ATS-related activities of their broker-dealer operators and their
affiliates. In addition, we are adopting new Rule 304 as part of
Regulation ATS, which provides a process for the Commission to review
Form ATS-N filings and declare an NMS Stock ATS's initial Form ATS-N,
after notice and opportunity for hearing, ineffective.\1269\ Finally,
we are adopting amendments to Rule 301(b)(10) of Regulation ATS to
require that all ATSs memorialize in writing their procedures and
safeguards to protect subscribers' confidential trading
information.\1270\
---------------------------------------------------------------------------

    \1269\ Rule 304 also provides a process for the Commission to
declare amendments to Form ATS-N ineffective.
    \1270\ Current Rule 301(b)(10) requires all ATSs establish
procedures and safeguards to protect subscribers' confidential
trading information, but it does not expressly require that such
procedures and safeguards must be maintained in writing.
---------------------------------------------------------------------------

    The adopted amendments and Form ATS-N seek to make information
regarding the operations of NMS Stock ATSs available to market
participants, which will increase the operational transparency for NMS
Stock ATSs, bringing it more in line with the operational transparency
for national securities exchanges. The amendments also seek to improve
the quality of information regarding different NMS Stock ATSs'
operations and the ATS-related activities of their broker-dealer
operators and their affiliates. As discussed in more detail below, we
believe that this would help market participants make better-informed
decisions about where to route their orders in order to achieve their
trading or investment objectives, thereby improving the efficiency of
capital allocation and enhancing execution quality. Additionally, we
believe that requiring NMS Stock ATSs to memorialize their safeguards
and written procedures in writing will improve Commission oversight by
helping it better understand, monitor, and evaluate how each ATS
protects subscribers' confidential trading information from
unauthorized disclosure and access, which in turn could increase
investor protection. On the other hand, creation of responses to aid
disclosure of Form ATS-N and the possibility that we may declare the
Form ATS-N ineffective would entail costs to NMS Stock ATSs, which
could result in some of them ceasing to operate as ATSs. If some NMS
Stock ATSs cease operating as ATSs, it could impact the competitive
dynamics between NMS Stock ATSs and national securities exchanges, as
well as the competitive dynamics among NMS Stock ATSs and between NMS
Stock ATSs and broker-dealers who trade NMS stocks but do not operate
an ATS.
    We are sensitive to the economic consequences and effects,
including the costs and benefits, of our rules. The following economic
analysis identifies and considers the costs and benefits--including the
effects on efficiency, competition, and capital formation--that would
result from new Rule 304, Form ATS-N and the amendments to Rule 3a1-
1(a) and Regulation ATS. These costs and benefits are discussed below
and have informed the policy choices described throughout this
release.\1271\
---------------------------------------------------------------------------

    \1271\ Exchange Act Section 3(f) requires the Commission, when
it is engaged in rulemaking pursuant to the Exchange Act and is
required to consider or determine whether an action is necessary or
appropriate in the public interest, to consider, in addition to the
protection of investors, whether the action will promote efficiency,
competition and capital formation. See 15 U.S.C. 78c(f). In
addition, Exchange Act Section 23(a)(2) requires the Commission,
when making rules pursuant to the Exchange Act, to consider among
other matters the impact that any such rule would have on
competition and not to adopt any rule that would impose a burden on
competition that is not necessary or appropriate in furtherance of
the purposes of the Exchange Act. See 15 U.S.C. 78w(a)(2).

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

B. Baseline

    The numerous parties that would be affected by new Rule 304, Form
ATS-N, and the amendments include: Existing NMS Stock ATSs; potential
new NMS Stock ATSs; current and potential subscribers of NMS Stock
ATSs; broker-dealers that are affiliated with NMS Stock ATSs and their
customers; non-ATS affiliated broker-dealers and their customers;
broker-dealers that do not operate NMS Stock ATSs but send order flow
to NMS Stock ATSs; institutional investors that periodically transact
large trades on NMS Stock ATSs; other persons that seek to transact in
NMS stocks on ATSs; and national securities exchanges that compete for
order flow with NMS Stock ATSs and other OTC trading systems.
    We recognize that the economic effects of Rule 304, Form ATS-N, and
the amendments, including costs and benefits and effects on efficiency,
competition and capital formation, should be compared to a baseline
that accounts for the current market and regulatory framework for
trading NMS stocks. The baseline includes: Statistics on the number of
NMS Stock ATSs; current reporting requirements for NMS Stock ATSs; the
lack of public disclosure of NMS Stock ATSs' operations, as well as
disparate levels of information available to market participants about
NMS Stock ATSs' operations and the ATS-related activities of their
broker-dealer operators and their affiliates; and the competitive
environment between national securities exchanges and NMS Stock ATSs,
among NMS Stock ATSs, and between broker-dealers that operate NMS Stock
ATSs and broker-dealers that do not operate NMS Stock ATSs.
1. Current NMS Stock ATSs
    As of March 31, 2018 there are 41 ATSs that have noticed on their
Form ATS that they expect to trade NMS stocks.\1272\ During the first
quarter in 2018, 33 ATSs, all of which operated as dark pools, traded
NMS stocks and accounted for approximately 57 billion shares traded in
NMS stocks (approximately $2.9 trillion in dollar volume), representing
approximately 11.4% of total share trading volume (11.5% of total
dollar trading volume) on all registered national securities exchanges,
ATSs, and non-ATS OTC trading venues in the first quarter of
2018.\1273\ Based on their market share, NMS Stock ATSs represent a
significant source of liquidity in NMS stocks.
---------------------------------------------------------------------------

    \1272\ See supra note 9 and accompanying text.
    \1273\ See infra Table 1, ``NMS Stock ATSs Ranked by Dollar
Trading Volume (January 1, 2018-March 30, 2018)'' Total dollar
trading volume on all exchanges and off-exchange trading in the
first quarter of 2018 was approximately $25.4 trillion and
approximately 503 billion shares.
---------------------------------------------------------------------------

2. Current Reporting Requirements for NMS Stock ATSs
    Even though ATSs directly compete for order flow in NMS stocks with
national securities exchanges, ATSs are exempt from the definition of
``exchange'' and therefore are not required to register as national
securities exchanges with the Commission.\1274\ A system that meets the
criteria of Rule 3b-16(a) may operate as an ATS on the condition that
the ATS complies with Regulation ATS, which requires, among other
things, that the ATS make filings with the Commission on Form ATS and
Form ATS-R,\1275\ which are ``deemed confidential when filed,'' as well
as adhere to other reporting requirements under Regulation ATS.\1276\
Furthermore, ATSs must register as broker-dealers and become members of
an SRO. Accordingly, the ATS must comply with rules applicable to a
broker-dealer and the SRO's rules applicable to broker-dealers. In
addition, FINRA Rules 6160 and 6170 require each NMS Stock ATS to use a
single, unique MPID for trade reporting purposes.\1277\ FINRA uses the
trade data reported by ATSs to publish aggregated weekly trading volume
and trade count information on its website for each ATS on a security-
by-security basis.\1278\
---------------------------------------------------------------------------

    \1274\ See supra Section II.B (discussing the conditions to the
exemption from the definition of ``exchange'' for an ATS).
    \1275\ See supra Section II.C (discussing the Form ATS filing
requirements). See also supra note 65 and accompanying text
(discussing the Form ATS-R filing requirements).
    \1276\ See supra Section II.C (discussing the requirements of
Regulation ATS); see also 17 CFR 242.301(b).
    \1277\ See FINRA Rules 6160 and 6170. See also supra note 15.
    \1278\ FINRA computes the aggregated statistics from trade data
reported by ATSs to the FINRA equity trade reporting facilities
(i.e., the Alternative Display Facility, the Trade Reporting
Facilities, and the OTC Reporting Facility). For trade data prior to
February 1, 2016, FINRA publishes aggregated trade data reported by
ATSs pursuant to former FINRA Rule 4552. FINRA publishes the
information regarding NMS stocks in the S&P500 Index or the Russell
1000 Index and certain exchange-traded products on a two-week
delayed basis, and the information on all other NMS stocks and OTC
equity securities on a four-week delayed basis. See FINRA OTC
Transparency Data at https://otctransparency.finra.org/. See also
supra note 15.
---------------------------------------------------------------------------

3. Lack of Standardized Public Disclosure
    As described in detail in the Proposal,\1279\ the level of
information about the operations of NMS Stock ATSs and the ATS-related
activities of the NMS Stock ATSs' broker-dealer operators and their
affiliates vary across NMS Stock ATSs and across subscribers. Although
Regulation ATS states that information on Form ATS is ``deemed
confidential when filed,'' \1280\ some NMS Stock ATSs voluntarily make
their filings publicly available.\1281\ NMS Stock ATSs that either
voluntarily make their Form ATS publicly available, or publish summary
information of their operations, provide market participants more
information about their operations than do NMS Stock ATSs that do not
make their Forms ATS or information about their operations publicly
available.\1282\ However, market participants cannot always use these
voluntary disclosures to systematically compare NMS Stock ATSs, because
the disclosures are not standardized.\1283\ Additionally, subscribers
might have access to more information about the NMS Stock ATSs to which
they subscribe than they might about others, and also might have more
information about their NMS Stock ATSs than might non-subscribers. For
example, subscribers might have access to the NMS Stock ATS's
subscriber manual, other subscriber quotes, and, potentially, certain
market quality statistics an NMS Stock ATS may publish or otherwise
disclose to subscribers in addition to what is currently publicly
disclosed under Exchange Act Rule 605.\1284\
---------------------------------------------------------------------------

    \1279\ See Proposal, supra note 2, at 81110-11.
    \1280\ See 17 CFR 242.301(b)(2)(vii).
    \1281\ See supra note 56.
    \1282\ On the other hand, some ATSs not only provide current
Form ATS on their public websites, they also provide more
information regarding their ATS operations. For instance, one
commenter asks all their subscribers to consent to having their
names publicly disclosed on their website so that all their
subscribers know the universe of entities that they could be
executing against. See Luminex Letter at 1.
    \1283\ The level of detail and the format in which information
is presented on Form ATS varies among the NMS Stock ATSs. Several
commenters agree with us that either there is a lack of disclosure
about the operations of NMS Stock ATSs or that there is a need to
standardize disclosures made by NMS Stock ATSs. See Fidelity Letter
at 1; ICI Letter at 1; SIFMA Letter at 3. One commenter specifically
states that opacity of venue matching logic ``increases costs for
brokers connecting to venues, and they in turn pass these costs to
clients.'' See AI Letter at 2.
    \1284\ Exchange Act Rule 605(a) requires every market center,
including ATSs, to make publicly available for each calendar month a
report containing standardized data on the covered orders in NMS
stocks that it receives for execution from any market participant.
Data on execution quality required under Exchange Act Rule 605(a)
includes order sizes, execution sizes, effective spreads, price
improvement, and quarterly volume of shares traded. See Rule
605(a)(8) for the definition of a covered order.
---------------------------------------------------------------------------

    Subscribers to an NMS Stock ATS might have varying access to the
different services of the NMS Stock

ATS.\1285\ Those subscribers with greater access might obtain more
knowledge and information about the operations of NMS Stock ATSs than
the subscribers with less access. With this additional information,
subscribers with greater access can make more nuanced decisions about
which trading venue suits their trading purposes, and thus possess an
informational advantage over other subscribers.
---------------------------------------------------------------------------

    \1285\ See Proposal, supra note 2, at 81111 (discussing the
differential access of subscribers to NMS Stock ATSs).
---------------------------------------------------------------------------

    Even if having greater access to the services of an NMS Stock ATS
yields additional information about the operations of the NMS Stock ATS
to certain subscribers, subscribers that do not have full access to
services of the NMS Stock ATS, and the resulting additional
information, might still want to trade on NMS Stock ATSs in spite of
their relative informational disadvantage. Had these subscribers
possessed more detailed information about the operations of the NMS
Stock ATS, they might have been able to make more informed--and
therefore potentially different--decisions about where to route their
orders for execution.
4. NMS Stock ATS Treatment of Subscriber Confidential Trading
Information
    Under current Rule 301(b)(10) of Regulation ATS,\1286\ all ATSs
must establish adequate safeguards and procedures to protect
subscribers' confidential trading information, and, to ensure that
those safeguards and procedures are followed, must also establish
adequate oversight procedures.\1287\ Furthermore, all ATSs are required
to preserve certain records pursuant to Rule 303(a)(1).\1288\ However,
neither Rule 301(b)(10) nor Rule 303(a)(1) of Regulation ATS currently
requires that an ATS maintain and preserve their safeguards and
procedures to protect subscribers' confidential trading information, or
their related oversight procedures in writing.
---------------------------------------------------------------------------

    \1286\ 17 CFR 242.301(b)(10).
    \1287\ 17 CFR 242.301(b)(10).
    \1288\ See Proposal, supra note 2, at 81087; see also supra
Section III.B.6 (discussing amendments to Exchange Act Rule 303).
---------------------------------------------------------------------------

