Order Competition Rule — SEC — US

SECURITIES AND EXCHANGE
COMMISSION
17 CFR Parts 240 and 242
[Release No. 34–96495; File No. S7–31–22] RIN 3235–AM57 Order Competition Rule AGENCY: Securities and Exchange Commission. ACTION: Proposed rule. SUMMARY: The Securities and Exchange Commission (‘‘Commission’’) is proposing to amend the regulation governing the national market system (‘‘NMS’’) under the Securities Exchange Act of 1934 (‘‘Exchange Act’’) to add a new rule designed to promote competition as a means to protect the interests of individual investors and to further the objectives of an NMS. The proposed rule would prohibit a restricted competition trading center from internally executing certain orders of individual investors at a price unless the orders are first exposed to competition at that price in a qualified auction operated by an open competition trading center. The proposed rule would also include limited exceptions to this general prohibition. In addition, the Commission is proposing to amend the regulation governing the NMS to add new defined terms included in the proposed rule. DATES: Comments should be received on or before March 31, 2023. ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments

Use the Commission’s internet
comment form (https://www.sec.gov/ rules/submitcomments.htm); or
Send an email to rule-comments@
sec.gov. Please include File Number S7– 31–22 on the subject line. Paper Comments
Send paper comments to Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number S7–31–22. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s website (http://www.sec.gov/rules/ proposed.shtml). Comments are also available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Operating conditions may limit access to the Commission’s Public Reference Room. All comments received will be posted without change. Persons submitting comments are cautioned that the Commission does not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. Studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any materials will be made available on the Commission’s website. To ensure direct electronic receipt of such notifications, sign up through the ‘‘Stay Connected’’ option at www.sec.gov to receive notifications by email. FOR FURTHER INFORMATION CONTACT: Dan Gray, Senior Special Counsel, Jennifer Dodd, Special Counsel, or Stacia Sowerby, Special Counsel, at (202) 551– 5500, Office of Market Supervision, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549. SUPPLEMENTARY INFORMATION: The Commission is proposing for public comment amendments to Regulation NMS [17 CFR 242.600 through 242.614] (‘‘Regulation NMS’’) that would add new 17 CFR 242.615 (‘‘Proposed Rule 615’’), add new defined terms to 17 CFR
242.600 (‘‘Rule 600’’) that are used in
Proposed Rule 615, and make conforming amendments to defined terms in 17 CFR 242.602, 17 CFR 242.611, and 17 CFR 242.614; and conforming amendments to defined terms in 17 CFR 240.3a51–1, 17 CFR 240.13h–1, 17 CFR 242.105, 17 CFR 242.201, 17 CFR 242.204, and 17 CFR 242.1000.
Table of Contents
I. Introduction
II. Overview of Market Structure for NMS
Stocks
A. Investors
B. Trading Centers
C. Order Types and Trading Costs
D. Quantitative Measures of Order Execution Quality and Trading Costs
1. Description of Quantitative Measures
2. Examples of Calculating Measures of
Order Execution Quality and Trading Costs
III. Statutory and Regulatory Background
A. Statutory Framework for an NMS B. Current Regulatory Components of the NMS for NMS Stocks
1. Rules Addressing Consolidated Market
Data
2. Rules Addressing Order Handling and
Execution
3. Rules Addressing Access to Trading
Centers
4. Disclosure of Order Routing Practices
and Order Execution Statistics
IV. Description of Proposed Rule 615
A. Overview of Order Competition Requirement B. Coverage of Proposed Rule 615
1. Definition of Segmented Order
2. Definition of Open Competition Trading
Center
3. Definition of Restricted Competition
Trading Center
4. Definition of Originating Broker
5. Exceptions
C. Qualified Auction Requirements
1. Auction Messages
2. Auction Responses
3. Pricing Increment
4. Fees and Rebates
5. Auction Execution Priority
D. Open Competition Trading Center Requirements E. Originating Broker Requirements F. Broker-Dealer Requirements G. National Securities Exchange Requirements
V. Request for Comment
VI. Paperwork Reduction Act Analysis
A. Summary of Collection of Information
1. Auction Messages
2. Identifying and Marking Segmented
Orders
3. Originating Broker Certification
4. NMS Stock ATS Policies and Procedures
To Exclude Subscribers
B. Proposed Use of Information
1. Auction Messages
2. Identifying and Marking Segmented
Orders
3. Originating Broker Certification
4. NMS Stock ATS Policies and Procedures
To Exclude Subscribers
C. Respondents
1. Auction Messages
2. Identifying and Marking Segmented
Orders
3. Originating Broker Certification
4. NMS Stock ATS Policies and Procedures
To Exclude Subscribers
D. Burdens
1. Auction Messages
2. Identifying and Marking Segmented
Orders
3. Originating Broker Certification
4. NMS Stock ATS Policies and Procedures
for Excluding Subscribers
E. Collection of Information Is Mandatory F. Confidentiality of Information Collected
1. Auction Messages
2. Identifying and Marking Segmented
Orders
3. Originating Broker Certification
4. NMS Stock ATS Policies and Procedures
To Exclude Subscribers
G. Retention Period for Recordkeeping Requirements H. Request for Comments
VII. Economic Analysis
A. Introduction
B. Baseline
1. Competition for Liquidity Provision in
NMS Stocks

1 ‘‘Order-by-order’’ competition in this context means an opportunity to compete to trade with individual investor orders by offering the most favorable price for each order based on the particular characteristics of the order, including the nature of the NMS stock, the size of the order, and market conditions at the time the order is submitted. Section II below provides an overview of the current market structure for NMS stocks, including descriptions of key terms used in this release that readers may find useful to assess and comment on the Commission’s proposal. Among many others, these terms include ‘‘individual investors,’’ ‘‘trading centers,’’ and ‘‘wholesalers.’’ 2 15 U.S.C. 78k–1 (‘‘section 11A’’). These objectives are: (1) economically efficient execution of securities transactions; (2) fair competition among brokers and dealers, among exchange markets, and between exchange markets and markets other than exchange markets; (3) the availability to brokers, dealers, and investors of information with respect to quotations for and transactions in securities; (4) the practicability of brokers executing investors’ orders in the best market; and (5) an opportunity, consistent with objectives 1 and 4, for investors’ orders to be executed without the participation of a dealer. 