $0.0030
access fee cap'' but the fee caps in Test Groups 1 and 2 ``will reduce
the exchanges' ability to compete on fees by 50% in Test Group 1'' and
``83% in Test Group 2'' which could be ``to the detriment of investors
and the public interest.'' \194\ In contrast, regarding proposed Test
Group 1, another commenter stated that ``[a]t 15 mils, there is still
room for significant fee differentiation and rebates remain sizeable.''
\195\
---------------------------------------------------------------------------

    \193\ See Cboe Letter I, at 16 (stating that the Proposing
Release ``does nothing to justify how the $0.0015 and $0.0005 fee
cap levels are appropriate'' and that lowering the current fee cap
``without meaningful discussion or justification is concerning and
inappropriate''); Morgan Stanley Letter, at 1. But cf. Healthy
Markets Letter I, at 15-16 (stating that the fee caps for Test
Groups 1 and 2 ``appear to be well-justified'').
    \194\ See Cboe Letter I, at 16-17.
    \195\ See Credit Suisse Commentary, at 3.
---------------------------------------------------------------------------

    With respect to Test Group 2, one commenter stated that ``[i]f the
ultimate intent of the proposal is to determine whether or not reducing
access fees will have an effect on how brokers route their customers'
orders, then we fully support the notion of Test Group 2 to see if the
incentive to avoid access fees is eliminated with a 5 cents per 100
share cap.'' \196\ Another commenter further stated that ``to the
extent that rebates have been traditionally funded by exchanges by the
fees collected,'' then Test Group 2 ``may lead to rebate reductions''
and obtaining data on this point is ``part of the reason why a study is
needed.'' \197\
---------------------------------------------------------------------------

    \196\ See T. Rowe Price Letter, at 2.
    \197\ See Healthy Markets Letter I, at 15-16.
---------------------------------------------------------------------------

    Finally, the Investor Advisory Committee recommended that the
Commission structure the Pilot's Test Groups ``as simply as possible,''
and was not persuaded that, in addition to having the no-rebate Test
Group, having two additional Test Groups with separate fee caps ``will
generate enough additional information to justify the additional
effort.'' \198\ Accordingly, the Investor Advisory Committee
recommended that the Commission consider having, in addition to the no-
rebate Test Group, only one Test Group with a fee cap and suggested a
cap of $0.0010.\199\
---------------------------------------------------------------------------

    \198\ IAC Recommendation, at 1.
    \199\ See id. For other commenters suggesting a $0.0010 fee cap,
see Goldman Sachs Letter and NYSE Letter III.
---------------------------------------------------------------------------

    The Commission appreciates the recommendation of the Investor
Advisory Committee and agrees with it. As noted above and further
discussed below, eliminating Test Group 2 will decrease the size of the
Pilot by one-

third. New Test Group 1 will have a cap of $0.0010, which adopts the
Investor Advisory Committee's recommendation and represents a blended
average of the two fee caps the Commission originally proposed.
    The Commission believes that new Test Group 1 retains the equities
exchanges' ability to compete through differing fees and rebates, as a
fee cap of $0.0010 provides exchanges with an opportunity to utilize
various fee and rebate structures to compete for order flow. As some
commenters noted, the current access fee cap was set thirteen years ago
and may represent an outsized portion of transaction costs in light of
the technological efficiencies achieved by the equities markets in the
last decade.\200\
---------------------------------------------------------------------------

    \200\ See Citi Letter, at 1-2; Goldman Sachs Letter, at 2.
---------------------------------------------------------------------------

    As revised, new Test Group 1 will facilitate an analysis of the
extent to which exchanges reduce rebates from their current levels as a
result of a materially reduced cap on the fees used to subsidize those
rebates, and the impact of a reduced fee and rebate level on order
routing behavior, execution quality, and market quality. In addition,
by materially reducing the fee cap, the Commission believes that new
Test Group 1 will provide useful data on the extent to which current
exchange fee levels (bounded by the current access fee cap) serve as a
disincentive to take liquidity on an exchange. Obtaining useful
information to better understand the potential impact of a
significantly reduced access fee cap will ultimately be beneficial to
investors and the public interest, as it may help illuminate the extent
to which the current fees and rebates effect the market and the extent
to which those effects have a detrimental impact on investor
transaction costs.
b. Applicability to Depth-of-Book and Non-Displayed Liquidity
    As proposed, Test Groups 1 and 2 were designed to isolate and test
a reduction in the Rule 610(c) fee cap, with all else remaining
unchanged. In the Proposing Release, the Commission asked whether
commenters thought the fee caps in Test Groups 1 and 2 also should
apply to depth-of-book and undisplayed liquidity.\201\ One commenter
recommended that it should.\202\
---------------------------------------------------------------------------

    \201\ See Proposing Release, supra note 2, at 13025.
    \202\ See Clearpool Letter, at 3 n.6.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission stated that it
preliminarily believed it was unnecessary for the fee cap Test Groups
to apply to depth-of-book and undisplayed liquidity because it would be
highly unlikely for an exchange to begin charging more to access non-
displayed interest or depth-of-book quotes (compared to displayed
interest), as it would lead to uncertainty for market participants that
remove liquidity because they typically would not be able to know in
advance or control with absolute certainty whether they interact with
non-displayed interest or depth-of-book quotes.\203\ The Commission
continues to believe it would be unlikely that either maker-taker or
taker-maker exchanges would begin charging differing fees in such a
manner.\204\ Furthermore, the Commission notes that the Rule 610(c)
access fee cap does not currently apply to non-displayed interest or
depth-of-book quotes. Introducing a new variable into the fee cap Test
Groups would make it more difficult to isolate the effects of a
particular change and uncover causal connections. Accordingly, for the
reasons noted above and discussed in the Proposing Release, the
Commission is not adopting this suggestion.\205\
---------------------------------------------------------------------------

    \203\ See Proposing Release, supra note 2, at 13023 n.136-37 and
accompanying text.
    \204\ In the Proposing Release, the Commission acknowledged that
there were three exchanges that charged different fees for displayed
and non-displayed liquidity. See id. Currently, there are two, IEX
and NYSE American. The Commission notes that the differences in fees
are minimal and because a small portion of exchanges have chosen to
adopt this fee structure to date, it is unlikely a significant
portion will choose to do so.
    \205\ See Proposing Release, supra note 2, at 13022-23.
---------------------------------------------------------------------------

c. Prohibiting Rebates and Linked Pricing in Test Groups 1 and 2
    In Test Groups 1 and 2 the Commission did not propose to cap the
level of rebates, prohibit rebates, or prohibit Linked Pricing, the
latter two of which it proposed to do in the no-rebate Test Group as
discussed below.\206\ In response, several commenters advocated for
applying restrictions on rebates to the fee cap Test Groups, primarily
in reaction to the potential for exchanges to subsidize their rebates
at or near current levels from sources other than transaction fee
revenue.\207\ For example, one commenter stated that ``[t]here is
already ample evidence to suggest that some exchanges currently use
revenues from other sources to subsidize their order routing
incentives, including rebates,'' such that the proposed fee caps may
have no impact on the level of rebates paid for Pilot Securities in the
fee cap Test Groups.\208\ This commenter therefore suggested that the
fee cap Test Groups include two subgroups, one as proposed, and a
second that would prohibit rebates and Linked Pricing (and also apply
to depth-of-book and non-displayed liquidity).\209\
---------------------------------------------------------------------------

    \206\ See Section II.C.6.d. infra. See also Proposing Release,
supra note 2, at 13021-24.
    \207\ See CFA Letter, at 6; Clearpool Letter, at 2-3; Healthy
Markets Letter I at 27-29.
    \208\ See Healthy Markets Letter I, at 28.
    \209\ See id. at 16.
---------------------------------------------------------------------------

    The Commission has carefully considered these comments and has
determined not to adopt these additional restrictions. While adding
more variables or more Test Groups to the Pilot could produce
informative results, it would directly complicate the Pilot's design
thus raising the Pilot's costs and burdens. For example, if the
Commission were to add subgroups to new Test Group 1 to prohibit
rebates, it likely would have to expand the number of stocks included
in the treatment groups or expand the duration of the Pilot in order to
achieve statistical power.\210\ It also would further complicate
exchange fee schedules and could lead to more variability in exchange
fees if exchanges customized their pricing differently for each Test
Group and subgroup. Rather, the Pilot's design represents a
comparatively simple construct that is easier to implement and manage
and yet should still facilitate the Commission's ability to analyze the
impact of fees and rebates on order routing behavior, execution
quality, and market quality. Achieving these goals, while minimizing
complexity and burdens, will also assist the Commission as it considers
potential future policy initiatives informed by the results of the
Pilot.
---------------------------------------------------------------------------

    \210\ See supra Section II.C.5 discussing the need to generate a
sufficient number of observations over the Pilot's duration to
permit researchers to investigate causal connections using economic
analysis capable of finding statistical significance.
---------------------------------------------------------------------------

    In addition, the fee cap Test Groups were specifically selected to
provide the exchanges with the continued ability to offer rebates,
should they so choose, albeit at lower levels, without impacting an
exchange's ability to maintain its net profit on a per transaction
basis. The Commission declines to prohibit rebates in new Test Group 1
as doing so would go beyond the construct and application of the Rule
610(c) fee cap by introducing additional variables, and thus would
distinctly alter the status quo in that Test Group, thereby
complicating the analysis in that treatment group.
    Lastly, the Commission continues to believe that it is unlikely
that exchanges will offer rebates at their current levels for Pilot
Securities in new Test Group 1 because exchanges will need to charge
lower offsetting transaction fees in that group in order to maintain a
profitable

pricing model. However, the Commission also recognizes, as did
commenters, that it is possible that the exchanges may choose to
subsidize rebates in Test Group 1 from other sources of revenue, which
could result in rebates exceeding the fee cap in that group. Whether
and to what extent that would occur in practice would be an important
result in new Test Group 1, and so the Commission believes the Pilot
should be structured so as not to preclude that possible result. The
Commission will closely monitor the fees charged by the exchanges for
non-transaction services during the Pilot and will consider the Pilot's
impact on such fees.
d. No-Rebate Test Group
    The Commission proposed that for Pilot Securities in Test Group 3,
equities exchanges generally would be prohibited from offering rebates,
either for removing or posting liquidity, and from offering Linked
Pricing, which, as discussed further below, is defined as a discount or
incentive on transaction fee pricing applicable to removing (or
providing) liquidity that is linked to providing (or removing)
liquidity.\211\ In addition, Test Group 3 would be unique in that its
restrictions would apply not only to displayed top-of-book \212\
liquidity, but also would apply to depth-of-book \213\ and undisplayed
liquidity.\214\ Transaction fees for securities in Test Group 3 would
remain subject to the current $0.0030 access fee cap in Rule 610(c) for
accessing a protected quotation.
---------------------------------------------------------------------------