    As discussed in the Proposal,\1289\ we believe that ATSs--in
particular, ATSs whose broker-dealer operators are large, multi-service
broker-dealers--currently have and maintain in writing their safeguards
and procedures to protect subscribers' confidential trading
information, as well as the oversight procedures to ensure such
safeguards and procedures are followed. One commenter agrees that
significant ATSs have largely reduced to writing their safeguards and
procedures to protect subscribers' confidential trading
information.\1290\ Additionally, this commenter also states these
written safeguards and procedures are likely to occur in multiple
formats and in different forms within the same broker-dealer. We
acknowledge that, to the extent an ATS broker-dealer operator currently
maintains written safeguards and written procedures to protect
subscribers' confidential trading information, the written safeguards
and written procedures might exist in multiple formats or differing
forms within the same broker-dealer operator. Nevertheless, under the
current regulatory environment for ATSs, absent specific questions in
an examination by the Commission or its staff, we are not able to
determine whether all ATSs currently have written safeguards and
written procedures to protect subscribers' confidential trading
information or, if an ATS does possess written safeguards and written
procedures, to what extent they exist in multiple formats or differing
forms.
---------------------------------------------------------------------------

    \1289\ See Proposal, supra note 2, at 81111.
    \1290\ See HMA Letter at 23.
---------------------------------------------------------------------------

5. Competition
    The current market for trading NMS stocks is served by national
securities exchanges, ATSs, and liquidity providers (including broker-
dealers who internalize), who compete to supply investors with
execution services at efficient prices. These trading venues, which
compete to match orders, provide a framework for price negotiation and
disseminate trading information. The sections below discuss the current
state of competition between NMS Stock ATSs and national securities
exchanges; competition among NMS Stock ATSs; and competition between
broker-dealers that operate NMS Stock ATSs and broker-dealers that do
not operate NMS Stock ATSs.
a. Competition Between NMS Stock ATSs and Registered National
Securities Exchanges
    In the market for NMS stock execution services, NMS Stock ATSs not
only compete with other NMS Stock ATSs, they also compete with national
securities exchanges. As discussed in the Proposal,\1291\ NMS Stock
ATSs have grown in complexity and sophistication. Some NMS Stock ATSs
now offer features similar to those offered by national securities
exchanges, including, among other things, anonymous order submission,
limit order book matching systems, a wide range of order types, and
high-speed connectivity options. However, unlike national securities
exchanges, most NMS Stock ATSs have adopted a dark trading model, and
do not display any quotations in the consolidated quotation data.\1292\
Two commenters state that NMS Stock ATSs also compete with national
securities exchanges for order flow by offering features that are not
readily available on national securities exchanges.\1293\ For example,
while most national securities exchanges match trades via a price/time
priority limit order book, some NMS Stock ATSs may match trades via
auctions or block crossing mechanisms.\1294\
---------------------------------------------------------------------------

    \1291\ See Proposal, supra note 2, 80 FR at 81009.
    \1292\ See id.
    \1293\ See Consumer Federation of America Letter at 4; ICI
Letter at 3.
    \1294\ See Proposal, supra note 2, 80 FR at 81009; see also ICI
Letter at 3.
---------------------------------------------------------------------------

    As discussed above and explained in more detail in the
Proposal,\1295\ NMS Stock ATSs and national securities exchanges are
subject to different regulatory regimes, including different
obligations to disclose information about their trading operations and
activities. This has resulted in differences in operational
transparency between national securities exchanges and NMS Stock ATSs,
which limits the ability of market participants to compare the
operations and execution quality of NMS Stock ATSs and national
securities exchanges.
---------------------------------------------------------------------------

    \1295\ See supra Sections II.B-C (discussing the different mix
of obligations and benefits applicable to ATSs and registered
national securities exchanges). See also Proposal, supra note 2, at
81111-12.
    \1296\ See supra Section II.B.
    \1297\ See Proposal, supra note 2, at 81111-12
    \1298\ See, e.g., Section 19(g) of the Exchange Act, 15 U.S.C.
78s(g), and Section 6(b) of the Exchange Act, 15 U.S.C. 78f(b). For
further discussion of the costs and benefits of registering as a
national securities exchange, see Proposal, supra note 2, at 81111-
12.
---------------------------------------------------------------------------

    In addition to the burdens discussed above,\1296\ and as discussed
in more detail in the Proposal,\1297\ national securities exchanges and
other SROs also have regulatory obligations, such as enforcing their
rules and the federal securities laws with respect to their members,
which do not apply to ATSs.\1298\ However, national securities
exchanges also enjoy certain benefits that are not afforded to NMS
Stock ATSs, such as establishing norms regarding conduct, trading, and
fee structures. ATSs, on the other hand, are regulated as broker-
dealers, and must comply with the rules of FINRA. Trading venues that
elect to register as national securities exchanges can gain

added prestige by establishing listing standards for their securities.
Additionally, national securities exchanges can be direct participants
in NMS plans, which provide additional sources of revenue and input
into the operation of the national market system that is not available
to NMS Stock ATSs.\1299\
---------------------------------------------------------------------------

    \1299\ See Regulation ATS Adopting Release, supra note 3, at
70880, 70902-70903 (Section discussing generally some of the
obligations and benefits of registering as a national securities
exchange).
---------------------------------------------------------------------------

    As discussed in more detail in the Proposal, since the adoption of
Regulation NMS in 2005, the market for NMS stock execution services has
become more fragmented and the number of national securities exchanges
and NMS Stock ATSs has increased.\1300\ Over the past decade, with the
increase in fragmentation in the market for execution services, there
has been a shift in the market share of trading volume in NMS stocks
across trading venues.\1301\ The number of active dark pools trading
NMS stocks has increased from approximately 10 in 2002,\1302\ to 33
today.\1303\ The market share of total NMS stock share volume that is
attributable to dark pools has increased from 7.9% in 2009 \1304\ to
11.4% during the first quarter of 2018.\1305\ Thus, greater
fragmentation in the market for NMS stock execution services over the
past decade has resulted in trading volume being executed on different
venues, some of which include NMS Stock ATSs, particularly NMS Stock
ATSs that operate as dark pools.\1306\
---------------------------------------------------------------------------

    \1300\ See Proposal, supra note 2, at 81112. For a list of
current national securities exchanges, see https://www.sec.gov/rules/sro.shtml.
    Although there are 12 national securities exchanges that trade
NMS stocks, they are currently controlled by 5 exchange groups,
namely, CBOE Global Markets, Inc. (which controls BZX, BYX, EDGA,
and EDGX), CHX Holdings, Inc. (which controls CHX), Intercontinental
Exchange, Inc. (which controls NYSE American, NYSE, and NYSE Arca),
IEX Group Inc. (which controls IEX), and NASDAQ, Inc. (which
controls Nasdaq, BX, and PHLX).
    \1301\ For further discussion see Proposal, supra note 2, at
81112.
    \1302\ See Regulation of Non-Public Trading Interest at 61209
n.9, and accompanying text (proposing rules and amendment to joint
industry plans describing the term dark pool).
    \1303\ See supra notes 11-12 and accompanying text.
    \1304\ See supra notes 13-14 and accompanying text.
    \1305\ See supra Section X.B.1.
    \1306\ Several commenters also stated that ever since the
inception of Regulation ATS, the market for trading NMS stocks has
become more fragmented, and the number of NMS Stock ATSs and the
trading volume executed on these venues has increased, but they did
not provide quantitative estimates of the number of ATSs or the
fraction of trading volume executed on different venues. See CFA
Institute Letter at 2; Consumer Federation of America Letter at 4;
Fidelity Letter at 3; LeveL ATS Letter at 2; Schneiderman Letter at
1, SIFMA Letter at 2.
---------------------------------------------------------------------------

    Several commenters state that since the inception of Regulation
ATS, ATSs have operated at a competitive advantage relative to national
securities exchanges, because they operate with lower transparency and
greater opacity relative to national securities exchanges.\1307\
Another commenter states that ``ATSs are competitors to exchanges, but
do not have the same oversight, transparency requirements or
responsibilities.'' \1308\ This commenter also states that ``It is
clearly unfair competition for ATSs to be subject to far less
requirements than exchanges while executing a large percentage of the
market volume.'' \1309\ We agree that NMS Stock ATSs face lower
regulatory burdens than national securities exchanges, including
differences in the obligations to publicly disclose information about
their trading operations and activities. This has resulted in
differences between the operational transparency of NMS Stock ATSs and
national securities exchanges and made it more difficult for market
participants to evaluate how their orders interact, match, and execute
on the NMS Stocks ATSs than on national security exchanges. As
discussed in the Proposal,\1310\ the growth in the number of NMS Stock
ATSs may be driven by these less stringent regulatory obligations.
However, national securities exchanges also enjoy certain advantages
which are not available to NMS Stock ATSs, such as the ability to list
securities and share in market data revenue generated by the CTA.
---------------------------------------------------------------------------

    \1307\ See CBOE Letter at 1; CFA Institute Letter at 2; Consumer
Federation of America Letter at 1-2, 4; ICI Letter at 3.
    \1308\ See Anonymous at 1.
    \1309\ See id.
    \1310\ See Proposal, supra note 2, at 81112.
---------------------------------------------------------------------------

b. Competition Among NMS Stock ATSs
    NMS Stock ATSs also compete with each other in a niche in the
market for NMS stock execution services. The rise in the number of NMS
Stock ATSs has not only affected competition between national
securities exchanges and ATSs for order flow of NMS stocks, it has also
impacted competition among NMS Stock ATSs.
    Table 1, which is based on aggregated trade data reported by ATSs
to the FINRA equity trade reporting facilities for 13 weeks of trading
from January 1, 2018, to March 30, 2018, depicts the market share of
total dollar volume for NMS stocks, and the total share volume for NMS
stocks for individual ATSs.\1311\ Even though there are many NMS Stock
ATSs, much of the NMS stock dollar volume on ATSs is transacted by only
a handful of venues. Table 1 shows that the top 7 NMS Stock ATSs ranked
by dollar volume accounted for 63.4% of total dollar volume transacted
on ATSs and 59.2% of total share volume transacted on ATSs from January
1, 2018, to March 30, 2018.
---------------------------------------------------------------------------

    \1311\ See supra note 15.

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

[GRAPHIC] [TIFF OMITTED] TR07AU18.000

Table 1: NMS Stock ATSs Ranked by Dollar Trading Volume

(January 1, 2018--March 30, 2018) \1314\
---------------------------------------------------------------------------

    \1312\ Total Consolidated Volume includes all trading in NMS
stocks on all national securities exchanges, ATSs, and non-ATS OTC
trading.
    \1313\ See supra note 2 for definition of ``dark pool''.
    \1314\ Table 1 Data Sources: (1) FINRA Alternative Trading
System (ATS) Transparency Data is aggregated trade data reported by
ATSs to the FINRA equity trade reporting facilities and made
available on FINRA's website as part of the OTC Transparency Data.
The OTC Transparency Data is provided via http://www.finra.org/industry/OTC-Transparency and is copyrighted by FINRA 2018. (2) NYSE
Trade and Quote Database (TAQ).
---------------------------------------------------------------------------

    This table shows the 33 ATSs that effected transactions in NMS
stocks from January 1, 2018--March 30, 2018, ranked in descending order
by dollar volume transacted. ATS data is reported weekly, and these
dates approximately correspond to the first quarter of 2018. Dollar
volume transacted on an ATS is calculated by multiplying the share
volume for a given NMS stock on the ATS in a given week by the average
trade price for that week. Dollar volume for each NMS stock is then
aggregated across all NMS stocks that traded on the given ATS in that
week. Also reported in this table is the number of trades, share
volume, each NMS Stock ATS's market share of all NMS Stock ATS dollar
volume and NMS Stock ATS share volume in that quarter.
    Table 2, which is based on aggregated trade data reported by ATSs
to the FINRA equity trade reporting facilities

for 13 weeks of trading from January 1, 2018, to March 30, 2018, shows
the average trade size, which is share volume divided by the number of
trades on each of the NMS Stock ATSs. The table reveals marked
differences in the average trade size of transactions executed on the
various NMS Stock ATSs. Eight NMS Stock ATSs had average trade sizes in
excess of 10,000 shares. This suggests that some NMS Stock ATSs receive
large block orders and execute large trades.\1315\ One of the
advantages for market participants of trading on block crossing
networks is the ability to execute large block orders while minimizing
the movement of prices against their trading interest.\1316\
---------------------------------------------------------------------------

    \1315\ For purposes of this analysis we considered block orders
as orders of more than 10,000 shares, which is the traditional
definition for block orders. See Proposal, supra note 2, at 81008.
See also Rule 600(b)(9) of Regulation NMS (defining block size with
respect to an order), 17 CFR 242.600(b)(9).
    \1316\ See Proposal, supra note 2, at 81008 n.126, 127.
---------------------------------------------------------------------------

    While these NMS Stock ATSs on average execute large size trades,
the combined market share of these NMS Stock ATSs is only 12.6% when
measured in dollar volume, and 6.0% when measured in share volume. The
vast majority of NMS Stock ATSs have average trade sizes between 100
and 460 shares. The average trade size across all 33 NMS Stock ATSs is
204 shares, while the two NMS Stock ATSs with the highest market shares
(measured either in dollar volume or share volume) have average trade
sizes of 155 and 163 shares, respectively. These trade sizes are not
significantly different from the average trade size of 146 shares on
national securities exchanges,\1317\ which suggests that the niche
market NMS Stock ATSs serve is not very different from the market as a
whole.\1318\
---------------------------------------------------------------------------

    \1317\ Tuttle (2013) also found that trade sizes on ``lit''
national securities exchanges are similar to those taking place on
``dark ATSs.'' However, Tuttle (2013) did not include odd lot trades
when calculating trade sizes for ``lit'' national securities
exchanges or ``dark ATSs.'' See Laura Tuttle, Alternative Trading
Systems: Description of ATS Trading in National Market System Stocks
(October 2013), http://www.sec.gov/marketstructure/research/alternative-trading-systems-march-2014.pdf (``Tuttle: ATS Trading in
NMS Stocks''). Unlike ``lit'' national securities exchanges, dark
ATSs do not publicly disseminate top of the limit-order book
information. See id.
    Table 2 in the Proposal reports that between March 30, 2015, and
June 26, 2015, the average trade size on NMS Stock ATSs was 214
shares and the average trade size on national securities exchanges
was 181 shares. Calculations for both of the average trade size
metrics reported in the Proposal include odd lots trades. However,
calculations for the average trade size on national securities
exchanges reported in the Proposal also include TAQ trade volume
reported from bulk trades, opening and closing trades, and intraday
crosses. See Proposal, supra note 2, at 81114.
    \1318\ One commenter conducted similar analysis, computing
average trade sizes in ``top volume ATSs'' for three time periods:
May 12, 2014-May 16, 2014; March 30-June 26, 2015; and January 11,
2016-January 15, 2016 and reached similar conclusions. See Anonymous
Letter at 4.

