[Federal Register Volume 84, Number 34 (Wednesday, February 20, 2019)]
[Rules and Regulations]
[Pages 5202-5306]
[FR Doc No: 2018-27982]

Vol. 84

Wednesday,

No. 34

February 20, 2019

Part II

Securities and Exchange Commission

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17 CFR Parts 200 and 242

Transaction Fee Pilot for NMS Stocks; Final Rule

Federal Register / Vol. 84 , No. 34 / Wednesday, February 20, 2019 /
Rules and Regulations

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200 and 242

[Release No. 34-84875; File No. S7-05-18]
RIN 3235-0761

Transaction Fee Pilot for NMS Stocks

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'' or
``SEC'') is adopting a new rule of Regulation National Market System
(``Regulation NMS'') under the Securities and Exchange Act of 1934
(``Exchange Act'') to conduct a Transaction Fee Pilot (``Pilot'') for
National Market System (``NMS'') stocks to study the effects that
exchange transaction fee-and-rebate pricing models may have on order
routing behavior, execution quality, and market quality. We expect the
data generated by the pilot, combined with data from existing sources,
will facilitate an empirical evaluation of whether the existing
exchange transaction-based fee and rebate structure is operating
effectively to further statutory goals.

DATES:
    Effective date: April 22, 2019 through December 29, 2023.
    Compliance date: As designated by Notice pursuant to 17 CFR
242.610T(c)(2).

FOR FURTHER INFORMATION CONTACT: Richard Holley III, Assistant
Director; Johnna Dumler, Special Counsel; Erika Berg, Special Counsel;
or Benjamin Bernstein, Special Counsel, each with the Division of
Trading and Markets, Securities and Exchange Commission, 100 F Street
NE, Washington, DC 20549, or at<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION: The Commission is adopting new 17 CFR
242.610T (Rule 610T) to conduct a Transaction Fee Pilot for NMS stocks.

Table of Contents

I. Executive Summary of Rule 610T
II. Discussion of Rule 610T
    A. Focus on Exchange Pricing Models and the Distortions They Can
Cause
    1. Exchange Fee Models and Regulatory Framework
    2. Impact of Exchange Fee Models
    3. Focus on Exchange Fee Models
    4. Non-Exchange Trading Centers
    5. Options Exchanges
    B. Securities
    1. The Share Price Threshold of Pilot Securities
    2. The Duration of Pilot Securities
    3. Selecting Pilot Securities From All NMS Stocks
    4. The Ability of Issuers to Opt Out of the Pilot
    C. Pilot Design
    1. Need for a Pilot
    2. Pilot Design
    3. No Overlap With Tick Size Pilot
    4. Stratified Selection of Pilot Securities
    5. Number of NMS Stocks Included in Each Test Group
    6. Reduction to the Pilot Size
    7. Fee Cap Test Groups
    8. Control Group
    9. Alternative Designs
    10. Metrics To Assess the Pilot
    D. Timing and Duration
    1. Disclosure Initiatives and the Pilot
    2. Automatic Sunset at Year One
    3. Pre- and Post-Pilot Periods
    4. Early Termination
    5. Inclusion of a Phase-In Period
    E. Data
    1. Pilot Securities Exchange Lists and Pilot Securities Change
Lists
    2. Exchange Transaction Fee Summary
    3. Order Routing Data
    F. Implementation
    G. The Commission's Authority To Conduct the Pilot
III. Paperwork Reduction Act
    A. Summary of Collection of Information
    B. Proposed Use of Information
    C. Respondents
    D. Total Initial and Annual Reporting and Recordkeeping Burdens
    1. Pilot Securities Exchange Lists and Pilot Securities Change
Lists
    2. Exchange Transaction Fee Summaries
    3. Order Routing Datasets
    E. Collection of Information Is Mandatory
    F. Confidentiality of Responses to Collection of Information
    G. Retention Period for Recordkeeping Requirements
IV. Economic Analysis
    A. Background and Market Failures
    1. Market Failure at the Broker-Dealer Level
    2. Market Failure at the Exchange Level
    B. Baseline
    1. Current Information Baseline
    2. Current Market Environment
    C. Analysis of Benefits and Costs of Transaction Fee Pilot
    1. Benefits of Transaction Fee Pilot
    2. Costs of the Pilot
    D. Impact on Efficiency, Competition, and Capital Formation
    1. Efficiency
    2. Competition
    3. Capital Formation
    E. Alternatives
    1. Propose Rulemaking Without Conducting a Pilot
    2. Expand Transaction Fee Pilot To Include Non-Exchange Trading
Centers
    3. Trade-At Test Group
    4. Alternative Pilot
    5. Adjustments to the Transaction Fee Pilot Structure
V. Regulatory Flexibility Analysis
VI. Statutory Authority and Text of the Rule Amendments

I. Executive Summary of Rule 610T

    Congress directed the Commission, through Section 11A of the
Exchange Act, to facilitate the establishment of a national market
system and use its broad authority to carry out the objectives of
Section 11A, including, among others, to assure the economically
efficient execution of securities transactions.\1\ In furtherance of
these goals, and as part of its oversight of registered national
securities exchanges, the Commission periodically undertakes reviews of
various aspects of market structure and current regulations to evaluate
whether, in light of changes in technology and business practices, the
current regulatory framework continues to fairly, effectively, and
efficiently promote fair and orderly markets, serve the public interest
and the protection of investors, and promote capital formation.
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    \1\ 15 U.S.C. 78k-1(a)(1)(C)(i). See also supra Section II.G
(discussing the Commission's authority to conduct the Pilot).
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    As discussed below, one aspect of the current regulatory framework
focuses on the current pricing and fee structure for transactions in
securities. As the Commission discussed in its Pilot proposal, the
predominant transaction pricing structure that developed among equities
exchanges to attract order flow is the ``maker-taker'' fee model.\2\
Specifically, out of thirteen equities exchanges, seven utilize the
``maker-taker'' fee model, in which they pay a rebate to a provider of
liquidity and charge a fee to a taker of liquidity. Among the remaining
exchanges, four utilize a ``taker-maker'' pricing model (also called an
inverted model) where they charge a fee to a provider of liquidity and
pay a rebate to a taker of liquidity,\3\ and two have a ``flat fee''
model.\4\ In recent years this area has

attracted considerable attention and generated significant debate,
focusing on the effects, both positive and negative, that exchange
transaction-based pricing models may have on market quality and
execution quality, with some commenters advocating action by the
Commission.
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    \2\ See Securities Exchange Act Release No. 82873 (March 14,
2018), 83 FR 13008 (March 26, 2018) (``Proposing Release'' or
``Proposal'').
    \3\ See Cboe BYX U.S. Equities Exchange Fee Schedule (as of
December 2018), available at https://markets.cboe.com/us/equities/membership/fee_schedule/byx/; Cboe EDGA U.S. Equities Exchange Fee
Schedule (as of December 2018), available at https://markets.cboe.com/us/equities/membership/fee_schedule/edga/; Nasdaq
BX Fee Schedule (as of December 2018), available at https://www.nasdaqtrader.com/Trader.aspx?id=bx_pricing; NYSE National
Schedule of Fees and Rebates (as of December 2018), available at
https://www.nyse.com/publicdocs/nyse/regulation/nyse/NYSE_National_Schedule_of_Fees.pdf. EDGA adopted a taker-maker fee
schedule in July 2018. See Securities Exchange Act Release No. 83643
(July 16, 2018), 83 FR 34643 (July 20, 2018) (SR-CboeEDGA-2018-012).
    \4\ See Investors Exchange Fee Schedule (as of December 2018),
available at https://iextrading.com/trading/fees/; NYSE American
Equities Trading Fees and Price List (as of December 2018),
available at https://www.nyse.com/publicdocs/nyse/markets/nyse-american/NYSE_America_Equities_Price_List.pdf. NYSE American offers
rebates to eDMMs in their assigned NYSE American-listed securities.
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    The Commission is uniquely situated and vested with the
responsibility under Section 11A of the Exchange Act to examine the
impact that this aspect of our market structure has on our national
market system. And, in light of the questions raised about the impact
of these fee models and the amount of attention garnered, we believe
this is an area ripe for Commission review. But, the Commission
currently lacks the data necessary to meaningfully analyze the impact
that exchange transaction fee-and-rebate pricing models have on order
routing behavior, market and execution quality, and our market
structure generally. To address this information gap, the Commission
has designed the Pilot to produce data that will facilitate a more
thorough understanding of the potential issues associated with exchange
transaction-based pricing models. In particular, the Commission has
designed the Pilot to gather data on the effect both current regulatory
fee caps and rebates have on market quality and execution quality. The
data gathered will assist the Commission in determining whether any
changes in the current regulatory framework are appropriate and enable
the Commission to make more informed and effective policy decisions.
This, in turn, enables the Commission to carry out the objectives of
the national market system and oversee the national securities
exchanges.
    As discussed fully in the proposing release, the Commission
proposed a pilot to test the effect of exchange transaction fees and
rebates.\5\ The following chart summarizes the terms of the Pilot as
adopted, which are discussed in more detail below:
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    \5\ See Proposing Release, supra note 2.

                                      Transaction Fee Pilot for NMS Stocks
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Duration......................   2 years with an automatic sunset at 1 year unless, no later than 30 days prior
                                  to that time, the Commission publishes a notice that the pilot shall continue
                                  for up to 1 additional year; plus a 6-month pre-Pilot Period and 6-month post-
                                                                  Pilot Period.
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Applicable trading centers....   Equities exchanges (including maker-taker & taker-maker) but not ATSs or other
                                                          non-exchange trading centers.
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Pilot securities..............  NMS stocks with average daily trading volumes >=30,000 shares with a share price
                                  >=$2 per share that do not close below $1 per share during the Pilot and that
                                    have an unlimited duration or a duration beyond the end of the post-Pilot
                                                                     Period.
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                                Group..................  Number of NMS      Fee cap..........  Rebates
                                                          stocks.                               permitted?
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Pilot design..................  Test Group 1...........  730..............  $0.0010 fee cap    Yes.
                                                                             for removing and
                                                                             providing
                                                                             displayed
                                                                             liquidity (no
                                                                             cap on rebates).
                                Test Group 2...........  730 (plus          The 17 CFR         No. Rebates and
                                                          appended           242.610(c) (Rule   Linked Pricing
                                                          Canadian           610(c)) $0.0030    Prohibited for
                                                          interlisted        cap continues to   removing and
                                                          stocks).           apply to fees      providing
                                                                             for removing       displayed and
                                                                             displayed          undisplayed
                                                                             liquidity.         liquidity
                                                                                (except for
                                                                                specified market
                                                                                maker activity).
                                Control Group..........  Pilot Securities   The Rule 610(c)    Yes.
                                                          not in Test        cap continues to
                                                          Groups 1 or 2.     apply to fees
                                                                             for removing
                                                                             displayed
                                                                             liquidity (no
                                                                             cap on rebates).
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Pilot data....................        1. Pilot Securities Exchange Lists and Pilot Securities Change Lists.
                                                      2. Exchange Transaction Fee Summary.
                                                           3. Order Routing Datasets.
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II. Discussion of Rule 610T

    In response to its proposal to conduct a Transaction Fee Pilot in
NMS stocks (the ``Pilot''), the Commission received a number of comment
letters from a diverse group of commenters, including exchanges,
investment managers, broker-dealers, and other market participants, as
well as academics, listed issuers, analytics firms, market observers,
and industry associations.\6\ As discussed below, after review and
consideration of the comments received, the Commission is adopting Rule
610T with certain modifications from that in the proposal.
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    \6\ The Proposal was developed, in part, by reference to a
recommendation for an access fee pilot submitted to the Commission
by the Equity Market Structure Advisory Committee (the ``EMSAC'').
See Proposing Release, supra note 2, at 13009, 13012-14.
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A. Focus on Exchange Pricing Models and the Effects They Can Cause

1. Exchange Fee Models and Regulatory Framework
    Regardless of the fee model, all fees of a registered national
securities exchange ``exchange'') are subject to the standards and
process requirements set forth in the federal securities laws.\7\ In
particular, Section 6 of the Exchange Act requires, among other things,
that the rules of an exchange provide for the ``equitable allocation''
of ``reasonable'' fees and that they not be ``designed to permit unfair
discrimination.'' \8\ Section 11A of the Exchange Act directs the
Commission to use its authority to facilitate the establishment of a
national market system for securities that assures economically
efficient execution of securities transactions, fair competition,
availability of information with respect

to quotations for and transactions in securities, and the
practicability of brokers executing investors' orders in the best
market.\9\ In addition, Rule 610(c) of Regulation NMS imposes upon
exchanges a fee cap of $0.0030 per share for the execution of an order
against its ``protected quotation.'' \10\
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    \7\ Under the Exchange Act, exchange fee changes are effective
on the day that the exchange files them with the Commission, and
neither advance notice nor Commission action is required before an
exchange may implement a fee change. See 15 U.S.C. 78s(b)(3)(A)(ii).
The Commission may, within 60 days after an exchange filed its fee
change with the Commission, summarily suspend the new fee and
institute proceedings to determine whether to disapprove it. See 15
U.S.C. 78s(b)(3)(C).
    \8\ See 15 U.S.C. 78f(b)(4)-(5).
    \9\ See 15 U.S.C. 78k-1(a)(1).
    \10\ 17 CFR 242.610(c); Securities Exchange Act Release No.
51808 (June 9, 2005), 70 FR 37496, 37543-46 (June 29, 2005) (``NMS
Adopting Release''). See also 17 CFR 242.600(b)(58) (defining
``protected quotation''); 17 CFR 242.600(b)(57) (defining
``protected bid or protected offer''); 17 CFR 242.600(b)(3)
(defining ``automated quotation'').
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    In 2005, when it adopted the fee limitation in Rule 610(c), the
Commission noted, in part:

    The adopted fee limitation set forth in Rule 610(c) of
Regulation NMS is designed to preclude individual trading centers
from raising their fees substantially in an attempt to take improper
advantage of strengthened protection against trade-throughs and the
adoption of a private linkage regime. In particular, the fee
limitation is necessary to address `outlier' trading centers that
otherwise might charge high fees to other market participants
required to access their quotations by the Order Protection Rule. It
also precludes a trading center from charging high fees selectively
to competitors, practices that have occurred in the market for
Nasdaq stocks. In the absence of a fee limitation, the adoption of
the Order Protection Rule and private linkages could significantly
boost the viability of the outlier business model. Outlier markets
might well try to take advantage of intermarket price protection by
acting essentially as a toll booth between price levels. The high
fee market likely will be the last market to which orders would be
routed, but prices could not move to the next level until someone
routed an order to take out the displayed price at the outlier
market.\11\
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    \11\ NMS Adopting Release, supra note 10, at 37545.

