the SROs are usually cheaper than SIP data. However, they may only
contain information from one exchange, or one exchange family. See,
e.g., Nasdaq Basic, supra note 1651; CBOE One, supra note 9 at n.
19; NYSE BQT, https://www.nyse.com/market-data/real-time/nyse-bqt;
TD Ameritrade Letter 2018, supra note 1651 (stating that the lower
cost of exchange TOB products, coupled with costs associated with
the process to differentiate between retail professionals and non-
professionals imposed by the SIP Plans, and associated audit risk,
favors retail broker-dealer use of exchange TOB products).
    \1773\ See Vendor Display Rule, Rule 603 of Regulation NMS;
Proposing Release, 85 FR at Section IV.B.2(a).
---------------------------------------------------------------------------

    The purchase of SIP data or proprietary market data from all
exchanges, either directly or indirectly, is necessary for all market
participants executing orders in NMS stocks.\1774\ SROs have
significant influence over the prices of most market data products. For
example, the exchanges individually set the pricing of the TOB data
feeds that they sell to market data aggregators and broker-dealers that
self-aggregate who in turn generate consolidated data. At the same
time, SROs collectively, as participants in the national market system
plans, decide what fees to set for SIP data.\1775\ Although market data
aggregators might compete with the exclusive SIPs by offering products
that provide consolidated data, they ultimately derive their data from
the exchanges' direct proprietary data feeds, whose prices are set by
the exchanges, a subset of SROs.\1776\
---------------------------------------------------------------------------

    \1774\ For example, 17 CFR 242.611(a) (Rule 611(a)) of
Regulation NMS requires trading centers to establish policies and
procedures to prevent trade-throughs. In order to prevent trade-
throughs, executing broker-dealers need to be able to view the
protected quotes on all exchanges. They can fulfill this requirement
by using SIP data, proprietary data feeds offered by the SROs, or a
combination of both.
    \1775\ See supra Section V.B.1.
    \1776\ Pursuant to Section 19(b) of the Exchange Act and Rule
19b-4 thereunder, SROs must file with the Commission proposed rules,
in which they set prices for their direct feed data. Those prices
can vary depending on the type of end user.
---------------------------------------------------------------------------

    Regarding the level of competition among non-SRO market data
aggregators that sell consolidated data to market participants, the
Commission currently does not have an estimate of the number of players
in this market and does not know how specialized these players
are.\1777\
---------------------------------------------------------------------------

    \1777\ The Commission understands that certain entities from the
list of market data vendors published on Nasdaq's website currently
perform the market data aggregator function. See Proposing Release,
85 FR at n. 516. This list does not provide a lower bound on the
number of such entities because the list includes firms that the
Commission believes are unlikely to perform high-speed data
aggregation. The list is also not an upper bound because the
Commission does not believe that all firms performing market data
aggregation are listed. While the Commission does not have the
number of data aggregators, the Commission has analyzed the effects
on such parties qualitatively. The Commission does not have this
information because data aggregators are not required to register
with the Commission and/or identify themselves as data aggregators.
Additionally, the Commission requested this information and did not
receive any comments providing estimates of the number of data
aggregators. While Commission does not have quantitative
information, the Commission does have the insights discussed in this
section and believes that these insights are sufficient to support
our analysis in this section.
---------------------------------------------------------------------------

    The production of both core data and proprietary data feeds
involves relatively high fixed costs and low variable costs.\1778\
Fixed costs are composed of, among others, costs to set up
infrastructure, regulatory approval costs, software development costs,
administrative costs and overhead costs, while variable costs include
costs to contract with and establish connectivity to each customer.
Importantly, fixed costs of the production of both core data and
proprietary data feeds are not specific to the production of data but
also support the exchanges' other services such as intermediating
trade. In such markets, the firms have additional incentives to
increase the number of their customers in order to spread the fixed
cost across a larger base of consumers.
---------------------------------------------------------------------------

    \1778\ See, e.g., Paul M. Romer, Endogenous Technological
Change, 98 J. Pol. Econ. S71-102 (1990) (pointing out that
information is fundamentally distinct from other goods because it
has a fixed cost of discovery and a near zero cost of replication).
---------------------------------------------------------------------------

(b) Current Structure of Market for Proprietary Market Data Products
    In addition to SIP data, the exchanges voluntarily disseminate
proprietary data

and charge fees for this data.\1779\ Proprietary data fees have
increased over the past decade.\1780\ SIFMA estimates that, for some
broker-dealers, data fees charged by some exchanges went up by three
orders of magnitude or more between 2010 and 2018.\1781\ One commenter
disagreed with this estimate by comparing it to a separate estimate
obtained for increases in market data revenue of 78.4% for Nasdaq over
the same period (including both revenue from exchange data and non-
exchange data products).\1782\ The Commission does not believe there is
necessarily any contradiction from the contrast in these estimates,
since fees for some broker-dealers for market data are not the same
thing as Nasdaq revenue for market data products, because the latter of
these contains revenue from all broker-dealers as well as market
participants who are not broker-dealers who purchase data from Nasdaq,
and it is possible that not all these entities purchase the same set of
data products. Correspondingly, exchanges' revenues from selling
proprietary data and connectivity services also increased over the last
several years. For example, Budish, et al. (2019) observe that
exchanges earn significant revenues from selling proprietary data (a
range of $555.4-$623.0M in 2015 by their estimate), as well as
connectivity services (a range of $436.8-$484.8M in 2015 by their
estimate).\1783\ According to NYSE's Form 1 filings, its revenues from
data services (including connectivity revenues but excluding SIP data
revenues) increased approximately 93% from 2014 to 2018. Similarly,
Nasdaq's Form 1 filings show an approximately 21% increase in their
revenues from data services (excluding revenues from connectivity
services and SIP data revenues).\1784\ On the other hand, during the
same period, revenues distributed back to NYSE by the exclusive SIPs
increased approximately 18% and the revenues distributed back to Nasdaq
increased approximately 12%. The exchanges' differences in their
reporting of these numbers make it difficult to compare revenue numbers
across exchanges. However, for both of these exchanges, their revenues
from the proprietary data and connectivity business have been growing
faster than the revenues they collect from SIP data.\1785\
---------------------------------------------------------------------------

    \1779\ See supra Section V.B.2(a) for details on these
proprietary feeds.
    \1780\ Some commenters agreed that fees have increased. See,
e.g., Virtu Letter at 2; Clearpool Letter at 2.
    \1781\ See SIFMA Letter; see also Virtu Letter I at 4
(discussing double ``dipping'' on fees by the exchanges).
    \1782\ See Nasdaq Letter IV at 29.
    \1783\ See Eric Budish, et al., Will the Market Fix the Market?
A Theory of Stock Exchange Competition and Innovation, (Univ. of
Chi., Becker Friedman Inst. for Econ., Working Paper No. 2019-72,
May 2019), available at https://ssrn.com/abstract=3391461 (Retrieved
from SSRN Elsevier database).
    \1784\ Nasdaq submitted estimates for Nasdaq's increase in
revenue from exchange and non-exchange data products of 78.4% over
the period from 2010 and 2018, and an increase of 62.4% for revenue
from connectivity services from 2010 to 2018. See Nasdaq Letter IV
at 29.
    \1785\ According to its 2014 Form 1 filing, NYSE collected
approximately $138 million as market data revenues, covered under
the ``data services fees'' income statement line item. According to
the notes to NYSE's financial statements, these market data revenues
include proprietary data revenues, SIP data revenues, and revenues
from connectivity services. NYSE's same revenue line item increased
to approximately $236 million by the end of 2018. Whereas during
this same time period, the revenues NYSE collected from the
exclusive SIPs went from approximately $40 million to approximately
$47 million. Nasdaq's 2014 Form 1 filing discloses approximately
$206 million in ``information services'' line item in its income
statement. According to the footnotes to its financial statements,
this line item includes Nasdaq's market data revenues and
redistributed SIP revenues but does not include connectivity service
revenues. In its 2018 Form 1 filing, Nasdaq disclosed $242 million
in revenues under the same information services line item. During
the same time period, Nasdaq's SIP data revenues went up from
approximately $76 million to $85 million, a smaller revenue increase
relative to its market data revenues.
---------------------------------------------------------------------------

    Indicia that exchanges may not be subject to robust competition
include that many broker-dealers state that even in the face of
increasing proprietary data fees they feel compelled to buy proprietary
data to be able to provide competitive trading strategies for their
clients.\1786\ Additionally, some academic research suggests that each
particular exchange's proprietary data has no substitutes for some uses
of the data and no perfect substitutes for any uses.\1787\ For example,
Budish et al. (2019) conclude that each exchange has market power with
respect to the data products (and the speed technology) specific to
that particular exchange because of a lack of substitutes for many
applications of their data.\1788\
---------------------------------------------------------------------------

    \1786\ See, e.g., SIFMA Letter at 2 (``[W]e do not believe that
the SIPs currently provide the necessary data to market participants
at the requisite speed to efficiently trade in today's high speed
and automated marketplace. As a result, many broker-dealers, asset
managers and other market participants are forced to purchase
proprietary data feeds from individual exchanges to create a
consolidated and robust view of the market, while additionally
bearing the economic burden of having to purchase consolidated data
from the SIPs. This results in an enormous cost burden on the
marketplace and creates a two-tiered market for market data by
limiting access to critical market data at the fastest speeds to
those who can afford to pay the exorbitant fees charged for it by
the exchanges.''); MFA Letter at 2 (``Today, the current exclusive
SIP model and content of core data does not serve the needs of
investors, many of whom must subscribe to the exchanges' proprietary
market data feeds at considerable additional cost to trade
effectively, while others are forced to rely on inferior information
and outdated technology.''); State Street Letter at 2 (``. . .
regulatory obligations and customer expectations related to best
execution, transaction cost analysis, transparency and market
competition generated further need for data that is unavailable on
the SIPs. As a result, market participants have become increasingly
dependent on proprietary data feeds marketed by the exchanges
outside of the SIPs.''); Capital Group Letter at 2 (``Over the last
15 years, the discrepancy in data elements and latency between
proprietary feeds and the consolidated tape has expanded such that
the SIP is no longer a realistic tool for institutional investors or
broker-dealers in meeting their respective best execution
obligations when routing orders.''). See also Roundtable Day One
Transcript at 198-199 (Joseph Wald, Clearpool) (``Clearpool and
other broker-dealers are compelled to purchase exchanges'
proprietary data feeds, both to provide competitive execution
services to our clients and to meet our best execution obligations
due to the content of the information contained in the proprietary
data feeds as well as the latency differences between them, which
are major and important considerations for brokers.'').
    \1787\ These points are supported by some commenters. See, e.g.,
BestEx Research Letter at 2, 4 (``. . . exchanges do not compete on
market data fees since each is an exclusive provider of their own,
indispensable content.'') and DOJ Letter at 4, stating that
characteristics of proprietary data feeds ``. . . would tend to
indicate that Prop Data products lack substitutes, which would in
turn enable the exchanges to exercise market power in determining
their pricing of these products because they are the only data
provider in their own markets.''
    \1788\ See Eric Budish et al., supra note 1783. See also
Glosten, Economics of the Stock Exchange Business: Proprietary
Market Data, (Jan. 2020), available at: https://ssrn.com/abstract=3533525 (Retrieved from SSRN Elsevier database).
---------------------------------------------------------------------------

    A commenter stated that there is competition between exchanges for
proprietary data products as part of their overall competition for
order flow.\1789\ While it is true that exchanges compete for order
flow, they are the sole source of data from their own exchange. Many
market participants use a full view of the market in order to route
orders effectively, regardless of whether or not they end up sending
the order to any particular exchange. The Commission understands that
some market participants may combine the exclusive SIPs with
proprietary feeds in order form a complete view of the market, but this
comes with disadvantages, as discussed elsewhere in this release.\1790\
---------------------------------------------------------------------------

    \1789\ See, e.g., Nasdaq Letter IV at 48.
    \1790\ See supra Section V.B.2(b).
---------------------------------------------------------------------------