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

[GRAPHIC] [TIFF OMITTED] TR07AU18.001

Table 2: NMS Stock ATSs Ranked by Average Trade Size

(January 1, 2018-March 30, 2018) \1320\
---------------------------------------------------------------------------

    \1319\ National securities exchanges that transacted in NMS
stocks during the period January 1, 2018 to March 30, 2018 included
NYSE MKT LLC, Cboe BZX Exchange, Inc.; Cboe BYX Exchange, Inc.; Cboe
EDGA Exchange, Inc.; Cboe EDGX Exchange, Inc.; Chicago Stock
Exchange, Inc.; The Investors Exchange LLC; NASDAQ OMX BX, Inc.;
NASDAQ OMX PHLX, Inc.; The Nasdaq Stock Market LLC; New York Stock
Exchange LLC; and NYSE Arca, Inc. NYSE National, Inc. (f.k.a.
National Stock Exchange, Inc.) was not trading, but on May 17, 2018
the Commission approved a proposed rule change in connection with
its relaunch. See supra note 9.
    \1320\ Table 2 Sources: (1) FINRA Alternative Trading System
(ATS) Transparency Data is aggregated trade data reported by ATSs to
the FINRA equity trade reporting facilities and made available on
FINRA's website as part of the OTC Transparency Data. The OTC
Transparency data is provided via http://www.finra.org/industry/OTC-Transparency and is copyrighted by FINRA 2018. (2) NYSE Trade and
Quote Database (TAQ).
---------------------------------------------------------------------------

    This table shows 33 ATSs that effected transactions in NMS stocks
from January 1, 2018-March 30, 2018, ranked in descending order by
average trade size. ATS data is reported weekly, and these dates
correspond approximately to the fourth quarter of 2017. Also reported
in this table is the raw number of trades, share volume, dollar volume,
and each NMS Stock ATS's market share of all NMS Stock ATS dollar
volume and NMS Stock ATS share volume. Dollar volume transacted on an
ATS is calculated by multiplying the share volume for a given NMS stock
on the ATS in a given week by the average trade price for that week.
Dollar volume for each NMS stock is then

aggregated across all NMS stocks that traded on the given ATS in that
week. Average trade size on national securities exchanges is calculated
from TAQ data using intraday trades that took place between 9:30 a.m.
and 4:00 p.m. Bulk trades and trades during the opening and close and
intraday crosses are excluded from the calculation.
    One commenter mentions that because the difference in average trade
size between national securities exchanges and NMS Stock ATSs is small,
this is evidence that ``these venues are no longer beneficial for
executing block size trades between large traders.'' \1321\ We do not
agree with the comment that NMS Stock ATSs are no longer beneficial for
executing block size trades. As can be seen in Table 2, eight ATSs have
average trade sizes in excess of 10,000 shares, indicating that these
ATSs are attractive venues for crossing block orders. Based on this, we
believe that some ATSs--particularly ones which have average trade
sizes in excess of 10,000 shares--are beneficial for certain market
participants wanting to trade large block sizes.
---------------------------------------------------------------------------

    \1321\ See Anonymous Letter at 3.
---------------------------------------------------------------------------

    As discussed in more detail in the Proposal,\1322\ while many NMS
Stock ATSs operating today are similar with respect to the limited
transparency they provide with respect to their trading model, we
understand that the services offered vary significantly across NMS
Stock ATSs.\1323\ Even though NMS Stock ATSs may not be privy to
detailed information about the operations of other NMS Stock ATSs, they
are able to garner information about the differential services offered
by their competitors through various means,\1324\ enabling ATSs to
modify their products and services to better compete within the market
for NMS stock execution services. Thus, as explained in more detail in
the Proposal,\1325\ an NMS Stock ATS may not be incented to fully
reveal how orders interact, match and execute on its platform, because
revealing such information adversely impacts the ATS's position within
the market by also informing its competitors.
---------------------------------------------------------------------------

    \1322\ Proposal, supra note 2, at 81115.
    \1323\ Two commenters agree with us. These commenters mention
that some ATSs offer subscribers the ability to customize trading
parameters, including price instructions and counterparty selection,
while others offer subscribers different methods of accessing the
ATS, such as FIX connections or trading through the broker-dealer's
smart order router. See Consumer Federation of America Letter at 4;
ICI Letter at 2-3.
    \1324\ These are discussed in more detail in the Proposal. See
Proposal, supra note 2, at 81115.
    \1325\ See id.
---------------------------------------------------------------------------

c. Competition Between Broker-Dealers That Operate NMS Stock ATSs And
Broker-Dealers That Do Not Operate NMS Stock ATSs
    As explained in more detail in the Proposal, competition for NMS
stock order flow also exists between the broker-dealers that operate
NMS Stock ATSs and broker-dealers that do not operate NMS Stock ATSs
but otherwise effect transactions in NMS stocks.\1326\ Some broker-
dealers who operate their own NMS Stock ATS(s) may provide their
affiliates with access to certain services that are not afforded to
broker-dealers that do not have their own ATS platform,\1327\ which may
result in trading advantages.\1328\
---------------------------------------------------------------------------

    \1326\ See id.
    \1327\ A number of commenters state that broker-dealer operators
and their affiliates may have access to certain features of an ATS
that are not available to other subscribers. See Better Markets
Letter at 4-6; Consumer Federation of America Letter at 7-10; HMA
Letter at 13-15; Liquidnet Letter at 11. One of these commenters
states that broker-dealer operators and their affiliates may receive
preferential treatment or access to the ATS, such as faster or more
direct access to the ATS, priority status to execute their orders
over those of other subscribers, or the ability to further customize
with whom their order flow interacts. See Consumer Federation of
America Letter at 8.
    \1328\ For further explanation, see Proposal, supra note 2, at
81115.
---------------------------------------------------------------------------

6. Effect of NMS Stock ATSs on the Current Market for NMS Stock
Execution Services
    As discussed above, the current market for NMS stock execution
services consists of competition for order flow among national
securities exchanges, NMS Stock ATSs, and broker-dealers who operate or
control non-ATS trading centers.\1329\ This section specifically
discusses the impact that this current market structure for NMS stock
execution services has on trading costs to market participants; the
process by which the price of NMS stocks are determined in the market
(``price discovery''); and market efficiency.
---------------------------------------------------------------------------

    \1329\ See supra Section X.B.5.
---------------------------------------------------------------------------

a. Trading Costs
    As described in detail in the Proposal,\1330\ some academic
research has suggested that the decline in trading costs since the
adoption of Regulation ATS in 1998 and Regulation NMS in 2005 could, in
part, be driven by the rising fragmentation of trading volume and
competition for order flow, through the proliferation of new trading
venues such as NMS Stock ATSs.\1331\ Trading on NMS Stock ATSs may also
benefit institutional investors \1332\ by providing a useful tool
whereby they may be able to reduce the ``price impact'' of their trades
and obtain enhanced execution quality for their orders.\1333\ Five
commenters also express the belief that the increase in trading on ATSs
has contributed to a competitive marketplace that has led to improved
costs and liquidity, and that this has benefitted both retail and
institutional investors.\1334\
---------------------------------------------------------------------------

    \1330\ See Proposal, supra note 2, at 81115-16.
    \1331\ Other academic literature has suggested that the increase
in fragmentation has had a counteracting effect and has increased
bid-ask spreads. This literature, however, has focused on small
stocks, and fragmentation across exchanges, rather than
fragmentation across exchanges and between exchanges and NMS Stock
ATSs. See Haslag, Peter and Matthew Ringgenberg, 2016, ``The Causal
Impact of Market Fragmentation on Market Liquidity,'' working paper,
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2591715; Baldauf, Markus and Joshua Mollner,
2017, ``Trading in Fragmented Markets,'' working paper, available at
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2782692.
    \1332\ See Proposal, supra note 2, at 81115 (discussing the
impact of NMS Stock ATSs on institutional investor trading costs).
    \1333\ One commenter agreed that NMS Stock ATSs, specifically
dark pools, serve a ``useful purpose to those wishing to trade large
blocks of shares at lower cost without moving the public price as a
result of other market participants identifying and trading ahead of
their interest.'' Barnard Letter at 1.
    \1334\ See Fidelity Letter at 3; LeveL ATS Letter at 2; Morgan
Stanley Letter at 4; STANY Letter at 2; UBS Letter at 8.
---------------------------------------------------------------------------

    Another element that may affect trading costs is order
internalization by broker-dealers. As described detail in the
Proposal,\1335\ some academic literature has found that internalization
of order flow increases trading costs and reduces market depth and
price informativeness. In the current operational environment of NMS
Stock ATSs, subscribers' orders or other trading interests could be
removed from the broker-dealer's NMS Stock ATS and routed to, among
other destinations, another trading center operated by the broker-
dealer operator for internalization. Thus, the fact that some broker-
dealers operate their own NMS Stock ATSs, and yet internalize some
order flow rather than executing it on their own NMS Stock ATS, may
have a deleterious effect on market quality.
---------------------------------------------------------------------------

    \1335\ See Proposal, supra note 2, at 81117.
---------------------------------------------------------------------------

    The current market for NMS stock execution services--which includes
NMS Stock ATSs--provides value to market participants. If all NMS Stock
ATSs were to cease operating as ATSs, market participants might incur
costs associated with not being able to find an adequate trading venue
that offers benefits similar to those that NMS Stock ATSs provide. To
the extent that market participants value these ATS-specific features,
the decision of certain NMS

Stock ATSs to cease operating as ATSs could increase the trading costs
of these market participants and impact whether and how they affect
certain trading strategies.
    While the existence of NMS Stock ATSs has reduced the trading costs
on average for market participants, the lack of transparency regarding
ATS operations and the ATS-related activities of the ATS broker-dealer
operator and its affiliates has contributed to higher search costs for
market participants to find a trading venue that serves their investing
or trading objectives. A by-product of these higher search costs is
uncertainty pertaining to how their orders will be handled,
particularly for subscribers to NMS Stock ATSs that have not made their
Form ATS public.\1336\
---------------------------------------------------------------------------

    \1336\ Several commenters agree with our analysis that the
differences have resulted in higher search costs for market
participants. See Better Markets Letter at 2; CFA Institute Letter
at 2; Consumer Federation of America Letter at 2-4.
---------------------------------------------------------------------------

b. Price Discovery
    While the increased fragmentation of trading volume associated with
the current market for NMS stock execution services has been a factor
in lowering trading costs for market participants, the academic
literature has found that it has had a mixed impact on price discovery.
    As described in more detail in the Proposal,\1337\ some academic
studies have suggested that the market segmentation caused by the
coexistence of national securities exchanges and NMS Stock ATSs can
improve price discovery.\1338\ They suggest that price discovery can
improve either as a result of more aggressive competition among market
participants in providing liquidity or as a result of the segmentation
of informed and uninformed market participants.\1339\ These academic
studies predict that because the orders of informed market participants
are more likely to execute on national securities exchanges, they will
be more likely to trade on national securities exchanges and uninformed
market participants will be more likely to trade on NMS Stock
ATSs.\1340\ Because informed market participants have better knowledge
about the value of a security than uninformed market participants, this
segmentation can improve price discovery on national securities
exchanges.\1341\
---------------------------------------------------------------------------

    \1337\ See Proposal, supra note 2, at 81116-17.
    \1338\ See Boulatov, Alex, and Thomas George, 2013, ``Hidden and
Displayed Liquidity in Securities Markets with Informed Liquidity
Providers,'' Review of Financial Studies 26, 2095-2137; Comerton-
Forde, Carole and Talis Putnins, 2015, ``Dark Trading and Price
Discovery,'' Journal of Financial Economics 118, 70-92.; and Zhu,
Haoxiang, 2014, ``Do Dark Pools Harm Price Discovery?'' Review of
Financial Studies 27, 747-789. Comerton-Forde and Putnins (2015) and
Zhu (2014) specifically examine dark pools.
    \1339\ Uninformed market participants trade for non-
informational reasons. In some cases, they are termed ``noise
traders,'' since their trades are based on their beliefs and
sentiments, and are not grounded on fundamental information. See
Vishwanath, Ramanna and Chandrasekhar Krishnamurti, 2009,
``Investment Management: A Modern Guide to Security Analysis and
Stock Selection,'' Springer Publishing.
    \1340\ See Proposal, supra note2, at 81116 (discussing the
segmentation of trading by informed and uninformed market
participants between national securities exchanges and ATSs).
    \1341\ See Comerton-Forde and Putnins (2015) and Zhu (2014),
supra note 1338.
---------------------------------------------------------------------------