    In light of the considerable debate surrounding exchange fee models
that pay rebates, which is well documented in the comment letters
submitted on the proposed Pilot, and the passage of time since the
Commission first adopted the Rule 610(c) fee cap as part of Regulation
NMS in 2005, the Commission now seeks to gather data to facilitate an
empirical assessment of the effect of exchange transaction fees and
rebates broadly--including the impact and continued appropriateness of
the Rule 610(c) fee cap \12\--by testing the effects of changes to
exchange fees and rebates on the markets and market participant
behavior.
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    \12\ At the time of its adoption in 2005, the fee cap codified
the then-prevailing fee level set through competition among the
various trading centers. See NMS Adopting Release, supra note 10, at
37545 (stating that ``the $0.003 fee limitation is consistent with
current business practices, as very few trading centers currently
charge fees that exceed this amount'').
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2. Impact of Exchange Fee Models
    In response to the Proposing Release, the Commission received a
number of comment letters criticizing existing fee-and-rebate pricing
models, but also a number of comment letters expressing support for
those same pricing regimes.\13\
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    \13\ The potential distortions mentioned by the commenters (and
discussed in this section) include, among others: (1) Conflicts of
interest faced by routing broker-dealers; (2) excess intermediation
and potential adverse selection; (3) market fragmentation; (4)
exchange fee avoidance; (5) complexity; (6) transparency; and (7)
elevated fees to subsidize rebates.
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    Many commenters focused on one potential distortion--whether
current pricing models ``present broker-dealers with a potential
conflict of interest,'' because their ``duty to pursue best execution
could be compromised when their trading venue decision is driven by the
economic incentive to minimize access fees paid and maximize rebates
received.'' \14\ As another commenter explained, ``a broker is
incentivized to route an order to the venue that pays it the most (or
costs the least), instead of the venue that has the highest likelihood
of offering the best execution for its customers, such as the one that
offers a higher probability of execution or meaningful price
improvement.'' \15\ As evidence of the potential harm that can result
from the conflicts presented by exchange rebates, one commenter noted
that institutional investors ``that specifically instruct brokers to
remove rebate-driven trading behaviors from their algorithms achieve
significantly lower trading costs that result in higher returns to
their investors.'' \16\ One commenter attributed this harm to the
tendency of rebates to ``affect the length of the order queue of
passive limit orders on the major maker-taker exchanges, while high
take fees on these markets make them less attractive for marketable
orders that cross the spread.'' The commenter argued that the ``net
result of this perverse pricing dynamic is a lower likelihood of
execution and a higher likelihood of adverse selection for orders in
the maker-taker queues,'' because orders at the ``middle or back of the
queue . . . are less likely to trade at their desired price, and when
they do trade, the overall market price as reflected by the [National
Best Bid and Offer (``NBBO'')] is more likely to move against them,
than when trading on venues that do not pay rebates.'' \17\
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    \14\ Capital Group Letter, at 2. See also, e.g., ICI Letter I,
at 2; Vanguard Letter, at 2; Invesco Letter, at 2; CFA Letter, at 2;
Oppenheimer Letter, at 2; Spatt Letter, at 4; AJO Letter, at 1;
Larry Harris Letter, at 3.
    \15\ Healthy Markets Letter I, at 5. See also, e.g., Copeland
Letter, at 1; Wellington Letter, at 1; Norges Letter, at 2.
    \16\ Babelfish Letter, at 1-3 (also referencing a Clearpool
Group study that found that a ``fee sensitive VWAP algorithm
executed during volatile times incurred seven times as much cost as
a fee agnostic algorithm''). See also T. Rowe Price Letter, at 2
(stating that ``[r]etail orders . . . are generally placed on the
exchange that offers the highest rebate to the broker, but show[s]
lower execution quality in terms of reduced probability of
execution''); Capital Group Letter, at 2 (``Our internal trade
analysis suggests that execution quality may be negatively impacted
when broker-dealers' routing decisions are made to minimize access
fees.'').
    \17\ IEX Letter I, at 6, A-1-A-2; IEX Letter II, at 7; IEX
Letter IV (appending research to support these views). See also,
e.g., Babelfish Letter, at 2 (stating that a ``frequently realized
scenario is that flow sent solely to a high rebate destination waits
in queue, often winds up canceled because price moves away, and then
receives an inferior price upon the eventual execution''); Larry
Harris Letter, at 1, 3; Brandes Letter, at 1-2. But see Grasso
Letter, at 3 (``waiting for a rebate[ ] may be fine'' if ``you have
low confidence about future prices for a large order and don't mind
if the order trades slowly while you accumulate shares'').
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    A number of commenters discussed other potential effects of
exchange pricing models. Some commenters believed that transaction fees
and rebates contribute to market fragmentation \18\ because they
encourage investors to ``turn to inverted markets to improve queue
priority'' \19\ or to ``route orders to non-exchange trading centers to
avoid the higher access fees that exchanges charge to subsidize the
rebates they offer.'' \20\ Likewise, one commenter thought that
``transaction fees and rebates contribute to market complexity through
the proliferation of new order types . . . designed to exploit
different transaction pricing models.'' \21\ Other commenters believed
that ``[t]ransaction fees and rebates . . . undermine market
transparency because the prices displayed by exchanges--and provided on
trade reports--do not include fee or rebate information and therefore
do not fully reflect net trade prices.'' \22\ Finally, some commenters

asserted that current pricing models unfairly subsidize rebates \23\ or
benefit sophisticated market participants like market-makers and
proprietary traders at the expense of other market participants.\24\
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    \18\ See, e.g., ICI Letter I, at 2.
    \19\ Credit Suisse Commentary, at 2. See also, e.g., Larry
Harris Letter, at 3 (noting that ``orders standing at inverted
exchanges usually execute before orders standing at the same price
at maker-taker exchanges'').
    \20\ Capital Group Letter, at 2. See also, e.g., IEX Letter I,
at 3 (``Excessive take fees . . . have been criticized as leading to
the migration of some order flow to less-regulated non-exchange
venues in search of reduced transaction costs, resulting in
increased market fragmentation and market complexity.'').
    \21\ ICI Letter I, at 2. See also, e.g., Vanguard Letter, at 2
(indicating that the ``desire to maximize rebate revenue and avoid
fees created order complexity within the equity markets as traders
sought profitable trading strategies'').
    \22\ ICI Letter I, at 2. See also, e.g., Goldman Sachs Letter,
at 3; Invesco Letter, at 2; State Street Letter, at 2; Wellington
Letter, at 1; Oppenheimer Letter, at 2; Capital Group Letter, at 3.
    \23\ See, e.g., Clearpool Letter, at 3 (stating that ``exchanges
chase order flow and provide rebates and other pricing incentives to
the largest trading firms at the expense of smaller market
participants who cannot take advantage of such rebates and, in
effect, end up subsidizing the trading of larger firms''); IEX
Letter I, at 3 (stating that transaction fees are ``used in effect
to subsidize the payment of rebates,'' which ``results in a
substantial penalty on investors and other participants who . . .
have a need for immediate liquidity'').
    \24\ See, e.g., T. Rowe Price Letter, at 2 (stating that rebates
lead to ``excessive intermediation . . . benefiting short-term
intermediaries at the expense of long-term investors''); ModernIR
Letter, at 3 (stating that rebates ``promote[ ] arbitrage, and
price-setting as its own end,'' leading to a ``paucity of real
orders''); Larry Harris Letter, at 1, 5-6 (stating that current
pricing models facilitate ``the execution of various parasitic
trading strategies by proprietary traders to the detriment of public
investors''); Capital Group Letter, at 3.
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    Other commenters expressed support for current exchange pricing
models. For example, one commenter believed that maker-taker pricing
``provides important benefits to issuers and investors,'' because
exchanges ``use rebates as a tool to promote displayed liquidity and
price discovery, which results in competitive bid-ask spreads, saving
transaction costs that investors may otherwise incur.'' \25\ Another
commenter argued that rebates can promote displayed liquidity by
providing ``a payment in exchange for posters of liquidity giving up
several valuable options,'' including ``the power to decide the time of
the trade'' and the ability to conceal trading intentions until the
point of execution.\26\ Building on this idea, one commenter
characterized ``[a]ccess fee caps and related rebates'' as features
that ``enable exchanges to compete with non-exchange trading venues by
essentially subsidizing the posted prices . . . and narrow[ing] the
NBBO, making it slightly more expensive to either match or improve upon
those prices off-exchange.'' \27\
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    \25\ State Street Letter, at 2. See also, e.g., Virtu Letter, at
3; Fidelity Letter, at 3; Nasdaq Letter I, at 9; Cboe Letter I, at
15-16. See also Nasdaq Letter III, at Exhibit A (providing graphs
using data from September 2018 on average quoted spread across
exchanges in S&P 500 stocks and time at the best quote across those
stocks). But cf. Larry Harris Letter, at 6-9 (acknowledging that
``quoted spreads are narrower under maker-taker pricing,'' but
opining that ``the narrower quoted spreads do not benefit the
public'').
    \26\ Magma Letter, at 3. See also, e.g., NYSE Letter IV, at 2
(arguing that ``pricing incentives enhance the quality and
reliability of display markets''); FIA Letter, at 4.
    \27\ FIA Letter, at 3-4. See also NYSE Letter I, at 6 (stating
that rebates ``allow liquidity providers to quote narrower spreads
by providing another source of revenue''); Grasso Letter, at 4
(``the main outcome of exchange pricing seems to be that it forces
exchanges to compete for customers,'' because it ``keeps their
margins tight and gives them incentives to improve the quality of
their offerings'').
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    As commenters fundamentally disagreed about the effect of exchange
transaction fee models and whether they have a positive or a negative
impact on the U.S. equities markets, commenters also held conflicting
views regarding whether and how the Commission should conduct the
Pilot.
3. Focus on Exchange Fee Models
    Recognizing the unique regulatory framework applicable to exchange
fees, and the disagreement over the impact of exchange fees and rebates
on the markets and market participants, the Commission focused its
proposed Pilot on studying the effect of exchange transaction fees and
rebates on order routing behavior, execution quality, and market
quality. Accordingly, the Commission proposed to include within the
Pilot all equities exchanges regardless of fee model.
    A large number of commenters supported applying the Pilot to all
equities exchanges.\28\ For example, one commenter believed that the
Pilot ``should include all equities exchanges . . . because rebates of
any kind provide inducements to trade and distort markets.'' \29\ A
different commenter thought that including taker-maker exchanges was
``both logical and feasible, given that all equities exchanges assess
fees that are subject to the Exchange Act and its rule filing
requirements.'' \30\ Other commenters ``agree[d] with the Commission's
assessment that the Pilot should apply to all equity exchanges . . .
thus treating all similarly situated exchanges equally,'' because this
would be ``critically important in determining what impact the
reduction of access fees or the elimination of rebates will have on
order routing practices.'' \31\ Some other commenters, however, opposed
including taker-maker exchanges in the Pilot, noting that Rule 610(c)
does not apply to taker-maker exchanges.\32\
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    \28\ See, e.g., Joint Asset Managers Letter, at 2; Brandes
Letter, at 2; Themis Trading Letter I, at 3; AJO Letter, at 1-2;
OMERS Letter, at 2; Copeland Letter, at 2; Virtu Letter, at 6;
Nuveen Letter, at 2; BlackRock Letter, at 1; RBC Letter I, at 3;
Vanguard Letter, at 2; CFA Letter, at 4; Wellington Letter, at 2;
Joint Pension Plan Letter, at 2; Oppenheimer Letter, at 2; Clearpool
Letter, at 5 n.8; TD Ameritrade Letter, at 4; Capital Group Letter,
at 3; Healthy Markets Letter I, at 10; Morgan Stanley Letter, at 3
n.5; AGF Letter, at 1.
    \29\ AJO Letter, at 1-2.
    \30\ See RBC Letter I, at 3-4.
    \31\ Capital Group Letter, at 3. See also, e.g., Clearpool
Letter, at 5 n.8; Oppenheimer Letter, at 2; Brandes Letter, at 2;
Copeland Letter, at 2.
    \32\ See, e.g., Cboe Letter I, at 28.
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    After considering the comments on this issue, the Commission
continues to believe that focusing the Pilot on equities exchanges
regardless of fee model is appropriate because it treats alike
similarly situated entities that all are subject to the same regulatory
framework and thereby will allow the Commission to evaluate the effect
of exchange fee-and-rebate pricing models and the continued
appropriateness of the Rule 610(c) fee cap. Further, it would be
incongruous to study rebates and fees offered by one type of equities
exchange (maker-taker), but not another type of equities exchange
(taker-maker) where the fees of both types of entities are subject to
the same legal requirements and can introduce the same types of
distortions that the Pilot seeks to study.
4. Non-Exchange Trading Centers
    As proposed, the Pilot would exclude non-exchange trading centers
such as alternative trading systems (``ATSs'').\33\ Several commenters
opined on this aspect of the proposal. A number of commenters agreed
with the Commission's proposal to exclude non-exchange trading centers
from the Pilot.\34\ Some of those commenters noted that exchanges are
subject to various fee-related regulatory provisions that are entirely
inapplicable to non-exchange trading centers. For example, one
commenter noted that non-exchange trading centers are not currently
subject to any access fee caps, and including such trading venues in
the Pilot ``would have the unintended and harmful effect of
unnecessarily changing ATS business models . . . .'' \35\
---------------------------------------------------------------------------