15 U.S.C. 78k–1(a)(1)(C). 3Table 3, infra, section VII.B.2.a. 4See infra note 372. 5As explained in more detail in section II.D below, the ‘‘effective spread’’ of a trade is measured as double the difference between the trade’s execution price and the midpoint of the national best bid and offer at the time of order receipt. Adverse selection reflects the ‘‘price impact’’ of a trade, which is measured as the difference between the midpoint of the national best bid and offer at the time of the trade and the midpoint of the national best bid and offer at a specified time (e.g., one minute or five minutes) after the time of the trade. 6Table 7, infra, section VII.B.4 (adverse selection costs, as measured by price impact, of marketable orders of individual investors in all NMS stocks are 71% lower at wholesalers (1.26 basis points) than on exchanges (4.40 basis points)). 7Section VII.B.4 below discusses an analysis of wholesaler trading data indicating the relationship between segmentation, adverse selection costs, and order execution quality. 8Table 5, infra, section VII.B.4 (83.17% of marketable orders routed to wholesalers receive price improvement when compared to the best publicly quoted prices for round lot sizes on national securities exchanges, and 8.78% of marketable orders routed to national securities exchanges receive such price improvement). These better prices are due in large part to the ability of wholesalers to offer sub-penny prices that are not permitted on national securities exchanges and other trading centers. The current rules that govern sub-penny trading are discussed in section III.B.2.c below.
2. Segmentation of Individual Investor
Order Flow
3. Institutional Investor Interactions With
Retail Orders
4. Execution Quality of Individual Investor
Marketable Orders in NMS Stocks
5. Variation in Wholesaler Execution
Quality
6. Retail Broker Services
7. Rules Addressing Consolidated Market
Data
C. Economic Effects
1. Benefits
2. Costs
3. Competition
4. Efficiency
5. Capital Formation
D. Reasonable Alternatives
1. Variation in Provisions Regarding
Segmentation and Routing
2. Alternate Definitions of Segmented
Orders
3. Variation in Auction Design
4. Variation in Exceptions to the Order
Competition Requirement
5. Variation in the Definition of Open
Competition Trading Centers
6. Wholesaler Information Barriers
7. Display Quotes in Retail Liquidity
Programs
8. Creation of a Retail Best Bid and Offer
9. Disclosure of Execution Quality of
Individual Investor Orders E. Request for Comments
VIII. Regulatory Flexibility Act Certification
IX. Consideration of Impact on the Economy
Statutory Authority
I. Introduction
The Commission is proposing a new rule, Proposed Rule 615 of Regulation NMS, entitled the ‘‘Order Competition Rule,’’ to promote a more competitive, transparent, and efficient market structure for NMS stocks, with resulting benefits to investors. Proposed Rule 615 would require that certain orders of individual investors be exposed to competition in fair and open auctions, before such orders could be executed internally by trading centers that restrict order-by-order competition.1 The Commission believes that the proposal would better advance each of the five Congressional objectives for an NMS set forth in section 11A of the Exchange Act.2 In particular, Proposed Rule 615 is designed to benefit individual investors by promoting competition and transparency as means to enhance the opportunity for their orders to receive more favorable prices than they receive in the current market structure, as well as to benefit investors generally by giving them an opportunity to interact directly with a large volume of individual investor orders that are mostly inaccessible to them in the current market structure. This section provides an overview of that market structure and how that market structure may impact investors. As discussed in sections II and VII below, individual investors primarily use market orders and marketable limit orders (collectively known as ‘‘marketable orders’’) to trade in NMS stocks. Market participants who use these orders seek to trade immediately at the best available prices in the market. Broker-dealers route more than 90% of marketable orders of individual investors in NMS stocks to a small group of six off-exchange dealers, often referred to as ‘‘wholesalers.’’ 3 The wholesaling business is highly concentrated, with two firms capturing approximately 66% of the executed share volume of wholesalers as of the first quarter of 2022.4 The practice of separately identifying and routing the marketable orders of individual investors to wholesalers is a form of ‘‘segmentation.’’ The term ‘‘segmentation’’ can refer to any practice by which a certain category of orders is identified and treated differently for execution than other categories of orders. As discussed in the economic analysis in section VII.B.2 below, individual investor orders are segmented because they are ‘‘low-cost’’ flow—they impose lower adverse selection costs on liquidity providers than the unsegmented order flow routed to national securities exchanges. ‘‘Adverse selection’’ involves situations where buyers and sellers have different information, and specifically for a liquidity provider, refers to the extent to which prices move against it after a trade. For example, if the price of a stock drops right after a liquidity provider buys it, the liquidity provider has suffered from adverse selection. Generally, the more severe the adverse selection, the larger the ‘‘effective spread’’ that would be expected for a trade because liquidity providers require a wider
effective spread to compensate them for the higher cost of adverse selection.5 In this respect, the size of effective spreads can be interpreted as a measure of the average adverse selection that liquidity providers expect to suffer when trading with incoming orders. Data analysis conducted for this proposal reveals that the average adverse selection costs of orders routed to wholesalers are far lower than the average adverse selection costs of orders routed to national securities exchanges.6 The primary benefit of segmentation for individual investors is that it can provide an opportunity for their lowcost orders to be executed at better prices than those generally available on national securities exchanges, a practice known as ‘‘price improvement.’’ 7 As discussed in section VII below, wholesalers often provide some price improvement relative to the best publicly quoted prices for round lot sizes on national securities exchanges.8 Price improvement, however, is not the same as competitive order execution. Today, the primary business model of wholesalers is to trade bilaterally as principal with individual investor orders (a form of ‘‘internalization’’). Typically, the way broker-dealers choose a wholesaler for any particular order is not based on the