    Other academic studies suggest that the presence of NMS Stock ATSs
in the current trading environment can harm price discovery.\1342\
These studies have suggested that because some NMS Stock ATSs are
crossing networks and often derive their prices from national
securities exchanges, price impact costs that result from trading on a
national securities exchange harm prices on NMS Stock ATSs, resulting
in less trading and harming price discovery.\1343\ When trading,
informed market participants often balance two types of costs, namely
price impact costs and execution costs. In comparison to NMS Stock
ATSs, on national securities exchanges an informed market participant's
order experiences lower execution risk but higher price impact costs.
However, since NMS Stock ATSs often match orders at prices derived from
national securities exchanges, and if trading on national securities
exchanges generates worse prices due to price impact, this could spill
over and affect a market participant's profit on trades executed on the
NMS Stock ATS. This spillover could result in informed market
participants trading less aggressively, which could in turn reduce
price discovery.\1344\ One academic study finds, while low levels of
trading on NMS Stock ATSs are not harmful, price discovery is harmed
when levels of trading on NMS Stock ATSs are high (i.e., they estimate
that this occurs when trading on NMS Stock ATSs in a given NMS stock
exceeds approximately 10% of dollar volume).\1345\
---------------------------------------------------------------------------

    \1342\ See Ye, Mao, 2011, ``A Glimpse into the Dark: Price
Formation, Transaction Cost and Market Share of the Crossing
Network,'' working paper, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1521494; Degryse, Hans, Frank de Jong and
Vincent van Kervel, 2015, ``The Impact of Dark Trading and Visible
Fragmentation on Market Quality,'' Review of Finance 19, 1587-1622;
Comerton-Forde and Putnins (2015), supra note1338. These studies
specifically examine dark pools.
    \1343\ One commenter agrees with the conclusions from these
studies and remarked that trading on NMS Stock ATSs ``reduces the
information that could assist the transparent market in determining
an accurate fair price'' and that prices quoted on transparent
markets may no longer be efficient or informative. See Barnard
Letter at 1-3.
    \1344\ See Ye (2011), supra note1342.
    \1345\ See Comerton-Forde and Putnins (2015), supra note 1338.
---------------------------------------------------------------------------

c. Market Efficiency
    Currently, the coexistence of national securities exchanges and NMS
Stock ATSs seems to have beneficial effects on market efficiency. One
academic study suggests that while not all trades that execute on NMS
Stock ATSs are large block trades, those that are have been beneficial
to market efficiency.\1346\ If NMS Stock ATSs were not a viable trading
venue for market participants, some market participants might not
execute large orders at all because of the price impact costs of
executing on a national securities exchange. Therefore, the ability for
market participants to execute large trades on NMS Stock ATSs generates
liquidity, which can improve market efficiency.\1347\ The same study
also suggests that small trades that execute on NMS Stock ATSs are
beneficial in that they also generate market efficiency.\1348\
---------------------------------------------------------------------------

    \1346\ See id.
    \1347\ A number of academic studies have found that increased
liquidity can improve market efficiency by reducing the limits to
arbitrage or increasing the incentives to produce costly
information. See Chordia, Tarun, Richard Roll and Avanidhar
Subrahmanyam, 2008, ``Liquidity and market efficiency,'' Journal of
Financial Economics 97, 249-268; Kyle, Albert, 1984, ``Market
structure, information, futures markets, and price formation,'' Gary
G. Storey, Andrew Schmitz, and Alexander H. Sarris (Editors.),
International Agricultural Trade: Advanced Readings in Price
Formation, Market Structure, and Price Instability, Westview Press,
Boulder and London (1984), pp. 45-64.
    \1348\ See Comerton-Forde and Putnins (2015), supra note 1338.
---------------------------------------------------------------------------

    Several commenters assert that the lack of transparency of NMS
Stock ATSs has resulted in a decrease in market efficiency because more
order flow executed on NMS Stock ATSs increases the difficulty
investors face when identifying which venues offer them the best
execution quality.\1349\ As discussed above, increased market
fragmentation could increase search costs by making it more difficult
for market participants to find liquidity to execute their
orders.\1350\ Increased search costs could reduce competition between
liquidity suppliers, which could increase trading costs.\1351\ These
increased trading costs could reduce the incentives for market
participants to acquire costly information, which could in turn result

in a reduction in market efficiency.\1352\ However, as discussed above,
the increased market fragmentation caused by NMS Stock ATSs could also
improve market efficiency by allowing institutional investors a viable
way to trade and reduce price impact costs.\1353\ The commenters did
not provide any analysis to support their claims that the increase in
order flow executed on NMS Stock ATSs has decreased market efficiency.
As such, we continue to believe that the current market for NMS stock
execution services, consisting of national securities exchanges, ATSs
and other off-exchange venues, has together resulted in an improvement
to market efficiency.
---------------------------------------------------------------------------

    \1349\ See Barnard Letter at 1-3; Better Markets Letter at 2.
    \1350\ See supra Section X.B.6.a.
    \1351\ See Yin, Xiangkang, 2005, ``A Comparison of Centralized
and Fragmented Markets with Costly Search,'' Journal of Finance, 60,
1567-1590.
    \1352\ See Kyle, Albert, 1989, ``Information speculation with
imperfect competition,'' Review of Economic Studies 56, 317-356.
    \1353\ See supra Section X.B.6.a.
---------------------------------------------------------------------------

C. Economic Effects and Effects on Efficiency, Competition, and Capital
Formation

    We have considered the economic effects of new Rule 304, Form ATS-N
and the amendments to Rule 3a1-1(a) and Regulation ATS. This section
provides an overview of the economic effects of new Rule 304, Form ATS-
N, and the amendments to Rule 3a1-1(a) and Regulation ATS, including
the costs, benefits, and the effects on efficiency, competition, and
capital formation. This section also discusses additional economic
effects, including benefits and costs related to specific requirements
of new Rule 304, Form ATS-N and the amendments to Rule 3a1-1(a) and
Regulation ATS.
    We believe that the amendments will improve Commission oversight
and thereby improve investor protection and generate greater
transparency about the operations of NMS Stock ATSs and the ATS-related
activities of their broker-dealer operators and their affiliates.\1354\
As explained below, through these effects, the adopted amendments may
promote greater competition for order flow, which could result in
enhanced execution quality, and we believe that this could result in
improvements to efficiency and capital formation.
---------------------------------------------------------------------------

    \1354\ See supra Sections V.C-D.
---------------------------------------------------------------------------

    We have attempted, where possible, to quantify the benefits and
costs and impacts on efficiency, competition, and capital information
that may result from new Rule 304, Form ATS-N, and the amendments to
Rule 3a1-1(a) and Regulation ATS. However, as we discussed in the
Proposal and as explained more fully below,\1355\ it is difficult to
quantify many of the economic effects of the new rule and amendments
due to the complexity of the market for NMS execution services and our
lack of certain relevant information. For instance, it is difficult to
determine what fraction of order flow will be internalized or routed to
national securities exchanges or to non-ATS trading centers if NMS
Stock ATSs are required to publicly disclose information about their
operations on Form ATS-N. Additionally, we do not have certain
information, such as information on market participant routing
agreements or fee arrangements that may influence future order routing
decisions.
---------------------------------------------------------------------------

    \1355\ See Proposal, supra note 2, at 81118.
---------------------------------------------------------------------------

    As we further noted in the Proposal, it is similarly difficult to
determine whether NMS Stock ATSs will continue or cease operating as
ATSs in light of the new rule and amendments,\1356\ as that decision
depends on numerous factors and we lack information about many of those
factors. For example, we do not have information on the extent to which
existing NMS Stock ATSs or potentially new ATSs rely on a competitive
advantage, such as a unique matching methodology or other operational
characteristics, to attract order flow, or the extent to which the new
disclosure requirements will impact those competitive advantages and
thus drive decisions on operating status. Moreover, we lack information
on how many NMS Stock ATSs may decide to register as national
securities exchanges, as some ECNs have in previous years, as a result
of new Rule 304, Form ATS-N and the amendments to Rule 3a1-1(a) and
Regulation ATS.\1357\
---------------------------------------------------------------------------

    \1356\ For the purposes of the PRA, we estimate the annual
average number of NMS Stock ATSs that file Cessation of Operation
notices on Form ATS-N. See supra Section IX.D.2.b.ii.C. This
estimate is based on the historical number of cessations per year
and, while recognizing that the amendments may result in cessations,
does not attempt to predict the effect of the amendments on the
number of cessations.
    \1357\ See Proposal, supra note 2, at 81109 (discussing ATSs
that previously operated as ECNs and subsequently registered as
national securities exchanges).
---------------------------------------------------------------------------

    Commenters did not provide any additional information or analysis
that would allow us to estimate the impacts on order flow or the
continued operation of NMS Stock ATSs under the new rule and
amendments. In light of the complexities of the market and the lack of
currently available information, we are unable to quantify many of the
economic effects of new Rule 304, Form ATS-N, and the amendments to
Rule 3a1-1(a) and Regulation ATS. Therefore, much of the discussion
below is qualitative in nature, although we try to describe, where
possible, the direction of these effects.
1. Economic Effects of Enhanced Filing Requirements of Form ATS-N
    As discussed above, we are amending Rule 3a1-1(a) and Regulation
ATS to require ATSs that transact in NMS stocks to comply with the
requirements of Rule 304 to operate pursuant to the exemption from the
definition of ``exchange.'' \1358\ The amendments would require an NMS
Stock ATS to file reports pursuant to Rule 304, which includes the
requirement to file Form ATS-N, in lieu of current Form ATS, to
disclose information about its operations and the ATS-related
activities of its broker-dealer operator and its affiliates.\1359\ We
believe that these disclosures will help market participants assess
whether the ATS's mode of operation is consistent with their ability to
obtain the best executions and also help them assess potential
conflicts of interest that might adversely impact their trading on the
NMS Stock ATS.
---------------------------------------------------------------------------

    \1358\ See supra Section III.A. See also Rules 3a1-1(a)(2) and
(3), 300, 301, and 304.
    \1359\ See supra Section V for information disclosed on Form
ATS-N.
---------------------------------------------------------------------------

    Rule 304 will also provide a process by which the Commission will
review initial Forms ATS-N and Form ATS-N amendments and declare them
ineffective if it finds that such action is necessary or appropriate in
the public interest, and is consistent with the protection of
investors. We are also adopting a process by which the Commission could
suspend, limit, or revoke an NMS Stock ATS's exemption from the
definition of an ``exchange'' under Rule 3a1-1(a)(2).\1360\ An NMS
Stock ATS could not operate pursuant to the exemption from the
definition of ``exchange'' unless the NMS Stock ATS files Form ATS-N
with the Commission and the Form ATS-N has become effective.\1361\
---------------------------------------------------------------------------

    \1360\ See supra Section IV.E (discussing the public posting
requirements of Form ATS-N).
    \1361\ See supra Section IV.A.3.
---------------------------------------------------------------------------

a. Benefits
    As described in detail in the Proposal,\1362\ we believe that new
Rule 304, Form ATS-N and the amendments to Rule 3a1-1(a) and Regulation
ATS would result in better regulatory oversight of NMS Stock ATSs and
increased investor protection by providing the Commission and relevant
SROs with information about NMS Stock ATSs that currently may only be
available during an examination process. In comparison to Form

ATS,\1363\ Form ATS-N will contain more detailed information about the
operations of NMS Stock ATSs, including information about the ATS-
related activities of the broker-dealer operator and its
affiliates.\1364\ The Commission and SROs could utilize this
information to help prioritize examinations and possibly help identify
potential issues. Additionally, the enhanced disclosure requirements
under Form ATS-N will provide market participants with significantly
more detailed information with which to analyze and evaluate how orders
are handled and executed on NMS Stock ATSs, which could allow them to
better assess an NMS Stock ATS as a potential trading venue.\1365\
---------------------------------------------------------------------------

    \1362\ See Proposal, supra note 2, at 81119-20.
    \1363\ See supra Section II.C (discussing the Form ATS filing
requirements).
    \1364\ See supra Section V for information disclosed on ATS-N.
    \1365\ Three commenters agreed with our assessment that the
enhanced disclosure requirements under Form ATS-N would result in
improved regulatory oversight by the Commission. See Fidelity Letter
at 1; SIFMA Letter at 3; Virtu Letter at 2.
---------------------------------------------------------------------------