    \211\ See Proposed Rule 610T(a)(3); Proposing Release, supra
note 2, at 13022-24.
    \212\ ``Top-of-book'' means the aggregated best bid and best
offer resting on an exchange; in other words, aggregate interest
that represents the highest bid (to buy) and the lowest offer (to
sell). See 17 CFR 242.600(b)(7) (defining ``best bid'' and ``best
offer'').
    \213\ ``Depth-of-book'' refers to all resting bids and offers
other than the best bid and best offer; in other words, all orders
to buy at all price levels less aggressive than the highest priced
bid (to buy) or all offers to sell at all price levels less
aggressive than the lowest priced offer (to sell). See 17 CFR
242.600(b)(8) (defining ``bid'' and ``offer'').
    \214\ ``Undisplayed'' refers to resting orders that are
``hidden'' and not displayed publicly in the consolidated market
data. See 17 CFR 242.600(b)(13) (defining ``consolidated display'')
and (b)(60) (defining ``published bid and published offer'').
---------------------------------------------------------------------------

    After careful consideration of the comments received on Test Group
3, discussed below, the Commission is adopting Rule 610T(a)(3) as
proposed, though it is being renamed as ``Test Group 2'' since the
Commission has reduced the number of Test Groups from three to two.
e. Prohibiting Rebates
    While there was significant disagreement among commenters on this
aspect of the Pilot, most commenters supported a ``no rebate'' group as
they believed it was critical to fully examine the effect that
transaction fees and rebates have on order routing behavior, execution
quality, and market quality.\215\
---------------------------------------------------------------------------

    \215\ See, e.g., Joint Asset Managers Letter, at 1; Clark-Joseph
Letter, at 2; Brandes Letter, at 1; CII Letter, at 3; Themis Trading
Letter I, at 3; AJO Letter, at 3; OMERS Letter, at 2; Copeland
Letter, at 2; ICI Letter I, at 3; Nuveen Letter, at 2; SIFMA Letter,
at 3-4; Better Markets Letter, at 2, 5; RBC Letter I, at 3; Vanguard
Letter, at 2-3; Fidelity Letter, at 9; Invesco Letter, at 2; CFA
Letter, at 4; MFS Letter, at 2; Wellington Letter, at 2; Joint
Pension Plan Letter, at 2; Citi Letter, at 2; Oppenheimer Letter, at
2; Clearpool Letter, at 2; Spatt Letter, at 2; Capital Group Letter,
at 3; Healthy Markets Letter I, at 17; IEX Letter I, at 5; Verret
Letter I, at 4; Norges Letter, at 2; AGF Letter, at 1; Decimus
Letter, at 3; JPMorgan Letter, at 3.
---------------------------------------------------------------------------

    In contrast, several commenters opposed prohibiting equities
exchanges from paying rebates. Specifically, three of the four exchange
commenters asserted that it would inhibit the ability of exchanges to
compete with off-exchange trading venues.\216\ In addition, these three
commenters, together with other commenters, expressed concerns that
prohibiting exchanges from paying rebates to liquidity providers would
widen the quoted bid-ask spread on exchanges, which could raise costs
on investors.\217\ Several of these commenters believed that
eliminating rebates for ``less-liquid'' or ``small and medium sized
companies'' would disproportionately impact the quoted spreads for such
stocks as they believed that rebates are a more significant incentive
to provide liquidity for less actively traded securities.\218\ Other
commenters also expressed concerns that spreads would widen for ETPs,
specifically less liquid ETPs, if rebates were prohibited or
significantly reduced.\219\
---------------------------------------------------------------------------

    \216\ See Cboe Letter I, at 7, 15-16; NYSE Letter I, at 3-6;
Nasdaq Letter I, at 7-8. See also, e.g., Mastercard Letter, at 1-2;
Capital Group Letter, at 3; Magma Letter, at 2; FIA Letter, at 4.
    \217\ See, e.g., Cboe Letter I, at 7; Nasdaq Letter I, at 9;
NYSE Letter I, at 6; Magma Letter, at 2; State Street Letter, at 3;
Morgan Stanley Letter, at 4; Cboe Letter II, at 4-7. See also Nasdaq
Letter III, at Exhibit A (providing graphs using data from September
2018 on average quoted spread across exchanges in S&P 500 stocks and
time at the best quote across those stocks). But cf. Larry Harris
Letter, at 6-9 (acknowledging that ``quoted spreads are narrower
under maker-taker pricing,'' but opining that ``the narrower quoted
spreads do not benefit the public'').
    \218\ See, e.g., Nasdaq Letter I, at 9; NYSE Letter II, at 11;
RBC Letter I, at 5; Nasdaq Letter III.
    \219\ See, e.g., Virtu Letter, at 7; Schwab Letter, at 3; State
Street Letter, at 2.
---------------------------------------------------------------------------

    The Commission is aware of the potential for adversely impacting
smaller capitalization securities, however, the Commission does not
agree with the commenters that believe that the Pilot necessarily will
result in such harm, or if there are adverse effects in the trading of
all or some portion of smaller capitalization securities, that the net
effect across securities will be negative. Rather, the Commission
agrees with the many commenters who believed that it is unclear what
the ultimate net impact of a no-rebate Test Group will be on quoted
spreads and trading costs for NMS stocks of different market
capitalizations and trading characteristics.\220\ The purpose of the
Pilot is to generate results that can offer data-driven insight on
these questions as a basis for possible future policy making in this
area. As discussed elsewhere, the revised Pilot has excluded securities
that trade fewer than 30,000 shares per day, as they are less likely to
provide actionable data.
---------------------------------------------------------------------------

    \220\ See, e.g., Decimus Letter, at 5 (observing that ``claims
on the existence of unambiguous harm to liquidity appear to be
exaggerated and driven by preconceived notions''). See also Section
IV infra (discussing the uncertainty of the Pilot's outcomes).
---------------------------------------------------------------------------

    This lack of empirical clarity is reflected in the divergent views
of commenters who offered conflicting predictions of the outcome of a
no-rebate Test Group. For example, one commenter questioned whether
rebates were necessary to attract displayed liquidity, opining that
``[p]ublic data shows that inverted and flat-fee exchanges often have
quotes on both sides of the NBBO, which shows that market participants
are willing to pay these exchanges to post quotes at the NBBO based on
their intrinsic desire to trade and not just in response to an exchange
rebate'' \221\ (emphasis in original). In response, one exchange
commenter suggested that Cboe EDGA Exchange, which does not pay
rebates, has wider spreads for displayed liquidity as compared to Cboe
EDGX Exchange, which does pay rebates for posting liquidity.\222\ A
different commenter did not ``anticipate a material widening for the
most liquid names (where rebates aren't necessary to incentivize
liquidity providers) or the most illiquid names (where rebates aren't
sizable enough to incentivize liquidity providers),'' and instead
anticipated ``a likely outcome of increased spreads for the middle tier
of

securities, where rebates have perhaps kept spreads artificially
narrow.'' \223\
---------------------------------------------------------------------------

    \221\ IEX Letter II, at 7.
    \222\ See NYSE Letter II, at 2. One commenter questioned NYSE's
analysis in this regard, noting that in general EDGA's volume is
limited to ``the most liquid names.'' This commenter stated that
NYSE ``distorts the real likely impact of the [P]ilot'' by including
spreads on less liquid securities. See Mulson Letter II, at 2.
    \223\ Citi Letter, at 3-4. See also Credit Suisse Commentary, at
3.
---------------------------------------------------------------------------

    Another commenter believed that quoted prices are ``almost always
set by natural investors'' and therefore, ``[r]emoving rebates will not
disrupt the desire of natural investors to post liquidity and tighten
spreads.'' \224\ In response, one commenter was ``skeptical'' about
this and stated that ``it is not realistic for the buy-side to be
continuously active on both sides of the market across all stocks
impacted by the Transaction Fee Pilot.'' \225\ That said, another
commenter, which also is a listed issuer, stated that it did not
``expect that a reduction or outright removal of rebates will have any
significant or harmful effects on the quality of prices displayed in
the public lit market, interfere with genuine liquidity and price
formation, or negatively impact [its] stock's trading volume, spread or
displayed size.'' \226\
---------------------------------------------------------------------------

    \224\ See Mulson Letter I, at 1. See also IEX Letter II, at 6.
    \225\ NYSE Letter II, at 11.
    \226\ See T. Rowe Price Letter, at 5.
---------------------------------------------------------------------------

    The Commission believes that the significant disagreement among
commenters on the potential impacts of prohibiting rebates demonstrates
the need to include a no-rebate bucket in the Pilot. For example, it is
unclear what effect--if any--the payment of a rebate has on a stock
that trades over 10 million shares per day with an average natural
quoted spread width constrained by the minimum trading increment of
$0.01. Likewise, it is unclear what effect--if any--the payment of a
rebate has on a stock that trades less than 100,000 shares per day with
an average quoted spread of $0.10 or more. In either case, the absence
of rebates may have little or no effect on quotes or competition for
natural order flow in such securities. Data is needed to empirically
evaluate commenters' diverging views of the effect of rebates. The
Pilot is designed to produce this and other data.
    By prohibiting rebates in one Test Group the Pilot should produce
results that facilitate a direct study of the effect of rebates,
including on fees, order routing, execution quality, and market
quality.\227\ The Commission believes that the no-rebate Test Group
will provide useful information on trading in the absence of rebates
that will facilitate a data-driven approach to better understand the
role and effect of rebates in our current market structure. The results
generated by this Test Group will allow researchers to study the
relationship between rebates and quoted spreads for stocks of varying
liquidity profiles and market capitalizations. It also will allow
market participants to directly test with their own order flow whether,
in the absence of rebates in the most actively traded stocks, they are
better able to compete for queue priority and thereby capture the
quoted spread when posting liquidity.\228\ Therefore, the Commission
continues to believe that the Pilot will be substantially more
informative with a no-rebate bucket and the value of generating that
information to inform the Commission's consideration of the effect of
exchange transaction fee models justifies proceeding with the Pilot to
better inform both sides of the rebate debate with data to test their
hypotheses.
---------------------------------------------------------------------------

    \227\ See Proposing Release, supra note 2, at 13022-23.
    \228\ See, e.g., T. Rowe Price Letter, at 2; Brandes Letter, at
1-2; Babelfish Letter, at 2.
---------------------------------------------------------------------------

    In summary, the Commission has carefully considered commenters'
suggested alternatives and whether to include the no-rebate feature in
the Pilot, and in light of the important regulatory purpose the Pilot
is designed to achieve, the Commission has determined that, for the
reasons discussed throughout, it is important to have a Test Group that
specifically focuses on the removal of rebates and the corresponding
impact on conflicts of interest, execution quality, and market quality.
    Finally, one commenter asserted that banning rebates ``presents [a]
misapplication of Rule 610(c)'' because the Commission has never before
banned rebates.\229\ While neither Rule 610(c), nor any other
Commission rule, currently prohibits a national securities exchange
from paying a rebate to provide or remove liquidity, the Commission
does not believe that the no-rebate Test Group misapplies Rule 610(c),
or any other rule. The no-rebate Test Group is not based on or related
to Rule 610(c). Rule 610(c) caps fees for removing a protected
quotation, whereas the no-rebate Test Group does not further limit fees
and instead prohibits rebates, among other things. Indeed, the Rule
610(c) fee cap continues to apply--unchanged and in its entirety--to
the no-rebate Test Group.
---------------------------------------------------------------------------

    \229\ See Cboe Letter I, at 12-13. See also Section II.G
(responding to comments regarding the Commission's legal authority
to conduct the Pilot).
---------------------------------------------------------------------------