    This commenter also stated in reference to the question of
competition in the provision of proprietary data that ``the
Commission's analysis is incomplete and flawed because it fails to
appropriately analyze competition between trading platforms, and never
considers the all-in price of trading in its discussion.'' \1791\ The
Commission does not believe that its analysis presented on this issue
is incomplete or

flawed for not including the all-in cost of trading because market data
and trading services, although related, are not the same thing.\1792\
For example, it is conceivable that market participants may want data
from an exchange even if they never route orders to that exchange. In
such a case, the cost of trading on that exchange is not even relevant
to that market participant. Therefore, whether exchanges face robust
competition in the market for their proprietary data products can be
determined by considering the indicia discussed above (among other
things) and without consideration of other costs of trading, which
include not only other SRO products, but often products and services
provided by additional third-party vendors. Because of these
considerations, the Commission also does not believe that the metric
offered by one commenter \1793\ produced by dividing one exchange
group's total revenue by its total dollar trading volume is necessarily
relevant to the question of robust competition and pricing in the
market for proprietary data products. Specifically, this revenue
includes revenue across all businesses, not just market data, and the
value of considering this revenue on a per trade basis at this exchange
group is unclear.
---------------------------------------------------------------------------

    \1791\ Nasdaq Letter IV at 29.
    \1792\ The relevant analysis was presented in the Proposing
Release, 85 FR at Section VI.B.3(b). See Proposing Release, 85 FR at
Section VI.B.3(d) for a discussion of trading services and the
market for their provision.
    \1793\ See Nasdaq Letter IV at 30.
---------------------------------------------------------------------------

(c) Current Structure of Market for Connectivity Services
    Exchanges are exclusive providers of their own connectivity
services, and for many market participants, effective trading
strategies require connection to many if not all of the exchanges,
making their demand for these connectivity services less elastic (i.e.,
less sensitive to price changes). The Commission examined data on
exchange orders that shows that large broker-dealers (as measured, for
example, by the number of messages sent to exchanges) connect to all or
almost all exchanges.\1794\ This is consistent with Roundtable
participants' stated view that in order to avoid a competitive
disadvantage, market participants have little choice but to purchase
direct connectivity services from multiple SROs.\1795\
---------------------------------------------------------------------------

    \1794\ Based on the sample of audit trail data made available to
the Commission by FINRA, firms that are connected to all exchanges
account for 76.6% of the message volume (there are 37 such firms out
of a total of 327 firms in the sample). Firms that are connected to
at least all but one of the exchanges account for 91.6% of the
message volume (there are 50 such firms). The FINRA data sample
covers the week of December 5, 2016, and includes messages sent to
11 exchanges (NYSE National and Chicago Stock Exchange are not part
of this sample).
    \1795\ See Proposing Release, 85 FR at Sections III.C.2.(a),
II.A.
---------------------------------------------------------------------------

    As mentioned above, the exchanges offer different connectivity
options to transmit market data to market participants. These options
may include fiber optics connections, wireless microwave connections,
and laser transmission, all of which vary in speeds and
reliability.\1796\ The fastest and more reliable connections (e.g.,
laser transmission) offer market participants an advantage over other
market participants with slower or less reliable connections.
Therefore, the Commission believes that the exchanges have incentives
to offer multiple levels of connectivity and exchanges can charge
higher prices for the fastest connections.
---------------------------------------------------------------------------

    \1796\ See Proposing Release, 85 FR at Section II.A.
---------------------------------------------------------------------------

(d) Current Structure of the Market for Trading Services in NMS Stocks
    The market for trading services is served by exchanges, ATSs, and
liquidity providers. The market relies on competition to supply
investors with execution services at efficient prices. These trading
venues, which compete to match traders with counterparties, provide a
framework for price negotiation and disseminate trading information.
The market for trading services in NMS stocks currently consists of 16
national securities exchanges, as well as off-exchange trading venues
including wholesalers \1797\ and 34 NMS stock alternative trading
systems.\1798\
---------------------------------------------------------------------------

    \1797\ Wholesalers are broker-dealers that pay retail brokers
for sending their clients' orders to the wholesaler to be filled
internally (as opposed to sending the trade orders to an exchange).
Typically, a wholesaler promises to provide price improvement
relative to the NBBO for filled orders.
    \1798\ As of November 23, 2020, 34 NMS stock ATSs are operating
pursuant to an initial Form ATS-N. A list of NMS stock ATSs,
including access to initial Form ATS-N filings that are effective,
can be found at https://www.sec.gov/divisions/marketreg/form-ats-n-filings.htm.
---------------------------------------------------------------------------

    Since the adoption of Regulation NMS in 2005, the market for
trading services has become more fragmented. The number of exchanges
increased from eight in 2005 to 16 exchanges operating today.\1799\
Additionally, the market shares of individual exchanges became less
concentrated, with a shift in market shares from some of the bigger and
older exchanges to the newer ones.\1800\ For instance, from 2005 to
2013, there was a decline in the market share of trading volume for
exchange-listed stocks on NYSE.\1801\ At the same time, there was an
increase in the market share of newer national securities exchanges
such as NYSE Arca, Cboe BYX, and Cboe BZX.\1802\
---------------------------------------------------------------------------

    \1799\ See Proposing Release, 85 FR at n. 660.
    \1800\ See Letter from Edward T. Tilly, Chairman and Chief
Executive Officer, Cboe, to Brent J. Fields, Secretary, Commission
(May 25, 2018), at n. 9.
    \1801\ See Securities Exchange Act Release No. 76474 (Nov. 18,
2015), 80 FR 80998, 81112 (Dec. 28, 2015) (Regulation of NMS Stock
Alternative Trading Systems Proposing Release).
    \1802\ Id.
---------------------------------------------------------------------------

    Additionally, the proportion of NMS stocks trading off-exchange
(which includes both internalization and ATS trading) increased; for
example, as of July 2020, ATSs alone comprised approximately 10 percent
of consolidated dollar volume, and other off-exchange volume totaled
approximately 23 percent of consolidated dollar volume.\1803\ Aside
from trading venues, exchange market makers provide trading services in
the securities market. These firms stand ready to buy and sell a
security ``on a regular and continuous basis at a publicly quoted
price.'' \1804\ Exchange market makers quote both buy and sell prices
in a security held in inventory, for their own account, for the
business purpose of generating a profit from trading with a spread
between the sell and buy prices. Off-exchange market makers also stand
ready to buy and sell out of their own inventory, but they do not quote
buy and sell prices.\1805\
---------------------------------------------------------------------------

    \1803\ Data sources: TAQ and FINRA's OTC Transparency Data
weekly summaries (https://otctransparency.finra.org/otctransparency/AtsDownload). Due to FINRA's weekly aggregation, the actual sample
is 03/30/2020 through 06/26/2020 (i.e., the last two working days of
March are included, and the last two working days of June are
excluded).
    \1804\ See Commission, Fast Answers: Market Maker (modified Mar.
17, 2000), available at http://www.sec.gov/answers/mktmaker.html.
    \1805\ See Laura Tuttle, OTC Trading: Description of Non-ATS OTC
Trading in National Market System Stocks, Securities and Exchange
Commission (Mar. 2014), available at http://www.sec.gov/dera/staff-papers/white-papers/otc-trading-white-paper-03-2014.pdf.
---------------------------------------------------------------------------

    Trading venues can rely on the SIP, proprietary feeds, or a
combination of both to determine the NBBO for the purposes of trade
execution. One commenter observed that over one third of ATSs
exclusively rely on the SIP when determining trade prices and that
other ATSs used the SIP as a backup and in place of the direct feeds
from some exchanges.\1806\
---------------------------------------------------------------------------

    \1806\ See BestEx Research Letter at 3.
---------------------------------------------------------------------------

    All of these developments increased the competitiveness of the
market for trading services in NMS stocks. However, the Commission
recognizes that while the market is more competitive, the actual level
of competition that any given trading venue faces may depend on
multiple factors including the liquidity of a stock

as well as the type of trading venue and market participant engaging in
the trade.
(e) Broker-Dealers' Competitive Strategies for Trading Services
    While many market participants use market data to make investment
decisions, not all market participants are equally competitive in how
they trade based on this data. Some broker-dealers and other latency
sensitive traders utilize sophisticated routing tools to strategically
decide how to fill an order, including when and where to submit the
order, how to split a larger order (i.e., into how many pieces, or
``child orders'' \1807\), how large the child order sizes should be,
and what order type(s) should be used, e.g., whether to use a market
order, limit order, or some other order type. The strategies employed
by broker-dealers and other latency sensitive traders in this regard
are designed to secure the best possible execution price(s) for an
order. For example, the methodologies utilized in trading orders can
impact the price of the stock being purchased or sold in a manner that
can increase or decrease its execution cost. Commenters stated that the
trend towards higher proprietary data fees has had a negative impact on
the market, such as making it more difficult for broker-dealers to
compete.\1808\
---------------------------------------------------------------------------

    \1807\ ``Child order'' refers to a smaller order that was a
piece of a larger ``parent'' order.
    \1808\ See, e.g., Clearpool Letter at 2 (``. . . of all the
issues relating to the costs of trading, the trend toward higher
market data fees has had the most negative impact on the securities
markets. It remains increasingly difficult for many broker-dealers
to compete in the current market environment due, in part, to issues
related to the costs associated with trading.'').
---------------------------------------------------------------------------

    Broker-dealers in particular compete with each other to provide the
lowest possible execution costs for their clients (i.e., high execution
quality) as quickly as possible.
    An example of routing tools as noted above is an SOR. SORs employ
the use of algorithms (e.g., by broker-dealers on behalf of a client)
designed to optimally send parts of an order (child orders) to various
market centers (e.g., exchange and ATSs) so as to optimally access
market liquidity while minimizing execution costs. SORs help to
determine how to quickly access (``take'') available market liquidity
before other market participants, and help to determine how to
strategically place limit orders to optimize queue priority across
various limit order books among exchanges. The ability to optimize
queue priority facilitates the ability for a broker to ``capture the
quoted'' spread, i.e., buy on the bid or sell on the offer, while also
potentially benefitting from exchange rebates paid to liquidity
providers.
    The Commission understands that data beyond the NBBO with minimal
latency are important inputs \1809\ to strategies designed to optimize
the ability to access market liquidity and minimize execution costs.
Further, the Commission understands that competing with the most
effective SORs is more difficult without possessing real-time market
data while minimizing data latency,\1810\ and that those traders who do
not access trading tools that utilize comprehensive market data with
low-latency experience higher execution costs on average.
---------------------------------------------------------------------------

    \1809\ In addition to such data, the Commission believes that
there are also ongoing significant personnel and technological costs
to producing a sophisticated, competitive SOR.
    \1810\ Some commenters supported the idea that proprietary data
is important in order to be competitive in offering executing
brokerage services. See, e.g., Healthy Markets Letter I at 5; T.
Rowe Price Letter at 1.
---------------------------------------------------------------------------

    One commenter stated that the association of broker-dealers with
proprietary data feeds represents behavior that is ``largely window-
dressing,'' and that broker-dealers still rely heavily on the
SIP.\1811\ This commenter also stated that many broker-dealers have ``.
. . layers of market data normalization and aggregation by third-party
vendors'' which further increase the latency of the data as it is
used.\1812\ To the extent this it is the case that any current
subscriber of proprietary data feeds does not, in fact, make good use
of them according to the most competitive standards, the Commission
believes it represents a further way in which more capable users of
market data are separated from less capable users of market data, and
not an indication that proprietary market data feeds are of no real
advantage to any broker-dealer.
---------------------------------------------------------------------------

    \1811\ See BestEx Research Letter at 3.
    \1812\ See BestEx Research Letter at 4.
---------------------------------------------------------------------------

C. Economic Effects of the Rule

1. Consolidated Market Data
    The Commission believes that the enhancements to consolidated data
will result in numerous beneficial economic effects. These economic
effects derive from codifying the definition of core data, from
redefining the round lot, and from expanding the content of core data.
    The change will have the benefit of mitigating the influence of
existing conflicts of interest inherent in the existing exclusive SIP
model.\1813\ The change reduces the divergence between exchanges'
proprietary DOB products and current SIP data because it establishes
data elements that competing consolidators can include in their
consolidated market data products.
---------------------------------------------------------------------------

    \1813\ See supra Section V.A.2. for a discussion of these
conflicts of interest.
---------------------------------------------------------------------------