    We are also adopting a requirement that Form ATS-N and Form ATS-N
amendments be filed electronically in a XML text-searchable format. We
believe that requiring Form ATS-N and Form ATS-N amendments to be filed
in a XML text-searchable format, coupled with the enhanced disclosure
requirements, will facilitate a more effective and thorough review and
analysis of NMS Stock ATSs by regulators, which should yield greater
insights into the operations of NMS Stock ATSs and the ATS-related
activities of their broker-dealer operators and their affiliates. Such
benefits could increase investor protection by improving the
effectiveness and efficiency of the examination process.
    We believe that the process of reviewing an initial Form ATS-N or
Form ATS-N amendments will allow the Commission to evaluate, among
other things, the completeness and comprehensibility of the NMS Stock
ATSs' disclosures and, if necessary, declare the Form ATS-N
ineffective.\1366\ We believe that the review and public disclosure
process will improve the quality of information the Commission receives
from NMS Stock ATSs, which will allow the Commission to better protect
investors from potentially incomprehensible or incomplete disclosures
that would misinform market participants about the operations of an NMS
Stock ATS or the ATS-related activities of its broker-dealer
operator.\1367\
---------------------------------------------------------------------------

    \1366\ See supra Section IV.A.4 (describing the effectiveness
process for initial Form ATS-N filings).
    \1367\ One commenter agrees that our enhanced regulatory
oversight can help ensure consistency of disclosures provided by
ATSs and their broker-dealer operators. See Fidelity Letter at 1.
---------------------------------------------------------------------------

    We received several comment letters regarding whether the proposed
amendments would adequately protect investors. One commenter was
optimistic, stating the amendments are aimed at ``bolstering
transparency in capital markets, which should enable and enhance
investor protections.'' \1368\ Three commenters were not as optimistic.
One commenter states that the Commission review process for Form ATS-N
``will very quickly devolve into an unreasonably burdensome exercise
for Commission staff while providing little benefit to market integrity
or investor protection.'' \1369\ Another commenter mentions that ``no
amount of required public disclosure can cure the problem presented by
an ATS that makes inaccurate disclosures to subscribers.'' \1370\ A
third states that no amount of disclosure can provide the necessary
protection against broker-dealer conflicts of interest, and that more
needs to be done to protect investors.\1371\ We continue to believe
that increased regulatory oversight and disclosure of NMS Stock ATS
operations and activities would help protect investors. We expect that
the quality of the information the Commission receives from NMS Stock
ATSs will improve as a result of the incentives created by the
procedure to review their filings and declare them ineffective, if
necessary, and that the incidences of incomplete and incomprehensible
disclosures would be mitigated. As market participants will not be able
to trade on NMS Stocks ATSs that do not comply with Form ATS-N
requirements, the review process will protect investors from events
that may have transpired if ATSs, whose Forms ATS-N have been declared
ineffective, were allowed to trade NMS stocks. Additionally, we
continue to believe that the disclosure of broker-dealer conflicts of
interest will allow market participants to better assess an NMS Stock
ATS as a potential trading venue and thus better protect their
interests.\1372\
---------------------------------------------------------------------------

    \1368\ See CFA Institute Letter at 6.
    \1369\ See Consumer Federation of America Letter at 10.
    \1370\ See Fidelity Letter at 4.
    \1371\ See Better Markets Letter at 1, 5-6.
    \1372\ See infra Section X.C.2.a (``Economic Effects of Public
Disclosure of Form ATS-N--Benefits'').
---------------------------------------------------------------------------

b. Costs
    As described in detail in the Proposal,\1373\ we believe that the
filing requirements of Form ATS-N could impose costs on NMS Stock ATSs.
We recognize that an ineffectiveness declaration could impose costs on
an NMS Stock ATS--such as costs from having to cease operations, roll
back a change in operations, or delay the start of operations--and
could impose costs on individual market participants and the overall
market for NMS stock execution services resulting from a potential
reduction in competition or the removal of a sole provider of a niche
service within the market.\1374\ However, NMS Stock ATSs and market
participants would not incur these costs unless the Commission declares
a Form ATS-N or a Form ATS-N amendment ineffective. We believe that NMS
Stock ATSs would be incentivized to comply with the requirements of
Form ATS-N, as well as federal securities laws, including the other
requirements of Regulation ATS, to avoid an ineffectiveness
declaration, which produces benefits to the market. Therefore, we
believe that NMS Stock ATSs would be incentivized to submit Form ATS-N
disclosures that are complete and comprehensive to avoid bearing the
costs of resubmitting a Form ATS-N filing or of having their Form ATS-N
declared ineffective.
---------------------------------------------------------------------------

    \1373\ See Proposal, supra note 2, at 81120-21.
    \1374\ See infra Section X.C.4.a (``Impact on Efficiency,
Competition, and Capital Formation--Competition'').
---------------------------------------------------------------------------

    We also understand that both new and existing NMS Stock ATSs will
incur implementation costs in order to comply with the amendments to
Regulation ATS. NMS Stock ATSs will need to develop internal processes
to ensure correct and complete reporting on Form ATS-N, which can be
viewed as a fixed setup cost, which NMS Stock ATSs may have to incur,
regardless of the amount of trading activity that takes place on them.
As a result, these implementation costs will fall more heavily on
lower-dollar volume NMS Stock ATSs (as opposed to ATSs transacting
greater dollar volume), because these ATSs have a smaller revenue base
to accommodate the largely fixed implementation costs. However, smaller
NMS Stock ATSs that are not operated by multi-service broker-dealer
operators and do not engage in other brokerage or dealing activities in
addition to their NMS Stock ATSs will likely incur lower implementation
costs because certain sections of Form ATS-N (such as

several items of Part II) will not be applicable to these NMS Stock
ATSs.
    In addition to affecting NMS Stock ATSs, the implementation costs
could also indirectly affect market participants by potentially causing
some NMS Stock ATSs to alter or reduce the services they offer to
certain subscribers. For example, the adopted amendments might cause
some NMS Stock ATSs to reduce or stop offering customized reports to
certain subscribers in order to redirect resources to support the
standardized reports.
    Relative to the baseline, the amendments to Regulation ATS will
also impose implementation costs for all NMS Stock ATSs, including
Legacy NMS Stock ATSs, in that they will require NMS Stock ATSs to
adhere to heightened disclosure and reporting requirements regarding
their operations. Legacy NMS Stock ATSs should already comply with the
current requirements of Regulation ATS. Therefore, the compliance costs
of the amendments should be incremental relative to the costs
associated with the existing requirements. Specifically, we believe
that the incremental costs will consist largely of providing new
disclosures and updating records and retention policies necessary to
comply with the amendments. Based on the analysis for purposes of the
PRA,\1375\ we estimate that the amendments to Regulation ATS relating
to Rules 301(b)(2)(viii) and 304 of Regulation ATS, including Form ATS-
N, will result in a one-time burden of 127.4 hours for each NMS Stock
ATS,\1376\ which will result in an estimated one-time paperwork
compliance cost to an NMS Stock ATS of approximately $41,689.10.\1377\
This will result in an aggregate estimated initial hour burden for all
NMS Stock ATSs to complete Form ATS-N and comply with Rules
301(b)(2)(viii) and 304 of Regulation ATS of 5,223.4 hours at an
estimated cost of $1,709,253.10.\1378\
---------------------------------------------------------------------------

    \1375\ See supra Section IX (estimating burden hours). We
estimate the wage rate associated with these burden hours based on
salary information for the securities industry compiled by SIFMA.
The estimated wage figure for attorneys, for example, is based on
published rates for attorneys, modified to account for a 1,800-hour
work-year and multiplied by 5.35 to account for bonuses, firm size,
employee benefits, and overhead, yielding an effective hourly rate
for 2013 of $380 for attorneys. See Securities Industry and
Financial Markets Association, Management & Professional Earnings in
the Securities Industry--2013, available at: https://www.sifma.org/resources/research/management-and-professional-earnings-in-the-securities-industry-2013/. These estimates are adjusted for an
inflation rate of 6.85% based on the Bureau of Labor Statistics data
on CPI-U between October 2013 and March 2018. Therefore, the current
inflation-adjusted effective hourly wage rates for attorneys are
estimated at $406 ($380 x 1.0685). We discuss other costs of
compliance with the proposed rule below.
    \1376\ See supra note 1228 and accompanying text.
    \1377\ (Attorney at $406 x 54.1 hours) + (Chief Compliance
Manager at $518 x 0.5 hours) + (Compliance Manager at $302 x 33.9
hours) + (Senior Systems Analyst at $278 x 30.25 hours) + (Senior
Marketing Manager at $298 x 1 hour) + (Compliance Clerk at $68 x
7.65 hours) = $41,689.10. This compliance cost estimate for a Form
ATS-N includes the estimated costs associated with completing Part
III Items 24 and 25 of Form ATS-N, but as explained above, we
believe that the majority of NMS Stock ATSs would not be required to
complete those items of the form. See supra Section IX.D.2.b.i.C.
    \1378\ 127.4 burden hours x 41 NMS Stock ATSs = 5,223.4 burden
hours. $41,689.10 x 41 NMS Stock ATSs = $1,709,253.10. This
preliminary aggregate compliance cost estimate assumes that all NMS
Stock ATSs would be required to complete Part III Items 24 and 25 of
Form ATS-N. However, as noted above, we estimate that 1 NMS Stock
ATS would be required to complete Part III, Item 24, see supra
Section IX.D.2.b.i.C, and 2 NMS Stock ATSs would be required to
complete Part III, Item 25, see id.
---------------------------------------------------------------------------

    In addition to the implementation costs mentioned above, there are
also expected ongoing costs for NMS Stock ATSs to comply with the
amendments to Rule 3a1-1(a) and Regulation ATS. For instance, NMS Stock
ATSs will incur ongoing costs associated with amending their Form ATS-N
prior to material changes in their operations, or to correct any
material information that has become inaccurate. Regardless of the
reason for filing a Form ATS-N amendment, we estimate for the purposes
of the PRA that it will take an NMS Stock ATS approximately 28.2 hours
annually \1379\ to prepare and file its Form ATS-N amendments at an
estimated annual cost of $8,898.60 per ATS.\1380\ This will result in
an estimated aggregate ongoing hour burden for all NMS Stock ATSs to
amend their Forms ATS-N and comply with Rules 301(b)(2)(viii) and 304
of Regulation ATS of 1,156.2 hours at an estimated cost of $364,842.60
annually.\1381\
---------------------------------------------------------------------------

    \1379\ See supra Section IX.D.2.b.ii.B. As explained above, we
estimate that each NMS Stock ATS would file 3 Form ATS-N amendments
per year, and the hourly burden per amendment would be 9.4 hours.
    \1380\ (Attorney at $406 x 16.5 hours) + (Compliance Manager at
$302 x 6 hours) + (Compliance Clerk at $68 x 5.7 hours) = $8,898.60.
    \1381\ 28.2 hours x 41 NMS Stock ATSs = 1,156.2 hours. $8.898.60
x 41 NMS Stock ATSs = $364,842.60.
---------------------------------------------------------------------------

    Some existing NMS Stock ATSs that also trade non-NMS stocks might
incur additional costs due to the amendments. As discussed above,\1382\
pursuant to the amendments to Regulation ATS, an ATS that trades both
NMS stocks and non-NMS stocks will be subject to the requirements of
Rule 304 with respect to its NMS stock trading operations and Rule
301(b)(2) with respect to its non-NMS stock trading operations.
Accordingly, NMS Stock ATSs that also transact in non-NMS stocks will
incur additional implementation costs when compared to ATSs that only
trade NMS stocks, because the former group will be required to file
both Form ATS-N and a revised Form ATS that removes discussion of those
aspects of the ATS related to the trading of NMS stocks. Those NMS
Stock ATSs will also be required to file a pair of Forms ATS-R four
times annually. For the purposes of the PRA, we estimate that the
aggregate initial burden for those ATSs to separately file an initial
Form ATS-N in regard to their NMS stock trading activity and a current
Form ATS in regard to their non-NMS stock trading activity will be
1,774 hours \1383\ at an aggregate estimated cost of $474,431.\1384\ We
also estimate that the aggregate annual burden to file separate Forms
ATS-R for those ATSs that effect transactions in both NMS stocks and
non-NMS stocks will be 180 hours \1385\ at an aggregate estimated cost
of $59,560.\1386\ Furthermore, we estimate that these ATSs that
facilitate transactions in both NMS stocks and non-NMS stocks will
incur an additional estimated recordkeeping burden of 3 hours annually
per ATS, resulting in an estimated cost of $333.96 per ATS \1387\ and
an aggregate estimated hour burden of 30 hours at an estimated cost of
$3,339.60, due to the amendments to Rule 303(a)(2)(ii).\1388\
---------------------------------------------------------------------------

    \1382\ See supra Section IX.D.2.b.iii.
    \1383\ See supra note 1255 and accompanying text.
    \1384\ ((Attorney for Form ATS at $406 x 13 hours) + (Attorney
for Form ATS-N at $406 x 54.1 hours) + (Chief Compliance Manager for
Form ATS-N at $518 x 0.5 hours) + (Compliance Manager for Form ATS-N
at $302 x 33.9 hours) + (Senior Systems Analyst for Form ATS-N at
$278 x 30.25 hours) + (Senior Marketing Manager for Form ATS-N at
$298 x 1 hour) + (Compliance Clerk for Form ATS at $68 x 7 hours) +
(Compliance Clerk for Form ATS-N at $68 x 7.65 hours)) x 10 ATSs =
$474,431. This aggregate compliance cost estimate includes the
estimated costs associated with completing Part III, Items 24 and 25
of Form ATS-N, but as explained above, we believe that the majority
of NMS Stock ATSs would not be required to complete those items of
the form. See supra Section IX.D.2.b.i.C.
    \1385\ See supra note 1258 and accompanying text.
    \1386\ ((Attorney at $406 x 3.5 hours) + (Compliance Clerk at
$68 x 1 hours) x (4 filings annually)) x 10 ATSs = $59,560.
    \1387\ At an average cost per burden hour of $111.32, see supra
note 1265, the resultant total related cost of compliance for each
ATS would be $333.96 ((3 burden hours) x $111.32/hour).
    \1388\ 3 hours x 10 ATSs = 30 burden hours. $333.96 x 10 ATSs =
$3,339.60. See supra Section IX.D.2.b.vi.
---------------------------------------------------------------------------