    The data generated by the Pilot will help empirically assess, in
light of changing market conditions, whether the existing transaction-
based fee and rebate structure continues to further the statutory
goals.\230\ Importantly, while exchanges would retain the ability to
charge transaction fees as high as the current $0.0030 cap in the no-
rebate Test Group, they would no longer need to charge transaction fees
at levels priced to offset the rebates they formerly paid. Accordingly,
the no-rebate Test Group is intended to test, within the current
Regulation NMS regulatory structure, natural equilibrium pricing for
transaction fees.
---------------------------------------------------------------------------

    \230\ For example, if take fees are set at levels to subsidize
maker rebates, and if those rebates have little or no impact on
quoted spreads of certain NMS stocks, then the take fees on trades
in those stocks may constitute a tax on takers of liquidity without
a corresponding benefit to the market.
---------------------------------------------------------------------------

f. Application to Depth-of-Book and Non-Displayed Liquidity
    Several commenters supported applying the prohibition on rebates in
the no-rebate Test Group to depth-of-book and non-displayed liquidity
as they believed it would avoid the risk that the Pilot's results could
be subject to distortions if exchanges continue to offer rebates for
depth-of-book and non-displayed liquidity.\231\ In contrast, two
exchange commenters opposed this aspect of the proposal. One
characterized this aspect of the proposal as an ``unjustified pricing
restriction[ ]'' that was part of a ``new regulatory scheme . . . .''
\232\ The other argued that ``[t]he Proposal lacks internal coherence''
in that it excludes ATSs ``because they do not have protected quotes,
but then includ[es] unlit exchange orders that also are unprotected.''
\233\
---------------------------------------------------------------------------

    \231\ See, e.g., Clark-Joseph Letter, at 2; Clearpool Letter, at
3 n.6; Healthy Markets Letter I, at 18; IEX Letter I, at 7.
    \232\ NYSE Letter I, at 12.
    \233\ Nasdaq Letter I, at 6.
---------------------------------------------------------------------------

    For the reasons stated in the Proposing Release, the Commission
continues to believe that allowing exchanges to continue to offer
rebates in the no-rebate Test Group for depth-of-book and non-displayed
orders could substantially distort the Pilot results.\234\ The no-
rebate Test Group is designed to test the absence of exchange
transaction rebates. It would weaken the Pilot's results to prohibit
rebates on displayed orders but allow them on non-displayed orders, as
the Pilot would not be able to collect data on what would happen in the
absence of rebates. Only by prohibiting the payment of all rebates in
one Test Group will the Commission be able to gather data on a pure
``no rebate'' environment, thereby facilitating a direct observation of
the impact of rebates on order routing behavior, execution quality, and
market quality

when compared to the other Test Group and Control Group.
---------------------------------------------------------------------------

    \234\ See Proposing Release, supra note 2, at 13023.
---------------------------------------------------------------------------

    As noted above, the Commission received a significant number of
comments in support of directly studying the effects of prohibiting
rebates.\235\ In order to avoid the potential distortion from a too-
narrowly-tailored Test Group that focuses only on one type of rebate
but ignores another, the Commission believes that prohibiting rebates
on all exchange volume--including depth-of-book and non-displayed
liquidity--is necessary to generate the most useful Pilot results on
the effect of exchange transaction rebates broadly.
---------------------------------------------------------------------------

    \235\ See supra note 215.
---------------------------------------------------------------------------

    In addition, the Commission believes that the no-rebate Test
Group's application to depth-of-book and non-displayed orders is
consistent with the Commission's decision to exclude ATSs, which do not
have protected quotes.\236\ As discussed above, ATSs are excluded from
the Pilot based on a number of reasons, including the materially
different treatment of exchange fees under the current federal
securities laws and their lack of a protected quotation. With respect
to the no-rebate Test Group, it would be incoherent for the Commission
to purport to test a prohibition on exchange transaction-based rebates
but do so only for some rebates (i.e., on displayed interest) while
ignoring the potential for exchanges to pay rebates on non-displayed
liquidity and depth-of-book interest.\237\ The possibility that an
exchange could offer rebates for non-displayed and depth-of-book
quotes, while eliminating them on displayed interest, could present a
loophole with the potential to undermine the design of the no-rebate
Test Group and distort the Pilot results for the no-rebate Test Group,
rendering the results of the Pilot's ``no-rebate'' Test Group incapable
of speaking to the impact of rebates.
---------------------------------------------------------------------------

    \236\ Cf. supra note 233.
    \237\ Price-time priority (where orders are prioritized for
execution based on ranking by price and, when two orders are at the
same price, by time of entry), generally does provide the ability
for an incoming order to bypass non-displayed liquidity.
---------------------------------------------------------------------------

g. Maintaining Rule 610(c) Access Fee Cap
    Two commenters recommended that, unlike Rule 610(c), the no-rebate
Test Group go beyond Rule 610(c) to also prohibit exchanges from
charging fees in excess of $0.0030 to provide displayed liquidity.\238\
As noted in the Proposing Release, the no-rebate Test Group is designed
specifically to test, within the current regulatory structure, natural
equilibrium pricing for transaction fees in an environment where
exchange transaction-based rebates are prohibited.\239\ While this
would theoretically allow an exchange to charge fees in excess of
$0.0030 to provide liquidity, the Commission notes that several
exchanges stated that one of the perceived benefits in providing
rebates to liquidity providers is that it facilitates narrower spreads
and therefore believes it is unlikely exchanges would charge such
higher fees during the Pilot.\240\
---------------------------------------------------------------------------

    \238\ See Healthy Markets Letter I, at 18; CFA Letter, at 6-7.
    \239\ See Proposing Release, supra note 2, at 13023.
    \240\ See supra notes 217-218 and accompanying text.
---------------------------------------------------------------------------

    One commenter expressed concerns that the no-rebate Test Group
would ``provide exchanges with the flexibility to propose a variety of
new fee structures for liquidity-taking orders,'' which could create
new conflicts for brokers routing customer orders.\241\ Accordingly,
this commenter believed that the no-rebate Test Group should instead
impose a fee cap of $0.0002, where the expectation would be that
rebates would be lowered to a de minimis amount and the Pilot would be
more symmetrical and thereby more effective in analyzing broker order
routing practices.\242\ The Commission continues to believe that in
light of the current debate surrounding the potential conflict of
interest posed by the payment of rebates and potential effects they may
have on the markets, including the many comments received in response
to the Proposal, the Pilot will be substantially more informative with
a no-rebate bucket than a bucket that dramatically lowers the fee cap
assuming that rebates would follow. While reducing the fee cap to
$0.0002 would reduce the likelihood that an exchange would offer
rebates at current levels (assuming the exchange desired to fund
transaction-based rebates only through transaction-based fees),
exchanges would retain the ability to pay rebates and could subsidize
them from other sources of revenue leading to rebates that greatly
exceed $0.0002. In contrast, only a complete prohibition on rebates
will permit researchers to observe directly the impact of rebates on
order routing behavior, execution quality, and market quality, and
compare this Test Group to the Control Group and the other Test Group
where rebates can continue to be offered. Further, imposing a fee cap
of $0.0002 instead of prohibiting rebates would not allow Test Group 2
to test, within the current Regulation NMS regulatory structure,
natural equilibrium pricing for transaction fees, particularly if the
cap is below where the natural equilibrium price would otherwise be
found.
---------------------------------------------------------------------------

    \241\ See Citadel Letter, at 5.
    \242\ See id.
---------------------------------------------------------------------------

    Two commenters expressed concern that because exchanges can
continue to charge access fees of up to $0.0030 per share in the no-
rebate Test Group, they may fail to engage in competition on fees.\243\
In contrast, another commenter believed that, in the no-rebate Test
Group, ``the fee for removing liquidity could still move closer to zero
in order for exchanges to incentivize takers in the absence of
rebates.'' \244\ The Commission believes that observing price
competition in the absence of any distortive effects caused by rebates
is an important aspect of the Pilot. Accordingly, the no-rebate Test
Group is intended to test, within our current regulatory structure,
whether competitive market forces are sufficient to produce natural
equilibrium pricing for transaction fees in the absence of rebates.
---------------------------------------------------------------------------

    \243\ See Fidelity Letter, at 9; Citadel Letter, at 5.
    \244\ Credit Suisse Commentary, at 4.
---------------------------------------------------------------------------

h. Prohibiting Linked Pricing
    In connection with prohibiting rebates, the no-rebate Test Group
also would prohibit Linked Pricing, such that an exchange would be
prohibited from adopting any discounts on transaction fees to remove
(i.e., ``take'') liquidity where that discount is determined based on
the broker-dealer's posted (i.e., ``make'') volume on the exchange,
which would result in the broker-dealer paying a lower take fee in
return for providing a certain level of liquidity on the exchange.\245\
---------------------------------------------------------------------------

    \245\ See Proposing Release, supra note 2, at 13023. The
Commission notes that most exchanges also utilize tiering in their
pricing models in which they offer lower fees or larger credits in
return for additional volume. See, e.g., Spatt Letter, at 4; RBC
Letter II, at 4.
---------------------------------------------------------------------------

    Some commenters that addressed the prohibition on Linked Pricing
were supportive of the proposal and generally believed that the
prohibition would preserve the integrity of the Pilot and facilitate an
environment where exchanges are able to set transaction fees at a
natural equilibrium level.\246\ In contrast, two exchange commenters
opposed the prohibition.\247\ Specifically, one commenter characterized
this aspect of the proposal, in conjunction with the prohibition on
rebates, as an ``unjustified pricing restriction'' that is ``unrelated
to Regulation NMS's Access

Fee Cap.'' \248\ As discussed above, the no-rebate Test Group,
including the Linked Pricing prohibition, is not based exclusively on
the Rule 610(c) fee cap.
---------------------------------------------------------------------------

    \246\ See, e.g., Capital Group Letter, at 3; IEX Letter I, at 7.
    \247\ See NYSE Letter I, at 12; Cboe Letter I, at 10.
    \248\ NYSE Letter I, at 12.
---------------------------------------------------------------------------

    The Commission continues to believe that prohibiting Linked Pricing
supports the objective of the no-rebate Test Group, which is to gather
data on the impact of creating an environment where fee levels are not
potentially distorted by the rebates they subsidize and rebates do not
influence routing, particularly for customer orders.\249\ In the
absence of a Linked Pricing prohibition, exchanges could use make
(take) volume to subsidize take (make) activity, which could perpetuate
the cross-subsidization of fees. For example, if an exchange adopts
Linked Pricing for the no-rebate Test Group securities, it might offer
a discounted transaction fee to remove liquidity only to those market
participants that post a certain volume on the exchange. Perpetuating
this potential distortion could cloud the Pilot results for the no-
rebate Test Group if the Linked Pricing incentive interferes with the
Pilot's ability to isolate and analyze the impacts on fees and routing
that the no-rebate Test Group is designed to study.
---------------------------------------------------------------------------

    \249\ See Proposing Release, supra note 2, at 13023-24.
---------------------------------------------------------------------------