    \33\ See Proposing Release, supra note 2, at 13014. As discussed
in the Proposing Release, the term ``trading center'' as used there
and throughout this release is a collective term that refers broadly
to the venues that trade NMS stocks. See id. at 13009 n.7. For
purposes of this release, the term ``trading center'' includes
national securities exchanges that are registered with the
Commission and that trade NMS stocks (referred to herein as
``equities exchanges'' or ``exchanges''), as well as other types of
``non-exchange venues'' that trade NMS stocks, including ATSs and
broker dealers that internalize orders by matching them off-exchange
with reference to the national best bid and offer.
    \34\ See, e.g., Brandes Letter, at 2; AJO Letter, at 2; MFA
Letter, at 2; BIDS Letter, at 1-2; BlackRock Letter, at 1; SIFMA
Letter, at 5; Virtu Letter, at 6; Fidelity Letter, at 10; Citi
Letter, at 2; Clearpool Letter, at 4-5; Luminex Letter, at 1; Morgan
Stanley Letter, at 3 n.5.
    \35\ Virtu Letter, at 6. See also, e.g., SIFMA Letter, at 5;
Clearpool Letter, at 5.
---------------------------------------------------------------------------

    In addition, several commenters emphasized the fundamental ways in
which the fee structures employed by

non-exchange trading centers are different from the fee models utilized
by the equities exchanges and, as a result, concluded that excluding
non-exchange trading centers was appropriate.\36\ For example, one such
commenter explained that ``inducements (low fees, no fees, rebates)
offered by ATSs and other off-exchange venues are not universal across
all broker-dealers or market participants. Instead, the fees paid (or
not paid) by market participants to ATSs and other off-exchange venues
are negotiated between each market participant and the trading venue,''
such that ``the number of fee permutations and inconsistencies across
brokers for any single ATS could be substantial.'' \37\ Still other
commenters believed that excluding non-exchange trading centers from
the Pilot was appropriate because ``ATSs are not protected venues, and
thus free market competition among them constrains their pricing
power.'' \38\ One commenter supported excluding ATSs because ``there is
nothing to be gained by including venues that don't have the same
underlying issues that exchanges present with their rebate and `maker-
taker' pricing models.'' \39\
---------------------------------------------------------------------------

    \36\ See, e.g., Morgan Stanley Letter, at 3 n.5 (stating that
``many broker-dealer[ ] operators of ATSs generally charge clients
an overall commission rate (rather than an access fee) for a bundle
of services, including access to their ATSs''); BIDS Letter, at 1-2,
AJO Letter, at 2; Healthy Markets Letter I, at 10.
    \37\ AJO Letter, at 2.
    \38\ Citi Letter, at 2. See also, e.g., Fidelity Letter, at 10
(stating that ``ATS' fee structures are already subject to
competitive market forces and have more complex pricing models than
exchanges[,] making their participation in the Proposed Pilot less
useful''); SIFMA Letter, at 5 (opining that ``competitive forces
already push access fees [at ATSs] to an appropriate level . . .
lower than the access fees charged by exchanges,'' because ATS
access fees ``are included in the total cost consideration of
trading'').
    \39\ Luminex Letter, at 1.
---------------------------------------------------------------------------

    On the other hand, other commenters expressed concerns with
omitting non-exchange venues from the Pilot.\40\ One concern was that
by excluding non-exchange venues, the Pilot data would be incomplete.
For example, one commenter believed that excluding non-exchange venues
``could create an imperfect picture of the overall impact of the
transaction fees put in place under the Pilot program'' and could
compromise the value and utility of the data collected during the
Pilot. \41\ Another commenter argued that by excluding non-exchange
venues, the Pilot will not return ``meaningful data upon which to make
informed analysis and conclusions'' because it would ``ignore off-
exchange trading representing approximately 39 percent of total U.S.
equities market trading.'' \42\ This commenter further believed that
the Pilot would be unable to properly assess the potential conflicts of
interest because it will not know ``the baseline for remuneration
occurring off-exchange, or know what impact the Proposal has on that
baseline[.]'' \43\ One commenter objected to excluding ATSs ``based on
the fact that the proposed Pilot is a `new regulatory regime' for ATSs
. . . .'' \44\ While one commenter recognized the complexity involved
with subjecting non-exchange trading centers to the access fee cap
under Rule 610(c), it argued that such complexity did not provide a
sufficient basis to treat exchanges and non-exchange trading centers
disparately.\45\ A few commenters recommended excluding ATSs, but
requiring them to submit the required order routing data.\46\
---------------------------------------------------------------------------

    \40\ See, e.g., Nasdaq Letter I, at 2, 5-7; Cboe Letter I, at
12-13; MFS Letter, at 2; RBC Letter I, at 4; ASA Letter, at 3;
ViableMkts Letter, at 2; Angel Letter II, at 2.
    \41\ See Wellington Letter, at 2 (acknowledging, however, that
it is ``impractical for the Commission to include off-exchange
venues''). See also, e.g., RBC Letter I, at 4; ProAssurance Letter,
at 2.
    \42\ Nasdaq Letter I, at 2, 5-7. See also, e.g., NYSE Letter I,
at 2.
    \43\ See Nasdaq Letter I, at 7.
    \44\ See, e.g., Cboe Letter I, at 13.
    \45\ See NYSE Letter I, at 7-8.
    \46\ See, e.g., Better Markets Letter, at 8.
---------------------------------------------------------------------------

    The Commission believes that excluding non-exchange venues from the
Pilot should not negatively impact the Pilot's data or impact its
results. As noted above, the Pilot is designed, among other things, to
assess the effects of exchange fee models. Because exchange fee models
are materially different both in their structure and regulatory
treatment, the potential effects that may be associated with exchange
fee models are not applicable in the same manner to ATSs. Similarly,
the question of whether rebates narrow the quoted spread is
inapplicable to ATSs, which do not publicly display an automated
quotation. Further, ATS activity is not being overlooked as increases
or decreases in ATS volume during the Pilot will be reflected in other
existing data sources. Accordingly, Commission researchers (hereinafter
``researchers'') will be able to assess market-wide changes in order
flow during the Pilot.
    Further, even if non-exchange venues provided order routing data
pursuant to the Pilot, researchers would be unable to meaningfully
correlate changes in an ATS's order flow with the fees of that ATS
because those fees are bespoke, typically bundled, and are not as
transparent as exchange fees.\47\ Exchange fees are not only fully
transparent in published fee schedules, but exchange fee changes must
be filed with the Commission and thus they have a precise effective
date attached to each filing. This level of transparency for exchange
fees and rebates, which is not present for ATSs,\48\ is an important
component facilitating researchers' ability to draw causal connections
with the Pilot's results. While obtaining order routing data from ATSs
might provide interesting insight into their business, it could not be
meaningfully correlated with ATS fees and fee changes and is not
necessary to study the Pilot's results. Rather, existing sources of
data on ATS activity, including data published by the Financial
Industry Regulatory Authority (``FINRA''), will permit researchers to
observe changes in ATS activity during the Pilot.
---------------------------------------------------------------------------

    \47\ As noted by several commenters, equities exchanges and non-
exchange trading centers currently employ different fee models.
While equities exchanges charge transaction-based fees, non-exchange
trading centers may not charge separate transaction-based fees, but
instead may use bundled pricing such that a particular order is not
necessarily associated with a particular fee. See, e.g., Morgan
Stanley Letter, at 3 n.5 (stating that ``many broker-dealer[ ]
operators of ATSs generally charge clients an overall commission
rate (rather than an access fee) for a bundle of services, including
access to their ATSs''); BIDS Letter, at 1-2, AJO Letter, at 2. See
also Proposing Release, supra note 2, at 13016. The Commission is
not aware of any ATSs that currently pay transaction-based rebates.
    \48\ See supra notes 310-312 and accompanying text (discussing
recent amendments to Regulation ATS and their relevance to the
proposed Pilot).
---------------------------------------------------------------------------

    Among commenters critical of excluding non-exchange venues, some
believed it could raise competitive issues to apply the Pilot's pricing
limitations to the equities exchanges, but not impose the same pricing
limitations on non-exchange trading centers that trade the same
equities securities.\49\ One exchange commenter found it
``inexplicabl[e]'' that the Pilot ``focuses only on exchanges and
entirely ignores off-exchange venues, which are the venues that are
most likely to benefit from a pilot that pointedly decreases the
incentive (i.e., rebates) to post protected quotes on-exchange.'' \50\
---------------------------------------------------------------------------

    \49\ See, e.g., ASA Letter, at 3; Cboe Letter I, at 12, 26-27;
Nasdaq Letter I, at 5-7; NYSE Letter I, at 3-8.
    \50\ See Cboe Letter I, at 12. See also Nasdaq Letter I, at 6;
NYSE Letter I, at 3-5; NYSE Letter II, at 12.
---------------------------------------------------------------------------

    Several commenters suggested that the exclusion of non-exchange
trading centers from the Pilot could ``create incentives for market
participants to move more order flow to off-exchange platforms,''
thereby putting the national securities exchanges at a competitive
disadvantage as compared to off-exchange trading centers.\51\ However,
a

commenter suggested the opposite could happen and that the Pilot might
actually ``encourage more order flow to gravitate to the exchanges''
because the Pilot would reduce the access fee cap on the equities
exchanges thereby making it less expensive to transact on an
exchange.\52\
---------------------------------------------------------------------------

    \51\ See, e.g., Wellington Letter, at 2; Oppenheimer Letter, at
3; Angel Letter II, at 2; Nasdaq Letter I, at 6-7; Cboe Letter I, at
12; NYSE Letter I, at 3-5; Curtiss-Wright Letter, at 1; ASA Letter,
at 3.
    \52\ See, e.g., Citi Letter, at 2; Decimus Letter, at 5-6.
---------------------------------------------------------------------------

    The Commission does not believe that the Pilot necessarily will put
the equities exchanges at a competitive disadvantage or
disproportionally harm them when competing with non-exchange trading
centers for investors' orders. Currently, only exchanges are subject to
the Rule 610(c) fee cap, and Test Group 1 is designed to test a lower
cap. The Commission does not believe that exchanges charging lower fees
will necessarily make them less competitive with other venues for
natural order flow, for example order flow that removes liquidity.
Rather, it is possible that lower fees in Test Group 1 across all
exchanges may actually improve their competitive position in attracting
that order flow,\53\ particularly with respect to fee sensitive routing
algorithms because, all else being equal, fee sensitive algorithms
generally seek to minimize trading costs and would likely rank
exchanges more favorably in their routing tables when exchanges reduce
their fees to remove liquidity.
---------------------------------------------------------------------------

    \53\ See, e.g., Citi Letter, at 2; Decimus Letter, at 5-6. See
also, infra Section IV.D ``Impact on Efficiency, Competition and
Capital Formation'' and note 782 infra and accompanying text.
---------------------------------------------------------------------------

    In addition to testing a lower fee cap level, the Pilot also will
test a prohibition on rebates and ``Linked Pricing,'' which, as
discussed further below, is defined as a discount or incentive on
transaction fee pricing applicable to removing (or providing) liquidity
that is linked to providing (or removing) liquidity.\54\ The intent of
this is to gather data to assess, among other things, the effect of
exchange rebates. Potential distortions, which may be caused or
exacerbated by exchange rebates, may themselves be placing exchanges at
a competitive disadvantage, in which case the elimination of rebates
could improve the competitive position of exchanges, for example if
taker fees are set at levels independent of the need to subsidize maker
rebates. Once again, data is needed to empirically assess this issue,
and the Commission believes that the Pilot is the best way to obtain
that data.\55\
---------------------------------------------------------------------------