    The amendments to Regulation ATS will require Form ATS-N be filed
electronically in a structured format

through EDGAR.\1389\ Based on the widespread use and availability of
the internet, we believe that filing Form ATS-N in an electronic format
will be less burdensome and a more efficient filing process than the
current paper process for NMS Stock ATSs and the Commission, as it is
likely to be less expensive and cumbersome than mailing and filing
paper forms to the Commission.
---------------------------------------------------------------------------

    \1389\ See supra Section VII (Section in the front-end which
specifically discusses structured disclosure aspects of Form ATS-N).
---------------------------------------------------------------------------

    In order to electronically file a Form ATS-N, a broker-dealer
operator of an NMS Stock ATS will need to access the EDGAR system. As
discussed above,\1390\ a broker-dealer that has not previously received
access to EDGAR would need to submit a Form ID.\1391\ For the purposes
of the PRA, we estimate that each ATS that needs to submit a Form ID to
gain access to EDGAR will incur a one-time burden of 0.15 hours, which
would result in each ATS incurring a one-time estimated cost of
$45.30.\1392\ Based on analysis in the PRA, we estimate that each year
1 new NMS Stock ATS will be operated by an entity that needs to submit
a Form ID to gain access to EDGAR.\1393\ This would result in an
aggregate estimated initial burden of 0.15 hours at an estimated cost
of $45.30.\1394\
---------------------------------------------------------------------------

    \1390\ See supra Section IX.D.2.b.iv.
    \1391\ See id (discussing Central Index Key (``CIK'') numbers).
    \1392\ Compliance Manager at $302 x 0.15 hours = $45.30.
    \1393\ Because all ATSs, regardless of whether they trade NMS
stocks, are operated by registered broker-dealers who have been
assigned a CIK number, for the purposes of the PRA, we estimate that
Legacy NMS Stock ATSs or non-NMS Stock ATSs that later decide to
trade NMS stocks will not incur any costs associated with gaining
access to EDGAR. See supra Section IX.D.2.b.iv.
    \1394\ 0.15 burden hours x 1 NMS Stock ATS = 0.15 burden hours.
$45.30 x 1 NMS Stock ATS = $45.30.
---------------------------------------------------------------------------

    Rule 304(b)(3) will require each NMS Stock ATS to make public via
posting on the NMS Stock ATS's website, a direct URL hyperlink to the
Commission's website that contains the documents enumerated in Rule
304(b)(2). For the purposes of the PRA, we estimate that each NMS Stock
ATS will incur an initial, one-time burden of approximately 2 hours to
program and configure its website in order to post the required direct
URL hyperlink pursuant to Rule 304(b)(3),\1395\ which will result in
each NMS Stock ATS incurring an estimated one-time cost of
approximately $556.\1396\ This will result in an aggregate estimated
initial, one-time hour burden for all NMS Stock ATSs to comply with
Rule 304(b)(3) of approximately 82 hours at an estimated cost of
approximately $22,796.\1397\
---------------------------------------------------------------------------

    \1395\ See supra Section IX.D.2.b.v.
    \1396\ Senior Systems Analyst at $278 x 2 hours = $556.
    \1397\ 2 hours x 41 NMS Stock ATSs = 82 hours. $556 x 41 NMS
Stock ATSs = $22,796.
---------------------------------------------------------------------------

2. Economic Effects of Public Disclosure of Form ATS-N
    We believe that the amendments requiring public disclosure of Form
ATS-N will improve the information available to market participants and
make that information consistent, which would assist market
participants in evaluating and choosing the NMS Stock ATSs to which
they may route orders or become a subscriber due to the enhanced
disclosure requirements. Requiring such public disclosure will increase
the operational transparency requirements of NMS Stock ATSs to bring
those requirements more in line with the operational transparency
requirements of national securities exchanges.\1398\
---------------------------------------------------------------------------

    \1398\ See supra Section III.A.
---------------------------------------------------------------------------

a. Benefits
    We believe that the public disclosure of Form ATS-N will generate
greater transparency about the operations of NMS Stock ATSs and the
ATS-related activities of their broker-dealer operators and their
affiliates. This will aid market participants by reducing search costs
when evaluating potential NMS stock trading venues to decide which
venue best suits their trading purposes. This section discusses
specific economic benefits of the public disclosure of Form ATS-N
including: The economic benefits of public disclosure of standardized
information about the operations of NMS Stock ATSs; the economic
benefits of public disclosure of the ATS-related activities of the
broker-dealer operator and its affiliates; the economic benefits of
public disclosure of aggregate platform-wide order flow and execution
statistics regarding the NMS Stock ATS; and the economic benefits of
filing Form ATS-N in a structured format.
(i) Benefits of Public Disclosure of Standardized Information of
Operations of NMS Stock ATSs
    We believe that requiring detailed, public disclosures about the
operations of NMS Stock ATSs will, among other things, better
standardize the type of information market participants receive about
those operations. As a result, search costs for market participants
will be lower relative to the baseline, as homogenous disclosure
requirements for all NMS Stock ATSs as part of the amendments to
Regulation ATS should facilitate market participants' comparison of NMS
Stock ATSs when deciding which venue most suits their trading purposes.
Accordingly, as described in detail in the Proposal,\1399\ we believe
the enhanced operational transparency resulting from the public
disclosures on Form ATS-N should aid market participants when
evaluating potential trading venues, and that the requirement for NMS
Stock ATSs to disclose whether and how they segment their order flow,
any criteria used to assign order flow, and their fee structures should
provide market participants with a better understanding of the
operating environment for NMS Stock ATSs.\1400\ Beyond providing
benefits to market participants, the enhanced disclosure requirements
for NMS Stock ATSs could provide benefits to certain NMS Stock ATSs or
national securities exchanges.\1401\ Since the establishment of
Regulation ATS, the market for order execution services for trading NMS
stocks--particularly on ATSs--has flourished. The number of ATSs that
trade NMS stocks has increased substantially since the inception of
Regulation ATS, and as of the end of the first quarter of 2018, trading
volume of NMS stocks on ATSs accounted for 11.4% of total share
volume.\1402\ As they are expected to calibrate the level of
transparency between NMS Stock ATSs and national securities exchanges,
the amendments could foster greater competition for order flow of NMS
stocks between these trading platforms. This greater competition for
order flow could in turn incentivize NMS Stock ATSs to innovate--
particularly in terms of their technology--so that they can attract
more trading volume to their venue.
---------------------------------------------------------------------------

    \1399\ See Proposal, supra note 2, at 81123-24.
    \1400\ See Proposal, supra note 2, at 81123 (discussing the
effects of the increased public disclosures about the operations of
NMS Stock ATSs on market participant search costs).
    \1401\ See id (discussing the effects of the increased public
disclosures about the operations of NMS Stock ATSs on certain NMS
Stock ATSs).
    \1402\ See supra Section X.B.1.
---------------------------------------------------------------------------

    One commenter states that ``[f]ailing to extend enhanced
transparency requirements to Exchanges for activities commensurate with
those of ATSs would result in an incomplete picture of market quality,
making it difficult for investors to conduct meaningful comparisons to
inform their decisions and protect their own interests.'' \1403\ As
discussed above,\1404\ national securities exchanges are already
subject to more stringent public disclosure requirements than NMS Stock
ATSs. For example,

national securities exchanges are required to publicly file proposed
rule changes with the Commission to disclose, among other things, their
manner of operations and fees.\1405\ These proposed rules changes are
subject to notice and comment from the public, as well as Commission
consideration, pursuant to Section 19(b) and Rule 19b-4.\1406\
Therefore, we continue to believe that the adopted amendments would
reduce the discrepancy in the level of transparency between NMS Stock
ATSs and national securities exchanges, thereby assisting market
participants in making more informed trading decisions and providing
them with a clearer understanding about where to route their orders in
order to receive best execution.
---------------------------------------------------------------------------

    \1403\ See Markit Letter at 4.
    \1404\ See supra Section X.B.5.a.
    \1405\ See Proposal, supra note 2, at 81011.
    \1406\ See id.
---------------------------------------------------------------------------

    The adopted amendments modify the process for publicly disclosing a
material amendment to a Form ATS-N from the process originally detailed
in the Proposal.\1407\ We proposed in Rule 304(b)(2)(iv) making all
amendments to Form ATS-N, including material amendments, public upon
filing.\1408\ In response to commenters' concerns that making public
Form ATS-N material amendments before expiration of the Commission's
30-day calendar review period could stifle innovation or be confusing
or misleading to the public,\1409\ we are modifying the proposed rules
for making Form ATS-N material amendments public. Under the adopted
amendments, the cover page of the filed material amendment will be made
public by the Commission upon filing and, unless the Commission
declares the material amendment ineffective, the entirety of the
material amendment, as amended, will be made public by the Commission
following the expiration of the Commission's 30-calendar day review
period.\1410\ The cover page would provide a brief narrative about the
content of the amendment including: The Part and Item number of Form
ATS-N that is subject to the change, whether or not such change will
apply to all subscribers and the broker-dealer operator, and a brief
summary of the change. Although the adopted process for material
amendments would not provide market participants with as much
transparency about a forthcoming material change to the operations of
the NMS Stock ATS as the proposed process, we believe that the adopted
process will provide increased transparency, relative to the baseline,
to market participants about a material change during the Commission
review period.
---------------------------------------------------------------------------

    \1407\ See supra Section IV.B.1.a (discussing Form ATS-N
material amendments).
    \1408\ See Proposal, supra note 2, at 81034.
    \1409\ See supra Section IV.E.2.c.
    \1410\ See id.
---------------------------------------------------------------------------

(ii) Benefits of Public Disclosure of the ATS-Related Activities of the
Broker-Dealer Operator and Its Affiliates
    Most NMS Stock ATSs are operated by broker-dealers that also engage
in other brokerage and dealing activities.\1411\ A broker-dealer
operator of an NMS Stock ATS, or its affiliates, could have business
interests that conflict with the interests of its ATS's
subscribers,\1412\ or customers of its subscribers.\1413\ As described
in more detail in the Proposal,\1414\ we believe that public disclosure
of detailed information about the ATS-related activities of the broker-
dealer operator and its affiliates on Form ATS-N will allow market
participants to better evaluate any conflicts of interest that may
arise from such activities, allowing market participants to better
determine whether submitting order flow to a particular NMS Stock ATS
aligns with their business interests.\1415\ Further, the enhanced
disclosure requirements could discourage broker-dealer operators from
trading internally as principal in their NMS Stock ATS under
circumstances where the trading might raise conflict of interest
concerns, because those operations will be subject to public scrutiny
by market participants.\1416\
---------------------------------------------------------------------------

    \1411\ See supra Section II.A.2.
    \1412\ Based on information provided on Form ATS, a small number
of ATSs solely limit their broker-dealer business to the operation
of an ATS.
    \1413\ One commenter states that unavoidable conflicts of
interest arise if an operator (or its affiliates) engages in
principal trading activities within the ATS or if it is informed by
others' trading activities within the ATS. See HMA Letter at 13.
Another commenter states ``conflicts of interest arising from the
operational complexities of ATSs, including the dual roles of the
broker-dealer as ATS operators and as brokers, proliferated, all
while remaining invisible to investors.'' Better Markets Letter at
2.
    \1414\ See Proposal, supra note 2, at 81124-25.
    \1415\ A number of commenters generally agree with us that
increased standardized information about the manner of operations of
the broker-dealer that operates the NMS Stock ATS and potential
conflicts of interest that may arise with its affiliates may better
enable market participants to evaluate the extent to which
individual trading venues align with their investment and trading
decisions. See Fidelity Letter at 1; ICI Letter at 3; KCG Letter at
1; MFA/AIMA Letter at 2; PDQ Letter at 2; SIFMA Letter at 4-8.
    \1416\ See Proposal, supra note 2, at 81124 (discussing the
effects of the public disclosure of the ATS-related activities of
the broker-dealer operator and its affiliates).
---------------------------------------------------------------------------

    The adopted amendments modify the requests for information on Form
ATS-N regarding the activities of the NMS Stock ATS broker-dealer
operator and its affiliates from those in Proposed Form ATS-N.\1417\ In
response to commenters' concerns that the scope of the requests in Part
III of proposed Form ATS-N are too broad (especially for large,
multiservice broker-dealers) and might require information about the
broker-dealer operator's and its affiliates' activities that do not
directly relate to the NMS Stock ATS, we are modifying certain requests
on proposed Form ATS-N to solicit information from NMS Stock ATSs that
focus on (1) the ability of the business units or affiliates of the
broker-dealer operator to enter, or direct the entry of, orders into
the NMS Stock ATS; and (2) whether those business units and affiliates
receive any preferential treatment with respect to the services offered
by the NMS Stock ATS, including any special access to information about
trading interest.\1418\ This differs from the Proposal primarily with
regard to the proposed requests for information about the trading
centers of the broker-dealer operator and its affiliates that did not
transact on the NMS Stock ATS. For example, Part III, Item 1 of
proposed Form ATS-N would have required an NMS Stock ATS to disclose
whether the broker-dealer operator or any of its affiliates operate or
control any non-ATS trading center(s) that is an OTC market maker or
executes orders in NMS stocks internally by trading as principal or
crossing orders as agent (``non-ATS trading centers''), and if so, to
(1) identify the non-ATS trading center(s); and (2) describe any
interaction or coordination between the identified non-ATS trading
center(s) and the NMS Stock ATS.\1419\ We have modified this disclosure
to omit from Form ATS-N a list of non-ATS trading centers of the
broker-dealer operator or its affiliates that cannot trade on the NMS
Stock ATS.
---------------------------------------------------------------------------