    Two commenters recommended that the Commission also prohibit an
exchange from offering any inducement, including discounts on non-
transaction fees, such as those for market data, co-location, or
connectivity ports, which are linked to trading volumes in the no-
rebate Test Group.\250\ The Commission is not expanding the application
of the Linked Pricing prohibition in the manner suggested by these
commenters. The Pilot, and the no-rebate Test Group specifically, is
designed to test the extent to which transaction fees and rebates
create conflicts of interest that influence order routing or introduce
distortions that impede execution quality and market quality. The Pilot
is not designed to eliminate or control for all potential inducements
to transact on a particular market and the Commission believes that
expanding the Pilot to a wider array of variables could inhibit the
Pilot's ability to isolate the impacts of exchange transaction-based
rebates and the effects they may have.\251\
---------------------------------------------------------------------------

    \250\ See RBC Letter I, at 3; MFS Letter, at 2-3.
    \251\ As is the case for any fee or fee change an exchange
adopts, if an exchange were to propose such a fee change it would
need to analyze in its Form 19b-4 filing how its fee change
constitutes an ``equitable allocation'' of ``reasonable'' fees and
how it is not ``unfairly discriminatory.'' See 15 U.S.C.
78s(b)(3)(A)(ii).
---------------------------------------------------------------------------

    Further, two commenters requested the Commission to clarify that
the Linked Pricing prohibition applies across Test Groups such that
exchanges may not tie rebates or transaction fee discounts in another
Test Group to volume in the no-rebate Test Group.\252\ As previously
stated in the Proposal, the no-rebate Test Group is designed to gather
data on the impact of creating an environment where fee levels are not
potentially distorted by rebates and rebates do not influence routing.
In proposing the Linked Pricing prohibition, the Commission recognized
that a Linked Pricing arrangement could potentially distort transaction
fee pricing if fees continue to be set at a subsidy level above their
natural equilibrium, and it also could perpetuate the potential
conflicts of interest associated with rebates and order routing. Any
Linked Pricing incentives offered by exchanges that are linked, or
otherwise related to, posting or removing liquidity in Pilot Securities
included in the no-rebate Test Group would contradict the Commission's
intent for the no-rebate Test Group and frustrate the ability of the
Pilot to generate useful data in that group. Accordingly, the Linked
Pricing prohibition in Test Group 2 prohibits exchanges from offering
any discounts or incentives on transaction fees that are linked to
activity, whether it be posting or removing activity, in any securities
included in Test Group 2, as well as prohibits exchanges from offering
Linked Pricing arrangements in Test Group 2 securities that are based
on, or include, activity in any Pilot Securities.
---------------------------------------------------------------------------

    \252\ See IEX Letter I, at 7-8; Norges Letter, at 2.
---------------------------------------------------------------------------

    In addition, one commenter ``suggest[ed] that the linked pricing
prohibition should extend to auction fees or any other transaction fees
charged by the exchange,'' as ``[c]losing auction fees, especially, are
a significant source of listing market revenue, and . . . discounts on
these fees could likewise lead to the distortions described by the
Commission (or even to increases in auction fees to other participants
to fund the targeted discounts).'' \253\ Because Rule 610T(a)(3)
prohibits exchanges from providing a discount or incentive on
transaction fees applicable to removing (providing) liquidity that is
linked to providing (removing) liquidity, and auction fees are
``transaction fees,'' the Linked Pricing prohibition applies to auction
fees. Exchanges will not be permitted to consider make (take) volume
during intraday trading when calculating auction fees, as such an
arrangement would perpetuate potential distortions associated with fee-
and-rebate pricing models including the cross-subsidization of fees.
---------------------------------------------------------------------------

    \253\ IEX Letter I, at 7.
---------------------------------------------------------------------------

i. Linked Pricing Market Maker Exception
    The Commission proposed an exception to the Linked Pricing
prohibition to permit an exchange to adopt new rules to provide non-
rebate Linked Pricing to its registered market makers during the Pilot
in consideration for the market maker meeting rules-based market
quality metrics.\254\ The Commission explained that to qualify for this
limited exception, an exchange would need to propose market making
standards in a rule change filing submitted pursuant to Section
19(b)(2) of the Exchange Act, and also would need to propose the fee
incentive it would provide for meeting those standards.\255\
---------------------------------------------------------------------------

    \254\ See Proposing Release, supra note 2, at 13024.
    \255\ See id. at 13024 n.140.
---------------------------------------------------------------------------

    Several commenters requested further clarification about the market
maker exception to the prohibition on Linked Pricing. Specifically, one
commenter recommended that the Commission provide additional detail
about the types of market quality metrics upon which access to Linked
Pricing is contingent.\256\ Other commenters believed that it is
important that any such standards adopted by exchanges be sufficiently
stringent to prevent market participants from availing themselves of
Linked Pricing in a manner that would jeopardize the ability of the no-
rebate Test Group to provide valuable data on the impact of the absence
of rebates (or a rebate-like incentive) on order routing behavior,
execution quality, and market quality or that would permit market
participants to unfairly exploit this aspect of the Pilot.\257\
---------------------------------------------------------------------------

    \256\ See Clark-Joseph Letter, at 2-3.
    \257\ See, e.g., Brandes Letter, at 2; Themis Trading Letter I,
at 3; CFA Letter, at 7; Clearpool Letter, at 4; Healthy Markets
Letter I, at 33; Decimus Letter, at 6 n.22.
---------------------------------------------------------------------------

    The Commission continues to believe that permitting exchanges to
adopt rules to offer Linked Pricing to their registered market makers
for securities in the no-rebate Test Group preserves the ability of an
exchange to attract market makers through non-rebate incentives and
thereby helps maintain the baseline framework in which exchanges can
provide incentives to their registered market makers.\258\ Commenters
highlighted the importance of ensuring that any new rules that
exchanges propose to provide Linked Pricing to registered market makers
in the no-rebate Test Group be designed so as to not inhibit the
Pilot's ability to

generate useful data on the impact of rebates on order routing
behavior, execution quality, and market quality. The Commission agrees
that if they are not narrowly tailored, these non-rebate incentive
programs could continue to potentially distort transaction fee pricing,
particularly if the exchange's fees are set at a subsidy level above
the natural equilibrium within the current regulatory structure to
subsidize these market maker incentives.
---------------------------------------------------------------------------

    \258\ See Proposing Release, supra note 2, at 13024.
---------------------------------------------------------------------------

    Rather, the market maker exception to Linked Pricing is intended to
permit an exchange to impose rules for its registered market makers in
ways that would improve its market in a meaningful way, such that it
could use the enhanced liquidity provided by its registered market
makers to improve its displayed quotation and thereby attract buyers
and sellers to the exchange.\259\ The non-rebate incentives would only
apply to trading activity by a registered market maker in its capacity
as a market maker (i.e., acting as principal), and would not apply to
any customer activity or activity from other trading desks or business
units affiliated with the market maker (and possibly using the same
MPID), be it agency, principal or riskless principal trading, traded by
or through such market maker. Accordingly, only a registered market
maker's principal trading activity in its capacity as a registered
market maker in the no-rebate Test Group would be able to satisfy any
market quality metrics, and the only trades that would be eligible to
receive the non-rebate incentive pricing would be a registered market
maker's principal trades in its capacity as a registered market maker
in the no-rebate Test Group securities.
---------------------------------------------------------------------------

    \259\ See id. While it will be up to each individual exchange to
design market quality metrics for offering non-rebate Linked Pricing
to their registered market makers, such metrics could include, for
example: (1) Requirements to trade to stabilize the market; (2)
requirements on consecutive price changes and price continuity; (3)
material time quoting on both sides of the NBBO; (4) materially
enhanced quoted depth on both sides of the NBBO; (5) frequency of
setting an improved BBO on the exchange; (6) frequency of setting an
improved NBBO; and (7) compliance with narrow maximum quote widths.
---------------------------------------------------------------------------

8. Control Group
    The Commission proposed that Pilot Securities that are not placed
in one of the Test Groups would be placed in the Control Group.\260\
One commenter addressed the Control Group and supported the
Commission's proposed approach.\261\ The Commission continues to
believe that a control group is vital to test the effects of fee
changes in the Test Groups, as a control group subject to the current
access fee cap would provide an appropriate baseline for analyzing the
effects of the Pilot against the status quo.\262\ For these reasons and
the reasons discussed in the Proposing Release, the Commission is
adopting the Control Group as proposed, which will be subject to the
current Rule 610(c) access fee cap.\263\
---------------------------------------------------------------------------

    \260\ See Proposing Release, supra note 2, at 13024.
    \261\ See Healthy Markets Letter I, at 19.
    \262\ See id.
    \263\ See 17 CFR 242.610(c). Consistent with Rule 610(c), the
Control Group will only cap fees for taking (removing) a protected
quotation; it will not apply to fees for posting liquidity or
otherwise cap or prohibit rebates. See also Proposing Release, supra
note 2, at 13024.
---------------------------------------------------------------------------

9. Alternative Designs
a. Include a Trade-At Requirement
    In the Proposing Release, the Commission asked whether the Pilot
should include a ``trade-at'' provision that would restrict price
matching of protected quotations.\264\ Several commenters supported
including a trade-at requirement because they believed doing so would
increase the amount of liquidity available on exchanges and thereby
further price discovery.\265\
---------------------------------------------------------------------------

    \264\ See Proposing Release, supra note 2, at 13025. A ``trade
at'' provision would require that orders be routed to a market with
the best displayed price or be executed at a materially improved
price.
    \265\ See e.g., Adorney Letter, at 1; Birch Bay Letter, at 1. In
addition, in clarifying its position on rebates in equity market
structure, NYSE stated that it could support a prohibition on
rebates if ``done in a measured manner that creates an offsetting
incentive to display liquidity, such as a `Trade At' provision[ ]''
which the Pilot does not provide. NYSE Letter II, at 5.
---------------------------------------------------------------------------

    In contrast, other commenters opposed including a trade-at
requirement as they believed doing so would increase the Pilot's
complexity; impact the ability of the data to assess the impact of
transaction fees and rebates on order routing, execution quality, and
market quality; be inconsistent with, or unnecessary for, a study of
the issues pertinent to the Pilot; and be anti-competitive.\266\ In
addition, two commenters noted that a trade-at requirement would not be
necessary because the reduction in the fee cap ultimately could result
in more volume being executed on exchanges.\267\
---------------------------------------------------------------------------

    \266\ See, e.g., MFA Letter, at 3; ICI Letter I, at 3; BlackRock
Letter, at 2; FIA Letter, at 5; SIFMA Letter, at 4; Fidelity Letter,
at 10; Citadel Letter, at 6-7; Citi Letter, at 3.
    \267\ See SIFMA Letter, at 4; Citi Letter, at 3.
---------------------------------------------------------------------------

    The Commission believes that adding a trade-at requirement would
unnecessarily complicate the Pilot in a manner that would increase
costs on market participants and potentially impact the ability of the
Pilot to isolate the effects of changes in exchange transaction fees
and rebates. Accordingly, the Commission is not including a trade-at
requirement in the Pilot. If the Pilot were to also assess the impact
of a trade-at requirement, it would need to increase the number of Test
Groups, thereby increasing the number of securities included in the
Pilot, to be able to isolate the effects of a trade-at requirement
separately from the effects of changes in exchange transaction fees and
rebates. The Commission believes any potential benefits from analyzing
the impact of a trade-at requirement do not justify the additional
costs that expanding the Pilot would impose. Rather than introduce
another variable into the Pilot, the Commission believes that the Pilot
should remain focused on permitting an analysis, in the context of our
current market structure, of the effect of exchange transaction fees
and rebates. Further, the Commission notes that the Tick Size Pilot
featured a trade-at test group, so as that pilot's post-pilot period
concludes, the Commission will have access to current data to analyze
the impact of a trade-at prohibition in the context of that pilot.\268\
---------------------------------------------------------------------------