    One commenter stated that the claim that the expansion of core data
mitigates conflicts of interest fails to consider the fact that the
Governance Order gives some non-SRO market participants voting power on
the effective national market system plan(s) Operating Committee.\1814\
This commenter stated that the non-SROs would have a conflict of
interest and that this needs to be considered when discussing any
conflicts mitigated by the rules. The Commission disagrees with this
commenter's assessment. It is not clear how the introduction of non-SRO
votes to the Operating Committee and their associated interests are
relevant to the question of whether or not the expansion of core data
will mitigate the conflicts of interests of the SRO members of the
Operating Committee. As discussed above,\1815\ the Governance Order
will reduce, but not eliminate the conflicts of interest of the SROs on
the Operating Committee. The potential for further mitigation of the
influence of those conflicts remains and the Commission continues to
believe that the expansion of core data will have that benefit.
---------------------------------------------------------------------------

    \1814\ See Nasdaq Letter IV at 49.
    \1815\ See supra Section III.I.
---------------------------------------------------------------------------

(a) Definitions of Consolidated Market Data, Core Data, Administrative
Data, and Regulatory Data
    The Commission's definitions of ``consolidated market data,''
``consolidated market data product,'' ``core data,'' ``regulatory
data,'' ``administrative data,'' and ``self-regulatory organization-
specific program data'' under Regulation NMS will specify the quotation
and transaction information in NMS stocks that can be collected,
consolidated, and disseminated under rules of the national market
system and pursuant to an effective national market system plan(s).
This definition will codify the dissemination of certain current SIP
data elements, and will include some additional data elements, but will
not include some data that the exclusive SIPs currently disseminate.
This section discusses the secondary economic effects of this expansion
to consolidated market data that will come from codifying the inclusion
of some current SIP data in ``consolidated market data,'' while
subsequent sections discuss the economic effects of the new round lot
definition and expanding the content of core data. These secondary
effects are

providing flexibility to the Equity Data Plans for including new data
elements, requiring that regulatory data will continue to be provided
in the decentralized consolidation model, cost to update the national
market system plan(s), and costs to obtain data that is currently in
SIP data but will not be included in consolidated market data, such as
data on information related to OTC equities, certain corporate bonds,
and indices.\1816\
---------------------------------------------------------------------------

    \1816\ See supra Section II.C.2(c).
---------------------------------------------------------------------------

    The Commission believes the definitions of ``self-regulatory
organization-specific program data,'' ``regulatory data'' and
``administrative data,'' along with the ability for the Equity Data
Plan(s) to add elements to these proposed definitions, will promote
regulatory efficiency by providing flexibility for consolidated market
data to include data elements beyond those explicitly defined as
``consolidated market data.'' It provides a mechanism for the
participants in the national market system plan(s) to propose to add
additional data elements, such as elements similar to current retail
liquidity programs. This will allow for organic change in consolidated
market data that may become useful due to future market and regulatory
developments. Further, while the underlying data content of
``regulatory data'' is currently included in disseminated SIP data, the
definition of ``regulatory data'' will help ensure that market
participants continue to have access to this information as part of
consolidated market data.\1817\
---------------------------------------------------------------------------

    \1817\ Commenters agreed that regulatory data is highly relevant
and important to all types of market participants. See, e.g., IEX
Letter at 7; MEMX Letter at 6.
---------------------------------------------------------------------------

    The Commission recognizes that the Equity Data Plan(s) will incur
one-time initial implementation costs in ensuring the plans are
consistent with the proposed definitions of ``consolidated market
data,'' ``core data,'' ``administrative data,'' ``regulatory data,''
and ``self-regulatory organization-specific program data,'' but the
plans will not incur significant ongoing costs as a result of the
codification of these five definitions.\1818\ These initial
implementation costs will come from the Operating Committees needing to
draft revisions to their respective plans that are consistent with the
proposed definitions.
---------------------------------------------------------------------------

    \1818\ See infra Section V.C.2(d)(ii) and supra Section
IV.D.6(c) for a discussion of these costs. Below in Section
V.C.1(c)(iv), the Commission also discusses the costs of including
data elements to the definition of ``core data'' that are not
currently in SIP data.
---------------------------------------------------------------------------

    The Commission believes that not including some data elements that
the exclusive SIPs currently transmit \1819\ in the definition of
``consolidated market data'' may have some costs to those market
participants who would want to arrange to get this data
elsewhere.\1820\ The UTP SIP offers quotation and transaction feeds for
OTC equities, and the CTA Plan permits the dissemination of
``concurrent use'' data related to corporate bonds and indexes.\1821\
Under the amendments, these data elements will not be defined as
consolidated market data or core data elements. However, the amendments
will not preclude the provision of these data elements by the SROs via
proprietary data products to market participants and investors who wish
to receive them.
---------------------------------------------------------------------------

    \1819\ See supra Section II.C.2(c) and Proposing Release, 85 FR
at Section III.B.
    \1820\ One commenter agreed, stating that not including
quotation and transaction data for OTC equities in consolidated
market data would increase both the costs to provide the data and
the costs of market participants to acquire it. See FINRA Letter at
11.
    \1821\ See supra Section II.C.2(c) and Proposing Release, 85 FR
at Section III.C.
---------------------------------------------------------------------------

    One commenter stated that not including quotation and transaction
data for OTC equities in consolidated market data may reduce market
participant access to this data and would increase both the costs to
the SRO to provide the data and the costs of market participants to
acquire it.\1822\ This commenter also stated that, because OTC equities
may become listed and become NMS stocks and vice versa, not providing
this data in the same feed as core data could result in a disruption of
market data when a security switches between being listed and unlisted
and investors or market participants are not subscribed to both
services providing core data and data for delisted issuers.\1823\ The
Commission acknowledges that not including information related to OTC
equities in consolidated market data may potentially increase the costs
of FINRA providing this data and market participants to acquire the
data. The Commission also acknowledges that this could prove disruptive
to market participants not receiving both information related to OTC
equities and core data if a security switches between being listed and
unlisted. However, the extent of these effects is uncertain and would
depend on the fees FINRA charges for the data.\1824\ Market
participants may still receive both of these data elements in the same
data feed because competing consolidators would be able to offer a
product that contains both information related to OTC equities as well
consolidated market data.\1825\ The degree to which competing
consolidators offer this product will depend on the fees FINRA charges
for this data as well as the fees for consolidated market data
offerings set by the NMS plan.\1826\
---------------------------------------------------------------------------

    \1822\ See FINRA Letter at 9, 11.
    \1823\ See FINRA Letter at 11.
    \1824\ See supra Section II.C.2(c).
    \1825\ Competing consolidators will not be restricted from also
offering data elements from SRO proprietary data. See supra note 220
and accompanying text.
    \1826\ See supra Section II.C.2(c) (discussing fees for
information related to OTC equities) and infra Section V.C.2(b)(i)
(discussing fees for consolidated market data).
---------------------------------------------------------------------------

(b) Effects of New Round Lot Definition
    The final amendments will reduce the number of shares included in
the definition of a round lot for NMS stocks for which the prior
calendar month's average closing price on the primary listing exchange
was greater than $250.00.\1827\ Higher priced stocks will be grouped
into tiers based on their price and stocks in higher price tiers will
have fewer shares in their definition of a round lot. In addition, part
of the definition of core data will require that the best bid and offer
and national best bid and offer include odd-lots that, when aggregated,
are equal to or greater than a round lot and that such aggregation
shall occur across multiple prices and shall be disseminated at the
least aggressive price of all such aggregated odd-lots.\1828\ Round lot
quotes will be protected quotations subject to the trade-through
prevention requirements of Rule 611 and the locked and crossed markets
restrictions of Rule 610(d).\1829\
---------------------------------------------------------------------------

    \1827\ See supra Section II.D.2.
    \1828\ See supra Section II.E.2(b). Several exchanges already
aggregate odd-lot orders into round lots and report such aggregated
odd-lot orders as quotation information to the exclusive SIPs. See
Proposing Release, 85 FR at nn. 157-58.
    \1829\ See supra Section II.E.2(a).
---------------------------------------------------------------------------

    For stocks priced above $250, the new round lot definition will
result in the inclusion of quotes at better prices in core data that
were previously excluded from being reported because they consisted of
too few shares. This will make these quotes visible to anyone who
subscribes to core data, thereby improving transparency.\1830\ This
will also mechanically narrow NBBO spreads for most stocks with prices
greater than $250, which will affect other Commission or SRO rules and
regulations. This section discusses the effects of the new round lot
definition on: The NBBO, market participants, the

internalization of retail order flow, and on trading venues.
Additionally, this section discusses the effects of the monthly
calculation to determine the round lot size, the costs of the new round
lot definition, and the effects of the new round lot definition on
other rules and regulations.
---------------------------------------------------------------------------

    \1830\ The Vendor Display Rule will require broker-dealers to
show, in the context of which a trading or order-routing decision
can be implemented, a consolidated display that includes quotes
derived from the new round lot size. See supra Section II.D.2(b) and
infra Section V.C.1(b)(vii).
---------------------------------------------------------------------------

(i) Effects on the NBBO
    The new round lot definition will change the average spread between
the NBBO for many stocks with prices above $250 because the NBBO will
now be calculated based off of the smaller round lot size. Because odd-
lot shares exist in these stocks at prices that are better than the
national best bid and offer (i.e., at prices higher than the national
best bid and prices lower than the national best offer), the new
national best bid and offer will be at a higher/lower price because
fewer odd-lot shares will need to be aggregated together (possibly
across multiple price levels) to form a round lot. This will result in
a quoted spread that is calculated based off of the NBBO being narrower
for these stocks.\1831\ The reduction in spreads will be greater in
higher priced stocks because stocks in higher priced tiers will have
fewer shares included in the definition of a round lot.\1832\
---------------------------------------------------------------------------

    \1831\ Commenters agreed that the new round lot size would
tighten spreads. See, e.g., Nasdaq Letter III at 11, 15; ICI Letter
at 6; BestEx Research Letter at 6; CBOE Letter at 5.
    \1832\ See supra Section II.D.2(a).
---------------------------------------------------------------------------

    The Commission believes that market participants relying on new
core data will see a significant improvement in the NBBO for stocks
that fall into the higher priced round lot tiers. Table 3 confirms this
belief by updating the analysis from the Proposing Release to account
for the new round lot tier structure.\1833\ Specifically, Table 3 shows
the percentage of instances in a sample of market data when the NBBO
provided at the time by an exclusive SIP \1834\ was inferior to the
price of an NBBO determined by the new definition of a round lot in the
final amendments. For instance, the table shows that for stocks with
prices between $1,000.01 and $10,000, the new round lot definition
caused a quote to be displayed that improved on the current round lot
quote 47.7% of the time. The frequency of this narrower NBBO is lower
for lower priced stocks. For example, the new round lot definition
resulted in a quote being displayed that improved on the current round
lot quote 26.6% of the time in the $250.01-$1000 tier. This analysis
shows that, within each round lot tier the new round lot definition
will improve the quoted spread in a significant number of instances.
---------------------------------------------------------------------------

    \1833\ See Proposing Release, 85 FR at Table 4.
    \1834\ Since the source used for this SIP NBBO is an exclusive
SIP itself, this quote includes quotes the exchanges produce by
aggregating or ``rolling up'' odd-lots to obtain a round lot-sized
quote.

                                       Table 3--Instances of Smaller NBBO
----------------------------------------------------------------------------------------------------------------
                                                                         Instances of smaller NBBO (%) \3\
                                                                 -----------------------------------------------
                       Round lot tier 1 2                                                           Best bid or
                                                                     Best bid        Best ask        best ask
----------------------------------------------------------------------------------------------------------------
1. $0-$250 (100 shares).........................................             n/a             n/a             n/a
2. $250.01-$1,000 (40 shares)...................................            16.3            16.5            26.6
3. $1000.01-$10,000 (10 shares).................................            40.2            34.6            47.7
4. $10,000.01+ (1 share)........................................             n/a             n/a             n/a
----------------------------------------------------------------------------------------------------------------
\1\ Tier based on the stock's prior month's average closing price in April 2020.
\2\ Twelve stocks trade in round lots different than 100 shares and are included in the table. Six stocks are in
  the $0-250 tier and currently trade in 10 share lots, 2 stocks are in the $250.01-$1,000 tier and trade in 10
  share lots, 3 stocks are in the $1000.01 to $10,000 tier, and 1 stock is in the $10,000.01+ tier. In the
  $1000.01 to $10,000 tier, 1 stock trades in 1 share lots and 2 stocks trade in 10 share lots. In the
  $10,000.01+ tier, 1 stock trades in 1 share lots.
\3\ Overall frequency of smaller NBBO quotes during May 2020 for the new round lot tier criteria (source: Direct
  feeds) versus the current 100 share round lot criteria (source: SIP). The denominator consists of hourly
  snapshots from 10:30 a.m. to 3:30 p.m. for each trading day in May 2020. The numerator is the total number of
  snapshots with smaller NBBO quotes.