9As shown in Table 7, infra, section VII.B.4, wholesalers execute internally (in ‘‘principal transactions’’) 90.44% of the dollar volume of executed marketable orders routed to them. As discussed in section VII.B.2.b below, wholesalers primarily obtain external executions of the remaining volume of the marketable orders in ‘‘riskless principal’’ transactions. 10Table 18 and Table 19, infra, section VII.C.1.b (figures in text are for the CAT rebate base competitive shortfall estimates). 11See, e.g., section VII.B.3, infra, discussing institutional investor interactions with retail orders. 12Table 20, infra, section VII.C.1.b. 13See, e.g., Section VII.C.1.c, infra, discussing potential improved execution quality for institutional investor orders. 14See infra section IV.B.1; section VII.D.2.c. price the wholesaler is willing to provide for that order, as wholesalers do not display or otherwise indicate in real-time the prices at which they are willing to trade with individual investor orders. Instead, a wholesaler is often chosen by a formula that depends on past execution quality of the wholesaler, its relationship with the broker-dealer, and other factors. In addition, the bilateral nature of the wholesaler business model not only restricts contemporaneous competition among wholesalers, it also restricts opportunities for other market participants to trade with the low-cost flow. Once a wholesaler receives an individual investor’s marketable order, the wholesaler’s execution of the order does not face competition at all—the wholesaler typically executes the order internally without providing any opportunity for other market participants, including institutional investors, to compete to provide more favorable prices for the order.9 This lack of order-by-order competition among market participants is particularly significant in the market for NMS stocks, which is an order-driven market in which a wide range of market participants, including institutional investors, seek to provide liquidity on national securities exchanges by posting orders for the approximately 12,000 NMS stocks. In contrast, the listed options market is a quote-driven market in which professional market makers dominate liquidity provision by displaying quotes in the more than 1,000,000 different options series. In sum, in the current market structure for NMS stocks, individual investor orders are not merely segmented; they also are isolated from order-by-order competition by a wide range of market participants, which, as discussed below, can affect the prices that individual investors receive for their orders. Data analysis suggests that opening up individual investor orders to order-byorder competition would lead to significantly better prices for those investors. In a fully competitive market, competition among liquidity providers would be expected to drive the amount of price improvement that an order receives to a level commensurate with its adverse selection cost (setting
aside other relevant costs). All else equal, the lower an order’s expected adverse selection cost, the greater would be the order’s expected price improvement. However, as discussed in section VII.C.1.b below, the current isolation of individual investor orders from orderby-order competition results in suboptimal price improvement for such orders. The Commission labels this forgone price improvement ‘‘competitive shortfall.’’ Based on an analysis of trading data from the wholesalers and national securities exchanges in the first quarter of 2022, the competitive shortfall is estimated to be approximately 1.08 basis points per dollar traded by wholesalers or 1.08 cents for every $100 traded, with an estimated total annual competitive shortfall of $1.5 billion.10 In addition to this competitive shortfall, the isolation of individual investor orders at wholesalers prevents other investors from having an opportunity to trade with this low-cost flow. Institutional investors that currently submit their own marketable orders on national securities exchanges and other trading centers potentially could trade at better prices if given an opportunity to interact with the marketable orders of individual investors in fair and open auctions.11 For example, data analysis indicates that undisplayed liquidity often is available at trading centers other than wholesalers when a wholesaler executes marketable orders of individual investors at prices less favorable for the individual investor than the prices of the undisplayed liquidity.12 Moreover, if institutional investors that currently pay a full ‘‘spread’’ (that is, the difference between the highest price bid and the lowest price offer) to access liquidity were able instead to interact in auctions with the marketable orders of individual investors that currently are mostly inaccessible to them, these institutional investors could benefit from lower spread costs.13 The Commission is proposing Rule 615 to encourage greater competition for individual investor order execution. Proposed Rule 615 generally would require that individual investor orders be exposed to order-by-order competition in fair and open auctions designed to obtain the best prices before such orders could be internalized by wholesalers or any other type of trading center that restricts order-by-order competition. As a result, individual investor orders could continue to receive the benefits of segmentation (i.e., better prices that reflect the low adverse selection costs of those orders), but without the negative effects of those orders being isolated from order-byorder competition (i.e., such better prices not fully reflecting the low adverse selection costs of those orders; and a substantial percentage of those orders seldom being accessible to institutional investors and other market participants). In sum, the auctions required by Proposed Rule 615 are intended to enhance competitive forces as a means to protect the interests of investors in
the NMS. In developing the specific elements of Proposed Rule 615, the Commission has been guided by this goal of benefiting investors by enhancing competition. The overriding objective of these elements of Proposed Rule 615 is to maximize the opportunity for a wide range of market participants to participate in auctions on terms that will promote the best possible prices for the orders of individual investors. In this respect, the Commission has drawn from its experience with the operation of existing auctions for orders in listed options and tailored Proposed Rule 615 to promote fair and open auctions that reflect the particular nature of the market for NMS stocks. As discussed in