    \268\ See also infra Section IV.E (discussing trade-at).
---------------------------------------------------------------------------

b. No Fee Cap Test Group
    Several commenters advocated for including a Test Group that does
not cap transaction fees, believing that it is important to test
whether competition alone can constrain pricing and result in a natural
equilibrium transaction fee.\269\ One commenter noted that currently
fees tend to ``cluster'' at the access fee cap imposed by Rule 610(c)
and as such recommended including an additional Test Group that does
not cap fees.\270\
---------------------------------------------------------------------------

    \269\ See, e.g., Clark-Joseph Letter, at 2; Nasdaq Letter I, at
13; Cboe Letter I, at 27-28.
    \270\ See Barnard Letter, at 1. Another commenter recommended
including a Test Group that did not cap fees because it believed
that the current structure encourages exchanges to charge fees for
data feeds and technology services, which the commenter suggests are
higher than they otherwise would be if transaction fees were not
capped. See Modern IR Letter, at 3.
---------------------------------------------------------------------------

    When it adopted Rule 610(c), the Commission explained that the
access fee cap is necessary to, among other things, inhibit the ability
of exchanges to take advantage of the Order Protection Rule by acting
as a ``toll booth'' between price levels and ensure that quotations are
fair and useful by limiting the ability of high fees to distort the
price of displayed limit orders.\271\
---------------------------------------------------------------------------

    \271\ NMS Adopting Release, supra note 10, at 37545.
---------------------------------------------------------------------------

    The Commission believes that the no-rebate Test Group will permit
analysis of the impact of competitive forces on fees in the absence of
current practices

that use fees to subsidize those rebates. Specifically, to the extent
exchanges will no longer need to charge access fees up to $0.0030 to
subsidize rebates in that Test Group, the Commission believes that
competitive forces among the exchanges may result in fees approaching a
new equilibrium level, within the current regulatory structure, for
stocks in the no-rebate Test Group.\272\
---------------------------------------------------------------------------

    \272\ See, e.g., Goldman Sachs Letter, at 2 (characterizing
$0.0030 as an ``outdated benchmark'' that ``is too high and far from
representative of true prices in the marketplace'').
---------------------------------------------------------------------------

    The Commission notes that the order protection requirements of 17
CFR 242.611 (Rule 611) will continue to apply to all of the Pilot
Securities including those in the no-rebate Test Group. As such, the
basis for imposing a fee cap (summarized above) remains intact during
the Pilot and the Commission believes that applying the current fee cap
to the no-rebate Test Group will guard against the possibility, albeit
highly unlikely, that an outlier exchange could seek to charge
exorbitant fees for the no-rebate Test Group stocks that would be
inconsistent with the rationale behind the Rule 610(c) fee cap.\273\
---------------------------------------------------------------------------

    \273\ The Commission notes that the Proposal included a question
regarding whether a fee cap would continue to be necessary to
constrain exchange pricing if equilibrium pricing is achieved and
the Commission expects that some market participants may analyze the
Pilot results for answers to this question. See Proposing Release,
supra note 2, at 13025.
---------------------------------------------------------------------------

c. Basis Point Pricing
    Two commenters recommended that, because stock prices have
increased (i.e., a number of high profile stocks currently trade above
$100 per share), using basis point pricing may be a better reference
point than using the current access fee cap because the current access
fee cap can impact stocks differently based on their price.\274\
Specifically, one of these commenters proposed that ``Test Group 1
contain the same constraints as Test Group 3 but with an access fee
limitation expressed in basis points.'' \275\ However, the Commission
believes that doing so would increase the Pilot's complexity and could
interfere with the Pilot's ability to provide useful data to assess the
impact of the current exchange fee models on order routing behavior,
execution quality, and market quality because exchange transaction fees
and rebates are currently not assessed in basis points and thus this
would introduce a new variable into the Test Group as it could raise or
lower the fees depending on a stock's share price, which can vary over
time. The more variables that are introduced, the more difficult it
could be to isolate the effects of a particular change and uncover
causal connections. Accordingly, the Commission is not adopting a
requirement that one of the Test Groups include an access fee cap
expressed in basis points.
---------------------------------------------------------------------------

    \274\ See Clearpool Letter, at 3; Cboe Letter II, at 8-9.
Another commenter also stated that it thought it was ``a worthwhile
exercise to explore the possibility of a move to basis points. . . .
'' See Citi Letter, at 6.
    \275\ See Clearpool Letter, at 3.
---------------------------------------------------------------------------

d. Higher Fee Caps and Fees Based on Tick Size
    Four commenters addressed a question in the Proposing Release about
including a Test Group that would allow for access fees higher than the
current cap under Rule 610(c).\276\ One of these commenters
specifically recommended reducing access fees to $0.0005 per share for
the most liquid securities, while imposing gradually higher access fees
for stocks of lower liquidity, up to a cap of potentially $0.0050 for
the least liquid securities.\277\ Another commenter recommended
including an additional Test Group with an access fee cap of $0.0040,
believing this would provide data to test whether an increase in the
fee cap reduces bid-ask spreads in light of the many comments
contending that spreads will increase in conjunction with lower rebates
connected to a reduced access fee cap.\278\ In addition, one commenter
suggested that if tick sizes were set based on the characteristics of
an individual stock, the transaction fee cap could then be a particular
percentage of the tick size.\279\ Such an approach could result in an
access fee cap above $0.0030 per share for certain securities.
---------------------------------------------------------------------------

    \276\ See Nasdaq Letter I, at 13; TD Ameritrade Letter, at 6;
Angel Letter II, at 2; Cboe Letter II, at 8.
    \277\ See TD Ameritrade Letter, at 6.
    \278\ See Angel Letter II, at 2. See also Cboe Letter II, at 8.
    \279\ See Morgan Stanley Letter, at 3.
---------------------------------------------------------------------------

    The Commission has carefully considered these suggestions. As
discussed above, other commenters have noted that the current access
fee cap was set thirteen years ago when markets and technology were
markedly different.\280\ Indeed, a few commenters argued it was
outdated and too high.\281\ Accordingly, the Commission does not
believe that raising the access fee cap to levels that are above what
trading centers were charging thirteen years ago necessarily is
consistent with the technological efficiencies that have been realized
in the intervening years. While market-based solutions and even
regulatory responses to enhance the investor experience with trading in
thinly-traded securities are worthy of attention, and were the subject
of a recent Division of Trading and Markets staff roundtable, the
Commission does not believe that the Pilot should introduce the
potential for higher rebates--and the further exacerbated distortions
that would likely accompany them--when it is attempting to study the
effect of the current exchange fee models and fee and rebate
levels.\282\ Accordingly, the Commission is not adopting a higher fee
cap in any of the Pilot's Test Groups.
---------------------------------------------------------------------------

    \280\ See supra note 200 and accompanying text.
    \281\ See id.
    \282\ See Transcript of the Division of Trading and Markets'
Roundtable on Market Structure for Thinly-Traded Securities (April
23, 2018), available at https://www.sec.gov/spotlight/equity-market-structure-roundtables/thinly-traded-securities-rountable-042318-transcript.txt.
---------------------------------------------------------------------------

e. Order Protection Rule
    The Commission solicited comment on whether it would be appropriate
to suspend the Rule 611 order protection requirements in one or more
Test Groups.\283\ In response, three commenters opposed eliminating the
order protection requirements within the Pilot because doing so would
increase the cost and complexity of the Pilot, and also could
complicate analysis of the Pilot's results to the extent it clouded the
focus on transaction fees and rebates.\284\
---------------------------------------------------------------------------

    \283\ See Proposing Release, supra note 2, at 13025.
    \284\ See SIFMA Letter, at 4; JPMorgan Letter, at 3; Schwab
Letter, at 3 (also stating that eliminating Rule 611 for certain
Pilot Securities ``would significantly negatively impact retail
order flow and the quality of trade execution'').
---------------------------------------------------------------------------

    In contrast, one commenter recommended eliminating the order
protection requirements for securities in the no-rebate Test
Group.\285\ This commenter stated that prohibiting rebates is
insufficient to ``remove the perceived or real conflicts on broker
routing or materially address'' various negative effects that the
commenter believed Rule 611 has had on the equities markets.\286\
---------------------------------------------------------------------------

    \285\ See T. Rowe Price Letter, at 2-4.
    \286\ See id. at 4.
---------------------------------------------------------------------------

    After considering the comments received, the Commission believes
that the Pilot should not introduce additional variables by, in this
case, removing the Rule 611 protected quotation status for automated
quotations in any particular Test Group. In order to add a new variable
to the Pilot, the Commission would need to include additional Test
Groups and increase the number of securities in order to be able to
isolate separately the effects of each variable that is included

in the Pilot or else it would create an asymmetric Pilot that would
make it more difficult to evaluate the data and establish causal
inferences regarding the impacts of changes to exchange transaction
fees and rebates. As discussed above, most commenters were critical of
the Pilot's proposed size. The Commission desires to have a narrowly
tailored pilot focused on generating useful data on the impact of
exchange fees and rebates on order routing behavior, execution quality,
and market quality. Adding another variable to the Pilot would increase
the Pilot's complexity as well as costs of the Pilot.
f. Other Ideas for Additional Test Groups and Related Questions
    In addition to the above questions, the Commission asked a number
of other questions in the Proposing Release to solicit commenters'
opinions on equities market structure issues and whether the Pilot
should be used as a vehicle to further investigate other related areas.
The Commission received a few comments on these points. For example, in
response to a question about whether commenters believe the minimum
trading increment should be reduced for the most actively traded NMS
stocks if the Pilot's data suggests that rebates do not significantly
improve market quality or execution quality for these securities, one
commenter stated it ``would strongly support inclusion of a half-penny
spread bucket, or consideration of a separate small-tick pilot for
highly liquid stocks.'' \287\
---------------------------------------------------------------------------

    \287\ Pragma Letter, at 4. See also Proposing Release, supra
note 2, at 13025.
---------------------------------------------------------------------------

    Another commenter recommended that the Pilot test a prohibition on
``tiered pricing,'' whereby exchanges offer lower per share fees or
greater per share rebates to market participants that transact in
greater volumes, believing that absent such a prohibition, exchanges
would continue to offer these incentives, which would serve ``to
potentially work around the prohibition on offering rebates.'' \288\
---------------------------------------------------------------------------

    \288\ See Clearpool Letter, at 3-4.
---------------------------------------------------------------------------

    Further, one commenter suggested adding a new Test Group ``to test
an anti-fragmentation policy,'' in which ``the order that sets the SIP
NBBO receives the execution in all circumstances (e.g., bypassing
hidden orders). ''\289\
---------------------------------------------------------------------------

    \289\ See Birch Bay Letter, at 2.
---------------------------------------------------------------------------