    The effects of instances of narrower NBBOs under the new round lot
definition depends on the trading volume of stocks in the tiers
affected by the change. The Commission believes that, in particular,
for securities with a significant amount of dollar trading volume,
there will be significant changes to (tightening of) the quoted spread
displayed under the new round lot definition. Table 4 accounts for the
new round lot definition, showing the number of NMS stocks that would
be in each round lot tier based on monthly average closing prices in
September of 2020, as well as the percent of overall average daily
volume (``ADV'') and notional value (``$ADV'') of each price group
during one week of trading in October of 2020.\1835\ It shows that
while most stocks, approximately 98.5%, will remain unaffected by the
new round lot definitions, around 28.1% of the dollar trading volume
currently is in stocks that will have a new round lot definition.
---------------------------------------------------------------------------

    \1835\ See Proposing Release, 85 FR at Table 1.

                           Table 4--Round Lot Tier Number of Stocks and Trading Volume
----------------------------------------------------------------------------------------------------------------
                                                                     Number of      Percent of      Percent of
                       Round lot tier \1\                            stocks in     ADV, by price  $ADV, by price
                                                                  round lot tier     group \2\       group \2\
----------------------------------------------------------------------------------------------------------------
1. $0-$250 (100 shares).........................................           9,023           97.12           71.93
2. $250.01-$1,000 (40 shares)...................................             117            2.79           23.24
3. $1000.01-$10,000 (10 shares).................................              16            0.09            4.82
4. $10,000.01+ (1 share)........................................               1            0.00            0.02
----------------------------------------------------------------------------------------------------------------
\1\ Tier based on the stock's prior month's average closing price in September 2020.
\2\ Percent of ADV and Percent of $ADV are based on trading volume between October 5-9, 2020.

    The Commission believes that the size of the change in the spread,
conditional on the NBBO being smaller, will also be substantial. Table
5 confirms this belief by updating the analysis from the Proposing
Release that quantifies the average change in the spread offered by the
best quote under the new round lot definition, conditional on the event
that the NBBO is smaller in the first place.\1836\ The table shows, for
example, that the new round lot definition in the $250.01-$1000 tier
could yield a 7 basis point reduction in the spread (conditional on the
NBBO being smaller). Because the average quoted half spread is 24 basis
points, this represents a significant reduction in the half spread. In
the case of the $1000.01 to $10,000 tier, the difference of 13 basis
points represents an even more significant fraction of the 23 basis
point average half spread.
---------------------------------------------------------------------------

    \1836\ See Proposing Release, 85 FR at Table 5.

                                         Table 5--Size of Change in NBBO
----------------------------------------------------------------------------------------------------------------
                                                                                Average      SIP: Average
                                                     Best bid:       Best ask:    difference  in  quoted percent
               Round lot tier 1 2                 Average  price  Average  price   quoted  half     half spread
                                                  change ($) \3\  change ($) \3\  spread (%) \4\        (%)
----------------------------------------------------------------------------------------------------------------
1. $0-$250 (100 shares).........................             n/a             n/a             n/a             n/a
2. $250.01-$1,000 (40 shares)...................            0.64            0.89            0.07            0.24
3. $1000.01-$10,000 (10 shares).................            2.48            2.81            0.13            0.23
4. $10,000.01+ (1 share)........................             n/a             n/a             n/a             n/a
----------------------------------------------------------------------------------------------------------------
\1\ Tier based on the stock's prior month's average closing price in April 2020.
\2\ Twelve stocks trade in round lots different than 100 shares and are excluded.
\3\ Conditional on a the instance of a smaller quote, stock-day average price improvement is calculated using
  MIDAS data, which consists of hourly snapshots from 10:30 a.m. to 3:30 p.m. for each trading day in May 2020.
  Calculation is based on the difference between the best bid/best ask calculated under the new round lot tier
  definition (source: Direct feeds) compared to the NBBO based on the current 100 share round lot criteria
  (source: SIP)
\4\ Conditional on a the instance of a smaller quote (bid or ask), stock-day average difference in percent
  quoted half spread is calculated by SIP NBBO quoted percent half spread minus the new percent quoted half
  spread under the proposed round lot tier criteria. Quoted half spread is defined by: Quoted half-spread = QSit
  = 100 * (Askit-Bidit)/(2*Mit), where M is the midpoint between the best bid and best ask.

    In the Proposing Release, the Commission qualitatively discussed
that the change in round lot size could cause the NBBO and protected
quotes to widen for the twelve stocks that currently have a round lot
size less than 100 shares.\1837\ However, one commenter stated that the
Commission did not analyze the effects of the change in round lot size
and protected quotes on these twelve stocks.\1838\ In response to this
comment, the Commission quantitatively analyzed the effects of the
revised definition of round lot size on these stocks using data from
one week of trading in October 2020 and confirmed that the NBBO would
widen in some of these stocks.\1839\ The analysis showed that the round
lot size will not change for four of these stocks, so their NBBO will
not change. However, for eight of these stocks the round lot size would
increase. In these 8 stocks, the analysis showed that, on average, the
NBBO would widen 97.1% of the time under the new round lot definition.
In the instances in which the NBBO was wider, the Commission found that
the NBBO half-spread increased by an average of 3.66% in these stocks.
---------------------------------------------------------------------------

    \1837\ See Proposing Release, 85 FR at 16824, 16830-1.
    \1838\ See NYSE Letter II at 6.
    \1839\ The round lot tiers for these twelve was based on the
stocks' prior month's average closing price in September 2020. The
analysis for these twelve stocks used the same data source and
methodology as the analysis in Tables 4 and 6, but was based on
trading occurring between October 5-9, 2020. Because the new round
lot size will be protected, this analysis also examines the change
in the protected quotes under the final amendments.
---------------------------------------------------------------------------

(ii) Effects on Market Participants
    For stocks priced above $250, the new round lot definition will
result in the inclusion of quotes at better prices in core data that
were previously excluded from being reported because they consisted of
too few shares. This will make these quotes visible to anyone who
subscribes to core data, thereby improving transparency.\1840\ The
Commission believes that this will create an economic benefit for
market participants who currently rely exclusively on SIP data to
obtain market information, such as many retail investors. These market
participants will benefit from being able to see information on these
smaller quotes at better prices before they send in their orders, which
may improve their trading decisions and order execution quality by
providing an opportunity to realize gains from trade,\1841\ as
discussed below in this section.\1842\ This may also improve price
efficiency. This is because certain odd-lot information not currently
disseminated as part of SIP data will be made available as part of core
data; therefore market participants who use SIP data who previously did
not use the information contained in these odd-lot quotes will be able
to incorporate this information into their trading decisions. These
trading decisions are integral to how market prices are formed. Also,
the change may affect order routing and the share of order flow
received by each exchange, since more market participants who rely on
core data will be aware of quotes at better prices that are currently
in odd-lot sizes, and these may not be on the same exchange as the one
that has the best 100 share quote.
---------------------------------------------------------------------------

    \1840\ Commenters agreed that the new round lot definition would
improve transparency. See, e.g., Schwab Letter at 4; CBOE Letter at
5. The Vendor Display Rule will require broker-dealers to show, in
the context of which a trading or order-routing decision can be
implemented, a consolidated display that includes quotes derived
from the new round lot size. See supra Section II.D.2(b) and infra
Section V.C.1(b)(vii).
    \1841\ See supra note 1593.
    \1842\ It will also benefit market participants who post odd-lot
quotes at prices superior to the NBBO because market participants
that rely exclusively on SIP data may now be able to see some of
these quotes and trade against them.
---------------------------------------------------------------------------

    The Commission believes that changing the round lot definition to
include smaller-size orders in stocks priced higher than $250 will
benefit market participants who would have traded with price-improving
odd-lot quotes in these stocks but do not do so because they cannot see
information on odd-lot quotes.\1843\ Under the final

amendments, these market participants will be able to see these quotes
in core data, and make a decision about whether to trade based on this
newly visible, improved price.\1844\ This may benefit market
participants, including many retail investors, because they will be
able to realize the gains from trade that are available in this
situation and are not currently occurring because of the lack of
information. Also, some market participants may wish to exchange an
odd-lot quantity of a stock by posting a limit order for an odd-lot
amount. Currently, this order's price is not visible to market
participants who rely solely on SIP data, and thus there may be delays
in getting this limit order filled, since such market participants
would not send market orders in. Thus, adding smaller-size quotes in
core data for certain stocks will result in a benefit to both the
market participants who would submit the market orders and the market
participants who post the odd-lot quotes they execute against.
---------------------------------------------------------------------------

    \1843\ Currently, some information about odd-lot quotes ends up
in core data through certain exchanges rolling up odd-lot quotes
into round lots. But even in this case, the rolled up quote is
reported to the exclusive SIPs at the worst price out of all the
odd-lots that were rolled up to produce the quote, so the full
amount of price improvement available on that exchange is still not
visible to market participants relying solely on exclusive SIPs for
market data.
    \1844\ Commenters agreed that the new round lot definition would
show more odd-lot trading interest. See, e.g., CBOE Letter at 6;
BlackRock Letter at 3.
---------------------------------------------------------------------------

    The magnitude of this benefit depends on the amount of additional
trading generated by the inclusion of odd-lot information. In
particular, the Commission believes that to the extent many market
participants who rely solely on SIP data and lack information on odd-
lot quotes would have traded frequently against odd-lot quotes had they
known about them, the benefit will be large. However, if it is uncommon
for market participants who would trade frequently against odd-lot
quotes to rely solely on SIP data and to lack information on odd-lot
quotes, then the Commission believes that the associated economic
benefit from including smaller-size quotes in core data for certain
stocks will be small. The Commission believes it is not possible to
observe this willingness to trade with existing market data.
    The Commission believes that the new round-lot definition will
benefit market participants by improving order routing in stocks priced
higher than $250, provided that they do not already obtain information
on odd-lots from proprietary feeds.\1845\ Currently, market
participants who rely on core data are not aware of odd-lot quotes
available at other exchanges that exist at prices that are better than
the national best bid and offer (e.g., the exchange with the best
priced 100 share quote may not be the exchange with the best priced
odd-lot quote).\1846\ The new round lot definition will make more of
these quotes in higher priced stocks visible to market participants
that subscribe to core data, which will improve order routing and may
improve order execution quality and facilitate best execution for these
market participants.\1847\
---------------------------------------------------------------------------

    \1845\ This benefit would apply to both market participants who
are routing their own orders and market participants whose orders
are being routed by a broker-dealer, provided the broker-dealer does
not do not already obtain information on odd-lots from proprietary
feeds.
    \1846\ Battalio, Corwin, and Jennings (2016) examined the
frequency of trading at inferior prices as compared to available
unprotected odd-lot quotes in a sample of 10 high-priced stocks
during one week in 2015. They found that there was an unprotected
odd-lot limit order available at a better price for 2.52% of the
trades that occurred. See Robert Battalio et al, Unrecognized Odd
Lot Liquidity Supply: A Hidden Trading Cost for High Priced Stocks,
12 J. Trading 35 (2016). A commenter also referenced this study and
stated that unprotected odd-lot quotes at prices better than the
NBBO at other exchanges get traded through. See BlackRock Letter at
4.
    \1847\ For a discussion of order execution quality and the
provision of execution services by broker-dealers, see supra Section
V.B.3(e).
---------------------------------------------------------------------------