    \54\ See Rule 610T(a)(2).
    \55\ See infra Section IV.A.2. and C.1.a.i.
---------------------------------------------------------------------------

    Further, while exchanges may compete with non-exchange trading
centers for order flow, exchange fees and the fees of non-exchange
trading centers are treated very differently under the federal
securities laws. Indeed, one of the distinguishing features of
registered national securities exchanges is that--unlike non-exchange
trading centers--their fees are subject to the principles-based
standards set forth in the Exchange Act, as well as the rule filing
requirements thereunder. In particular, the federal securities laws
require the entirety of each and every fee, due, and charge assessed by
an exchange to be transparent and publicly posted for all to see, and
must be an equitable allocation of reasonable dues, fees and other
charges and not be unfairly discriminatory.\56\ On the other hand,
similar requirements do not apply to the fees of non-exchange trading
centers that do not provide public transparency into their full
itemized fee schedules and typically are individually negotiated on a
customer-by-customer basis.\57\ By including all equities exchanges
regardless of fee model, and excluding other types of trading centers,
the Pilot is designed to include all trading centers whose fees are
subject to the principles-based standards set forth in the Exchange Act
as well as the rule filing requirements thereunder.\58\ Thus, the Pilot
will produce data to empirically evaluate the effects that transaction-
based fees and rebates may have on, and the effects that changes to
those fees and rebates may have on, order routing behavior, execution
quality, and market quality more generally.
---------------------------------------------------------------------------

    \56\ See 15 U.S.C. 78f(b)(4)-(5).
    \57\ All exchange fee changes are published for public comment
and required to be publicly posted on the internet, whereas fees of
non-exchange trading centers are typically bespoke. Fee changes of
non-exchange trading centers are not subject to the provisions of
the federal securities laws requiring that fees be an ``equitable
allocation'' of ``reasonable'' fees and not ``unfairly
discriminatory.''
    \58\ See 15 U.S.C. 78f(b)(4)-(5) (requiring, among other things,
that an exchange's fees be an ``equitable allocation'' of
``reasonable'' fees and that they not be ``designed to permit unfair
discrimination.''). In addition, only exchange fees are subject to
the rule filing requirements under Section 19(b) of the Exchange Act
and 17 CFR 240.19b-4 (Rule 19b-4) thereunder. See also Proposing
Release, supra note 2, at 13016.
---------------------------------------------------------------------------

    The Commission believes that subjecting non-exchange trading
centers to the Pilot would go beyond the scope of the current
regulatory framework that applies only to exchanges and would not
further the Commission's evaluation of the impact of the existing
regulatory regime, including, but not limited to, the Regulation NMS
fee cap, which applies exclusively to exchange fees and rebates. In
effect, the Pilot will help the Commission carry out its statutory
responsibility to assess the effect of exchange fees and rebates, which
do not apply to non-exchange trading centers.\59\
---------------------------------------------------------------------------

    \59\ While exchange fees are filed with the Commission on Form
19b-4 and the Commission publishes notice of them for public comment
and has an opportunity to summarily suspend them within 60 days, the
Commission's non-action on a fee filing within that period does not
constitute an endorsement or approval of an exchange fee. Issues
with fees and how they impact market participants and market
structure may or may not be obvious at first and adverse effects may
take time to manifest as the market adjusts to a new fee. The
Commission, and the exchanges as self-regulatory organizations, must
enforce their rules and the federal securities laws with the goal of
protecting investors and the public interest.
---------------------------------------------------------------------------

5. Options Exchanges
    Finally, the Commission proposed to exclude options exchanges from
the Pilot, because options and equities are materially different types
of securities. In addition, the access fee cap under Rule 610(c) does
not currently apply to the options exchanges.\60\
---------------------------------------------------------------------------

    \60\ See Proposing Release, supra note 2, at 13015.
---------------------------------------------------------------------------

    Several commenters agreed with the Commission's exclusion of the
options exchanges.\61\ No commenters suggested that the Commission
include options markets in the Pilot. For the reasons noted above and
discussed in the Proposing Release, the Commission is not including
options markets within the scope of the Pilot.\62\
---------------------------------------------------------------------------

    \61\ See, e.g., MFA Letter, at 2; SIFMA Letter, at 5; Fidelity
Letter, at 10.
    \62\ See Proposing Release, supra note 2, at 13015.
---------------------------------------------------------------------------

B. Securities

    As proposed, all NMS stocks \63\ that meet specified initial and
continuing minimum standards would be eligible for inclusion in the
Pilot (collectively, ``Pilot Securities'').\64\ The Commission received
a number of comments regarding the scope of Pilot Securities to be
included in the Pilot.
---------------------------------------------------------------------------

    \63\ See 17 CFR 242.600(b)(47) (defining ``NMS stock'').
    \64\ See Proposing Release, supra note 2, at 13017. See also
Proposed Rule 610T(b)(1)(ii).
---------------------------------------------------------------------------

1. The Share Price Threshold of Pilot Securities
    The Commission proposed that an NMS stock must have a minimum
initial share price of $2 at the time the pre-Pilot Period commences to
be included in the Pilot and that any Pilot Securities that close below
$1 at the end of a trading day during the proposed Pilot would be
removed from the Pilot.\65\
---------------------------------------------------------------------------

    \65\ See Proposing Release, supra note 2, at 13017; Proposed
Rule 610T(b)(1)(ii). The Commission notes that the proposed language
in Rule 610T(b)(1)(ii) has been modified slightly. As proposed, Rule
610T(b)(1)(ii) contained the phrase ``minimum initial share price of
at least $2 . . . .'' As adopted, the clause ``minimum initial share
price of $2'' is being substituted for the phrase ``minimum initial
share price of at least $2'' to delete redundant text. In addition,
as proposed, Rule 610T(b)(1)(ii) explained that a Pilot Security
that closes below $1 would be ``removed from the Test Group or the
Control Group and will no longer be subject to the pricing
restrictions set forth in (a)(1)-(3). . . .'' As adopted, this
language is being modified slightly to make it more concise.
Accordingly, as adopted, this language provides that if the share
price of a Pilot Security closes below $1 at the end of a trading
day ``it will be removed from the Pilot.''

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

    One commenter opposed the $2 initial minimum share price threshold
as overly restrictive.\66\ Other commenters, however, agreed that the
securities in the Pilot should have an initial minimum $2 per share
price threshold at the time of the initial stock selection, because
this threshold ``will capture virtually all NMS stocks while minimizing
the risk that securities will drop out of the Pilot . . . .'' \67\ One
of these commenters believed the proposed thresholds would ``help
ensure consistency among the Test Groups and limit the risk of data
anomalies due to changes in the composition of those groups.'' \68\
Another commenter noted that the choice of ``$2 and $1 thresholds . . .
follows the reasonable parameters established during [the] . . . Tick
Size Pilot'' and asserted that the ``determination to pull out
securities that close at under $1 during the pilot seems appropriate,
especially given the fundamentally different fee structures applicable
to stocks with prices less than $1.00.'' \69\
---------------------------------------------------------------------------

    \66\ See Angel Letter I, at 2.
    \67\ RBC Letter I, at 5. See also, e.g., Better Markets Letter,
at 6; Healthy Markets Letter I, at 11-12.
    \68\ RBC Letter I, at 5.
    \69\ Healthy Markets Letter I, at 12.
---------------------------------------------------------------------------

    The Commission continues to believe that the proposed share price
thresholds for Pilot Securities are appropriate. The Commission notes
that no commenters opposed the proposed $1 minimum continuing price
threshold, which will exclude such stocks from the Pilot because stocks
with quotations of less than $1 are subject to different regulatory and
fee treatment.\70\ The Commission continues to believe that an initial
$2 share price threshold will best balance the need to include a broad
set of NMS stocks in the Pilot with the desire to ensure that
substantially all of the securities selected at the outset of the Pilot
remain part of their respective Test Groups throughout the duration of
the Pilot, including during the pre- and post-Pilot periods. The
Commission does not believe that the $2 threshold is overly restrictive
because, as discussed in the Proposal, it is uncommon for securities
priced at $2 or more to fall below $1.\71\ Lowering the initial stock
selection threshold below $2 could increase the likelihood that
securities selected for the Pilot get dropped from the Pilot if their
share price closed below $1 during the Pilot. Such a result would
change the composition of the Test Groups during the Pilot, which might
adversely impact the quality of the data produced by the Pilot. For
these reasons and the reasons discussed in the Proposing Release, the
Commission adopts as proposed the share price thresholds set forth in
Rule 610T(b)(1)(ii).
---------------------------------------------------------------------------

    \70\ See Proposing Release, supra note 2, at 13017.
    \71\ See id. at 13017 n.102 (noting that only 4.3% of publicly
traded common stocks and ETPs with a share price above $2 during
2012-2016 dropped below $1 in that period).
---------------------------------------------------------------------------

2. The Duration of Pilot Securities
    The Commission proposed that, in order to be included in the Pilot,
an NMS stock must have an unlimited duration or a duration beyond the
end of the post-Pilot period in order to be included in the Pilot.\72\
No comments were received regarding this condition. For the reasons
outlined in the Proposing Release, the Commission adopts this aspect of
the Pilot as proposed.\73\
---------------------------------------------------------------------------

    \72\ See Proposing Release, supra note 2, at 13017; Proposed
Rule 610T(b)(1)(ii).
    \73\ See Proposing Release, supra note 2, at 13018 n.103.
---------------------------------------------------------------------------

3. Selecting Pilot Securities From All NMS Stocks
    The Commission proposed to select Pilot Securities from among the
entire universe of NMS stocks, subject to the minimum share price
threshold and duration requirements. As proposed, the Pilot would
include a broad and diverse cross-section of securities, including, for
example, stocks of all market capitalizations as well as ETPs.
    The Commission received comments on the universe of Pilot
Securities that generally fell into four categories: (1) The inclusion
of stocks with market capitalizations below $3 billion, (2) the
inclusion of ETPs, (3) the inclusion of Canadian interlisted stocks,
and (4) the inclusion of NMS stocks other than stocks of operating
companies and ETPs. Each of these points is discussed below.
a. Market Capitalization and Liquidity
    The Commission proposed to select Pilot Securities from among NMS
stocks of all market capitalizations.\74\ A few commenters recommended
that the Pilot exclude securities with smaller market capitalizations
and/or thinly-traded securities. One commenter suggested that the
``majority of securities within the Test Groups should be more liquid''
and that thinly-traded securities, if included, ``should be a minority
of all securities in the Test Groups.'' \75\ Similarly, one exchange
commenter stated that the Pilot ``should exclude less active stocks as
the liquidity in such stocks will likely be severely and negatively
impacted by this Pilot.'' \76\ This commenter asserted that ``[l]ess
active stocks are highly dependent on professional liquidity providers
to post liquidity'' and speculated that ``[d]ecreasing incentives for
liquidity providers to post liquidity in less active stocks will have a
pronounced impact on liquidity . . . manifest[ing] in significantly
wider spreads and significantly less depth in these securities.'' \77\
Noting that ``many industry participants appear to advocate for
increased incentives for liquidity provision in thinly-traded stocks,''
the commenter did not believe that the Pilot's goals were ``worth the
risk to liquidity and capital formation that the Commission itself
identifie[d.]'' \78\
---------------------------------------------------------------------------

    \74\ See id. at 13018. The EMSAC's recommendation was to limit a
pilot to stocks above $3 billion in market capitalization in order
to avoid overlap with the Tick Size Pilot. See id. The Commission
notes, however, that the Tick Size Pilot ended on September 28, 2018
and the Pilot Period for the Transaction Fee Pilot will not start
before the post-pilot period for the Tick Size Pilot ends on April
2, 2019. See Section II.C.3. infra.
    \75\ RBC Letter I, at 6. See also, e.g., Harris Letter, at 1; T.
Rowe Price Letter, at 4.
    \76\ Cboe Letter I, at 28.
    \77\ Id. See also, e.g., Morgan Stanley Letter, at 4; Leaf
Letter, at 1.
    \78\ Cboe Letter I, at 19. See also, e.g., Proposing Release,
supra note 2, at 13069.
---------------------------------------------------------------------------

    Another commenter was similarly concerned that the Pilot would
``have a significant impact on small to medium issuers since exchanges
will not be able to provide incentives to market makers to support
trading in those companies' securities.'' \79\ This commenter stated
that ``[l]iquidity rebates can be critical for such securities to
motivate market makers to support the stock with aggressive and
actionable quotations.'' \80\ Further, the commenter opined that the
Pilot would ``risk damaging companies' ability to efficiently raise
capital,'' which it believed would ``particularly harm small and medium
sized companies, for which the current market structure is already not

optimized.'' \81\ The commenter further argued that ``incentives
(rebates) are important to creating two-sided markets across all
stocks, especially thinly traded stocks.'' \82\
---------------------------------------------------------------------------