    The Commission appreciates all of these recommendations. After
considering these comments, as well as other comments opposed to
including more NMS stocks in the Pilot, the Commission believes that
the Pilot should not introduce additional variables. In order to add a
new variable to the Pilot, the Commission would need to include
additional Test Groups and materially increase the number of securities
(or materially increase the Pilot's duration) to be able to isolate
separately the effects of each variable that is included in the Pilot.
Otherwise, adding variables would create an asymmetric Pilot that would
make it more difficult to evaluate the data and establish causal
inferences regarding the impacts of changes to exchange transaction
fees and rebates. As discussed above, most commenters were critical of
the Pilot's proposed size and the Commission similarly desires to have
a narrowly tailored pilot focused on generating useful data on the
impact of exchange fees and rebates on order routing behavior,
execution quality, and market quality. Adding another variable to the
Pilot would increase the Pilot's size, complexity, and costs.
g. Gradual Reduction of Current Fee Cap Across All Stocks
    One commenter suggested that, rather than conducting the Pilot, the
Commission should instead consider imposing a ``gradual reduction of
the current fee cap across all stocks periodically.'' \290\ The
commenter stated that this approach would facilitate data collection
and an opportunity ``to observe order routing behavior changes, while
applying the same economics to all stocks uniformly.'' \291\
Furthermore, the commenter stated that if a control group was necessary
in this scenario ``for comparison purposes'' it would recommend placing
50% of stocks in the control group and the other 50% in the Test Group
subject to the gradual reductions in access fees.\292\
---------------------------------------------------------------------------

    \290\ Morgan Stanley Letter, at 2.
    \291\ Id.
    \292\ Id.
---------------------------------------------------------------------------

    The Commission has considered this alternative but believes that
the Pilot is a preferable approach because it will permit researchers
to conduct differences-in-differences analysis over a much shorter time
frame. By establishing stratified treatment groups and simultaneously
testing different changes in the same variable, the Pilot will reduce
the impact of events (economic, natural, political, etc.) across time
and thereby is more conducive to an apples-to-apples comparison of the
various treatment groups to one another. Pursuing a simultaneous and
linear gradual reduction, such as that proposed by the commenter, could
require greatly extending the Pilot's duration depending on the number
of fee cap levels to be tested. More importantly, this proposed
alternative would not provide the Commission with the opportunity to
directly observe the impact of rebates on order routing behavior,
execution quality, and market quality because it would not necessarily
include a prohibition on rebates and therefore having a no-rebate
bucket will be substantially more informative. Lastly, as the
Commission believes that a Control Group is necessary to ensure the
usefulness of the Pilot's data, pursuing the proposed structure would
impact more NMS stocks than the Pilot (as 50% of stocks would be
included in the Test Group and 50% in the control group).
h. $0.0010 Access Fee
    One commenter recommended that rather than pursuing the Pilot, the
Commission should instead amend Rule 610(c) to reduce the access fee
cap to $0.0010 and also ``conduct an abbreviated study of the effects
of eliminating rebates similar to the criteria of Pilot Test Group
Three.'' \293\ This commenter stated that ``there is broad
recognition'' that the access fee cap should be reduced and the Pilot
will ``be lengthy, complex and costly'' but ``will not yield a
different conclusion.'' \294\ The commenter stated that reducing the
access fee cap to $0.0010 would be calibrated with present-day trading
and execution costs, would better ensure displayed prices reflect the
actual economic costs of an execution, and would allow exchanges to
continue maintain their current net capture rates, while also choosing
to offer rebates to incentivize liquidity provision if they chose to do
so.\295\
---------------------------------------------------------------------------

    \293\ See Goldman Sachs Letter, at 1-4.
    \294\ Id. at 1.
    \295\ Id.
---------------------------------------------------------------------------

    The Commission believes that its revised Pilot design responds to
this commenter's core recommendation, though the Commission is
instituting a $0.0010 fee cap as part of the Pilot and not as an
amendment to Rule 610(c). The Commission continues to believe that a
Pilot is necessary to provide data to objectively evaluate the effect
of exchange fees and rebates. Ultimately, the Pilot will enable a data-
driven analysis of the impact of transaction fees and rebates on order
routing behavior, execution quality, and market quality, which will
serve as a valuable precursor to the Commission's consideration of
future policy making in this area.
10. Metrics To Assess the Pilot
    A number of commenters recommended that the Commission

more clearly articulate what it believes would constitute a
``successful'' Pilot and how it will judge whether the Pilot achieves
that measure of success.\296\ Several of these commenters suggested
specific metrics or criteria they thought the Commission should analyze
when evaluating the impact of the Pilot, many of which were measurement
criteria suggested by EMSAC.\297\ One commenter suggested that the
Commission provide guidance about how its staff will be evaluating the
metrics used to determine whether to recommend market structure changes
to the Commission following the Pilot.\298\ In addition, two commenters
suggested the Commission designate an independent third party to
conduct an analysis of the Pilot data upon the Pilot's completion.\299\
Another commenter stated that the ``industry should be afforded the
opportunity to comment'' on the metrics and criteria used to evaluate
the Pilot.\300\
---------------------------------------------------------------------------

    \296\ See, e.g., State Street Letter, at 2; Fidelity Letter, at
3-4; Capital Group Letter, at 4; ICI Letter I, at 5; OMERS Letter,
at 2; MFS Letter, at 2; Virtu Letter, at 8; FIA Letter, at 2; SIFMA
Letter, at 2-3, 5; TD Ameritrade Letter, at 2; STANY Letter, at 3;
Morgan Stanley Letter, at 3; Cboe Letter I, at 29; Nasdaq Letter I,
at 7; NYSE Letter, at 2; Pragma Letter, at 2; ModernNetworks Letter;
Healthy Markets Letter I, at 35.
    \297\ See, e.g., State Street Letter, at 2-3; Fidelity Letter,
at 8; Vanguard Letter, at 3; ICI Letter I, at 5; T. Rowe Price
Letter, at 4; MFS Letter, at 2; BlackRock Letter, at 2-3; SIFMA
Letter, at 5-6; Morgan Stanley Letter, at 3; Spatt Letter, at 5;
Cboe Letter I, at 29; IEX Letter I, at 2; Pragma Letter, at 2-3.
    \298\ See SIFMA Letter, at 3. Another commenter requested that
the Commission clarify the role it expects the Division of Economic
and Risk Analysis to play in analyzing the Pilot's data and provide
an anticipated timeline for the issuance of a report on the Pilot
data. See IEX Letter I, at 2.
    \299\ See Fidelity Letter, at 3, 8; MFS Letter, at 2.
    \300\ See Virtu Letter, at 8.
---------------------------------------------------------------------------

    In response to these comments, the Commission emphasizes that its
staff will likely not be the sole entity analyzing data related to the
Pilot. As was the case for the recent Tick Size Pilot, the Commission
believes that market participants will publish their own analyses of
the Pilot using data that is uniquely available to them and the metrics
that they believe are most useful or relevant, and encourages market
participants to do so.\301\ To the extent that interested parties
prepare their own analyses, they may submit them to
<EMAIL_ADDRESS>with the words ``Transaction Fee Pilot
Analysis'' in the subject line, and the Commission will post those
reports on its public website.\302\
---------------------------------------------------------------------------

    \301\ For example, institutional firms could study their ability
to capture the spread when passively posting, and how that is
impacted within the Pilot's treatment groups.
    \302\ The Commission encourages market participants to disclose
what sources of data they used for their analyses and describe the
methodology they used, and to make those reports publicly and freely
available.
---------------------------------------------------------------------------

    The Commission encourages market participants to make public any
analysis they perform on their own trading activity, such as non-
proprietary transaction cost analysis (``TCA''), so that it may be
publicly reviewed and used to help inform the public dialogue
concerning the effect of exchange fees and rebates.\303\ To the extent
that independent analyses are made public, they can contribute to the
Commission's consideration of any future regulatory action in this
area.
---------------------------------------------------------------------------

    \303\ For example, the Pilot's order routing datasets will
collect aggregated data, not individual order-by-order level data,
and reflects the ``child'' orders that are processed by an exchange.
Thus, the order routing dataset will not capture the entire
lifecycle of a ``parent'' order from its inception through to
execution. Accordingly, the Pilot's order routing datasets will not
by themselves permit analyses on an order-by-order basis, and will
therefore be unable to assess the execution quality of orders at the
``parent'' level. If market participants and other interested
parties conduct parent order-level analyses and make their findings
public, then the Commission would be able to consider them as it
assesses the Pilot's ultimate impact on order routing behavior,
execution quality, and market quality. See, e.g., T. Rowe Price
Letter, at 4 (recommending that the Commission view analyses of the
Pilot conducted by registered investment advisers as a ``key
input'').
---------------------------------------------------------------------------

    Given the valuable input of independent analysis, the Commission
believes that the success or failure of the Pilot will be determined by
whether it produces an exogenous shock that generates measurable
responses capable of providing insight into the effects of fees and
rebates on the markets and market participant behavior.\304\ In the
absence of a Commission Pilot that effects change across all equities
exchanges in a coordinated manner, researchers would be unable to
collect meaningful, comparative data to test the effects of such
changes and perform those analyses.\305\
---------------------------------------------------------------------------

    \304\ As noted in the Proposal, the Pilot is designed to produce
an exogenous shock that simultaneously creates distinct fee
environments, each of which restricts transaction-based fees or
rebates differently, enabling synchronized comparisons to the
current environment for purposes of inferring the existence of
causal relationships. See Proposing Release, supra note 2, at 13047
and 53. An exogenous shock to a system occurs when an element of the
system is changed from without the system. (i.e., the change or
shock is not under the control or influence of those within the
system) but can induce endogenous (i.e., within the system)
responses. In the Pilot's context, the exogenous shock takes the
form of a reduction of the maximum permissible transaction fees and
a prohibition on rebates and Linked Pricing on all U.S. equities
exchanges. See infra Section IV.
    \305\ See infra Section IV.B.1.
---------------------------------------------------------------------------

    Success or failure of the Pilot is thus independent of the outcome
of the Pilot. For example, a Pilot that shows, with statistical
significance, that rebates narrow the quoted spread in thinly-traded
stocks would be equally ``successful'' as a Pilot that shows that
rebates do not narrow the spread in such stocks. In this sense, the
``success'' of the Pilot is that it created the conditions that permit
measurement and analysis of that issue in a manner that helps resolve
speculative assumptions among the commenters about the impact of fees
and rebates.
    Furthermore, it is worth noting that the data collected pursuant to
Rule 610T is only part of what researchers will need to conduct
analysis of the impact of exchange fees and rebates on the markets. For
example, the Pilot's order routing datasets contain data to help assess
order routing and certain aspects of execution quality, but will not
contain any data on exchange quotations, which is available from
existing sources. Consequently, researchers will need to use existing
data sources to assess the impact of the Pilot on exchange quoting
activity and market quality. As such, to the extent that the Pilot data
produces null results, for example the Pilot's order routing datasets
do not show any change in liquidity during the Pilot, the Commission
believes that independent analysis from market participants, looking at
order-level data, may nevertheless detect an impact. Even if the Pilot
produces a null result for some metrics, and third-party analysis is
not publicly available or does not find an impact, the Commission
nevertheless believes the Pilot would still be useful to inform future
policymaking that is intended to benefit investors.\306\
---------------------------------------------------------------------------

    \306\ For example, a result that shows no impact on liquidity
for a Test Group may still be relevant to the Commission's
consideration of the effects of transaction fee-and-rebate pricing
models on order routing behavior, execution quality, and market
quality and whether the existing exchange transaction-based fee and
rebate structure continues to further the statutory goals.
---------------------------------------------------------------------------