    The Commission believes that the new round lot definition may
improve price efficiency for stocks priced above $250.\1848\ The wider
availability of information about odd-lot quotes may mean that more
market participants (who currently rely solely on SIP data) will
incorporate the information contained in those quotes into their
trading decisions. This may have the effect of improving the efficiency
with which this information becomes reflected in prices.
---------------------------------------------------------------------------

    \1848\ For additional discussion of the price efficiency point,
see infra Section V.D.1.
---------------------------------------------------------------------------

    The Commission believes that the new round lot definition may cause
changes to order flow as market participants change their trading
strategies to take advantage of newly visible quotes.\1849\ This may
mean that there would be changes to the share of order flow each
exchange receives as a result of this rule. The Commission is uncertain
about the magnitude of this effect.
---------------------------------------------------------------------------

    \1849\ For example, currently a market participant, relying on
SIP data, may submit an order to the exchange with the exclusive SIP
NBBO and in the process, trade at an inferior price to an odd-lot
quote that the market participant was not aware of on another
exchange. If the market participant would have preferred to route to
the price-improving odd-lot quote, then under the updates to core
data the market participant will send the order to the exchange with
the smaller, price improving quote.
---------------------------------------------------------------------------

    As observed by commenters,\1850\ the new round lot definition will
also improve transaction cost analysis and best execution analysis in
higher priced stocks, which are benchmarked against the NBBO. A smaller
round lot size will improve these analyses because it will increase the
accuracy of the NBBO, which will now better reflect smaller sized odd-
lot quotes that may be available at better prices, possibly on another
exchange.\1851\
---------------------------------------------------------------------------

    \1850\ See, e.g., ICI Letter at 7; AHSAT Letter at 5. It will
also improve the accuracy of Rule 605 statistics. See infra Section
V.C.1(b)(vii).
    \1851\ See supra Section V.C.1(b)(i) and discussion in this
section.
---------------------------------------------------------------------------

    Some commenters stated that new round lot tiers would increase
complexity and create confusion among investors.\1852\ The Commission
acknowledges that the new round lot tiers may initially increase
complexity when they are first implemented.\1853\ However, after the
new round lot tiers are implemented, the Commission does not believe
they will significantly increase the complexity of the market or create
confusion for a number of reasons.\1854\ First, market participants
already trade in stocks with round lot sizes other than 100
shares.\1855\ Second, most NMS stocks will have a round lot size of 100
shares under the new round lot tier definitions.\1856\ Third, core data
will be distributed with the size of the NBBO and best quotes from each
exchange given in shares and not number of round lots.\1857\ Currently,
the SIPs indicate size as the number of round lots available at the
NBBO and each exchange's best quote, so investors need to convert round
lot size to share size for stocks with round lots other than 100
shares. Under the final amendments, investors will observe the number
of shares available and will not need to make this conversion. Fourth,
the Commission expects that broker-dealers and other market
participants will modify or develop their systems to automatically keep
track of the different round-lot changes.\1858\
---------------------------------------------------------------------------

    \1852\ See, e.g., Clearpool Letter at 11-12; STANY Letter II at
3; TD Ameritrade Letter at 10.
    \1853\ See infra Section V.C.1(b)(v).
    \1854\ Commenters agreed that the new round lot tiers would not
add significant complexity. See, e.g., MEMX Letter at 4 (``Once
tiers are required, although technology changes will be needed to
implement the tiering structure, MEMX does not believe that there is
significant additional complexity associated with supporting
differing numbers of tiers.''); IEX Letter at 4.
    \1855\ See supra Section V.C.1(b)(i).
    \1856\ The Commission estimates that approximately 98.5% of NMS
stocks will have a round lot size of 100 shares. See supra Table 4.
    \1857\ See supra Section II.C.2(e). One commenter stated that
showing the number of shares rather than the number of round lots
would reduce confusion with different size round lot tires. See CBOE
Letter at 13-14.
    \1858\ See infra Section V.C.1(b)(v).
---------------------------------------------------------------------------

    Commenters stated that the reduced round lot sizes would cause less
liquidity to be available at the new NBBO in higher priced round lot
tiers

and that more marketable orders would have to walk the book and execute
at prices outside the NBBO.\1859\ One of these commenters stated that
the round lot tier structure in the Proposing Release would cause many
retail investors' marketable orders to walk the book, which could lead
to confusion and disappointment among retail investors because they are
not used to having their orders walk the book.\1860\ The Commission
acknowledges that the smaller round lot size could lead to a smaller
number of shares at the NBBO for most stocks in higher priced round lot
tiers. However, this effect will depend on how market participants
adjust their order submissions. For example, as observed by a
commenter, orders pegged to the NBBO will remain at the NBBO.\1861\ If
this represents a significant portion of orders at the NBBO, then the
number of shares at the NBBO may not change significantly.
---------------------------------------------------------------------------

    \1859\ See, e.g., TD Ameritrade Letter at 7-8, 10; AHSAT Letter
at 5; Nasdaq Letter III at 12.
    \1860\ See, e.g., TD Ameritrade Letter at 8. The round lot tier
sizes the commenter was referring to in the Proposing Release were
based on a $1,000 notional size. The adopted round lot tiers are
based on a larger $10,000 notional size, which should significantly
decrease the frequently of a marketable order being larger than the
notional value of the adopted round lot tiers compared to the round
lot tiers in the Proposing Release. See supra Section II.D.2(a).
    \1861\ See BestEx Research Letter at 6.
---------------------------------------------------------------------------

    If the size at the NBBO decreases in a stock in a higher priced
round lot tier, then it could increase the frequency with which
marketable orders walk the book. The adopted round lot tier sizes are
based on a notional value of $10,000. Staff analysis estimated that the
average notional trade size in 2019 was $8,068 (excluding
auctions).\1862\ Commenter analysis also observed that a significant
portion of trading occurred at or below $10,000.\1863\ The Commission
acknowledges that these estimates indicate that if the available
liquidity at the NBBO is close to the $10,000 notional value, then
there could be an increase in the frequency with which orders walk the
book in the higher priced round lot tiers. However, as discussed above
in this section, it is not entirely clear how investor orders and the
size at the NBBO will change. Therefore, it is also uncertain how
frequently orders will walk the book under the new round lot tiers.
Even if the size at the NBBO declines, the Commission does not believe
it will cause a significant increase in the frequency that retail
investors' marketable orders walk the book and lead to confusion among
retail investors for two reasons. First, currently most retail investor
marketable orders execute off-exchange at retail internalizers and do
not execute on an exchange and walk the limit order book.\1864\ Because
retail internalizers may offer price improvement, it is possible that
the retail internalizer could fill the entire order at a price that is
equal to or better than the NBBO.\1865\ Second, even if a retail
marketable order was routed to an exchange, it may not be greater than
the notional size of the NBBO at an exchange in a higher priced round
lot tier.\1866\ Additionally, even if the size at the NBBO is smaller
and a marketable order walks the book or a retail internalizer does not
execute the whole order at the NBBO, the Commission does not believe
that the average price at which it executes will decrease, i.e.,
transaction costs will not increase, because the NBBO will be at a
better price.\1867\
---------------------------------------------------------------------------

    \1862\ See supra Section II.D.2(a). Several commenters stated
that the Commission did not conduct analysis to determine the
notional value of the proposed round lot tiers. See, e.g., Nasdaq
Letter V at 4-5; Angel Letter at 13-14. In developing the notional
value for the adopted round lot tiers, the Commission considered its
estimate of the average trade size in 2019 and commenter analysis on
the size of trades and orders. See supra note 269 and accompanying
text.
    \1863\ See Virtu Letter at 3-4 (stating that data from 2019 to
present show that the vast majority (over 75%) of all trades are
still for less than $10,000); Angel Letter at 17 (``[T]he median
trade size is roughly $10,000.''); IntelligentCross Letter at 3
(``[T]he notional value of the median trade today is about
$2,000.'').
    \1864\ See infra Section V.C.1(b)(iii).
    \1865\ It is also possible that a retail internalizer could
execute part of the order and route the rest to an exchange, where
it could execute against the NBBO or walk the book.
    \1866\ One commenter observed that the average retail trade size
between 2007 and the present is around $14,581. See Virtu Letter at
3-4. The minimum notional size at the NBBO on a single exchange in
the higher priced round lot tiers will be $10,000. If more than one
exchange were at the NBBO, then an order would need to execute at
the available liquidity at those exchanges before walking the book.
    \1867\ See supra Section V.C.1(b)(i).
---------------------------------------------------------------------------

    As observed by commenters, protecting the smaller round lot quotes
in higher priced stocks will benefit retail investors by better
protecting their limit orders.\1868\ One commenter observed that 23
percent of its customers' limit orders for stocks priced higher than
$100 are less than 100 shares.\1869\ Under the new round lot tiers,
retail investors will benefit because a greater portion of their odd-
lot sized orders in higher priced stocks will be protected and not
traded-through.\1870\
---------------------------------------------------------------------------

    \1868\ See, e.g., Schwab Letter at 4-5; SIMFA Letter at 9-10.
    \1869\ See Schwab Letter at 4-5.
    \1870\ See supra note 1846.
---------------------------------------------------------------------------

    One commenter stated that the smaller round lot size in higher
priced stocks would disadvantage the limit orders of retail traders
because it would make it easier for low-latency professional traders to
step ahead of them with less risk.\1871\ The Commission disagrees with
this commenter. Currently low-latency professional traders that receive
proprietary feeds that contain all odd-lot information do not need to
submit a round lot sized order to step ahead of retail limit orders.
These traders can submit an odd-lot-sized order to step ahead of the
retail investor's order at a lower price and the retail investor may
not observe it if the retail investor only receives SIP data. With the
smaller round-lot size in higher priced stocks, retail investors who
only receive core data would be better able to observe if a smaller
order steps ahead of their order at a better price and may be able to
adjust their limit order in response.
---------------------------------------------------------------------------

    \1871\ See TD Ameritrade Letter at 9.
---------------------------------------------------------------------------

    One commenter stated that protecting smaller round lot quotes would
negatively impact the trading of institutional investors because market
participants would post smaller displayed quotes and institutional
investors with larger orders would have to slice their trading activity
into smaller increments to avoid signaling their trading
interest.\1872\ The Commission does not believe that protecting the
smaller round lot size in higher priced stocks will negatively impact
the trading of institutional investors. It is already common practice
for institutional investors' parent orders to be sliced into smaller
child orders.\1873\ Additionally, because the round lot tiers are based
on a notional value, $10,000, which is larger than the average trade
size, $8,068 (excluding auctions),\1874\ the Commission does not
believe that market participants are likely to significantly reduce the
size of their displayed limit orders and institutional investors'
orders will not have to be sliced into smaller sizes than they already
are. Additionally, the Commission believes that protecting the smaller
round lot sizes in higher priced stocks could benefit smaller odd-lot-
sized child limit orders that institutional investors submit. Because
more of these orders would now be observable in core data, they may be
more likely to execute against the marketable orders of market
participants who rely on SIP data and were not previously able to
observe these orders, as described above in this section.
---------------------------------------------------------------------------

    \1872\ See T. Rowe Price Letter at 3.
    \1873\ See supra Section V.B.3(e).
    \1874\ See supra note 1862 and accompanying text.