    \1417\ See Proposal, supra note 2, at 81043.
    \1418\ See supra Section V.C.
    \1419\ See Proposal, supra note 2, at 81045.
---------------------------------------------------------------------------

    This modification means that, relative to the disclosures on
proposed Form ATS-N, market participants will receive less information
concerning the non-ATS related operations of the NMS Stock ATS broker-
dealer operator and its affiliates. However, we believe that the
disclosures in adopted Form ATS-N concerning the ATS-related activities
of the broker-dealer operator or its affiliates will still allow market
participants to better evaluate any potential conflicts of interest
that may arise on the NMS Stock ATS. Therefore, we do not believe that
the benefits from the public disclosure of the ATS-related

activities of the broker-dealer operator or its affiliates on adopted
Form ATS-N will vary significantly from the benefits described in the
Proposal.\1420\
---------------------------------------------------------------------------

    \1420\ See Proposal, supra note 2, at 81122.
---------------------------------------------------------------------------

(iii) Benefits of Public Disclosure of Aggregate Platform-Wide Order
Flow and Execution Statistics
    Part III, Item 26 of adopted Form ATS-N requests that an NMS Stock
ATS explain and provide the most recent disclosure of aggregate
platform-wide order flow and execution statistics regarding the NMS
Stock ATS that are not otherwise required disclosures under Exchange
Act Rule 605 of Regulation NMS and that the NMS Stock ATS provided to
one or more subscribers by the NMS Stock ATS at the end of calendar
quarter. As described in detail in the Proposal, this disclosure
request could benefit market participants.\1421\
---------------------------------------------------------------------------

    \1421\ See Proposal, supra note 2, at 81124.
---------------------------------------------------------------------------

    NMS Stock ATSs that currently provide these aggregate platform-wide
order flow and execution statistics to one or more subscribers could
continue to provide their subscribers with these market quality
statistics, in which case, the NMS Stock ATS will publicly disclose
these statistics and how they are calculated in Form ATS-N, and all
market participants, not just subscribers, would have access to the
information. We believe this would reduce the discrepancy in
information that subscribers receive and provide the opportunity for
more market participants to benefit from this information which may be
useful to market participants when evaluating an NMS Stock ATS as a
possible venue to which to route orders in order to accomplish their
investing or trading objectives.\1422\ Further, to the extent that
subscribers that receive those market quality statistics currently do
not know how the NMS Stock ATS calculates the market quality
statistics, adopted Form ATS-N would help these subscribers better
understand the statistics.
---------------------------------------------------------------------------

    \1422\ See id (discussing how the disclosure of aggregate
platform-wide order flow and execution statistics might help NMS
Stock ATSs attract order flow).
---------------------------------------------------------------------------

    Two commenters agree with us that the requirement to disclose
aggregate platform-wide order flow and execution statistics on Form
ATS-N, if they are otherwise disclosed to subscribers, could cause NMS
Stock ATSs to stop providing these statistics to their
subscribers.\1423\ If some NMS Stock ATSs cease disclosing these market
quality statistics to subscribers, it could reduce transparency to the
detriment of the subscribers who currently benefit from the receipt of
certain market quality statistics regarding an NMS Stock ATS, which
could in turn result in spill-over effects on the market. One commenter
agrees and states the elimination of this flow of information from the
NMS Stock ATSs would have a deleterious effect on subscriber knowledge
and understanding of a given ATS's operations, and negatively affect
the availability of information that some subscribers consider
important for their best execution determinations.\1424\
---------------------------------------------------------------------------

    \1423\ See MFA/AIMA Letter at 5; SIFMA Letter at 27. One of
these commenters suggests that these NMS Stock ATSs could begin to
direct parties requesting statistics and analysis to order
information available on FINRA's website or through third-party
vendors. See SIFMA Letter at 27.
    \1424\ See SIFMA Letter at 27.
---------------------------------------------------------------------------

(iv) Benefits of Filing Form ATS-N in a Structured Format
    We believe that benefits will accrue to both the Commission and
market participants as a result of having a structured format for Form
ATS-N. Specifically, having Form ATS-N filed in the XML text-searchable
format will allow the Commission and its staff and market participants
to efficiently review and analyze information provided on Form ATS-N.
In particular, the XML format will allow the Commission and the public
to better gather, analyze, aggregate, compare, and use the Form ATS-N
data. Requiring XML should result in the Form ATS-N data being provided
in a consistent, structured format. XML is an open standard that
defines, or ``tags,'' data using standard definitions. The tags
establish a consistent structure of identity and context. This
consistent structure can be automatically recognized and processed by a
variety of software applications such as databases, financial reporting
systems, and spreadsheets, and then made immediately available to the
end user to search, aggregate, compare, and analyze.
    We believe that requiring Form ATS-N be provided in an XML format
will provide the Commission and the public with data about NMS Stock
ATSs in a format that facilitates search capabilities, and comparative
analyses across NMS Stock ATSs and across filings, including more
advanced text analytics for the more narrative responses of Form ATS-N.
Absent this requirement of a specified format, users of the Form ATS-N
data that wanted to aggregate the data or search across filings or
filers would need to spend additional time transferring the data into a
consistent format before it could be analyzed, or incur the cost of a
service provider that specializes in this data aggregation and
comparison process. Further, unrestricted manual entry of data could
lead to errors, thereby potentially reducing data quality and
usability.
    Commenters who supported the standardization of Form ATS-N
information also underscored the importance of making the information
comparable.\1425\ While the commenters did not make specific reference
to the structured format, having the Form ATS-N information submitted
using the Commission's XML schema will enhance the comparability of the
Form ATS-N data by ensuring that the information has been submitted
completely and consistently. Two commenters addressed the importance of
completeness to Form ATS-N filings.\1426\ With the Commission's XML
schema, the restrictions incorporated into the schema (and
consequently, also reflected in the web-fillable form) will help test
for completeness of the data before submission and reduce filer
uncertainty on the completeness and consistency of their filing. One
commenter recommended that we consider ways to present information that
would improve the readability and navigability of disclosure through
the use of technology such as hyperlinks and/or XBRL technology.\1427\
The XML format selected by us is a technology format that presents the
data consistently, which improves the readability and navigability of
the data. In fact, XBRL is an XML-based technology, but, as discussed
later, we do not think that XBRL is the appropriate format for this
form.\1428\ While hyperlinks may be useful in some situations to cross-
reference information, it does not by itself enhance the comparability
of the underlying data, but can be incorporated within the XML format,
as permitted.
---------------------------------------------------------------------------

    \1425\ See Fidelity Letter at 1; Morgan Stanley Letter at 2;
SIFMA Letter at 3; UBS Letter at 2-3.
    \1426\ See MFA/AIMA Letter at 4; SIFMA Letter at 32-33.
    \1427\ See Fidelity Letter at 5.
    \1428\ See infra Section X.D.11.
---------------------------------------------------------------------------

b. Costs
    We recognize that the filing and public disclosure of Form ATS-N
and Form ATS-N amendments could impose costs on NMS Stock ATSs as well
as costs on market participants. This section discusses specific costs
associated with the filing and public disclosure of Form ATS-N
including: the costs to NMS Stock ATSs; the effects of public
disclosure of Form ATS-N on

the price impact costs of market participants; and the costs associated
with filing Form ATS-N and Form ATS-N amendments in a structured
format.
(i) Costs to NMS Stock ATSs
    We recognize that there would be costs that accrue to NMS Stock
ATSs as a result of the adopted amendments. For NMS Stock ATSs,
disclosure of previously non-public information could have some impact
on the direction of order flow in the market. If this previously non-
public information is valuable to certain NMS Stock ATSs--to the extent
that it drives its revenues--disclosure of this information on Form
ATS-N could be costly for these NMS Stock ATSs. For instance,
disclosure of an NMS Stock ATS's innovations could potentially result
in other ATSs implementing similar methodologies, which could cause the
NMS Stock ATS to lose its technological advantage. Such an ATS may need
to engage in costly research in order to develop new innovations to
stay profitable in the market. If an ATS cannot innovate fast enough to
regain its competitive advantage in the market, order flow may then
potentially migrate to other NMS Stock ATSs, broker-dealers that
operate non-ATS trading centers, or to national securities
exchanges.\1429\ Additionally, some order flow could be directed away
from an NMS Stock ATS and towards one of these other trading centers if
the disclosure of previously non-public information, such as aggregate
platform-wide order flow and execution statistics or information about
the ATS related activities of the broker-dealer operator and its
affiliates, causes some market participants to discover that their
orders would have a greater likelihood of receiving lower execution
quality on the NMS Stock ATS relative to these other trading centers.
As such, this may result in lower revenues for some NMS Stock ATSs.
These ATSs may then find it unprofitable to continue operating as ATSs
and could exit the market for stock execution services or switch their
business strategies to increase market share or profitability, possibly
by continuing to operate as non-ATS OTC execution venues, such as OTC
trading venues in which the broker-dealer operator internalizes order
flow.\1430\
---------------------------------------------------------------------------

    \1429\ See infra Section X.C.4.a for a discussion of the
competitive effects of these costs (``Impact on Efficiency,
Competition, and Capital Formation--Competition'').
    \1430\ See infra Section X.C.4.a.i.
---------------------------------------------------------------------------

    However, as discussed above,\1431\ we lack certain information
necessary to quantify the extent to which entities that operate as ATSs
for NMS Stocks would be dissuaded from doing so. Specifically, as
discussed in the Proposal,\1432\ the decision for an NMS Stock ATS to
continue operating or to cease operating as an ATS depends on numerous
factors and we lack information about many of those factors. Commenters
did not provide any additional information or analysis that would allow
us to quantify the impact on Legacy NMS Stocks ATSs or other entities
that may otherwise seek to operate a new NMS Stock ATS. Therefore,
while we continue to believe that the costs of the adopted amendments
could cause some Legacy NMS Stock ATSs to cease operating as ATSs and
could dissuade some entities who would seek to operate as ATSs for NMS
Stocks from doing so, we remain unable to quantify that impact.
Furthermore, we do not have information to make reasonable assumptions
about the fraction of displaced volume--from NMS Stock ATSs that would
cease operations--that would be internalized by broker-dealer operator
or its affiliates or directed towards national securities exchanges,
NMS Stock ATSs, or non-ATS OTC trading centers.
---------------------------------------------------------------------------

    \1431\ See supra Section X.C and supra note 1356.
    \1432\ See Proposal, supra note 2, at 81118.
---------------------------------------------------------------------------

(ii) Price Impact Costs
    We recognize that heightened disclosure requirements pertaining to
the public disclosure of Form ATS-N could increase market participants'
trading costs relative to the baseline if some ATSs cease operating as
ATSs or if there is reduced entry of new NMS Stock ATSs. Institutional
investors can elect to use NMS Stock ATSs in an attempt to minimize the
price impact of their trades. Even though the size of the average order
on NMS Stock ATSs has been shown to be roughly equivalent to that on
national securities exchanges, smaller orders on NMS Stock ATSs can be
the result of shredding larger orders.\1433\ Preventing information
regarding those orders from becoming public can minimize adverse price
moves that may occur when proprietary traders learn that there may be
large buyers or sellers in the market. Thus, NMS Stock ATSs represent a
tool for institutional investors to help control information leakage.
---------------------------------------------------------------------------

    \1433\ See Tuttle: ATS Trading in NMS Stocks, supra note 1317.
---------------------------------------------------------------------------

    If there is reduced entry of new NMS Stock ATSs or some NMS Stock
ATSs cease operating as ATSs and shut down their ATSs as a result of
the amendments, there could be a reduction in the number of trading
platforms that allow institutional investors to control their price
impact costs. Institutional investors who would have traded on these
NMS Stock ATSs, might now have to trade on other trading venues, such
as other NMS Stock ATSs, non-ATS OTC execution venues, or national
securities exchanges. If institutional investors execute their orders
on a national securities exchange, they might have to absorb price
impact costs, because national securities exchanges may not offer a
means for reducing these costs.
    Additionally, if some NMS Stock ATSs cease operating as ATSs and
begin operating as non-ATS OTC execution venues, such as an OTC trading
venue in which the broker-dealer operator internalizes order flow,
there could be an increase in the internalization of order flow.
Increased internalization could reduce market depth and price
informativeness and increase spreads and price impact costs.\1434\
However, as discussed above,\1435\ we do not know the extent to which
the adopted amendments would affect an NMS Stock ATS's decision to
continue operations or cease operating as an ATS, and, therefore,
cannot estimate the number of ATSs that would cease operating as ATSs.
Nor do we have information in order for us to make reasonable
assumptions about the fraction of displaced volume--from NMS Stock ATSs
that would cease operations--that would be internalized by a broker-
dealer operator or its affiliates or directed towards national
securities exchanges, NMS Stock ATSs, or non-ATS OTC trading centers.
Commenters did not provide any additional information or analysis that
would allow us to quantify the number of Legacy NMS Stocks ATSs that
would cease operating as ATSs or estimate the impacts on
internalization or order flow. Therefore, we cannot estimate the impact
that the adopted amendments would have on an NMS Stock ATS's price
impact costs.
---------------------------------------------------------------------------