    In response to commenters' requests for additional insight into the
types of questions that the Commission hopes the Pilot will be able to
answer, the Commission believes that the order routing datasets, as
well as other data that is already readily accessible to researchers,
should facilitate analysis of the impact of the Pilot through a broad
spectrum of metrics. In particular, the Commission will consider, and
encourages others to consider, the following questions in contemplating
the impact of changes to fees and rebates across the exchanges. These
questions include, but are not limited to:

    1. To what extent do access fees and rebates impact routing
decisions for liquidity-taking orders? Are orders to take liquidity
more likely to be routed to an exchange (compared to an off-exchange
venue or ATS) in a lower access fee environment than they are
currently? To what extent are impacts or changes in routing
decisions driven by potential conflicts of interest created by
transaction fees and rebates rather than other factors such as fill
rates and execution quality?
    2. To what extent do access fees and rebates impact routing
decisions for liquidity-supplying orders? Are orders to provide
liquidity less likely to be routed to an exchange (compared to an
off-exchange venue or ATS) in a lower rebate environment than they
are currently? To what extent do impacts or changes in order routing
appear to be driven by potential conflicts of interest caused by
rebates rather than other factors such as execution quality (e.g.,
fill-rates, time to fill, capturing the quoted spread, adverse
selection, or reversion)?
    3. What impact does a reduction or elimination in rebates have
on the NBBO, including spread width and the depth of interest
displayed at the NBBO? To what extent does a potential decrease in
depth of interest at the NBBO result in lower fill rates or smaller
fill sizes for investor orders? Are natural investors better able to
obtain queue priority in exchange order books, and are they more
frequently able to capture the quoted spread when posting passively
(e.g., buy on the bid and sell on the offer)?
    4. Are there common characteristics for securities (e.g.,
average daily trading volume, price, or market capitalization) where
a reduction or elimination of rebates begins to impact quoted
spread? If so, what are those common characteristics and at what
level do reduced rebates begin to have an impact on quoted spread?
To what extent does a change in quoted spread affect transaction
costs for investor orders? If quoted spread widens in a security, to
what extent is the potential spread cost offset by the reduction in
the transaction fees paid, or a change in the ability to capture the
quoted spread?
    5. Are there common characteristics for securities where a
reduction or elimination of rebates does not impact quoted spread?
If so, what are those common characteristics (e.g., average daily
trading volume, price, or market capitalization)?
    6. Are there common characteristics for securities (e.g.,
average daily trading volume, price, or market capitalization) where
a reduction or elimination of rebates begins to impact effective
spread?
    7. How can we best understand the effects of rebates provided on
inverted venues (where rebates are paid to takers of liquidity)?
    8. What impact do lower access fees and rebates have on the
amount of displayed and non-displayed liquidity on exchanges?
    9. In the absence of rebates, do competition and market forces
operate to produce a market equilibrium (within the current
regulatory structure) that constrains transaction fees to levels at
or below today's current access fee cap? What do such market forces,
and any resultant equilibrium pricing, tell us about the need to
impose a cap on access fees? Does the Pilot provide any data that
suggests, in the absence of rebates, an access fee cap would still
be necessary as long as Rule 611 of Regulation NMS continues to
impose order protection requirements on exchanges with protected
quotes?
    10. What is the impact of a lower fee cap on trading volumes on
each exchange? What is the impact of a lower fee cap on other
measures of liquidity on each exchange? How should we understand the
difference between volume and liquidity?
    11. What is the impact of lower rebates on the ability of
smaller exchanges to attract liquidity-supplying orders?

    By providing a mechanism that is uniquely capable of facilitating
an empirical review of these and similar questions, the Pilot is an
essential tool that can further the understanding of an important
component of equities market structure. While other market structure
issues also might benefit from a pilot, exchange transaction fees
currently are a prime focus for empirical study, as evidenced by, among
other things, the EMSAC's recommendation to the Commission and the
number and nature of comments the Commission received on its proposal.
Ultimately, the Commission desires to use the Pilot's results to help
assess whether (and, if so, in which types of NMS stocks) rebates have
a positive impact on execution and market quality, or whether they have
no or little effect or a negative effect.

D. Timing and Duration

1. Disclosure Initiatives and the Pilot
    While a number of commenters urged the Commission to proceed
expeditiously with its proposed pilot,\307\ other commenters believed
the Commission should pursue different market structure initiatives
before conducting the Pilot \308\ or in lieu of the Pilot.\309\ The
Commission has adopted two of the market structure initiatives
identified by commenters--namely, proposals to enhance the operational
transparency of ATSs and to enhance disclosure of order routing
behavior.\310\
---------------------------------------------------------------------------

    \307\ See, e.g., IEX Letter I, at 1; Joint Pension Plan Letter,
at 2; Better Markets Letter, at 3; Brandes Letter, at 2; Clearpool
Letter, at 7.
    \308\ See, e.g., RBC Letter I, at 4; T. Rowe Price Letter, at 4;
Citi Letter, at 2.
    \309\ See, e.g., Nasdaq Letter I, at 1, 3 (``[A] transaction fee
experiment is inappropriate at this time because there are
alternatives and prerequisites the Commission must further
evaluate.''); NYSE Letter I, at 17-19 (stating that the Commission
should consider ``less costly and more effective alternatives'' to
the Pilot); Cboe Letter I, at 12, 22, 27 (recommending that the
Commission undertake a ``holistic examination of the entire equities
market framework'' including consideration of ``possible changes to
the Order Protection Rule [and] the Minimum Tick Increment Rule,''
``[s]trengthening and [a]rticulating the Duty of Best Execution,''
providing ``greater broker-dealer transparency,'' and adopting
amendments to Regulation ATS).
    \310\ See, e.g., Nasdaq Letter I, at 1, 3; NYSE Letter, at 17-
18; Cboe Letter I, at 12, 22, 27, Fidelity Letter, at 4. See also
Securities Exchange Act Release Nos. 83663 (July 18, 2018), 83 FR
38768 (August 7, 2018) (``Regulation ATS-N'') and 34528 (November 2,
2018), 83 FR 58338 (November 19, 2018) (``Amendments to Order
Handling Disclosure'').
---------------------------------------------------------------------------

    While some commenters believed that the information and data from
those new rules would complement the Pilot and ``improve understanding
of pilot data,'' \311\ others believed the new rules would instead
allow the Commission to determine ``whether a problem exists without
risking the potential negative impact of a pilot'' \312\ or thought
that potential conflicts of interest in order routing behavior would be
better addressed through increased transparency and disclosure than by
the Pilot.\313\ The Commission disagrees. Comments urging the
Commission to pursue disclosure-based initiatives focused only on one
narrow aspect of

the Pilot--studying the conflicts of interest between brokers and their
customers that are presented when exchanges pay rebates. However, such
an approach does not adequately advance the Pilot's broader purpose--
obtaining a better understanding of all potential impacts from fees and
rebates, and how fees and rebates may affect stocks differently
depending on their liquidity.
---------------------------------------------------------------------------