section IV below, these elements would
include the wide dissemination of auction messages in consolidated market data, requirements that any fees and rebates be capped at a low level ($0.0005 per share for auction prices of $1 or more) and be flat across all market participants, and requirements for execution priority of auction responses that give no advantage to the brokerdealer that routed the marketable order of an individual investor to the auction. In addition, the Commission has limited the scope of Proposed Rule 615 to contexts in which an auction could be most beneficial for individual investors. For example, individual investors that trade many times per day tend to use marketable orders that pose higher adverse selection risk for liquidity providers; hence, their orders would be outside the scope of the rule.14 In addition, proposed exceptions are provided for orders with a market value of $200,000 or more and for orders with execution prices (including prices constrained by non-marketable limit prices) that are very favorable for individual investors (i.e., the midpoint of the best displayed round lot

15As discussed in section IV.B.1 below, a subset of non-marketable limit orders with prices not as favorable for individual investors (i.e., beyond the midpoint of the best displayed round lot quotations) would not qualify for the proposed exceptions. 16NMS stocks generally include equity securities other than options that are listed on a national securities exchange. Rule 600(b)(55) of Regulation NMS defines ‘‘NMS stock’’ as any NMS security other than an option, and Rule 600(b)(54) defines ‘‘NMS security’’ to mean any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective NMS plan for reporting transactions in listed options. The definition of NMS stock does not include securities that are not listed on a national securities exchange, sometimes referred to as ‘‘over-the-counter’’ or ‘‘OTC’’ securities. 17A much more extensive discussion of the ‘‘market microstructure’’ of securities markets is provided by treatises on the subject. See, e.g., Larry Harris, Trading and Exchanges: Market Microstructure for Practitioners (Oxford University Press 2003) (‘‘Harris Treatise’’); Joel Hasbrouck, Empirical Market Microstructure: The Institutions, Economics, and Econometrics of Securities Trading (Oxford University Press 2007) (‘‘Hasbrouck Treatise’’). 18 15 U.S.C. 78k–1(a)(2). 19For a discussion of the specific orders covered by Proposed Rule 615, see Proposed Rule 600(b)(91) (defining the term ‘‘segmented order’’) and section IV.B.1 below (discussing the proposed definition of ‘‘segmented order’’). As discussed in section IV.B, the Commission is proposing to add definitions to Rule 600(b) of Regulation NMS and adjust the numbering of current definitions accordingly. Throughout this release, unless otherwise noted, references to existing Rule 600(b) definitions are to the definitions as they are currently numbered. References to proposed new definitions are designated with ‘‘Proposed Rule 600(b)’’ and reflect the proposed adjusted numbering. 20See, e.g., Securities Exchange Act Release No. 61358 (Jan. 14, 2010), 75 FR 3594, 3604–3605 (Jan. 21, 2010) (‘‘Equity Market Structure Concept Release’’) (measuring the transaction costs of institutional investors ‘‘can be extremely complex’’ because their ‘‘large orders often are broken up into smaller child orders and executed in a series of transactions’’ and ‘‘[m]etrics that apply to small order executions may miss how well or poorly the large order traded overall.’’). 21Rule 600(b)(95) of Regulation NMS defines ‘‘trading center’’ as a national securities exchange or national securities association that operates a self-regulatory organization (‘‘SRO’’) trading facility, an alternative trading system, an exchange market maker, an OTC market maker, or any other broker or dealer that executes orders internally by trading as principal or crossing orders as agent. 22Rule 600(b)(89) of Regulation
NMS defines ‘‘SRO trading facility’’ as, among other things, a facility operated by a national securities exchange that executes orders in a security. 23 ‘‘Broker’’ is generally defined in section 3(a)(4)(A) of the Exchange Act as any person engaged in the business of effecting transactions in securities for the account of others. 15 U.S.C. 78c(a)(4)(A). ‘‘Dealer,’’ in turn, is generally defined in section 3(a)(5)(A) of the Exchange Act as any person engaged in the business of buying and selling securities for such person’s own account through a broker or otherwise. 15 U.S.C. 78c(a)(5)(A). The term ‘‘broker-dealer’’ is used in this release to encompass all brokers, all dealers, and firms that are both brokers and dealers. 24Section 3(a)(1) of the Exchange Act defines ‘‘exchange’’ as, among other things, any organization that provides facilities for bringing together purchasers and sellers of securities. 15 U.S.C. 78c(1). 25 15 U.S.C. 78f. quotations or better).15 These exceptions would not be mandatory, however, which means that broker-dealers could choose whether or not to route orders with these characteristics to an auction. As discussed in section VII.D, the Commission assessed several alternatives to Proposed Rule 615, both to the design of the required auctions and to the auction approach itself. The Commission preliminarily considers Proposed Rule 615 to be the best approach for investors. As described throughout this release, and in more detail in section IV, Proposed Rule 615 is designed to maintain the price improvement benefits of the segmentation of individual investor orders and to enhance those benefits through the introduction of order-byorder competition with a wide range of market participants, including institutional investors, through an auction mechanism that is fast, lowcost, transparent, and fair. The next two sections of this release are intended to provide background information on the current structure and regulation of the market for NMS stocks that will help promote understanding of the details of the Commission’s proposal. Section II provides a general overview of the current market structure for NMS stocks, and section III provides background on the statutory and regulatory framework for NMS stocks.
Section IV then describes the proposal
in detail, and section V consolidates all Commission requests for comment on the proposal.