    \79\ Nasdaq Letter I, at 8-9.
    \80\ Id. at 3, 9 (alleging that the Pilot was ``arbitrary and
capricious and not in accordance with law,'' because it gave ``short
shrift'' to these concerns). See also Virtu Letter, at 7 (expressing
concern that the Pilot would ``harm investors in . . . less liquid
ETPs, which will be faced with less liquidity and wider spreads when
they seek to sell their holdings'').
    \81\ Nasdaq Letter I, at 2. See also ASA Letter, at 5.
    \82\ Nasdaq Letter III, at 1. The commenter provided a chart
showing how the exchanges compare to each other with respect to
maintaining a two-sided quote at least 50% of the day. In the chart,
some of the exchanges with a higher percent of two-sided markets
more than 50% of the day have taker-maker pricing, in which they
incentivize the removal of liquidity and charge fees to the provider
of liquidity. Id. at Exhibit A. But cf. NYSE Letter II, at 9-10
(arguing that rebates are necessary to promote display of
liquidity).
---------------------------------------------------------------------------

    Many other commenters supported including a broad scope of Pilot
Securities. For example, a group of twenty-one asset managers
submitting a joint letter stated that ``[a]s many NMS stocks as
possible should be in scope, including those with market
capitalizations below $3bln,'' in order to create a ``meaningful''
dataset.\83\ Another commenter agreed that the Pilot ``should encompass
the broadest universe of securities, as is feasible, in order to
maximize the sample size and provide the most robust dataset
possible,'' further arguing that ``[o]mitting securities of a specific
market cap seems arbitrary, would provide an incomplete view of the
overall market, and runs the risk of excluding meaningful data and
biasing the study.'' \84\
---------------------------------------------------------------------------

    \83\ Joint Asset Managers Letter, at 2. See also, e.g., Spatt
Letter, at 1-2 (stating that the Pilot was a ``very significant
improvement over the EMSAC proposal'' and that one of the ``major
improvements'' was ``the inclusion of lower market value stocks'');
Healthy Markets Letter I, at 11-12; Wellington Letter, at 2; MFA
Letter, at 2; Nuveen Letter, at 2; Lipson Letter, at 1; BlackRock
Letter, at 1; Vanguard Letter, at 2; CFA Letter, at 4; CIEBA Letter,
at 2; Joint Pension Plan Letter, at 2; Oppenheimer Letter, at 2.
    \84\ AJO Letter, at 2.
---------------------------------------------------------------------------

    Building on these arguments, other commenters believed it was
important to specifically ``test the argument that rebates are required
to promote liquidity provision in illiquid stocks.'' \85\ One commenter
noted that this debate ``has raged for years,'' which is ``the point of
the pilot: To provide market participants and the Commission with the
data needed to make those analyses.'' \86\ Another commenter similarly
asserted that the Pilot should include a broad set of NMS stocks to
``help settle academic debates on the relative impact of rebates on
liquid vs. less-liquid stocks and other supposedly beneficial aspects
of rebates.'' \87\
---------------------------------------------------------------------------

    \85\ Babelfish Letter, at 3.
    \86\ Healthy Markets Letter I, at 13.
    \87\ Better Markets Letter, at 6. See also, e.g., Vanguard
Letter, at 2 (``By including all NMS stocks, the SEC will receive
data to analyze the impacts of transaction fees on market quality
across various types of securities.''); TD Ameritrade Letter, at 6-7
n.11 (``including securities of small, mid and large cap companies .
. . will include some data on the impact that varying transaction
fees will have [on] thinly traded securities'').
---------------------------------------------------------------------------

    Notably, some of these commenters directly challenged the argument,
set forth by a number of other commenters, that thinly-traded or
smaller-capitalization NMS stocks would be harmed by the Pilot's
pricing restrictions. One commenter explained that, ``for less liquid
stocks, spreads tend to be wider, and as a result rebates become less
relevant as a matter of simple mathematics.'' \88\ To illustrate the
point, the commenter referred to a ``stock that typically trades at a
five-cent quoted spread,'' noting that a ``typical .0025 per share
rebate would equal one-twentieth of the quoted spread, so in these
instances a market maker's revenue from capturing the spread would far
outweigh the contribution of the rebate'' \89\ (emphasis in original).
Another commenter also questioned the ``significance of liquidity
rebates for making markets in less liquid/smaller-cap stocks,'' because
it believed this ``marginal incentive to provide liquidity . . . is
likely to be weak in the smaller-cap space typically characterized by
wide bid-ask spreads . . . .'' \90\ To support this argument, the
commenter referred to ``an empirical study of changes in maker-taker
arrangements on two European trading venues owned by BATS,'' now owned
by Cboe Global Markets, which suggested that `` `an elimination of the
make fee and a reduced take fee cap would result in worse market
quality for large capitalization stocks but better market quality for
small capitalization stocks' '' (emphasis in original).\91\ For this
reason, the commenter asserted that the ``link articulated by the
opponents of the proposed pilot is at best uncertain and that the pilot
may in fact result in improved liquidity for smaller-cap stocks''
(emphasis in original).\92\ The commenter therefore contended that it
was ``imperative to include a set of smaller-cap stocks in the pilot,
as the opponents' claims on the existence of unambiguous harm to
liquidity appear to be exaggerated and driven by preconceived
notions.'' \93\
---------------------------------------------------------------------------

    \88\ IEX Letter II, at 7. See also Credit Suisse Commentary, at
1, 3 (stating that the Pilot ``is likely to affect stocks
differently depending on their liquidity profile,'' but expecting
stocks ``with wider spreads'' in Test Groups 2 and 3 ``to continue
to behave similarly given that their liquidity may be less driven by
rebate-incentivized trading strategies to begin with''). But cf.
NYSE Letter II, at 11 (asserting that it was ``untrue'' that
``spreads for less-liquid securities are not sensitive to rebate
levels'' and referring to chart showing that NYSE American-listed
securities, ``which are generally less-liquid securities'' spent
less average time at the NBBO compared to maker-taker venues).
    \89\ IEX Letter II, at 7.
    \90\ Decimus Letter, at 4-5 (citing Marios Panayides et al.,
Trading Fees and Intermarket Competition 26 (Charles A. Dice Ctr.
for Research in Fin. Econ., Ohio State Univ., Working Paper No.
2017-3, 2017, available at, https://ssrn.com/abstract=2910438).
    \91\ Id. at 5.
    \92\ Id.
    \93\ Id.
---------------------------------------------------------------------------

    The Commission believes that the many commenters have, through
their analysis and ultimate disagreement on this issue, emphasized the
need for the Pilot to test the effect of transaction fees and rebates
on NMS stocks of all market capitalizations. It is unclear whether or
not changes to fees and rebates would harm smaller capitalization or
thinly-traded NMS stocks.\94\ As some commenters have noted, it also is
possible that the Pilot may have little effect on smaller-
capitalization or thinly-traded NMS stocks or that the Pilot may even
improve the liquidity of such stocks.\95\ The Commission also notes
that a pilot focused solely on large capitalization stocks may not
produce sufficient data to investigate how changes to transaction fees
and rebates will affect liquidity or capital formation across the
market. Because including smaller-capitalization NMS stocks in the
Pilot will produce a more meaningful dataset to support a broad
investigation into the effect of transaction fees and rebates on the
full spectrum of NMS stocks and among different segments of the
securities market, the Commission adopts this aspect of the rule as
proposed.
---------------------------------------------------------------------------

    \94\ See, e.g., Proposing Release, supra note 2, at 13065-66,
and 13069.
    \95\ See, e.g., notes 88-92 supra and accompanying text.
---------------------------------------------------------------------------

    As discussed further below, notwithstanding the decision to include
all NMS stocks regardless of market capitalization, the Commission
believes it is appropriate to exclude certain thinly-traded securities
(e.g., securities that trade fewer than 30,000 shares per day), in part
because rebates at that level of trading would be low enough to be
unlikely to impact order routing behavior and researchers would be
unlikely to get sufficient statistical power to analyze them in
isolation at those volume levels.\96\
---------------------------------------------------------------------------

    \96\ See supra Section II.C.6 (discussing the exclusion of
securities that trade fewer than 30,000 shares per day on average
from Test Groups 1 and 2). See also supra notes 88-92 and
accompanying text. Accordingly, the Commission notes that many
thinly-traded securities will be excluded from the Pilot, which
should assuage commenters' concerns regarding the impact of the
Pilot on less liquid or thinly-traded securities.

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

b. The Inclusion of ETPs
    The Commission proposed to select Pilot Securities from among all
NMS stocks, including ETPs. A number of commenters supported including
ETPs in the Pilot. Several commenters noted, for example, that
including ETPs ``would produce a more inclusive analysis of rebates and
fees across all segments of NMS stocks.'' \97\ One such commenter
believed that ``the benefits from collecting data that informs long-
term market structure improvements will outweigh any potential
temporary disadvantage.'' \98\
---------------------------------------------------------------------------

    \97\ BlackRock Letter, at 1. See also, e.g., Fidelity Letter, at
9.
    \98\ Vanguard Letter, at 2.
---------------------------------------------------------------------------

    On the other hand, a number of commenters expressed concern with
including ETPs in the Pilot. For example, one commenter stated that
``[m]any ETP issuers are . . . strongly opposed to the inclusion of
ETPs in the Pilot'' and suggested that the Commission had not
``sufficiently explained why it is appropriate to include ETPs in any
Pilot.'' \99\ This commenter noted that ``exchanges have implemented
numerous incentive structures designed to promote liquidity and narrow
spreads in ETPs'' that could be disrupted by the Pilot, ``negatively
impact[ing] liquidity and spreads in ETPs to the detriment of both new
and existing investors.'' \100\ Similarly, another commenter expected
the Pilot to ``result in spreads widening for ETPs holding pilot
stocks, even if ETPs are not included in the pilot, given that fair
value calculations rely on underlying constituent pricing,'' and
therefore cautioned that ``any negative effects of the pilot on
transaction costs could be intensified for ETP investors.'' \101\ A few
commenters ``believe[d] that the goals of the pilot can be achieved
without having to include ETPs in the pilot,'' because ``[t]he effects
of the pilot on stocks will be sufficient to draw conclusions about
potential changes to access fee rules.'' \102\
---------------------------------------------------------------------------

    \99\ Cboe Letter I, at 17-18.
    \100\ Id.
    \101\ State Street Letter, at 3.
    \102\ See, e.g., id.
---------------------------------------------------------------------------

    The Commission continues to believe that it is important to include
ETPs in the Pilot, because excluding them would hamper the Commission's
ability to gather key data that could be used to inform future
regulatory action in this area. The Commission does not believe it will
be able to draw meaningful conclusions about the impact of changes to
transaction fees and rebates on ETPs by observing the effects of the
Pilot on other securities, in part because ETPs have a unique create-
and-redeem process that does not apply to other NMS stocks.\103\
Nevertheless, ETPs are subject to the same rules and fees that apply to
all NMS stocks. To the extent that the Pilot results may inform future
policymaking, Pilot data that includes all types of NMS stocks that
would be impacted, including ETPs, will be more useful.
---------------------------------------------------------------------------

    \103\ See, e.g., Securities Exchange Act Release No. 75165 (June
12, 2015), 80 FR 34729, 34732 (June 17, 2015) (Request for Comment
on Exchange-Traded Products) (discussing the create-and-redeem
process for ETPs); Transcript of the Division of Trading and
Markets' Roundtable on Market Structure for Thinly-Traded Securities
(April 23, 2018), available at https://www.sec.gov/spotlight/equity-market-structure-roundtables/thinly-traded-securities-rountable-042318-transcript.txt (Panel Three discussing ETPs). In particular,
large volumes in ETPs can be transacted directly with the ETP issuer
in creation units, making the trading center volume in ETPs less
relevant to institutional traders that transact in large size
orders.
---------------------------------------------------------------------------

    Further, some commenters expressed concern regarding the potential
for competitive effects among certain ETP issuers. As one commenter
noted, ``if two ETPs with similar underliers or that track the same
index are placed in the two different [T]est [G]roups, the Pilot would
inevitably determine winners and losers.'' \104\ Another commenter
explained that ``ETPs with similar investment strategies are more
substitutable than stocks of operating companies,'' such that ``market
quality metrics likely play a greater role in driving flows to ETPs.''
\105\ For that reason, ``[i]f competing ETPs are in different test
groups--and market quality varies among the test groups,'' the
commenter believed that ``investors might migrate toward products in
the test groups with better market quality,'' thereby ``tilt[ing] the
playing field in favor of ETPs that happen to be assigned--at random--
to test groups that perform better at the expense of other products.''
\106\
---------------------------------------------------------------------------

    \104\ Morgan Stanley Letter, at 3-4. See also Nasdaq Letter I,
at 8-9 (stating that the Pilot was ``arbitrary and capricious and
not in accordance with law,'' in part because the Commission had
``fail[ed] to consider'' the competitive effects of placing ``ETPs
tracking similar indexes . . . in different test groups''); Cboe
Letter I, at 17.
    \105\ ICI Letter I, at 4 n.8.
    \106\ Id. at 4. See also, e.g., NYSE Letter I, at 7; Nasdaq
Letter I, at 8.
---------------------------------------------------------------------------