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

    Commenters stated that the Proposing Release did not consider the
effects the smaller round lot size could have on the options market,
where the standard options contract size is 100 shares.\1875\ The
Commission does not believe the new round lot tier sizes will have a
significant impact on the options market for a number of reasons.
First, the new round lot size will not change the size of the options
contract. Second, most NMS stocks will still have a round lot size of
100 shares under the new round lot tier definitions.\1876\ Third, even
for stocks that are in a higher priced round lot tier, the smaller
round lot may not have a significant impact on quoting in the options
market because the round lot definition will not change market maker
quoting obligations in the options market. Fourth, because there is
already a significant presence of odd-lot quotes better than the NBBO
in higher priced stocks,\1877\ the best prices in these stocks are
already frequently smaller than 100 shares. Therefore, the change in
the round lot size may not have a significant impact on arbitrage
opportunities between the options and equity markets for stocks in the
higher priced round lot tiers. Fifth, the options markets already have
standard options contracts on stocks with a round lot size less than
100 shares, so there are already conventions for dealing with options
in which the round lot size in the equity market is not 100
shares.\1878\
---------------------------------------------------------------------------

    \1875\ See, e.g., STANY Letter at 4; Nasdaq Letter IV at 2; Data
Boiler Letter I at 81.
    \1876\ The Commission estimates that approximately 98.5% of NMS
stocks will have a round lot size of 100 shares. See supra Table 4.
    \1877\ See supra Section V.B.2(a).
    \1878\ See supra Section II.D.2(a).
---------------------------------------------------------------------------

(iii) Effects on Internalization of Retail Order Flow
    The Commission believes that the change in the round lot size may
have an effect on wholesalers in the retail order flow internalization
business. Currently, some wholesalers,\1879\ by arranging to execute
orders on behalf of retail broker-dealers, offer superior prices
relative to the existing NBBO (i.e., price improvement) to retail
investors. As part of this arrangement, the wholesaler typically agrees
that some percentage of the broker-dealer's orders will execute at
prices better than the NBBO and/or agrees to certain execution quality
metrics. The Commission expects that the new definition of a round lot
will, at times, make the NBBO narrower for the affected stocks because
the new definition will include orders that are at superior prices to
the 100 share NBBO at a size less than 100 shares. As a result, it may
become more difficult for the retail execution business of wholesalers
to provide price improvement and other execution quality metrics at
levels similar to those provided under the 100 share round lot
definition today.\1880\
---------------------------------------------------------------------------

    \1879\ See supra note 1797 for a discussion of wholesalers and
retail internalization.
    \1880\ Commenters agreed that a protected smaller round lot
quote could affect the ability of internalizer to provide price
improvement to retail investors. See, e.g., Virtu Letter at 5.
---------------------------------------------------------------------------

    By the same mechanism, retail investors might or might not
experience an improvement in execution quality, as measured by
execution prices, from these wholesalers.\1881\ Assuming that the NBBO
has narrowed and wholesalers continue to agree to provide the same
amount of price improvement off of the narrower spread, retail
investors will receive better execution prices. One commenter stated
that retail investors will not receive better execution prices under
the new round lot sizes because wholesalers already offer price
improvement to retail investors that exceeds the potential improvements
in the NBBO from the new round lot size.\1882\ However, another
commenter stated that all investors, including retail, would experience
reduced execution costs from a tighter NBBO no matter where the
execution took place.\1883\ The Commission is uncertain whether the
execution quality retail investors receive from wholesalers will change
if the NBBO narrows for securities in the smaller round lot tiers
because the effect of the amendments on retail execution quality would
depend on how the change in the NBBO compared to the current price
improvement offered by wholesalers, as well as on changes in the degree
of price improvement wholesalers will offer in stocks with tighter
NBBOs, which is uncertain.
---------------------------------------------------------------------------

    \1881\ This improvement may not be transparent to the retail
investor. The price improvement metrics reported by retail broker-
dealers do not take into account odd-lot quotes priced better than
the NBBO. Even if a retail investor receives a better execution
price from the new round lot definition, it might not show up as
price improvement in retail wholesaler price improvement metrics if
the NBBO also narrowed as a result of the new round lot size and now
reflects odd-lot quotes that are priced better than the NBBO based
on the current round lot size. One commenter stated retail
wholesalers' price improvement metrics, along with Rule 605
statistics, are not accurate because they do not take into account
odd-lots quotes that are priced better than the NBBO. See Healthy
Markets Letter I at 6-17.
    \1882\ See TD Ameritrade Letter at 8, 10.
    \1883\ See Best Ex Research Letter at 6 (``A tighter NBBO will
reduce execution costs for all market participants--both retail and
institutional investors--no matter where executions take place.'').
---------------------------------------------------------------------------

    To the extent that retail wholesalers are held to the same price
improvement standards by retail broker-dealers in a narrower spread
environment, the profitability of the retail execution business for
wholesalers might decline. In particular, less ``spread profit'' would
be available to the wholesaler in a narrower NBBO. This is, in part,
because the wholesaler may often keep a portion of the spread profit
that is not given as price improvement to the investor who submitted
the order. Therefore, if the NBBO has narrowed and the same price
improvement must still be provided, less revenue will be left for the
wholesaler.\1884\ To the extent this happens, it will be a transfer
from the wholesaler to retail investors. As such, any impact on
wholesaler profitability depends on the same factors as the impact on
retail execution quality.
---------------------------------------------------------------------------

    \1884\ The NBBO based off the new round-lot definition will be
relevant to the spread considered by the wholesalers, because, among
other things, it would be used for Rule 605 execution statistics.
See infra Section V.C.1(b)(v) for further discussion of Rule 605
statistics.
---------------------------------------------------------------------------

    To make up for lower revenue per order filled in a narrower spread
environment, wholesalers may respond by changing how they conduct their
business in a way that may affect retail broker-dealers. There are
several possibilities, including but not limited to, reducing per order
costs associated with their internalization programs, such as reducing
any payments for order flow or reducing the agreed upon metrics for
price improvement. In the event that wholesalers reduce payments for
order flow, retail broker-dealers may respond by changing certain
aspects of their business. The Commission is uncertain as to how
wholesalers may respond to the change in the round lot definition, and,
in turn, how retail broker-dealers may respond to those changes, and
the Commission is uncertain as to the extent of these effects.
    The effect of lost revenue for wholesalers discussed above may be
reduced if wholesalers currently use proprietary feeds to trade, to the
extent they already see and respond to odd-lot quotations inside the
NBBO and currently provide execution quality to customers based upon
the superior odd-lot quotations.
(iv) Effects on Trading Venues
    The Commission believes that changes in the NBBO caused by the new
round lot definitions may also affect other trading venues, including

exchanges and ATSs.\1885\ Exchanges and ATSs have a number of order
types that are based off of the national best bid and offer.\1886\
Changes in the NBBO may affect how these order types perform and could
also affect other orders they interact with. Some ATS matching engines
also derive their execution prices based off of price improvement
measured against the NBBO. Changes in the NBBO from the new round lot
definition may affect execution prices on these platforms. Overall, the
Commission believes that these interactions may affect relative order
execution quality among different trading platforms, but it is
uncertain of the magnitude of these effects.
---------------------------------------------------------------------------

    \1885\ See supra Section V.C.1(c)(iv) for additional discussion
of effects on exchange rules.
    \1886\ For example, the apparent price improvement over the NBBO
calculated based off core data that is offered by a midpoint
crossing network will be reduced as a result of changes to the NBBO.
---------------------------------------------------------------------------

    Changes in relative execution quality may in turn affect the
competitive standing among different trading venues, with trading
venues that experience an improvement/decline in execution quality
attracting/losing order flow. However, the Commission is uncertain of
the magnitude of these effects.
    One commenter stated that protecting the smaller round lot size
could affect order flow to exchanges and other trading venues.\1887\
The narrower protected NBBO in higher priced round lot tiers could
cause more order flow to be routed to exchanges in these stocks.
Because off-exchange trading venues would not be able to trade-through
the NBBO, a narrower protected NBBO would limit the price range in
which off-exchange trading venues could execute trades and cause more
orders to be routed to exchanges in order to not trade through a
protected quote.
---------------------------------------------------------------------------

    \1887\ See Virtu Letter at 5.
---------------------------------------------------------------------------

(v) Effects of Monthly Round Lot Calculation
    The Commission believes that the use of the previous calendar
month's average closing price on the primary listing exchange to
determine the round lot tier for a given stock balances certain
tradeoffs that should be considered when selecting such a
benchmark.\1888\ The Commission is balancing a more up-to-date stock
price estimate against the costs imposed on market participants from
having to frequently make updates to systems and practices to account
for changes to a stock's round lot tier. A more recent average (e.g.,
the past week's average closing price) may better reflect the stock's
current price level, and thereby lead to the stock being placed in the
correct tier more frequently. However, such a recent estimate may be
more volatile and thus more prone to causing frequent changes to the
stock's status, especially if the stock's price level is close to a
round lot tier cutoff point. This could impose a greater burden because
it would require more frequent adjustments from market participants,
including SROs and competing consolidators, to account for what a
stock's round-lot tier is and what the NBBO for that stock would be
given its tier.\1889\
---------------------------------------------------------------------------

    \1888\ Commenters agreed that a monthly calculation strikes an
appropriate balance. See MFA Letter at 10; Data Boiler I at 25.
    \1889\ One commenter stated more frequent updates could impose a
higher administrative burden. See NovaSparks Letter at 1.
---------------------------------------------------------------------------

    Commenters stated that updating of a stock's round lot size each
month could create confusion.\1890\ One commenter stated that only
updating a stock's round lot size monthly could create confusion
because it could lead to a stock's current price not reflecting its
round lot tier, especially during months of extreme volatility or if a
stock splits its shares.\1891\ This commenter also stated that it could
create confusion and uncertainty at the end of each month if a stock's
price is close to a threshold and could also create confusion comparing
Rule 605 statistics if a stock changed round lot tiers.\1892\ The
Commission does not believe that the updating a stock's round lot tier
each month will create significant confusion. Most NMS stocks will
still have a round lot size of 100 shares under the new round lot tier
definitions.\1893\ In response to comments, the Commission estimated
that between August 2019 and August 2020, on average, only 17 stocks
would change round lot tiers each month, which means that most stock's
current prices would be reflective of their current round lot tiers.
Additionally, primary listing exchanges will publish data on each
stock's round lot size and the Commission expects market participants
will modify or develop systems to automatically keep track of a stock's
round lot size.\1894\
---------------------------------------------------------------------------

    \1890\ See, e.g., Nasdaq Letter IV at 17; MFA Letter at 12-13.
    \1891\ See Nasdaq Letter IV at 17.
    \1892\ See id.
    \1893\ The Commission estimates that approximately 98.5% of NMS
stocks will have a round lot size of 100 shares. See supra Table 4.
    \1894\ See infra Section V.C.1(b)(vi) (discussing the
implementation costs for these systems).
---------------------------------------------------------------------------

(vi) Costs of New Round Lot Definition
    The Commission believes that the new round lot definition will
impose two types of implementation costs on market participants: (1)
One associated with upgrading systems to account for additional message
traffic and (2) to modify and reprogram systems to account for the new
round lot definition.
    The Commission believes that market participants who currently rely
solely on core data to obtain NBBO feeds will incur some infrastructure
investment costs as a result of the change in the definition of a round
lot. This is because the change will likely lead to more frequent
updates to the NBBO and this will likely result in an increase in
message traffic for NBBO feeds.\1895\ Because most NMS stocks will
still have a round lot size of 100 shares,\1896\ the Commission does
not believe the increase in message traffic will be significant.
Therefore, the Commission does not believe that the system upgrades
required by the new round lot definition will be significant. However,
the Commission is unable to estimate the associated costs because it
does not have access to information about the infrastructure expenses a
broker-dealer incurs to process market data and because of the
likelihood that such costs vary substantially according to the existing
infrastructure of broker-dealers.
---------------------------------------------------------------------------

    \1895\ This will happen more in high-priced stocks where the new
round lot definition will have more of an effect.
    \1896\ The Commission estimates that approximately 98.5% of NMS
securities will have a round lot size of 100 shares. See supra Table
4.
---------------------------------------------------------------------------

    Additionally, for certain core data use cases, the costs described
in the preceding paragraph are likely to be minimal. Many broker-
dealers, when accessing data for the purposes of visual display,
currently obtain NBBO quotes from the exclusive SIPs with a ``per
query'' use case. This use case is set up so that a quote is only sent
when it is asked for. The Commission believes that this setup has very
little technological cost associated with it and that furthermore
whatever cost there is to receiving such a feed will not be impacted by
increasing the number of times the NBBO is updated over a given time
period. Thus, the Commission believes that for those broker-dealers who
rely on per query use cases for their quotes, the upgrade costs
resulting from changing the round lot definition will be minimal.\1897\
---------------------------------------------------------------------------

    \1897\ This conclusion is contingent on the assumption that
competing consolidators will choose to offer a per query service to
market participants so that this arrangement may continue. Because a
significant portion of market participants (particularly retail
investors) access SIP data on a per query basis, the Commission
believes that it is likely the Equity Market Data Plans will
continue to charge fees on a per query basis and some competing
consolidators will also offer a per query service in order to meet
the demand of market participants.