II. Overview of Market Structure for
NMS Stocks
This section provides an overview of the market structure for NMS stocks,16 particularly focusing on the types of market participants, order types, and trading costs that will be referred to throughout this release.17 An understanding of the current market structure, particularly the trading costs of different types of market participants, including liquidity takers and liquidity providers, is critically important when assessing the rationale and objectives of Proposed Rule 615. A. Investors
Section 11A(a)(2) of the Exchange
Act 18 provides that the Commission should have due regard for the protection of ‘‘investors’’ when facilitating the establishment of an NMS. As used in this release, the term ‘‘individual investor’’ will refer to natural persons that trade relatively infrequently for their own or closely related accounts.19 Individual investors generally trade in relatively small sizes that can be executed against immediately available liquidity. The term ‘‘institutional investor’’ as used in this release refers to investors that trade in much larger sizes and much more frequently than individual investors. Many institutional investors, such as pension funds and mutual funds, operate on behalf of a large number of individuals. Because institutional investors need to trade in large sizes that can exceed immediately available liquidity, their large ‘‘parent’’ orders typically will be broken into smaller ‘‘child’’ orders. Institutional investors typically are focused primarily on obtaining the best price for their large parent orders as a whole.20 The child orders will be fed into the market gradually so as to minimize the extent to which market prices move away before the full size of a parent order is executed, which is known as ‘‘slippage.’’ One means for institutional investors to minimize slippage is to limit ‘‘information leakage’’ concerning the unexecuted portions of their large parent orders by closely controlling the impact of the execution of their child orders on market prices. B. Trading Centers Trades in NMS stocks are executed at a number of different types of trading centers.21 As discussed below, trading centers that currently trade NMS stocks can be divided into five categories: (1) national securities exchanges operating SRO trading facilities; 22 (2) alternative trading systems (‘‘ATSs’’) that trade NMS stocks (‘‘NMS Stock ATSs’’); (3) exchange market makers; (4) wholesalers; and (5) any other brokerdealer that executes orders internally by trading as principal or crossing orders as agent.23 National securities exchanges, among other things, operate SRO trading facilities that bring together purchasers and sellers of NMS stocks and execute their trades, fall within the definition of an exchange in section 3(a)(1) of the Exchange Act,24 and are required to register under section 6 of the Exchange Act.25 As discussed further in section III.A below, national securities exchanges are subject to a comprehensive regulatory regime that, among other things, requires that their rules not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act and not be designed to permit unfair discrimination between customers,

26Table 1, infra, section VII.B.1.
27 17 CFR 240.3a1–1(a)(2); see also Securities Exchange Act Release No. 40760 (Dec. 8, 1998), 63 FR 70844, 70858 (Dec. 22, 1998) (‘‘Regulation ATS Adopting Release’’) (stating that the Commission would not consider making an assessment whether a particular system should register as an exchange unless such system exceeded the volume thresholds specified in 17 CFR 240.3a1–1(b): during three of preceding four calendar quarters, the system had (1) 50% or more of the average daily dollar trading volume in any security and 5% or more of the average daily dollar trading volume in any class of security; or (2) 40% or more of the average daily dollar trading volume in any class of securities). 28See Rule 301(b)(5); infra section III.B.3.b (discussing fair access requirements for NMS Stock ATSs). 29See Dealerweb Inc., Form ATS–N/OFA, Part III, Items 11 (Trading Services, Facilities and Rules) and Item 25 (Fair Access) (filed Oct. 24, 2022), https://www.sec.gov/Archives/edgar/data/817462/ 000081746222000015/0000817462-22-000015- index.htm (disclosing that the NMS Stock ATS is subject to the fair access requirements in symbols SPY and QQQ). This NMS Stock ATS generally limits its eligible subscribers to market makers, banks, broker-dealers, and asset managers with at least $10 under management. See id. at Part III, Item 1 (Types of Subscribers) and Item 2 (Eligibility for ATS Services). Access to Form ATS-Ns filed by NMS Stock ATSs are available on the Commission’s website at https://www.sec.gov/divisions/ marketreg/form-ats-n-filings.htm. 30Table 1, infra, section VII.B.1. 31See, e.g., New York Stock Exchange LLC (‘‘NYSE’’) Rule 104 (Dealing and Responsibilities of DMMs) (requiring the exchange’s Designated Market Makers (‘‘DMMs’’) to maintain a continuous two-sided quote for securities in which the DMM unit is registered with the exchange) available at https://nyseguide.srorules.com/rules. 32Another type of business operated by some OTC market makers is known as a ‘‘single dealer platform,’’ which primarily seeks to attract the orders of institutional investors for internal execution. Infra section VII.B.3. 33As discussed in section VII.B.1.a below, the Commission has identified six firms as wholesalers based on the public order routing disclosures of retail brokers. Retail broker services are discussed in section VII.B.6 below. 34Rule 606 is discussed in section III.B.4 below. 35See infra section VII.B.6.a. 36See Table 14, infra section VII.B.5.c. 37See, e.g., Cowen, Inc., ‘‘Cowen Market Structure: Retail Trading—What’s going on, what may change, and what can you do about it?’’ (Mar. 23, 2021), available at https://www.cowen.com/ insights/retail-trading-whats-going-on-what-maychange-and-what-can-institutional-traders-doabout-it/ (‘‘Market makers print most of these shares internally at their firm, so they trade off-exchange. One way we have for isolating retail volume is to look at the share of volume that trades off-exchange, but not in a dark pool. We
refer to this as ‘inaccessible liquidity.’ This is because most institutional orders—whether they are executed via algos directly or by high touch desks—primarily go to exchanges and dark pools.’’). 38Table 1, infra, section VII.B.1. 39Table 1, infra, section VII.B.1. issuers, and broker-dealers. All national securities exchanges publicly display quotations for NMS stocks in consolidated market data and are known as ‘‘lit’’ trading centers. As discussed in
section III.B.1 below, the best-priced