    While a few commenters discussed which treatment group would be
most problematic,\107\ many of the commenters took no position on the
direction of the presumed competitive impact and did not speculate
about how (or whether) inclusion in specific Pilot Groups would help or
harm ETPs.\108\
---------------------------------------------------------------------------

    \107\ See, e.g., Credit Suisse Commentary, at 6 (stating that
the Pilot could ``unintentionally advantage ETFs in the lower fee
group''). But cf. Nasdaq Letter I, at 8 (stating that ETPs ``in the
lower rebate groups would find themselves at a competitive
disadvantage to their competitors and may lose market share during
the pilot as a result'').
    \108\ See, e.g., SIFMA Letter, at 4-5; Invesco Letter, at 2-3;
Morgan Stanley Letter, at 3-4.
---------------------------------------------------------------------------

    To address the potential competitive harm, a few of these
commenters recommended that the Commission exclude ETPs from the Pilot
altogether,\109\ while most recommended that the Commission select ETPs
in a manner that may avoid any potential competitive effects among
similar ETPs, by: (1) Rotating all of the Pilot Securities through the
various treatment groups,\110\ (2) rotating only ETPs through the
various treatment groups,\111\ or (3) placing in the same Test Group
ETPs tracking similar indexes or holding similar investments.\112\
---------------------------------------------------------------------------

    \109\ See, e.g., Cboe Letter I, at 28; Invesco Letter, at 2-3;
State Street Letter, at 3; STA Letter, at 4.
    \110\ See, e.g., ICI Letter I, at 4-5, 5 n.10 (suggesting that
the Commission rotate securities every three to six months);
Oppenheimer Letter, at 3; Angel Letter II, at 3 (suggesting a
quarterly rotation). These commenters did not believe that rotation
would ``adversely affect the validity of pilot data'' or ``impose
more than a de minimis implementation burden or other costs on
market participants.'' ICI Letter I, at 4. See also Angel Letter II,
at 3. These commenters suggested that ``[a]nalysis of individual
security characteristics before and after a rotation to a new group[
] could yield relevant and important results.'' Oppenheimer Letter,
at 3. See also Angel Letter II, at 3.
    \111\ See, e.g., SIFMA Letter, at 5; State Street Letter, at 4;
Healthy Markets Letter II, at 8.
    \112\ SIFMA Letter, at 4. See also, e.g., Nuveen Letter, at 2;
BlackRock Letter, at 2; FIA Letter, at 4; Fidelity Letter, at 9;
State Street Letter, at 4; STANY Letter, at 4; Healthy Markets
Letter II, at 8. But cf. Angel Letter II, at 3 (stating that
``similar ETFs are probably the best natural controls for each
other, as their underlying portfolios are virtually identical,''
such that ``similar ETFs should definitely be in different treatment
groups to increase the power of the pilot'').
---------------------------------------------------------------------------

    Other commenters criticized these proposed alternatives for
selecting ETPs. One commenter, for example, questioned ``whether any of
the proposed remedies would address these concerns effectively or
fairly.'' \113\ Another commenter expressed concern that the
suggestions to place ``similar'' ETPs in the same Test Group might be
too complex to implement, as determining whether ETPs are ``similar''
to one another for purposes of Pilot rotation can be extremely
nuanced.\114\ This commenter explained that an ``effective
classification should take into account an ETP's underlying index,
portfolio constituents and asset class to provide an appropriate
`apples to apples' analysis,'' in addition to ``factors such as assets
under management, spread size and daily trading volume,'' which the
commenter believed ``would

introduce unnecessary complexity into the Proposal.'' \115\
---------------------------------------------------------------------------

    \113\ Schwab Letter, at 3.
    \114\ Invesco Letter I, at 2-3. See also, e.g., Healthy Markets
Letter II, at 8 (noting that it may be ``difficult to clearly and
consistently define `similar' ETPs'').
    \115\ Invesco Letter, at 2-3.
---------------------------------------------------------------------------

    The Commission recognizes the concern that securities placed in one
treatment group could be impacted differently than similar securities
placed in a different treatment group. While that effect could occur
for any security (e.g., stocks of different operating companies in the
same industry), it could potentially be more prominent for ETPs that
may be substantially similar. Nevertheless, the Commission notes that
similar ETPs are not necessarily identical and many other factors
influence investor demand and trading, including expense ratios,
trading commissions, and existing holdings.
    The Commission has carefully considered the three alternatives
suggested by the commenters \116\ and declines to adopt them. Rotating
either (1) all Pilot Securities or (2) only ETPs would increase
complexity and could increase the costs of the Pilot as the Commission,
exchanges, and market participants would need to manage a pilot whose
securities change treatment groups every several months. In particular,
a rotation design would be considerably more complex than the proposed
design by, for example, adding more treatment subgroups and requiring
frequent rotation of those subgroups. Given the choice between a simple
Pilot design with a short duration, on one hand, and a considerably
more complex design with a longer duration, on the other hand, the
Commission prefers to adopt this aspect of the rule as proposed.
Compared to the alternative designs suggested by some commenters, the
proposal results in a short narrowly drawn pilot with fewer
complexities and burdens, which is an outcome supported by many
commenters.\117\
---------------------------------------------------------------------------

    \116\ The Commission also considered comments providing
suggestions relevant to the implementation of these three
alternatives. As discussed above, the Commission is not adopting the
alternatives.
    \117\ See Section II.D.2 (discussing the duration of the Pilot)
and Section II.C.5. through 6. (discussing the number of stocks to
be included in the Pilot) infra.
---------------------------------------------------------------------------

    The Commission also considered the suggestion to group ETPs with
similar underlying holdings into the same treatment group. While this
suggestion involves slightly less ongoing complexity than rotating
securities during the Pilot, the Commission declines to adopt this
suggestion because it introduces its own complexity in that
categorizing ETPs according to their underlying holdings (and
potentially other characteristics) involves the exercise of subjective
judgment. In addition, grouping similar ETPs can negatively impact the
representativeness of the different treatment groups, particularly if
all of the similar ETPs are similar in volume, price, and market
capitalization. The Commission believes it may learn more from a study
that compares how different pricing regimes affect similarly-situated
ETPs, whereas keeping similar ETPs in the same treatment groups could
reduce the quality and usefulness of Pilot's results by inhibiting the
ability of researchers to compare treatment groups. While the potential
exists that similar ETPs in different Pilot treatment groups might
trade differently during the Pilot, it is not certain--and commenters
held divergent views concerning--whether and to what extent the Pilot
would be a contributing factor. Whether the absence of rebates or lower
fees help or hurt trading in similar ETPs is far from certain, and
whether investors would base trading decisions on those distinctions is
unclear. Excluding ETPs to avoid speculative harm would, however,
decidedly reduce the utility of the Pilot's results to inform future
policy making. Therefore, the Commission has determined not to adopt a
requirement to rotate securities or to group like ETPs. For these
reasons, the Commission adopts the rule as proposed to include ETPs in
the Pilot.
c. The Inclusion of Canadian Interlisted Stocks
    In the Proposal, the Commission requested comment on the selection
criteria and whether the Commission should consider inclusion or
exclusion of certain stocks from the Pilot sample set.\118\ In
response, several commenters discussed the inclusion of Canadian
interlisted stocks in the Pilot and recommended that the Commission
coordinate with Canadian securities regulators to avoid altering the
trading dynamics between Canada and the U.S. in those securities.\119\
For example, one commenter was ``concerned that the inclusion of
Canadian interlisted stocks in either one of the reduced access fee or
no rebate test groups may materially impact order flow by encouraging
transactions to move away from U.S. exchanges and on to Canadian
exchanges.'' \120\ Other commenters suggested that the Commission
coordinate with the Canadian Securities Administrators to avoid
``dramatic differences in the trading economics on inter-listed stocks
between Canadian and U.S. markets.'' \121\
---------------------------------------------------------------------------

    \118\ See Proposing Release, supra note 2, at 13019 (Questions
#5 and 8). See also id. at 13013 n.46 (noting the receipt of a
letter from the Canadian Security Traders Association proposing a
cross-border study on the effect of rebates on market quality in
conjunction with the Canadian Securities Administrators).
    \119\ See, e.g., Fidelity Letter, at 8; OMERS Letter, at 1; FIA
Letter, at 4; Healthy Markets Letter I, at 35; STA Letter, at 5.
Canadian interlisted stocks are stocks of Canada-based companies
that are primarily listed on a Canadian exchange (generally the
Toronto Stock Exchange), but that choose to also dually-list on a
U.S. exchange. See https://www.tsx.com/trading/toronto-stock-exchange/fee-schedule/ni-23-101 (for a quarterly list of
approximately 187 interlisted securities published by the Toronto
Stock Exchange featuring stocks that are listed on the Toronto Stock
Exchange or the TSX Venture Exchange).
    \120\ FIA Letter, at 4. See also Fidelity Letter, at 8.
    \121\ See, e.g., STA Letter, at 5.
---------------------------------------------------------------------------

    The Commission also received a comment letter from the academics
retained by the Canadian Securities Administrators (``CSA'') to assist
with planning, conducting, and analyzing a Canadian transaction fee
pilot (``Canadian Pilot'').\122\ According to the CSA researchers, the
Canadian Pilot likely will propose that, for approximately 180
interlisted stocks, 90 of them would be included in a no-rebate test
group with the remaining 90 placed in a control group.\123\ In their
letter, the CSA researchers requested that the Commission's Pilot treat
interlisted stocks similarly to their Canadian Pilot proposal--i.e.,
that both pilots place the same 90 interlisted stocks into their
respective no-rebate group and place the other 90 stocks into their
respective control group.\124\ By doing so, the CSA researchers believe
that both pilots will avoid confounding the analysis for each
respective pilot with respect to interlisted stocks because differences
in fees and rebates otherwise could incentivize shifts in cross-border
routing.\125\
---------------------------------------------------------------------------

    \122\ See CSA Letter. The preliminary details of the pilot
contemplated by the CSA, as reflected in the CSA Letter, were not
publicly available prior to the Proposing Release.
    \123\ Id. at 1.
    \124\ Id. at 2.
    \125\ Id. at 1-2.
---------------------------------------------------------------------------

    The Commission agrees with the CSA researchers and believes that it
is appropriate to coordinate with the CSA on a transaction fee pilot in
order to avoid the potential for distortionary effects between U.S. and
Canadian markets if rebates in the ``no-rebate'' interlisted stocks
continue to be allowed on one country's exchanges but not the other.
    Accordingly, in the event that the CSA proceeds with the Canadian
Pilot concurrently with the Commission's Pilot, the Commission will
append to the no-rebate Test Group the same Canadian interlisted stocks
that the CSA selects for its no-rebate treatment group, and the
remaining interlisted stocks will

be placed into the Control Group.\126\ Placing the same interlisted
stocks into the Pilot's no-rebate test group that the Canadian Pilot
places into its no-rebate test group will avoid the potential to alter
the trading dynamics between Canadian exchanges and U.S. exchanges in
those stocks that otherwise could result if not all exchanges were
subject to the same conditions, which should support the integrity of
the no-rebate test groups in both pilots.\127\ Coordination also will
avoid the potential for the Commission's Pilot to interfere with the
ability of Canadian securities regulators to conduct a pilot of their
own on Canadian-listed stocks which could be adversely impacted in the
absence of coordination.\128\ The Commission appreciates the interest
expressed by the CSA researchers in coordinating on a pilot with
respect to interlisted stocks, and looks forward to cooperating with
the CSA on this important data-gathering initiative in a manner that
benefits both nations' securities markets.
---------------------------------------------------------------------------

    \126\ In the event that the Canadian pilot does not go forward
or does not commence simultaneously with the Commission's Pilot,
interlisted stocks will be placed at the Pilot's outset into the
Control Group. Placing interlisted stocks in the Control Group will
preserve the status quo for interlisted stocks and avoid altering
the trading dynamics in them between U.S. and Canadian exchanges,
which will avoid adversely impacting Test Groups 1 and 2 with
respect to those stocks. If the Canadian pilot does go forward, but
the interlisted stocks that will be included in its no-rebate test
group are not known by the Commission at the time the Commission
issues the initial List of Pilot Securities, the Commission may
separately issue a subsequent list identifying the interlisted
stocks that will be appended to Test Group 2 or the Control Group
for the remainder of the Pilot.
    \127\ See, e.g., Proposing Release, supra note 2, at 13024
(discussing the design of proposed Test Group 3 and the prohibition
in Linked Pricing to support the integrity of a no-rebate test
group). See also CSA Letter, at 1 (expressing concern that ``the
results of the Canadian Pilot may be statistically and economically
inconclusive'' without coordination with the Pilot).
    \128\ See CSA Letter, at 1.
---------------------------------------------------------------------------

d. The Inclusion of Other Types of NMS Stocks
    A few commenters addressed the inclusion of other types of NMS
stocks, such as American Depositary Receipts (``ADRs''), rights, and
warrants. One commenter supported the proposed broad scope of Pilot
Securities and believed that ``analysis of . . . ADRs could provide
additional insight into the effect rebates and fees have on liquidity,
spreads and the overall trade experience.'' \129\ Another commenter
objected to the Commission's proposal to include rights and warrants in
the Pilot, but did not explain the basis for its objection.\130\ As
noted above, however, most commenters expressed general support for a
Pilot that includes all NMS stocks.\131\
---------------------------------------------------------------------------