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

    Trading venues and broker-dealers will experience implementation
costs from having to modify and reprogram their systems, including
matching engines and SORs, to account for the changes in the new round
lot definition. Commenters stated that there would be implementation
costs for market participants to develop systems to monitor and account
for changes in a stock's round lot size.\1898\ One commenter observed
that broker-dealers would need to make changes to their order routing
systems and systems that display customer orders each month to account
for changes in the round lot size.\1899\ This commenter also stated
that regulators would need to modify their surveillance systems each
month to account for changes in a stock's round lot size.\1900\
---------------------------------------------------------------------------

    \1898\ See, e.g., MEMX Letter at 4; Fidelity Letter at 6; STANY
Letter at 4; Nasdaq Letter IV at 17; MFA Letter at 12-13; Angel
Letter at 17.
    \1899\ See MFA Letter at 12-13. This commenter stated that Rule
604 does not require a broker-dealer to display a customer's limit
order if it is an odd-lot size.
    \1900\ See id.
---------------------------------------------------------------------------

    In the Proposing Release the Commission estimated that the
implementation cost for a trading venue to update its systems,
including its matching engine, to account for the new round lot
definition and changes in the Order Protection Rule would be similar to
the estimated costs of an exchange modifying its systems to implement
the Tick Size Pilot, which, based upon the input from commenters, the
Commission estimated to be around $140,000.\1901\ The Commission also
estimated in the Proposing Release that the implementation cost for a
broker-dealer to update its systems, including its SOR, would be
$9,000.\1902\ One commenter stated that the Commission significantly
underestimated the costs for a trading venue to update its systems and
estimated that its costs to modify its trading venue to account for the
changes in round lot size and order protection would be between $3.4
and $4 million.\1903\ The Commission agrees and believes that the
estimates from the Proposing Release underestimated the implementation
costs for modifying trading venue and broker-dealer systems to account
for the new round lot definition and changes in the Order Protection
Rule, which created a separate NBBO and PBBO.\1904\ However, the
Commission also believes, as suggested by commenters, that the new
round lot definition under the final amendments will require
significantly less system modifications compared to the Proposing
Release.\1905\ For example, one commenter stated that if the new round
lot definitions were protected then trading venues and broker-dealers
will be able to rely on existing technology to continue to operate
without significant changes to current execution and routing logic
compared to having to build new logic and workflow to account for a
separate NBBO and PBBO.\1906\ Additionally the Commission believes that
many broker-dealer and trading venue systems already account for
different round lot sizes and will not need to make extensive
modifications to account for a changing round lot size each month.
Therefore, although the implementation costs estimated in the Proposal
Release may have underestimated the costs to modify systems to account
for a separate NBBO and PBBO, the Commission believes they provide an
appropriate sense of the level of cost associated with the
implementation costs of modifying systems related to the new round lot
definition under the final amendments, including building or modifying
systems to account for the monthly change in a securities round lot
size. The Commission estimates that a trading venue will incur an
initial implementation cost of approximately $140,000 and a broker-
dealer will incur an initial implementation cost of approximately
$9,000 to modify its systems to account for the new round lot
definition. However, these costs will vary substantially according to
the existing infrastructure of the broker-dealer or trading venue.
---------------------------------------------------------------------------

    \1901\ In the Proposing Release, the Commission stated that it
did not have detailed information on the operation of exchange
matching engines and believed that the $140,000 from the Tick Size
Pilot may provide some sense of the level of cost associated with
the changes SROs, ATSs, and other off-exchange trading venues would
have to make. See Proposing Release, 85 FR at Section VI.C.1(c)(i).
    \1902\ See id.
    \1903\ See Nasdaq Letter IV at 17. This commenter also estimated
it would cost an additional $800,000 to $1.2 million to modify its
systems to account for the changes in locked and crossed markets as
a result of the changes in order protection. See Nasdaq Letter IV at
19.
    \1904\ See supra Section II.E.1.
    \1905\ See, e.g.; MEMX Letter at 4; BestEx Research Letter at 6-
9.
    \1906\ See MEMX Letter at 4.
---------------------------------------------------------------------------

(vii) Other Rules and Regulations
    The amendments to the definition of round lot and resulting
mechanical changes to the NBBO spread, affect how other rules and
regulations operate.\1907\ In particular, this change affects which
orders determine the reference price for numerous rules, including
rules under the Exchange Act, SRO rules, and effective national market
system plans.\1908\ Specifically, the Commission believes that the
changes to the NBBO may present changes to the benchmark prices used in
Regulation SHO, LULD, retail liquidity programs, market maker
obligations, and certain exchange order types and recognizes that the
change in the benchmark price may result in economic effects. Further,
changing the NBBO will alter the estimation mechanics for Rule 605
metrics, resulting in implementation costs. In addition, the round lot
definition will result in economic effects through its impact on the 17
CFR 242.606 (Rule 606) compliance. Finally, although the new round lot
definition may alter the requirements of some rules, such as Rules 602,
604, and 610(c), the Commission believes that the economic effects of
the changes are uncertain and depend on current practices of handling
odd-lot-sized orders. If broker-dealers already include odd-lot-sized
orders when complying with the provisions of these rules, then the new
round lot definition may not produce any economic effects related to
these rules.
---------------------------------------------------------------------------

    \1907\ The Commission is also deleting the reference to ``The
Nasdaq Stock Market, Inc.'' from the definition of protected bid or
offer and believes that this change will have no economic effects.
As explained above, Nasdaq is now a national securities exchange and
is thus otherwise bound by the definition. See supra note 361.
    \1908\ The Commission discussed many of these changes in the
Proposing Release. See Proposing Release, 85 FR at Section
III.C.1(d)(i).
---------------------------------------------------------------------------

    For the Short Sale Circuit Breaker, the reference bid for the
execution of a short sale transaction could be higher for stocks in the
higher priced round lot tiers under the final amendments than it is
currently, potentially slightly increasing the burdens on short
selling.\1909\ Currently, after the Short Sale Circuit Breaker
triggers, short sales can only execute at prices greater than the
national best bid. While short sales are currently permitted to execute
against any odd-lot quotations that exist above the national best bid,
the new round lot definition will reduce the instances of such odd-lot
quotations in higher priced stocks. Therefore, the final amendments may
result in a higher national best bid and thus result in a slightly
higher benchmark price for short sale executions in stocks priced more
than $250, reducing the fill rate of short sales or increasing the time
to fill for short sales.
---------------------------------------------------------------------------

    \1909\ One commenter stated that the Commission failed to
include analysis of how the change in the round lot definition
affected Rule 201 of Regulation SHO. See NYSE Letter II at 8. This
commenter is mistaken. The Commission did qualitatively analyze the
effects of the round lot definition on Rule 201 of Regulation SHO.
See Proposing Release, 85 FR at Section VI.C.1(c)(iii).
---------------------------------------------------------------------------

    In addition, a potentially higher national best bid (or lower
national best offer) price could marginally affect the trigger of the
Short Sale Circuit Breaker.

In particular, the final amendments could result in slight delays in or
a reduction in the number of Short Sale Circuit Breaker triggers, or it
could have the opposite effect in the nine stocks whose round lot size
will increase. In particular, a national best bid that includes smaller
round lots could result in a higher-priced execution relative to a
national best bid that does not include smaller round lots. This
higher-priced execution could be above the price that would trigger the
Short Sale Circuit Breaker whereas an execution on a 100-share quote
would have triggered the circuit breaker. This could delay the trigger
if the price continues downward, such that the circuit breaker still
triggers, or the circuit breaker may not trigger at all if the price
rebounds after such an execution. On the other hand, in the eight
stocks that will have a larger round lot size, and lower priced
national best bid, it could have the opposite effect on circuit breaker
triggers: Triggering sooner and more often.\1910\
---------------------------------------------------------------------------

    \1910\ See supra Section V.C.1(b)(i).
---------------------------------------------------------------------------

    The Commission believes that the economic effects of the potential
impact on the Short Sale Circuit Breaker are unlikely to be
significant. These effects should not create implementation costs, and
the Short Sale Circuit Breaker should continue to function consistent
with its stated purpose. Notably, if the adopted rule will result in
not triggering as many Short Sale Circuit Breakers, it could reduce
ongoing compliance costs in situations in which the price rebounds
despite the lack of a price test on short sales.
    Similarly, a potentially higher bid price or lower offer price
could affect the trigger of a Limit State under the LULD Plan. A lower-
priced national best offer or a high-priced national best bid could
result in that quote being more likely to touch a price band, thus
triggering a Limit State, when it otherwise would not have. Depending
on whether the quote would have otherwise rebounded, this could
increase the number of Limit States and/or Trading Pauses or could
merely trigger such Limit States or Trading pauses sooner. As in the
case of the Short Sale Circuit Breaker, the effects should not create
implementation costs, and LULD should continue to function consistent
with its stated purposes. In addition, the economic effects of this
potential marginal change depends largely on how often odd-lot
quotations lead price declines or lead price increases.
    As discussed in the Proposing Release,\1911\ a number of Rule 605
execution quality statistics are benchmarked to the NBBO. Under the
final amendments, the NBBO will be based on the tiered, price-based
round lot sizes, which means any Rule 605 execution quality statistics
that rely on the NBBO as a benchmark will reflect the modified
definition of the NBBO. This could cause certain execution quality
statistics to change in higher priced stocks. As discussed above, the
Commission believes that the NBBO will become narrower for some stocks
in higher price tiers. This could cause execution quality statistics
that are measured against the NBBO to change because they will be
measured against the new, narrower NBBO. For example, execution quality
statistics on price improvement for higher priced stocks may show a
reduction in the number of shares of marketable orders that received
price improvement because price improvement will be measured against a
narrower NBBO.\1912\ However, the Commission believes that some of
these changes may cause some Rule 605 statistics to more accurately
reflect actual execution quality because the NBBO based on the new
definition for round lots may now take into account more liquidity that
the current NBBO ignores.\1913\ The Commission believes that these
effects will be larger for stocks in higher price tiers because their
new round lot definition will include fewer shares.
---------------------------------------------------------------------------

    \1911\ See Proposing Release, 85 FR at Section III.C.1(d)(i).
    \1912\ A commenter agreed that the smaller round lot size would
cause a decrease in the number of orders showing price improvement
in Rule 605 statistics. See Nasdaq Letter IV at 19.
    \1913\ In the hypothetical case of a stock in which there are
often valuable odd-lot quotes, broker-dealers trading in this stock
can currently use these odd-lot quotes to improve on the NBBO, and
this improvement might be reflected in Rule 605 statistics. Under
the new round lot definition, if this stock is priced over $250 per
share, then some of these odd-lot quotes could end up being defined
as round lots under the new definition and thereby end up the basis
for the NBBO. With these quotes as the NBBO, the broker-dealer will
no longer appear to be improving over the NBBO in its execution, and
Rule 605 statistics may appear to indicate a decrease in execution
quality. However, they will, in fact, merely be reflecting a more
accurate picture of the market circumstances at the time of
execution. One commenter agreed that Rule 605 statistics may not be
accurate because they do not include information on odd-lot quotes
priced better than the NBBO. See Healthy Markets Letter at 15. One
commenter agreed that the new round lot size would improve the
accuracy of Rule 605 statistics and that this would improve
transaction cost analysis for funds that rely upon these statistics
to analyze broker-dealer execution quality. See ICI Comment Letter
at 7.
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    In addition, the NBBO midpoint in stocks priced higher than $250
could be different under the adopted rules than it otherwise would be,
resulting in changes in the estimates for Rule 605 statistics
calculated using the NBBO midpoint, such as effective spreads. In
particular, at times when bid odd-lot quotations exist within the
current NBBO but no odd-lot offer quotations exist (and vice versa),
the midpoint of the NBBO resulting from the rule will be higher than
the current NBBO midpoint. For example, if the NBB is $260 and the
national best offer is $260.10, the NBBO midpoint is $260.05. Under the
adopted rules a 40 share buy quotation at $260.02 will increase the
NBBO midpoint to $260.06. Using this new midpoint, effective spread
calculations for buy orders will be lower but will be higher for sell
orders. More broadly, the adopted rules will have these effects
whenever the new round lot bids do not exactly balance the new round
lot offers. However the Commission does not know to what extent or
direction that odd-lot imbalances in higher priced stocks currently
exist, so it is uncertain of the extent or direction of the change.
    Finally, the Commission recognizes that the new round lot
definitions could force market centers (or their third-party service
providers) to revise their processes for estimating the Rule 605
execution statistics. Such changes will result in implementation costs.
    The Commission recognizes that the NBBO serves as a benchmark in
SRO rules in addition to Exchange Act rules and effective national
market system plans. For example, the NBBO acts as a benchmark for
various retail liquidity programs on exchanges, for exchange market
maker obligations, for some order types, and for potentially many other
purposes.\1914\ As such, including smaller quotes in the NBBO will
change how these rules operate and these changes could have economic
effects. For example, having to post more aggressive limit orders into
retail liquidity programs could reduce the already low volume by
reducing the liquidity available but could result in better prices for
those retail investors able to execute against that liquidity. In
addition, a narrower NBBO could effectively increase some market maker
obligations, which could improve execution quality for investors and/or
provide a disincentive to being a market maker on the margin.
Alternatively, the exchanges with such retail liquidity programs, order
types, or market maker obligations could elect to propose rule changes
to maintain the current

operation of these rules. Such proposals could mitigate any follow-on
economic effects (both benefits and costs) but would require exchanges
to incur the expenses associated with proposing amendments to their
rules.
---------------------------------------------------------------------------