    \1434\ See supra Section X.B.6.a.
    \1435\ See supra Section X.C and supra note 1356.
---------------------------------------------------------------------------

    As described in detail in the Proposal,\1436\ the price impact cost
institutional investors face on a national securities exchange is
related to the depth of the market, and the depth of the market is
often related to the market capitalization of a stock and its
liquidity.\1437\ Because NMS Stock ATSs

trade larger dollar volume in small capitalization, low-priced stocks,
the price impact costs for institutional investors that trade in such
stocks could in fact increase significantly if many NMS Stock ATSs
decide to exit the market. However, as discussed above,\1438\ we cannot
estimate what price market participants would receive in these stocks
and, thus, we cannot estimate the price impact costs associated with
the adopted amendments.
---------------------------------------------------------------------------

    \1436\ See Proposal, supra note 2, at 81127-28.
    \1437\ A deep market is one in which larger orders do not have a
much greater impact on prices than smaller orders. See Foucault,
Pagano and Roell, 2013, ``Market Liquidity,'' Oxford University
Press.
    \1438\ See supra Section X.C and supra note 1356.
---------------------------------------------------------------------------

(iii) Filing in Structured Format
    We understand that there are also costs associated with varying
degrees of structuring Form ATS-N. By offering two options for filers
to submit Form ATS-N in EDGAR, filers will be able to select the method
best suited to their situation.\1439\ We believe that the XML format of
Form ATS-N has enhanced benefits for the Commission's and market
participants' use of Form ATS-N while minimizing costs relative to
filers having to file Form ATS-N using other structured formats.\1440\
By requiring the XML format, the Form ATS-N data must be structured to
conform to incorporated validations. As stated previously, the
validations will not test for the underlying accuracy of the data, but
it will test for consistency and completeness.\1441\ For the NMS Stock
ATSs that file Form ATS-N, the validations will help ensure that the
form they submit is complete and appropriately formatted so that
additional time will not have to be spent on subsequent Form ATS-N
filings to correct for those errors. By comparison, the EFFS system
originally proposed does not support the open-source XML format, but
rather a proprietary XML implementation called XFDL. As a result, the
EFFS system has fewer validation capabilities and cannot test for
consistency and completeness as broadly as the XML format, in
particular, at the element level. In addition, as proposed, filers
would have been required to individually upload each narrative response
as a separate exhibit, whereas EDGAR permits filers to provide all of
their narrative responses within one structured XML file, which will
slightly diminish their time spent in filing in the Form ATS-N
information.
---------------------------------------------------------------------------

    \1439\ See supra Section VII.
    \1440\ See infra Section X.D.11.
    \1441\ See supra Section VII (discussing structured disclosure
aspects of Form ATS-N).
---------------------------------------------------------------------------

3. Economic Effects of Written Safeguards and Written Procedures To
Protect Subscribers' Confidential Trading Information, and
Recordkeeping Requirements
a. Benefits
    As explained above, we believe that the amendments to Rules
301(b)(10) \1442\ and 303(a)(1) \1443\ of Regulation ATS could increase
investor protection by strengthening the effectiveness of NMS Stock
ATSs' safeguards and procedures to better protect confidential
subscriber trading information and improving those ATSs' ability to
implement and monitor the adequacy of, and the ATSs' compliance with,
their safeguards and procedures.\1444\ Furthermore, as discussed
above,\1445\ we believe that requiring ATSs to memorialize their
safeguards and procedures in writing will improve Commission oversight
by helping the Commission better understand, monitor, and evaluate how
each NMS Stock ATS protects subscribers' confidential trading
information from unauthorized disclosure and access, which in turn
could increase investor protection.\1446\ We also expect that this
requirement will help oversight by the SRO of which the NMS Stock ATS's
broker-dealer operator is a member.
---------------------------------------------------------------------------

    \1442\ 17 CFR 242.301(b)(10).
    \1443\ 17 CFR 242.303(a).
    \1444\ See supra Section VI.
    \1445\ See id.
    \1446\ Three commenters agree with us that requiring ATSs to
adopt written safeguards and written procedures would be beneficial
to Commission oversight by helping the Commission better understand,
monitor, and evaluate how each ATS protects subscribers'
confidential trading information from unauthorized disclosure and
access. See HMA Letter at 17-18; ICI Letter at 10-11; MFA/AIMA
Letter at 6.
---------------------------------------------------------------------------

b. Costs
    We believe that there would be implementation costs for NMS Stock
ATSs that have not preserved in writing their safeguards and procedures
to protect subscribers' confidential trading information and their
oversight procedures to ensure that those safeguards and procedures are
followed, which are required under Rule 301(b)(10) of Regulation
ATS.\1447\ Based on the analysis for purposes of the PRA, we estimate
that, in order to comply with the amendments to Rules 301(b)(10) and
303(a)(1)(v) of Regulation ATS,\1448\ it could take up to 87 ATSs an
estimated one-time burden of up to 8 hours each, resulting in an
estimated one-time paperwork cost of $2,910 for each ATS.\1449\ This
would result in an aggregate estimated initial hour burden of 696 hours
at an estimated cost of $253,170.\1450\
---------------------------------------------------------------------------

    \1447\ 17 CFR 242.301(b)(10).
    \1448\ See supra Section VI.
    \1449\ (Attorney at $406 x 7 hours) + (Compliance Clerk at $68 x
1 hour) = $2,910. As explained in the PRA, we believe that the
majority of ATSs already maintain their written safeguards and
procedures in writing, so most ATSs would not incur this initial
cost. See supra Section IX.D.1.b. For purposes of this economic
analysis, however, we assume that the initial cost of this new
requirement would be imposed on all ATSs.
    \1450\ 8 hours x 87 ATSs = 696 hours. $2,910 x 87 ATSs =
$253,170.
---------------------------------------------------------------------------

    Furthermore, the amendments to Rules 301(b)(10) and 303(a)(1)(v)
relating to written safeguards and written procedures to protect
subscribers' confidential trading information would impose ongoing
costs for all NMS Stock ATSs. For the purposes of the PRA, we estimate
it could take approximately 4 hours annually for each ATS to update and
maintain these safeguards and procedures,\1451\ resulting in an
estimated annual paperwork cost for each ATS of $948.\1452\ This would
result in an estimated aggregate ongoing hour burden for all ATSs to
maintain and update their safeguards and procedures pursuant to Rules
301(b)(10) and 303(a)(1)(v) of 348 hours at an estimated cost of
$82,476 annually.\1453\
---------------------------------------------------------------------------

    \1451\ See supra note 1116 and accompanying text.
    \1452\ (Attorney at $406 x 2 hours) + (Compliance Clerk at $68 x
2 hours) = $948 annual paperwork cost per ATS.
    \1453\ 4 annual burden hours x 87 ATSs = 348 annual burden
hours. $948 annual paperwork cost per ATS x 87 NMS Stock ATSs =
$82,476 aggregate annual paperwork cost.'
---------------------------------------------------------------------------

    We are also amending the recordkeeping rules relevant to the
amendments to Rule 301 and new Rule 304. NMS Stock ATSs shall preserve
Form ATS-N, Form ATS-N amendments, and a Form ATS-N notice of cessation
for the life of the enterprise and any successor enterprise pursuant to
Rule 303(a)(2) \1454\ of Regulation ATS.\1455\ We are also amending
Rule 303(a)(1) \1456\ so that ATSs must preserve for a period of not
less than three years, the first two in an easily accessible place, the
written safeguards and procedures that would be required under the
amendments to Rule 301(b)(10). We understand that these amendments
regarding recordkeeping requirements will require NMS Stock ATSs to set
up systems and procedures, and these are expected to account for a
portion of the implementation costs

related to Rules 301(b)(2)(viii) and 304 of Regulation ATS \1457\ and
the amendments to Rules 301(b)(10) and 303(a)(1)(v) of Regulation ATS
discussed above.
---------------------------------------------------------------------------

    \1454\ 17 CFR 242.303(a)(2).
    \1455\ An NMS Stock ATS that had previously made filings on Form
ATS would be required to preserve those filings for the life of the
enterprise, as well as filings made going forward on Form ATS-N.
    \1456\ 17 CFR 242.303(a)(1).
    \1457\ See supra Section X.C.1.b.
---------------------------------------------------------------------------

4. Impact on Efficiency, Competition, and Capital Formation
    We have considered the effects of the amendments on efficiency,
competition, and capital formation. We believe that the amendments will
help market participants make better informed decisions about where to
route their orders in order to achieve their trading or investment
objectives, enhance execution quality, and improve efficiency and
capital allocation.
    We understand that the amendments to Regulation ATS could affect
the competitive dynamics in the market for NMS stock execution
services.\1458\ These disclosure requirements for NMS Stock ATSs could
create a disincentive for entities to become ATSs in the market for NMS
stock execution services and also result in some stand-alone ATSs
exiting the market and some multi-service broker-dealers electing to
cease operating their NMS Stock ATSs and instead initiate or increase
operations as non-ATS OTC execution venues. However, in spite of these
costs, and as discussed in more detail below, we believe that the NMS
Stock ATSs that remain may propagate greater interaction between buyers
and sellers who trade on these venues, fostering not only trading
between one and another, but also facilitating the price discovery
process and capital formation. The consistent set of information that
will be disclosed in Form ATS-N will impact how market participants
react in terms of their trading, which could improve market
efficiency.\1459\
---------------------------------------------------------------------------

    \1458\ See infra Section X.C.4.a (``Impact on Efficiency,
Competition, and Capital Formation--Competition'').
    \1459\ See infra Section X.C.4.b (``Impact on Efficiency,
Competition, and Capital Formation--Efficiency'').
---------------------------------------------------------------------------

    Moreover, increased transparency regarding the operations of NMS
Stock ATSs could impact competition between broker-dealers that operate
NMS Stock ATSs and broker-dealers who trade NMS stocks but do not
operate an NMS Stock ATS, such as internalizers. Because broker-dealers
who transact in NMS stocks but do not operate ATSs are not subject to
the operational transparency requirements, these broker-dealers could
obtain a competitive advantage and attract and internalize order flow
that would otherwise be entered and executed on NMS Stock ATSs.
Furthermore, greater operational transparency of NMS Stock ATSs could
also impact competition between NMS Stock ATSs and national securities
exchanges, resulting in a larger amount of order flow being executed on
national securities exchanges.
a. Competition
    The adopted amendments could impact the competitive dynamics in the
market for NMS stock execution services, which includes competition
between national securities exchanges and NMS Stock ATSs, among NMS
Stock ATSs themselves, and between broker-dealers that operate NMS
Stock ATSs and those that do not.
    As discussed above,\1460\ we believe that the public disclosure of
Form ATS-N could appropriately calibrate the level of transparency
between NMS Stock ATSs and national securities exchanges, which could
foster even greater competition for order flow of NMS stocks between
those trading platforms. However, the increased public disclosure
requirements associated with adopted Form ATS-N along with the
uncertainty as to whether a Form ATS-N will be declared ineffective may
raise the barriers to entry for new entities seeking to act as ATSs in
the market for NMS stock execution services and may cause some existing
Legacy NMS Stock ATSs to cease operating as ATSs. This could affect
competition in the market for NMS stock execution services, which could
in turn affect market participants. Additionally, the public disclosure
of some previously non-public information about the manner of
operations of the ATS, such as information on certain matching
methodologies or order types, along with the greater competition for
order flow, could affect the incentives of NMS Stock ATSs to innovate.
---------------------------------------------------------------------------

    \1460\ See supra Section X.C.2.a.
---------------------------------------------------------------------------

    The sections below discuss specific impacts of the adopted
amendments on the competitive dynamics in the market for NMS stock
execution services, including: Their impact on the entry of new NMS
Stock ATSs and the continuation of existing Legacy NMS Stock ATSs, the
impact of changes in the number of NMS Stock ATSs on market participant
trading costs, and their impact on the incentives of ATSs to innovate.
(i) Entry of New and Continuation of Legacy NMS Stock ATSs
    We believe that the adopted amendments could potentially raise the
barriers to entry for new entities seeking to act as ATSs in the market
for NMS stock execution services and could also affect the decision of
Legacy NMS Stock ATSs to continue operating as ATSs. As discussed in
more detail below, the uncertainty surrounding whether Form ATS-N and
Form ATS-N amendment filings will be declared ineffective, the
increased implementation and ongoing compliance costs associated with
the adopted amendments, and the effects of public disclosure of
previously non-public information required on Form ATS-N might dissuade
some potential new ATSs from entering the market and could cause some
Legacy NMS Stock ATSs to cease operating as ATSs.\1461\
---------------------------------------------------------------------------

    \1461\ Several commenters agreed that the disclosure
requirements associated with Form ATS-N could act as a barrier to