    \129\ Oppenheimer Letter, at 3.
    \130\ TD Ameritrade Letter, at 4.
    \131\ See, e.g., Vanguard Letter, at 2; Joint Pension Plan
Letter, at 2; Oppenheimer Letter, at 2.
---------------------------------------------------------------------------

    The Commission continues to believe that it is appropriate to
select Pilot Securities from among the overall universe of NMS stocks.
Accordingly, the Commission will include all types of NMS stocks in the
Pilot, subject to the selection criteria described below. The
Commission believes this is appropriate because exchange fees and
rebates apply to all NMS stocks, as does the fee cap under Rule 610(c).
Aligning the scope of the Pilot with the scope of equities fees and the
equities fee cap will best facilitate analysis of the impact of changes
to transaction fees and rebates on different segments of the securities
market. Excluding from its scope any categories of NMS stocks would
deprive the Commission of data to inform future regulatory action
regarding this segment of the market. For those reasons, the Commission
adopts this aspect of the Pilot as proposed, subject to the selection
methodology described below in Section II.C.
4. The Ability of Issuers To Opt Out of the Pilot
    The Commission solicited comment as to whether issuers should be
allowed to request that their securities not be included in one of the
Pilot's Test Groups (i.e., ``opt out'') and the potential impact that
such an approach might have on the extent and quality of the data
collected by the Pilot.\132\
---------------------------------------------------------------------------

    \132\ See Proposing Release, supra note 2, at 13019.
---------------------------------------------------------------------------

    Several commenters argued that issuers should be permitted to opt
out of participation in the Pilot based on process concerns. For
example, one commenter's ``largest concern [was] that the genesis of
the proposal . . . deliberately excluded issuer representation'' by
``excluding the NYSE and Nasdaq from participation on the [EMSAC].''
\133\ This commenter asserted that the ``exclusion . . . from
participation in the pre-proposal discussions renders the `Opt Out'
option absolutely essential.'' \134\ Another commenter suggested that
the Commission could address such concerns by ``conven[ing] a summit
for issuers and perhaps [creating] a series of webcasts . . . to
explain the purpose of the test,'' as well as by ``form[ing] an Issuer
Advisory Committee that can weigh data and let companies opt into or
out of a test.'' \135\
---------------------------------------------------------------------------

    \133\ Issuer Network Letter I, at 2 (emphasis omitted) and
Issuer Network Letter II. See also Cboe Letter I, at 14-15
(criticizing the Pilot as ``based on recommendations made by a
committee that, however well-meaning, was flawed in its
construction'' because it lacked ``exchange or issuer
representation''); Home Depot Letter, at 2 (stating that the EMSAC
``did not include any input from issuers or issuer advocates . . .
like NYSE and Nasdaq'' and that it was ``difficult'' for ``issuers .
. . to understand how this Pilot could be implemented without input
from the issuers . . . it will directly impact''); ModernIR Email,
at 1 (stating that a ``study . . . crafted without input or choice
for issuers . . . would be an inexcusable travesty'').
    \134\ Issuer Network Letter I, at 2, 7 (emphasis omitted).
    \135\ ModernIR Email, at 1. See also Issuer Network Letter I, at
7 (suggesting that the Commission ``[p]lace the Access Fee Pilot on
hold for 90 days while [it] gathers a Blue Ribbon Panel . . . of a
dozen or so NYSE and Nasdaq listed company financial executives so
that we might conduct a comprehensive review'' of the Pilot
(emphasis omitted)).
---------------------------------------------------------------------------

    The Commission's proposal was subject to a full notice-and-comment
rulemaking process during which the Commission received a large number
of comments from the public, including issuers and their listing
exchanges. While the EMSAC recommendation was one of many inputs that
informed the Commission's development of the Pilot, the Commission's
Pilot differs substantially from EMSAC's recommendation as numerous
commenters have recognized.\136\ Accordingly, the Commission believes
that issuers, as well as other market participants, have had ample
opportunity to participate in the consideration of the Commission's
proposal for the Pilot.
---------------------------------------------------------------------------

    \136\ The EMSAC held meetings open to the public, which were
publicly webcast, as it was developing its recommendations. To
promote awareness of those meetings, the Commission issued press
releases to announce those meetings, which included the agenda for
those meetings. See, e.g., SEC Press Release 2015-216 (announcing
the agenda for an October 27, 2015 EMSAC meeting, highlighting the
discussion of fees and rebates, and soliciting comments from the
public thereon), available at https://www.sec.gov/news/pressrelease/2015-216.html. The Commission also published meeting minutes and
transcripts of the full EMSAC meetings. Finally, the Commission
provided a mechanism for the public to submit comments to the EMSAC
for its consideration, and a number of people did submit comments.
See https://www.sec.gov/comments/265-29/265-29.shtml (comment file
for File No. 265-29).
---------------------------------------------------------------------------

    Other commenters supported opt out based on specific concerns
surrounding the potential impact of the Pilot. A number of these
commenters were listed company issuers that expressed concern about how
the Pilot would affect trading in their securities.\137\ Commenters

supporting opt out emphasized the importance of giving issuers the
ability to avoid potential costs and uncertainty resulting from the
Pilot.\138\ For example, one commenter believed that the Pilot could
``caus[e] spreads to widen in securities selected for the test
groups,'' such that ``companies conducting a repurchase program or
secondary offering would incur higher costs,'' and the Commission
received a number of comment letters from listed issuers specifically
referencing that point and echoing the same concerns.\139\ This
commenter further argued that ``the Proposal would also harm the
ability of issuers whose securities are subject to access fee caps to
compete'' with issuers not subject to the Pilot's exchange fee
restrictions.\140\
---------------------------------------------------------------------------

    \137\ See, e.g., P&G Letter, at 1; McDermott Letter, at 1; Level
Brands Letter, at 1; ACCO Letter, at 1; NorthWestern Letter, at 1-2;
Ethan Allen Letter, at 1; Unitil Letter, at 1; Johnson Letter, at 2;
Sensient Letter, at 2; Hawaii Letter, at 1; Cott Letter, at 1; Leaf
Letter, at 1-2; First Majestic Letter, at 1; SIFCO Letter, at 2;
Weingarten Letter, at 1; Ennis Letter, at 2; Trex Letter, at 1;
Genesis Letter, at 1; Tredegar Letter, at 1; Energizer Letter, at 1;
ProAssurance Letter, at 1; Home Depot Letter, at 1; SMP Letter, at
2; Halliburton Letter, at 1; Era Letter, at 2; Natural Grocers
Letter, at 2; Newpark Letter, at 2; Knight-Swift Letter, at 2;
Farmer Mac Letter, at 1; BancorpSouth Letter, at 1-2; Haverty
Letter, at 1; Ampco-Pittsburgh Letter, at 2; Anixter Letter, at 2;
Avangrid Letter, at 2; NHC Letter, at 1; HP Letter, at 2; Curtiss-
Wright Letter, at 2; Murphy Letter, at 1.
    \138\ See, e.g., Cboe Letter I, at 29; ASA Letter, at 4-5.
    \139\ See Addendum to Healthy Markets Letter II, at 11
(attaching an email from NYSE to its listed companies). See also
note 137 supra.
    \140\ See NYSE Letter I, at 4. In its letter, the commenter
mentioned analysis it performed on NYSE-listed issuer secondary
offerings in 2017 that suggested that issuers ``with average spreads
under 20 basis points paid an average discount to market price of
2.6%'' and that ``companies with spreads above 20 basis points had
to discount their offerings nearly twice as much, to 4.9%.'' NYSE
Letter I, at 14 n.51. It is unclear, however, whether wider spreads
cause larger offering discounts or whether they are simply
correlated with them. For example, smaller companies that are less
well capitalized may have a wider spread compared to a larger,
better capitalized company, which could result in spreads being
correlated with a company's cost of capital (i.e., wider spreads
could be a reflection of a company's relative credit risk and cost
of capital, not a driver of it).
---------------------------------------------------------------------------

    Many other commenters opposed opt out.\141\ Some of these
commenters dismissed the concerns described above regarding the
potential costs on issuers whose stock is included in the Pilot.\142\
For example, one commenter disagreed with the notion that ``rebates are
needed to incentivize market makers to quote tight spreads'' in the
stocks of certain issuers who had submitted comment letters.\143\ This
commenter explained that the ``fifth of a cent rebate is not
incentivizing a tight bid-ask spread in these issuers' stocks,''
because that rebate represents an insignificant portion of their
average spread.\144\ Another commenter disagreed with the suggestion
that the Pilot would have a negative impact on issuers, arguing that
such position ``directly contradicts the public support by investors
for the Pilot.'' \145\ This commenter opined that the ``fundamental
forces of supply and demand that affect . . . the relative
attractiveness of individual public company stocks will be in no way
impaired if . . . exchanges are precluded from paying a rebate, or
required to accept a lower access fee.'' \146\
---------------------------------------------------------------------------

    \141\ See, e.g., Joint Asset Managers Letter, at 2; Citi Letter,
at 5; AJO Letter, at 2; Lipson Letter, at 1.
    \142\ See supra notes 138-140 and accompanying text.
    \143\ Themis Trading Letter II, at 3.
    \144\ Id. at 2-3.
    \145\ IEX Letter II, at 3. See also, e.g., Joint Pension Plan
Letter, at 2 (stating that the ``asset manager/asset owner community
is heavily supportive of such a pilot,'' which should ``provide the
necessary confidence to all public companies to be included''); ICI
Letter II, at 2 (``market structure is not a primary consideration
guiding the investment decisions of long-term investors''); Joint
Asset Managers Letter, at 2; Healthy Markets Letter II, at 2. But
cf. NYSE Letter II, at 4 (stating that ``many buy-side
institutions'' supporting the Pilot ``are willing to experiment with
real-world public companies and end investors to `get the data,'
even if the expected impact of limiting or eliminating rebates will
be a deterioration of the public quote'').
    \146\ IEX Letter II, at 3-4.
---------------------------------------------------------------------------

    Other commenters asserted that opt out would ``adversely affect the
quality of the data and the credibility of the Pilot,'' which could
weaken the findings that could be drawn from it.\147\ One commenter
explained that opt out ``would undercut the ability of economists to
draw sharp inferences based upon performance differences between the
treated and control stocks'' and that the ``non-random character of
`opt outs' '' could ``disproportionately reflect firms that were
especially responsive to feedback from the listing exchange or could
disproportionately reflect less liquid stocks, which would be
especially important for the access fee pilot.'' \148\
---------------------------------------------------------------------------

    \147\ RBC Letter I, at 6. See also, e.g., LATEC Letter, at 2;
Joint Pension Plan Letter, at 2; MFS Letter, at 3; Clearpool Letter,
at 8.
    \148\ Spatt Letter, at 3. See also, e.g., Healthy Markets Letter
I, at 12; CII Letter, at 4.
---------------------------------------------------------------------------

    One listed issuer, which is a large investment manager,
``welcome[d] the opportunity for [its] stock to be included in the
Pilot, with the ultimate goal of improving the overall market to be one
where prices can be set by long-term investors without distortion from
speculative market participants.'' \149\ This issuer did not ``expect
that a reduction or outright removal of rebates will have any
significant or harmful effects on the quality of prices displayed in
the public lit market, interfere with genuine liquidity and price
formation, or negatively impact [its] stock's trading volume, spread or
displayed size.'' \150\
---------------------------------------------------------------------------

    \149\ T. Rowe Price Letter, at 4. The issuer explained that its
stock, ``on average, trades about 1.5 million shares daily, with an
average displayed size of 200 shares and a spread of nearly $0.07,''
with ``40% of [its] average daily volume occur[ring] as displayed on
exchange volume.'' Id. at 4-5.
    \150\ Id. at 5.
---------------------------------------------------------------------------

    Finally, two commenters further argued that opt out would be
inconsistent with the existing market structure. One of these
commenters observed that ``[i]ssuers currently have no say over
exchanges' policies'' and that ``exchanges that modify their access
fees dozens of times a year do not survey issuers or permit them to
opt-out of these fee changes or creation of order types.'' \151\ The
other commenter opined that opt out ``may set an unfortunate precedent
that would allow an issuer to pick and choose among those aspects of
the National Market System that it likes while rejecting other aspects
that it may find less attractive to it, but [which] are necessary to
the smooth functioning of [the] United States public equity markets.''
\152\
---------------------------------------------------------------------------

    \151\ Better Markets Letter, at 7.
    \152\ MFS Letter, at 3.
---------------------------------------------------------------------------