    \1914\ See supra Section V.C.1(b)(i) for a discussion of the
effect of changes to the NBBO on order types and for a discussion
related to changes to round lot size for stocks with round lots of
less than 100 shares.
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    As discussed in the Proposing Release,\1915\ the definition of
round lot could result in an increase in the number of indications of
interest in higher priced stocks that will be required to be included
in 606(b)(3) reports. Depending on the number of potential indications
of interest included as a result of the final amendments, the
Commission believes that these changes could increase the benefits of
17 CFR 242.606(b)(3) (Rule 606(b)(3)) with little to no effect on
costs.\1916\ In particular, the inclusion could result in clients
receiving information on order routing for more of their orders, with
the resulting benefits. Further, because the incremental cost of adding
orders to the reports is low, the Commission does not expect that
adding indications of interest to the reports will significantly
increase costs.
---------------------------------------------------------------------------

    \1915\ See Proposing Release, 85 FR at Section III.C.1. for a
discussion of how the definition impacts Rule 606.
    \1916\ See Proposing Release, 85 FR at n. 227 for a discussion
of the benefits of 606(b)(3).
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    One commenter stated that the Commission did not examine the
effects of the new rules on Rule 603(b), the Vendor Display Rule.\1917\
The new round lot definition will require broker-dealers to show a
consolidated display that includes the NBBO derived from the new round
lot size in higher priced stocks. This will allow investors to see odd-
lot quote information that may not previously have been included in the
NBBO under the current round lot definition, which may improve their
trading decisions and order routing and execution quality.\1918\
Broker-dealers may also incur implementation costs in order to adjust
their systems.\1919\
---------------------------------------------------------------------------

    \1917\ See NYSE Letter II at 6-7.
    \1918\ See supra Section V.C.1(b)(ii).
    \1919\ See supra Section V.C.1(b)(vi).
---------------------------------------------------------------------------

    The new round lot definition would also affect the requirements
regarding the size of orders that need to be collected and made
available under Rules 602(a) and (b) and 604(a)(1) and (2). However, it
is unclear whether this will have any economic effects, because it
would depend on the current practices for handling odd-lot orders. For
example, exchanges may already have procedures to collect and make
available their best bids and offers to vendors, regardless of the size
of those best bids and offers. Further, broker-dealers may already
treat all bids and offers as firm quotes regardless of size and may
already display all customer limit orders regardless of size. To the
extent that these practices are in place, there will be no economic
effect from these changes. To the extent that these practices are not
in place, the final amendments will increase transparency in higher
priced stocks by requiring broker-dealers and trading venues to include
smaller sized orders that meet the new round lot definition under these
rules.\1920\ Broker-dealers and trading venues may also incur
implementation costs in order to adjust their systems.\1921\
---------------------------------------------------------------------------

    \1920\ See supra Section V.C.1(b)(ii).
    \1921\ One commenter stated that market makers would need to
make adjustments to their systems to display customer limit orders
in the new round lot sizes under Rule 604. See MFA Letter at 12-13.
These costs are included in the costs to adjust systems to the new
round lot size. See supra Section V.C.1(b)(vi).
---------------------------------------------------------------------------

    One commenter stated that the Commission did not consider the
burden that applying Rule 610(c) to the new round lot definition would
have on market participants and competition, including trading centers
that display quotes.\1922\ The Commission does not believe that
applying the new round lot definition to Rule 610(c) create a
significant burden for market participants, including trading centers
that display quotes, or have a significant impact on competition. The
Commission believes that exchanges may already pay the same rebates or
charge the same access fees regardless of order size. Therefore, it
does not expect the new round lot definition to affect these fees.
---------------------------------------------------------------------------

    \1922\ See NYSE Letter II at 7-8.
---------------------------------------------------------------------------

(c) Expanded Core Data Content
    The Commission is adopting amendments to include certain
information on odd-lot quotes at and inside the NBBO, certain depth of
book data, and information on orders participating in auctions in the
definition of core data. This section discusses the economic effects of
expanding the core data content separately for each additional core
data element and then discusses the additional costs that may accrue to
market participants from the combined new core data elements, although
competing consolidators will not be required to offer consolidated
market products that include all of the content of expanded core data
and market participants may choose not to take in all of the new core
data elements in every instance.\1923\ The economic effects discussed
in this section depend on the fees for data content underlying core
data charged by the effective national market system plan(s) for NMS
stocks and the competing consolidators. The fees for data content
underlying new core data are discussed later, in Section V.C.2(b).
---------------------------------------------------------------------------

    \1923\ See infra Section V.C.1(c)(iv).
---------------------------------------------------------------------------

    The Commission believes that expanding the content of core data to
include information on odd-lot quotes at and inside the NBBO, depth of
book information, and auction information will provide benefits to
market participants that previously only relied on the SIP and choose
to receive the new core data elements if the fees are lower as part of
consolidated market data than fees for equivalent data today.\1924\
Expanding core data will reduce information asymmetries between these
market participants and market participants that subscribe to
proprietary DOB feeds.\1925\ A reduction in information asymmetry may,
in turn, enhance market efficiency and price discovery if it leads to
information that was previously only contained in proprietary DOB feeds
being impounded into prices quicker.\1926\ The additional information
contained in expanded core data will also allow these market
participants to improve order routing and will help facilitate best
execution, which may reduce their transaction costs.\1927\ The
additional content of expanded core data could make consolidated market
data a reasonable alternative to exchange proprietary data feeds for
some market participants,\1928\ potentially lowering their costs.\1929\
---------------------------------------------------------------------------

    \1924\ See infra Section V.C.2(b)(i).
    \1925\ Commenters agreed that the expansion of core data would
reduce information asymmetries. See, e.g., BestEx Research Letter at
2; Better Markets Letter at 2-3; BlackRock Letter at 2; Capital
Group Letter at 2. See infra note 2404 and accompanying text for a
discussion of commenter stating that allowing competing
consolidators to offer customized products containing subsets of
expanded core data would increase information asymmetries.
    \1926\ Commenters agreed that the expansion of core data would
improve market efficiency and price discovery. See, e.g., Better
Markets Letter at 2-3; ICI Letter at 5.
    \1927\ Commenters agreed that the additional information in core
data would facilitate best execution. See, e.g., Clearpool Letter at
11; DOJ Letter at 4; IntelligentCross Letter at 2; SIMFA Letter at
3-4.
    \1928\ Commenters agreed that the expanded content of core data
could reduce some market participants' dependence on proprietary
data feeds. See, e.g., Clearpool Letter at 11; BlackRock Letter at
2; DOJ Letter at 4.
    \1929\ See infra Section V.C.2(b) (discussing potential fees for
consolidated market data). Commenters agreed the expanded content of
core data could lower costs for some market participants who
currently subscribe to proprietary DOB feeds and switch to
consolidated market data. See, e.g., Virtu Letter at 5.
---------------------------------------------------------------------------

    One commenter stated that it is unclear whether the expanded
content

of core data would be useful to any set of investors and that the
Proposing Release did not provide any analysis on this point.\1930\
This commenter questioned whether there would be demand for the
expanded content of core data, stating that it would simultaneously
provide ``too much and too little to be optimal for anyone--too much
data for the retail investor and too little for sophisticated
traders.'' \1931\ This commenter also stated that expanding the content
of core data would provide no real benefits because all of the
information is already available to everyone who needs it.\1932\ The
Commission disagrees with this commenter and believes there would be
demand for the expanded content of core data. Although the Commission
did not quantify the number of market participants that would subscribe
to the expanded content of core data, the Commission did provide a
qualitative analysis of how certain market participants might subscribe
to and could benefit from the expanded content of core data.\1933\
Although expanded core data will not contain all of the data contained
in proprietary DOB feeds, the Commission believes that it will contain
data that will be useful for market participants.\1934\ For example,
although the DOB data contained in expanded core data will only contain
five levels of depth, the Commission believes, and commenters agree,
that including five levels of depth in expanded core data will provide
a benefit to market participants, including allowing them to improve
their order routing.\1935\ The Commission believes that there are
market participants who would subscribe to proprietary DOB feeds, but
do not currently do so because of the cost.\1936\ Because the
Commission anticipates that the total fees for a consolidated market
data product containing all the elements of expanded core data are
likely to be less expensive than equivalent proprietary data
feeds,\1937\ the Commission believes that there would be demand from
these market participants for a consolidated market data product that
contains all the elements of expanded core data because it will reduce
information asymmetries between these market participants and market
participants that subscribe to proprietary DOB feeds.\1938\
Additionally, if a consolidated market data product containing all data
elements is offered at reduced latency, then some market participants
that currently rely on aggregated proprietary DOB feeds may use it as a
substitute for proprietary feeds.\1939\ Furthermore, there are likely
market participants that may only benefit by taking subcomponents of
expanded core data or products that competing consolidators offer that
may be derived from the expanded content of core data, such as products
that detail the best-priced odd-lot quotes or DOB imbalance measures.
Therefore, to the extent that the individual components of expanded
core data are less expensive than equivalent data from proprietary
feeds,\1940\ there will be demand for competing consolidators to also
offer consolidated market data products that contain a subset of
consolidated market data. Even if market participants do not directly
benefit from any of the expanded content of core data, they may benefit
indirectly if the broker-dealers that handle their orders subscribe to
the expanded content.\1941\ While the Commission believes there will be
demand for the expanded content of core data, the Commission remains
unable to quantify the number of market participants who will subscribe
to the expanded content of core data because it does not have
information on the number of market participants that would subscribe
to proprietary DOB feeds, but do not do so because of the cost, or
information on the number of market participants that currently
subscribe to proprietary DOB feeds but might switch to expanded core
data if the cost is lower.\1942\
---------------------------------------------------------------------------

    \1930\ See Nasdaq Letter IV at 33, 38 (``the Proposed Rule
replaces ``only pay for what you need'' with a feed that is
simultaneously providing too much and too little to be optimal for
anyone--too much data for the retail investor and too little for
sophisticated traders'').
    \1931\ See Nasdaq Letter IV at 38.
    \1932\ See Nasdaq Letter IV at 34.
    \1933\ See Proposing Release, 85 FR at Section VI.C.1.
    \1934\ For example, expanded core data will not contain complete
order-by-order information or full depth of book information.
    \1935\ See infra Section V.C.1(c)(ii). Commenters agreed that
five levels of depth is sufficient for many market participants.
See, e.g., State Street Letter at 2-3; Capital Group Letter at 3;
Fidelity at 4.
    \1936\ See supra note 28 (discussing commenters' views that the
cost of proprietary DOB products currently inhibits the purchase of,
and the widespread dissemination of, the data elements that will be
contained in expanded core data). See also Roundtable Day One
Transcript at 128-29 (Mark Skalabrin, Redline Trading Solutions)
(stating that some customers do not purchase exchange proprietary
DOB products because of the cost, explaining ``we sell to various
customers, leading firms that have lots of money and really imbed
this technology, but also to startup brokers and small firms trying