quotations of round lots of national securities exchanges (highest priced bids to buy and lowest priced offers to sell) are included in the consolidated market data feeds currently disseminated by centralized securities information processors (‘‘SIPs’’). In the first quarter of 2022, 16 national securities exchanges executed 59.7% of share volume in NMS stocks.26 NMS Stock ATSs operate facilities that fall within the definition of an exchange in section 3(a)(1) of the Exchange Act, but, as discussed in
section III.B.3.b below, they are
exempted from that definition if they register as broker-dealers and otherwise comply with Regulation ATS under the Exchange Act.27 No NMS Stock ATS currently displays quotations in NMS stocks in consolidated market data. The trading centers that do not display quotations are known as ‘‘dark’’ trading centers or ‘‘dark pools.’’ An NMS Stock ATS is required to provide fair access to its services if it had 5% or more of the average daily volume with respect to an NMS stock during four of the preceding six calendar months,28 and as of November 30, 2022, one NMS Stock ATS discloses on its Form ATS–N that it is subject to these fair access requirements for securities that are available for trading on its platform.29 In the first quarter of 2022, 32 ATSs executed 10.2% of volume in NMS stocks.30 An exchange market maker is defined in Rule 600(b)(32) of Regulation NMS as any member of a national securities exchange that is registered as a specialist or market maker pursuant to the rules of such exchange. Exchange rules typically require exchange market makers to provide liquidity by displaying quotations at which they are willing to buy and sell NMS stocks for their own account.31 In this respect, exchange market makers fall within the definition of a ‘‘dealer’’ in section 3(a)(5) of the Exchange Act as buying and selling NMS stocks for their own accounts as part of a regular business. The on-exchange volume of exchange market makers in NMS stocks is included in the volume for national securities exchanges referenced above because it is reported by such exchanges. Wholesalers fall within the definition of an OTC market maker in Rule 600(b)(64) of Regulation NMS—any dealer that holds itself out as being willing to buy from and sell to its customers, or others, in the United States, an NMS stock for its own account on a regular or continuous basis otherwise than on a national securities exchange in amounts of less than block size. The term ‘‘wholesaler’’ is not defined in Regulation NMS, but commonly refers to an OTC market maker that seeks to attract orders from broker-dealers that service the accounts of individual investors,32 referred to in this release as ‘‘retail brokers.’’ 33 The public order-routing reports required by 17 CFR 242.606 (‘‘Rule 606’’) 34 show that the six largest wholesalers collectively paid retail brokers $235 million in payment for order flow (‘‘PFOF’’) in the first quarter of 2022 for orders in NMS stocks.35 Many retail brokers do not accept PFOF for marketable orders in NMS stocks routed to wholesalers, though the retail brokers that do accept PFOF represent 73.88% of the dollar volume of marketable orders of retail brokers routed to wholesalers.36 Wholesalers do not display or otherwise reveal the prices at which they are willing to execute individual investor orders internally. Moreover, as discussed in section III.B.3 below, while they are subject to Commission and SRO requirements as broker-dealers, wholesalers are not
subject to a statutory or regulatory requirement to provide fair access. They are not required to provide an opportunity for other market participants, including institutional investors and other exchange market makers, to compete on an order-by-order basis to provide the best prices for the individual investor orders that the wholesalers internalize. Some institutional investors, for example, consider this order flow to be ‘‘inaccessible.’’ 37 In the first quarter of 2022, six large wholesalers internally executed 23.9% of share volume in NMS stocks.38 The fifth and final category of trading center that executes trades in NMS stocks is a catchall category encompassing broker-dealers that execute orders internally by trading as principal or crossing orders as agent. In the first quarter of 2022, over 230 broker-dealers (other than NMS Stock ATSs and OTC market makers) reported trades in NMS stocks, which accounted for the remaining 6.3% of share volume in NMS stocks.39
C. Order Types and Trading Costs
When seeking to buy and sell NMS stocks, investors submit orders through the broker-dealers that service their accounts. The order type most frequently used to trade by individual investors is a ‘‘market’’ order, which simply instructs a broker-dealer to seek an execution of the order at the best available price in the market. In contrast to market orders, a ‘‘limit order’’ specifies a ‘‘limit price’’—a price

40Rule 600(b)(47) of Regulation NMS defines a ‘‘marketable limit order’’ as any buy order with a limit price equal to or greater than the NBO at the time of order receipt, or any sell order with a limit price equal to or less than the NBB at the time of order receipt. 41Rule 600(b)(57) of Regulation NMS defines ‘‘non-marketable limit order’’ as any limit order other than a marketable limit order. 42Rule 606 order-routing reports reveal that customers of retail brokers used marketable orders for approximately 39–40% of their trades and used ‘‘other’’ orders for approximately 26–27% of their trades. Table 3, infra, section VII.B.2.a. As presented in Table 2 in section VII.B.2.a below, however, the PFOF rates received from wholesalers for these ‘‘other’’ orders almost exactly matched the rates received from wholesalers for marketable limit orders. Accordingly, it is likely that most of these other orders were marketable (i.e., immediately executable at the best available prices), although the orders may have had particular characteristics that led them to be classified as other orders. beyond which the investor is not willing to trade. Limit prices reflect an intention to ‘‘buy low and sell high.’’ For example, a buy order with a limit price of $20 means the investor would like to buy as soon as possible, but only at a price that is $20 or less. Conversely, a sell order with a limit price of $20 means the investor would like to sell as soon as possible, but only at a price that is $20 or more. In practice, the likelihood and speed of execution of limit orders can vary greatly depending primarily on the relation between their limit prices and the best-priced quotations that are displayed by national securities exchanges in the consolidated market data feeds. As discussed in section III.B.1 below, these quotations are in ‘‘round lot’’ sizes, which currently are 100 shares or more for nearly all NMS stocks. The highest price bid for an NMS stock is known as the national best bid (‘‘NBB’’), and the lowest price offer for an NMS stock is known as the national best offer (‘‘NBO’’). Collectively, the NBB and NBO are known as the national best bid and offer (‘‘NBBO’’). When a limit order to buy has a limit price that is equal to or greater than the NBO, it is known as a ‘‘marketable’’ limit order because it can be executed immediately at the best displayed quote to sell. Similarly, a limit order to sell is marketable when it has a limit price that is equal to or less than the NBB.40 For example, assume the NBB is $20.00 and the NBO is $20.10. A buy limit order with a price of $20.10 or higher is marketable, and a sell limit order with $20.00 or lower is marketable. Marketable limit orders are similar to market orders with respect to their willingness to trade immediately at the best displayed prices or better and will be referred to collectively in this release as ‘‘marketable orders.’’ Investors that use marketable orders to trade immediately at the best
available prices are known as ‘‘liquidity takers’’ and generally incur a trading cost for the service, known as a ‘‘spread.’’ In the example above, when the NBBO is $20.00 and $20.10, the quoted spread is 10 cents. An investor that wished to avoid paying a spread could use a ‘‘non-marketable’’ limit order in an attempt to become a ‘‘liquidity provider.’’ A non-marketable limit order to buy has a limit price that is less than the NBO, and a nonmarketable limit order to sell has a limit price that is greater than the NBB.41 For example, again using the example when the NBBO is $20.00 and $20.10, an investor could submit a buy limit order with a limit price of $20.00. This buy order is not marketable because it is priced less than the NBO of $20.10 and therefore cannot be executed immediately against the best displayed offer. A non-marketable limit order generally will ‘‘rest’’ on the continuous order book of a trading center awaiting the arrival of a contra-side marketable order against which it can execute. In the example, if the resting nonmarketable limit order to buy were able to obtain an execution at its limit price of $20.00 (e.g., by interacting with a contra-side marketable order to sell), the investor would have succeeded in trading at a price that was 10 cents lower than if the investor had used a marketable order and traded at the NBO of $20.10. The risk, however, of using a non-marketable limit order is that it may not execute at all if market prices move away from the order (i.e., prices increase for buy orders and decrease for sell orders). If this happens, the investor will incur an opportunity cost by missing a trade. Using the example of an NBBO of $20.00 and $20.10, assume the investor submitted a non-marketable order to buy with a limit price of $20.00, but did not obtain an execution and the NBBO then rose to $20.15 and $20.25. Seeing that the market was moving away, the investor decided to cancel the unexecuted non-marketable order and replace it with a marketable order to buy, which then was executed at the new NBO price of $20.25. In this case, the investor incurred an opportunity cost of 15 cents—the difference between (1) the original NBO price of $20.10 that the investor likely could have obtained if the investor first had used a marketable order to buy at $20.10 rather than using the non-marketable order in an unsuccessful attempt to buy at $20.00, and (2) the price of $20.25 at which the investor actually obtained an execution. In sum, an investor’s decision of whether to use marketable orders or non-marketable orders to trade can depend on an often complex judgment of whether prices are likely to move in the short-term future. Individual investors, who typically do not follow market prices closely throughout a trading day, often will not feel in the best position to make this judgment and generally choose to be liquidity takers by using marketable orders to obtain the certainty of an immediate execution at a
displayed price or better.42 Accordingly, a key source of trading costs for individual investors are the spreads they pay when using marketable orders. The narrower the spreads, the lower the prices at which they will buy and the higher the prices at which they will sell, which translate into lower trading costs and higher investment returns. Conversely, wider spreads mean higher trading costs and lower investment returns. The spread costs of individual investors highlight the role played by liquidity providers in determining spreads. Liquidity providers determine spreads by setting the prices at which they are willing to trade with marketable orders as such orders are submitted by liquidity takers. Liquidity providers can include professional market intermediaries, such as exchange market makers and OTC market makers (including wholesalers), as well as investors that use non-marketable limit orders. For example, national securities exchanges, which display the quotations that determine the NBBO, all operate continuous order books. Unexecuted non-marketable orders that have been routed to an exchange rest on its continuous order book awaiting an opportunity for interaction with incoming contra-side orders. Using the NBBO example of $20.00 and $20.10, assume a national securities exchange has displayed limit orders resting on its continuous order book with limit prices that equal the NBBO, but then an institutional investor submits a buy order with a limit price of $20.02 for display on the continuous order book. At this point, there will be a new NBB of $20.02 and the NBBO spread will have been reduced from 10 cents to 8 cents. If an individual investor’s market order to sell was routed to the exchange, the order would execute at the new NBB of $20.02, saving the individual investor two cents per share compared to the old NBB of $20.00. For liquidity providers, the adverse selection costs of trading with a given