    After careful consideration, the Commission does not believe that
issuers should be permitted to opt out of participation in the Pilot.
While the Commission understands issuers' concerns, allowing issuers to
opt out could undermine the representativeness of the Pilot's treatment
groups and potentially bias the Pilot's results, depending on the
number and characteristics of issuers that opt out. In turn,
researchers would be less able to rely on the data to perform analyses
and draw specific conclusions about the impact of the Pilot, thereby
limiting the usefulness of the Pilot's data to the Commission and
future regulatory initiatives.\153\ Although some commenters believe
that issuers may incur potential costs or endure competitive harms
depending on which of the Pilot's treatment groups their stock is in,
other commenters have argued that such effects are unlikely to
manifest. The Commission does not believe it is appropriate to
implement an opt out provision that could frustrate the collection of
useful and representative data based solely on concerns expressed by
some commenters regarding uncertain harms. It is precisely because of
this uncertainty that the Commission believes it is necessary to
conduct the Pilot to study these contested issues through an objective
empirical review of exchange transaction fees and rebates. For those
reasons, the Commission

adopts this aspect of the Pilot as proposed.
---------------------------------------------------------------------------

    \153\ See, e.g., Short Sale Position and Transaction Reporting,
Study by the Staff of the Division of Economic and Risk Analysis,
June 5, 2014, at 66-67 (discussing selection bias in the context of
an ``opt in'' voluntary pilot design).
---------------------------------------------------------------------------

C. Pilot Design

1. Need for a Pilot
    As a threshold issue, commenters disagreed about whether the
Commission should conduct any kind of pilot study of transaction fees
and rebates. One commenter, for example, characterized the proposed
Pilot as ``a solution in search of problem'' and claimed that the
Commission ``has provided no evidence that existing fee practices are
harming investors or interfering with fair competition.'' \154\ Another
commenter believed that the Pilot was unnecessary, but for the opposite
reason--namely, that there is ample evidence of the negative effects of
exchange rebate pricing models, such that the Commission should instead
take immediate action to ban them.\155\
---------------------------------------------------------------------------

    \154\ Cboe Letter I, at 5. See also, e.g., Virtu Letter, at 1-2;
Nasdaq Letter I, at 12-13. But cf. MFA Letter, at 2 (stating that
``regulators should periodically assess market practices and
regulations to ensure that U.S. equity markets continue to remain
efficient, liquid, fair, resilient and transparent for all market
participants'').
    \155\ See Larry Harris Letter, at 9-10.
---------------------------------------------------------------------------

    Most commenters, however, thought a Commission-led pilot was
necessary and supported the Commission's proposal to conduct one.\156\
These supportive commenters observed that ``market participants have
heavily debated the effects that transaction-based fees, particularly
access fees, and rebates may have on the equity markets'' and
``commend[ed] the SEC for advancing this discussion through a time-
limited, empirical study.'' \157\ Some of those commenters thought a
Commission-led pilot was necessary because competitive pressures among
exchanges may serve as a barrier to market-led reforms in this
area.\158\ The Commission agrees with the commenters that stated that
the Pilot is necessary because, as reflected in the comments discussed
above,\159\ there is strong disagreement about the impact of exchange
fee-and-rebate pricing models but a lack of data to study the issue.
The Commission believes it is important to further investigate these
impacts.\160\
---------------------------------------------------------------------------

    \156\ See, e.g., Decimus Letter, at 4 (stating that the Pilot
``would be valuable in generating concrete information and more
preferable to back-of-the-envelope calculations based on
questionable assumptions''); Wellington Letter, at 1 (stating that
the Commission could only ``draw[ ] definitive conclusions on the
impact of existing pricing models . . . through an actual
implementation'' of the Pilot); Verret Letter I, at 4 (stating that
the Commission ``appears to have considered adoption of a mandatory
rule to reshape market structure, and determined instead to take the
more deliberative and less costly approach of an initial pilot
program to generate more data from which it can determine a path
forward on market structure reform''); IAC Recommendation, at 2; MFA
Letter, at 2; ICI Letter I, at 1-2; RBC Letter I, at 2; Joint Asset
Managers Letter, at 2; Clark-Joseph Letter, at 1; Babelfish Letter,
at 3; State Street Letter, at 2; Themis Trading Letter II, at 3; IEX
Letter I, at 2-3.
    \157\ Fidelity Letter, at 2. See also, e.g., Brandes Letter, at
1 (expressing support for the Pilot and the ``Commission's effort to
shed light into a subject of heated debate among market
participants''); Barnard Letter, at 1 (stating that the Pilot was
``important, as historically there are many views on this topic, but
a paucity of credible data from which to draw conclusions''); Angel
Letter II, at 1 (stating that ``various commenters have wildly
differing perspectives on what will happen under the pilot,'' which
is ``strong evidence as to why the pilot is necessary'').
    \158\ See, e.g., T. Rowe Price Letter, at 3; Clearpool Letter,
at 2. The Commission notes that Nasdaq conducted an independent
access fee experiment in 2015, but the limited nature of that
experiment makes it difficult to draw conclusions from the data
gathered by Nasdaq. See Proposing Release, supra note 2, at 13011-
12. See also, e.g., IEX Letter III, at 6 (``Nasdaq's experiment and
its outcomes aren't a perfect proxy for what is likely to happen in
the Transaction Fee Pilot. That experiment was done unilaterally and
only in highly-liquid securities.''); Larry Harris Letter, at 9
(noting that Nasdaq's ``experimental fee reduction did not occur at
all trading venues that traded the subject securities,''
demonstrating that ``regulatory action is necessary to establish a
common pricing standard because market forces alone will not do
it'').
    \159\ See Section II.A.2 for a discussion of these comments.
    \160\ See also Section II.A.2 for a discussion of these impacts.
---------------------------------------------------------------------------

2. Pilot Design
    For each NMS stock that meets the initial criteria to be a Pilot
Security, discussed above, the Commission proposed to assign it to one
of three Test Groups, with 1,000 NMS stocks each, or the Control
Group.\161\ The composition of each Test Group would remain constant
for the duration of the Pilot, except, as described below, to reflect
changes to the composition of the groups caused by mergers, delistings,
or removal from a Test Group due to the share price of a stock closing
below $1.\162\
---------------------------------------------------------------------------

    \161\ See Proposing Release, supra note 2, at 13019. The
Commission notes that the proposed language in Rule
610T(b)(2)(ii)(E) has been modified slightly. As proposed, Rule
610T(b)(2)(ii)(E) was labeled as ``Test Group.'' As adopted, the
label ``Pilot Group'' is being substituted for the phrase ``Test
Group'' to provide additional clarity.
    \162\ See id.
---------------------------------------------------------------------------

    The Commission received a number of comments on the proposed Pilot
design, discussed below, focusing mainly on the number of securities
included in each Test Group. After consideration of all the comments
received and for the reasons discussed below, the Commission is
adopting two Test Groups that each contain 730 NMS stocks, functionally
combining proposed Test Groups 1 and 2 into a new Test Group 1 with a
blended fee cap of $0.0010. Accordingly, for the duration of the Pilot,
the following pricing restrictions will apply to Test Groups 1 and 2,
while the Control Group will remain subject to the current access fee
cap in Rule 610(c):

------------------------------------------------------------------------
                                       Proposed             Adopted
------------------------------------------------------------------------
Fee Cap Test Group 1............  1,000 NMS stocks..  730 NMS stocks.
                                  $0.0015 fee cap     $0.0010 fee cap
                                   for removing &      for removing &
                                   providing           providing
                                   displayed           displayed
                                   liquidity.          liquidity.
Fee Cap Test Group 2............  1,000 NMS stocks..  Not adopted.
                                  $0.0005 fee cap
                                   for removing &
                                   providing
                                   displayed
                                   liquidity.
No Rebate Test Group............  1,000 NMS stocks..  730 NMS stocks
                                                       (plus appended
                                                       Canadian
                                                       interlisted
                                                       stocks).
                                  Rebates and Linked  No change.
                                   Pricing
                                   Prohibited for
                                   removing &
                                   providing
                                   displayed &
                                   undisplayed
                                   liquidity (except
                                   for specified
                                   market maker
                                   activity).
                                  Rule 610(c) cap     No change.
                                   applies.
Control Group...................  Pilot Securities    No change.
                                   not in a Test
                                   Group.
------------------------------------------------------------------------

3. No Overlap With Tick Size Pilot
---------------------------------------------------------------------------

    \163\ See Proposing Release, supra note 2, at 13019-13020 n.117,
13020 (describing the proposed composition of the Tick Size Pilot
overlap subgroups). In the Proposal, the Commission specifically
solicited comment on whether the Pilot should overlap with the Tick
Size Pilot. See id. at 13025.
---------------------------------------------------------------------------

    While the Commission's proposed Pilot design took into
consideration the possibility that the Pilot could have been adopted
before the end of the Tick Size Pilot Program, the Commission also
noted that the overlap design would not be necessary if that were not
the case.\163\
    A few commenters opined on the potential overlap between the
proposed Pilot and the Tick Size Pilot, disagreeing on whether overlap
would be appropriate.\164\ However, because the Tick Size Pilot ended
on September 28, 2018, there no longer is any need for the Transaction
Fee Pilot to control for potential data distortions that could have
otherwise resulted from the simultaneous operation of the two pilot
programs. Accordingly, the Commission is not adopting the proposed Tick
Size Pilot overlap design.
---------------------------------------------------------------------------

    \164\ Cf., e.g., Clark-Joseph Letter, at 2 (noting that overlap
``certainly would not be a serious impediment''); SIFMA Letter, at 3
(arguing against an overlap).
---------------------------------------------------------------------------

    Relatedly, some commenters discussed whether there should be a
delay between the end of the Tick Size Pilot and the start of the
proposed Transaction Fee Pilot, with commenters disagreeing on that
point. For example, one commenter thought a delay would be appropriate
to allow markets to normalize before conducting a subsequent pilot
\165\ while another commenter thought markets would revert to their
baseline state extremely quickly after the Tick Size Pilot ends.\166\
---------------------------------------------------------------------------

    \165\ See Cboe Letter I, at 30.
    \166\ See Healthy Markets Letter I, at 14.
---------------------------------------------------------------------------

    The Tick Size Pilot concluded, but post-pilot data continues to be
collected until April 2, 2019. However, the Transaction Fee Pilot is
subject to a one-month implementation period followed by a six-month
pre-Pilot Period. Accordingly, the core of the Transaction Fee Pilot
will not commence until after the post-pilot period for the Tick Size
Pilot ends. By then, the Commission believes that the markets will have
had sufficient time to normalize and any overlap between the
Transaction Fee Pilot's pre-Pilot Period and the Tick Size Pilot's
post-pilot period will be minimal. In both cases, the respective pre-
and post-pilot periods are collecting benchmark data on the status quo.
As such, the overlap between them should not compromise either dataset.
    Finally, two commenters recommended that the Commission analyze the
Tick Size Pilot data prior to proceeding with the Transaction Fee
Pilot.\167\ While preliminary results from the Tick Size Pilot have
been made public, the two pilots are sufficiently dissimilar that the
Commission sees no reason for delay. The Tick Size Pilot tested a wider
minimum increment (from one cent to five cents) for smaller-
capitalization stocks, whereas the Transaction Fee Pilot will test a
lower rate for the Rule 610(c) fee cap and a prohibition on exchange
rebates (which typically are less than one-third of a penny) for stocks
of all market capitalizations. Accordingly, findings from the Tick Size
Pilot are not relevant to the design of the Transaction Fee Pilot.
---------------------------------------------------------------------------

    \167\ See Cboe Letter I, at 29; Nasdaq Letter I, at 4.
---------------------------------------------------------------------------

4. Stratified Selection of Pilot Securities
    The Commission proposed to select the stocks to be included in each
of the Test Groups and the Control Group through stratified sampling in
a manner that permits comparisons between each Test Group and the
Control Group.\168\
---------------------------------------------------------------------------

    \168\ See Proposing Release, supra note 2, at 13019.
---------------------------------------------------------------------------

    One commenter expressed support for the proposed approach to
stratification and noted that it was ``fundamental to the ability to
undertake causal inference in this setting . . . .'' \169\ In contrast,
a number of public company commenters expressed concern that stratified
sampling could result in their stocks being placed in a different Test
Group from other similar stocks in their ``peer group,'' which could
complicate comparisons of their stock's performance against peer-group
metrics.\170\ As discussed above, those commenters supported allowing
companies to ``opt out'' of the Pilot, which could impact the
stratification.\171\ Further, as discussed above, some commenters
recommended that the Commission select ETPs for the Pilot in a manner
that may avoid any potential competitive effects among similar ETPs,
either by: (1) Rotating all of the Pilot Securities through the various
treatment groups, (2) rotating only ETPs through the various treatment
groups, or (3) grouping ETPs with similar underlying holdings into the
same treatment group.\172\
---------------------------------------------------------------------------

    \169\ See Spatt Letter, at 3.
    \170\ See, e.g., Mastercard Letter, at 2; Avangrid Letter, at 2;
Energizer Letter, at 1.
    \171\ See supra Section III.C.4.
    \172\ See supra Section III.C.3.b.
---------------------------------------------------------------------------

    While the Commission understands the concerns of these commenters,
as discussed above in Section II.B, allowing issuers to opt out of the
Pilot could undermine the representativeness of the Pilot's treatment
groups and bias the Pilot's results. Further, also as discussed above
in Section II.B, rotating ETPs would require the Commission to
implement a more complex and lengthy design in order to maintain