    \311\ ICI Letter I, at 5-6, 6 n.12; ICI Letter II, at 3. See
also, e.g., RBC Letter I, at 4; Citi Letter, at 2; Citadel Letter,
at 3, 7 (stating that ``it is important to first finalize and
implement . . . Rule 606 enhancements before implementing the
Pilot'' to ``safeguard the integrity of the Pilot by ensuring that
any changes to broker-dealer order routing practices that result
from the increased transparency mandated by amended Rule 606 are
isolated from any similar changes that result from the design of the
Pilot''); Spatt Letter, at 4 (stating that the ``the enhanced
disclosures proposed would strengthen the potential causal inference
that the response to [the Pilot] would allow''). Some commenters
questioned whether the Pilot should proceed, because they believed
that the adoption of Regulation ATS-N and the Amendments to Order
Handling Disclosure will ``impact the very potential conflicts of
interest the Commission aims to study . . . .'' Nasdaq Letter II, at
2-4; see also NYSE Letter IV, at 2-3. As noted in this section, the
scope of the Pilot is broader than just conflicts of interest.
Therefore, those initiatives, or the impact they may have on order
routing behavior, would not provide sufficient data to evaluate the
effects of transaction fees and rebates on market quality and
execution quality. See infra Section IV.B.1.
    \312\ Nasdaq Letter I, at 1-2, 4; Nasdaq Letter II, at 2-4
(suggesting that the adoption of these regulations ``further
reduce[d] the already weak need for the [Pilot]''). See also, e.g.,
STANY Letter, at 2; ASA Letter, at 5-6; Era Letter, at 1. But cf.
Verret Letter I, at 4 (stating that the ``collection of data from
broker-dealers'' or the use of ``existing data contained in [OATS]''
were not ``feasible alternatives,'' because a ``randomized trial is
far superior for the purpose of generating robust statistical
analysis to inform subsequent rulemaking''); Proposing Release,
supra note 2, at 13046-47 (outlining the limitations of existing
data sources).
    \313\ See, e.g., STANY Letter, at 2; FIA Letter, at 3; Grasso
Letter, at 2. But cf. ICI Letter II, at 3 (noting that disclosure-
based rulemakings ``will not directly reduce the potential for
exchange transaction pricing models to create conflicts of interest
for broker dealers, nor will they provide data that would allow an
institutional investor to measure the impact of fee avoidance on
routing decisions''); Luminex Letter, at 1; Spatt Letter, at 4; IEX
Letter II, at 9.
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    Similarly, some commenters recommended that, either before
conducting the Pilot or in lieu of the Pilot, the Commission should
pursue other market initiatives such as enhancing broker-dealers' duty
of best execution \314\ or undertaking a ``broader review of equity
market structure,'' including the consideration of possible changes to
the Order Protection Rule or the Minimum Tick Increment Rule.\315\
Other commenters disagreed and did not believe that the Commission
should delay the Pilot in order to pursue other market structure
initiatives.\316\ For example, a few commenters advocated proceeding
with the Pilot because the Pilot may help to inform future policy
changes in these other areas.\317\ Other commenters characterized the
``holistic reform'' advocated by other commenters as ``an elusive
goal'' \318\ in light of market participants' competing interests--one
that has been used to ``slow down market structure reform for the past
decade.'' \319\
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    \314\ See, e.g., Nasdaq Letter I, at 3-4; Fidelity Letter, at 6;
Cboe Letter I, at 21-22.
    \315\ See Cboe Letter I, at 12; FIA Letter, at 3; Nasdaq Letter
I, at 4.
    \316\ See, e.g., IEX Letter II, at 9; Better Markets Letter, at
3; Brandes Letter, at 2; AJO Letter, at 2; OMERS Letter, at 3;
Clearpool Letter, at 7. Some of these commenters suggested that the
Pilot should proceed in conjunction with action on other market
structure initiatives. See, e.g., SIFMA Letter, at 1; Pragma Letter,
at 3-4.
    \317\ See, e.g., Verrett Letter I, at 5; Better Markets Letter,
at 3.
    \318\ Brandes Letter, at 2.
    \319\ Themis Trading Letter I, at 6. See also ICI Letter I, at
3.
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    The Commission believes that there is no need to delay proceeding
with the Pilot in order to pursue other potential equity market
structure initiatives. The Pilot seeks to resolve several equity market
structure questions that have been debated for several years.
Similarly, the Commission does not believe that it needs to complete
the Pilot before proceeding to consider other equity market structure
initiatives. Other initiatives may implicate equity market structure
questions that are narrower or broader than, or independent of,
exchange fee models, such as considering innovative approaches to
thinly-traded securities. The Commission expects that it will continue
to evaluate the need for other changes to equity market structure
during the Pilot.
2. Automatic Sunset at Year One
    The Commission proposed that the Pilot have a duration of one year
with a maximum period of two years. Specifically, the proposed Pilot
duration featured an automatic sunset at the end of the first year
unless, prior to that time, the Commission publishes a notice that the
Pilot shall continue for up to one additional year.\320\
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    \320\ See Proposing Release, supra note 2, at 13025. The
Commission notes that the proposed language in Rule 610T(c)(a)(ii)
has been modified slightly. As proposed, Rule 610T(c)(1)(ii)
contained the phrase ``shall continue for up to another year.'' As
adopted, the phrase ``shall continue for up to one additional year''
is being substituted for the phrase ``shall continue for up to
another year'' to simplify the rule text without substantively
changing the requirement.
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    After careful consideration of the comments received, the
Commission is adopting Rule 610T(c) as proposed. Many commenters
supported the proposed duration of the Pilot.\321\ For example, one
commenter asserted that ``each pricing experiment needs to be in place
for a sufficient length of time to enable the firms to adjust their
routing logic.'' \322\ Others agreed that the proposed duration would
reduce the ``desire to `wait out' the Pilot'' and would avoid ``the
incentive to alter behavior in order to distort the Pilot's results . .
. .'' \323\ Several commenters supported the automatic sunset provision
after one-year.\324\
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    \321\ See, e.g., SIFMA Letter, at 3; AGF Letter, at 2;
Wellington Letter, at 2. See also RBC Letter I, at 6 (stating ``a
pilot of at least one year and no more than two years will ensure
that ample data is collected over time, that the restrictions of the
various Pilot Test Groups cannot be evaded by delay, and that the
Pilot does not exist for a period of time beyond which its data
would be cumulative or of marginal significance relative to data
produced earlier in the Pilot period'').
    \322\ See Citi Letter, at 5 (stating that ``[c]ost-sensitive
firms may be able to more quickly adapt to new pricing, while
liquidity-based routers may need time to collect a new sample set to
adjust their routing logic,'' such that ``data in the weeks closer
to the conclusion of the Pilot may more accurately reflect the state
of the market and what the implications would be if implemented
long-term''). One commenter, however, did not believe that certain
``broker-dealers, proprietary traders, and algorithm vendors'' would
``incorporate the new fees into their routing systems on a timely
basis, if ever,'' because according to this commenter, ``[c]hanges
are costly and may prove to be ultimately unnecessary if pricing
reverts following the termination of the pilot study.'' Larry Harris
Letter, at 11.
    \323\ Joint Asset Managers Letter, at 2. See also Joint Pension
Plan Letter, at 2; Brandes Letter, at 2.
    \324\ See, e.g., SIFMA Letter, at 3; CFA Letter, at 6; Fidelity
Letter, at 9; IEX Letter I, at 4.
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    A few commenters, however, thought the proposed duration was too
short and that a minimum two-year pilot would be necessary.\325\ Some
other commenters believed that the necessary data could be obtained
within a shorter time frame. Among commenters advocating for a shorter
Pilot Period, the recommended duration varied and ranged from those who
felt there would be an ``immediate and measurable impact upon
implementation'' \326\ to those who felt the appropriate time frame
should be modified to an absolute maximum of one year.\327\ One
commenter questioned whether a ``1-2 year pilot that changes fees on
3,000 names'' was ``really a `pilot' or in fact a de facto imposition
of a significant reduction of transaction fees[.]'' \328\ Several
commenters expressed their view that the proposed length of the Pilot
would ``exacerbate[ ] the negative impact upon the affected issuers.''
\329\
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    \325\ See, e.g., Babelfish Letter, at 3; Healthy Markets Letter
I, at 19.
    \326\ See TD Ameritrade, at 5; see also, e.g., NorthWestern
Letter, at 1.
    \327\ See, e.g., FIA Letter, at 4; STANY Letter, at 3-4.
    \328\ Magma Letter, at 3. See also, e.g., Apache Letter, at 1;
Unitil Letter, at 2.
    \329\ See, e.g., Ethan Allen Letter, at 1; ProAssurance Letter,
at 2; Knight-Swift Letter, at 2.
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    One commenter took issue with the proposed length of the Pilot by
challenging what it believed to be conflicting statements of the
Commission in its original Proposal. According to the commenter, the
Commission asserted, on the one hand, that the ``market quickly reacts
to changes in (and elimination of) pricing changes, but on the other
hand, claims that the market does not react unless the changes are in
effect for at least a year.'' \330\ The Commission believes both of
those statements are correct and do not conflict. While many market
participants will react promptly to pricing changes, particularly those
with cost-based routing algorithms, others may need additional time to
fine tune liquidity-based routing algorithms as order flow changes in
response to fee changes.\331\ More importantly, however, the Pilot
needs to be long enough to discourage any market participant inclined
to resist adapting its behavior to the fee changes.\332\
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    \330\ NYSE Letter I, at 16.
    \331\ See, e.g., Citi Letter, at 5; Babelfish Letter, at 3.
    \332\ See Proposing Release, supra note 2, at 13071.
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    A few commenters opposed the one-year sunset provision, but for a
variety of different reasons. For example, one commenter thought a full
two-year pilot was necessary, another thought the Commission separately
has the authority to revise or terminate the Pilot early and does not
need a sunset

provision, and a third was critical of the lack of metrics that would
accompany the automatic sunset.\333\
---------------------------------------------------------------------------

    \333\ See Babelfish Letter, at 3; Healthy Markets Letter I, at
19; Cboe Letter I, at 19.
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    After careful consideration of the comments received, the
Commission is adopting the Pilot's duration as proposed. The Commission
believes that the Pilot's duration will provide an appropriate balance
between providing certainty about the maximum duration for the Pilot
while also allowing flexibility to conduct a Pilot for more than one
year if necessary to collect representative data. Further, the Pilot's
duration should be long enough to make it economically worthwhile for
market participants to adapt their behavior and not ``wait out'' the
Pilot. In addition, in light of the number of Pilot Securities
selected, which were selected to ensure sufficient statistical power to
allow for meaningful analysis, the Pilot's duration will allow for the
collection of a robust and representative data set over a sufficiently
long period of time,. The Commission considered a shorter time period
for the Pilot, but is concerned that short-term or seasonal events
could unduly impact the Pilot results and therefore data collected over
a shorter duration may not yield a sufficiently representative dataset
that would be capable of permitting analysis into the impact of
transaction-based fees and rebates and the effects that changes to
those fees and rebates have on order routing behavior, execution
quality, and market quality. For example, a shorter pilot period could
be impacted by seasonal idiosyncrasies, macroeconomic factors, or even
weather events.
    Further, the Commission recognizes that some market participants,
for example, broker-dealers whose liquidity-focused routing strategies
are based on, and continually updated based on, several weeks' worth of
data, will need time to fine tune their revised routing strategies.
While some market participants may adjust quickly, others, like
proprietary trading market participants, may wait to see how other
market participants react before refining their own routing
strategies.\334\ In other words, it could take a few months before some
market participants finish calibrating their routing strategies to the
fees and rebates that the exchanges adopt consistent with the Pilot's
requirements and adjust them as trading dynamics settle in response to
those changes. The exchanges also could take a number of weeks to
settle on new fee models as they see how other exchanges modify their
fee models to comply with the Pilot's requirements and then respond
accordingly, which could further delay the time it takes for broker-
dealers to adjust their routing and trading algorithms. Accounting for
all of this, the Commission intends that the proposed duration of the
Pilot be long enough to encourage wide participation by all market
participants (and discourage ``waiting out'' the Pilot) and thereby
help ensure that the Pilot produces results that are more reliable,
robust, and useful.
---------------------------------------------------------------------------

    \334\ See, e.g., Citi Letter, at 5.
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    The Commission also considered extending the Pilot period to two-
years as suggested by several commenters, and as was recommended by the
EMSAC, but continues to believe that the inclusion of the automatic
sunset provision at the end of the first year is preferable because it
will provide flexibility in the event that the Commission believes
additional time is necessary to ensure the collection of a robust
dataset with adequate statistical power for analysis, but will allow
the Pilot to automatically end after one-year in the event that
sufficient data is collected by that point with sufficient statistical
power to allow for meaningful analysis.
3. Pre- and Post-Pilot Periods
    The Commission proposed a six-month pre-Pilot Period as well as a
six-month post-Pilot Period.\335\ During those periods, the Commission
proposed to require the equities exchanges to collect and make
available the order routing datasets and Exchange Transaction Fee
Summaries in order to provide necessary benchmark information against
which researchers could assess the impact of the Pilot.\336\
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    \335\ See Proposing Release, supra note 2, at 13025-26. See also
Proposed Rule 610T(c).
    \336\ Proposed Rule 610T(d) and (e). See also Proposing Release,
supra note 2, at 13029, 13032. Primary listing exchanges will also
be required to prepare and publicly post updated Pilot Securities
Exchange Lists and Pilot Securities Change Lists for the duration of
the Pilot Period and through the post-Pilot Period. Id. at 13027-28.
The pre-Pilot data is intended to establish a baseline against which
to assess the effects of the Pilot, while the post-Pilot Period is
intended to help assess any post-Pilot effects following the
conclusion of the Pilot.
---------------------------------------------------------------------------

    Two commenters supported the proposed six-month pre-Pilot and post-
Pilot data collection periods.\337\ In contrast, two commenters
suggested adopting three-month long pre-Pilot and post-Pilot
Periods.\338\
---------------------------------------------------------------------------

    \337\ See FIF Letter, at 7, 9; Healthy Markets Letter I, at 19.
    \338\ See IEX Letter I, at 4; FIA Letter, at 4.
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    The Commission desires to implement the Pilot in a manner that
imposes the least amount of costs on the exchanges without compromising
the ability of the Pilot to obtain useful data. The Commission believes
that six-month pre- and post-Pilot Periods are necessary to establish a
baseline against which to compare the data collected during the Pilot
Period and any post-Pilot effects following the conclusion of the
proposed Pilot. Although the Commission appreciates the desire of
market participants to expedite the Pilot while constraining costs, the
Commission considers six months to be necessary to provide the targeted
statistical power for obtaining baseline data. As discussed above,
statistical power largely is a function of the number of observations
over a specified period of time. In order to shorten the pre- and post-
Pilot Periods (e.g., to three months instead of six months) while
maintaining the same statistical power, the Commission would need to
increase the number of securities in the Pilot by at least 120
securities. As discussed above and consistent with the comments it
received, the Commission desires to limit, not increase, the number of
securities included in the Pilot. Accordingly, the Commission is not
adopting a shorter duration for the pre- and post-Pilot Periods.
4. Early Termination
    Proposed Rule 610T did not contain a specific provision regarding
early termination of the Pilot. Several commenters recommended that the
Commission develop specific criteria for evaluating the possibility
that the Pilot may need to be terminated early.\339\ Some recommended