43See Table 7, infra, section VII.B.4. 44Rule 605 is discussed in section III.B.4 below. 45Rule 600(b)(36) of Regulation NMS defines ‘‘executed with price improvement’’ as, for buy orders, execution at a price lower than the NBO at the time of order receipt and, for sell orders, execution at a price higher than the NBB at the time of order receipt. 46Rule 600(b)(8) of Regulation NMS defines ‘‘average effective spread’’ as the share-weighted average of effective spreads for order executions marketable order flow are a key factor for determining the prices at which they are willing to trade with such flow, particularly for professional market intermediaries. These market intermediaries generally seek to generate short-term trading profits by buying and selling on a continuous basis and capturing a spread between their buys and sells. Adverse selection costs reflect the extent to which prices move against the liquidity provider in the seconds and minutes after a trade, which increases the difficulty faced by the liquidity provider in successfully capturing a spread between buys and sells. For example, assume an NBBO of $20.00 and $20.10, and a market maker provides liquidity by trading with a contra-side marketable sell order at the $20.00 NBB. The market maker may hope to profit by quickly providing liquidity to a contra-side marketable buy order at the $20.10 NBO and thereby earning a 10 cent spread. Seconds later, however, and before the market maker is able to liquidate the buy position, the NBBO declines to $19.85 and $19.95. In this case, the market maker has bought immediately prior to a 15 cent decline in the NBBO. This subsequent move in the NBBO is known as ‘‘price impact.’’ Instead of earning a 10 cent spread as it hoped by providing liquidity when the NBBO was $20.00 and $20.10, the market maker would realize a loss of 5 cents on its position if it then provided liquidity to a contra-side marketable buy order by selling at the new NBO of $19.95. Therefore, the market maker had an adverse selection cost of 15 cents. Accordingly, market makers assess the potential adverse selection costs of the liquidity-taking order flow with which they are likely to interact when setting the spreads at which they are willing to provide liquidity to such flow. Segmentation of marketable orders with low adverse selection costs is a means for liquidity providers to control such costs. As discussed in section VII,43 the marketable orders of individual investors routed to wholesalers have adverse selection costs (as measured by price impact) that are approximately 71% lower than the adverse selection costs of orders routed to national securities exchanges. The low adverse selection costs of the segmented marketable orders of individual investors generally enable wholesalers to offer better prices for such orders than would be available for unsegmented orders routed to national securities exchanges. The trading examples thus far have assumed that trades occur
at the NBBO prices, which are determined by round lot quotations displayed on national securities exchanges. In fact, however, trades can be executed on national securities exchanges at prices that are better than NBBO prices (‘‘NBBO price improvement’’). Marketable orders routed to access the NBBO at a national securities exchange can obtain NBBO price improvement in two primary contexts. First, a national securities exchange may have displayed orders on its continuous order book with sizes less than round lots, known as ‘‘odd lot quotations,’’ that are priced better than the NBBO. If a contra-side marketable order is routed to a national securities exchange with such an odd lot quotation, the contra-side marketable order will interact with the odd-lot quotation and receive a better price than the NBBO. Second, there may be undisplayed non-marketable limit orders resting on the continuous order book of a national securities exchange with prices that are better than such exchange’s displayed quotations. One common example is an NBBO midpoint order. An NBBO midpoint order has an execution price that is pegged to, and accordingly fluctuates with, the midpoint of the NBBO. If the NBBO is $20.00 and $20.10, and an NBBO midpoint order to sell is resting on the continuous order book of a national securities exchange, a marketable order to buy that is routed to such exchange will execute at the NBBO midpoint price of $20.05 rather than the NBO of $20.10. By trading at the NBBO midpoint, the incoming marketable buy order has obtained an immediate execution without paying any spread, and the resting NBBO midpoint order to sell has not earned any spread. Institutional investors may use undisplayed NBBO midpoint orders because they provide an opportunity to trade with contra-sided marketable flow, but without the information leakage (and potential slippage) that could occur if their orders were displayed. D. Quantitative Measures of Order Execution Quality and Trading Costs A variety of quantitative measures can be used to assess the quality of order executions that broker-dealers obtain for their individual investor customers, as well as more generally the trading costs of liquidity takers and liquidity providers. 17 CFR 242.605 (‘‘Rule 605’’) of Regulation NMS,44 for example, requires many trading centers, including national securities exchanges and wholesalers, to make data files publicly available on a monthly basis that include detailed measures of execution quality for marketable and nonmarketable orders in NMS stocks. This
section will describe some of the
quantitative measures included in Rule 605 data, as well as provide concrete examples illustrating specifically how the measures are calculated. These quantitative measures are referenced extensively throughout this release to explain the rationale for and the potential economic effects of Proposed Rule 615.

Description of Quantitative Measures
The following is a list, with brief descriptions, of quantitative measures of order execution quality and trading costs in NMS stocks that are included in, or can be derived from, Rule 605 data files. Specific examples of how the measures are calculated will be provided in section II.D.2 below. As stated above, NBBO price improvement is the amount by which the execution price of a marketable order is better than the relevant NBBO quotation at the time a marketable order is received by a trading center.45 For marketable buy orders, it is the amount by which the buy order received a price lower than the NBO at the time of order receipt. For marketable sell orders, it is the amount by which the sell order received a price higher than the NBB at the time of order receipt. ‘‘NBBO quoted half-spread’’ is onehalf of the difference between the NBO and NBB, as measured at the time when a marketable order is received by a trading center. The full quoted spread is halved to reflect the spread cost for establishing or liquidating a position (long or short). For example, if an investor uses a marketable order to buy at the NBO (incurring a half-spread to establish a long position), but then is able to use a non-marketable order to sell at the NBO (earning a half-spread to liquidate the long position), the investor would have paid a net spread of 0 cents on the ‘‘round-trip’’ transaction. ‘‘Effective half-spread’’ is the halfspread actually paid by a marketable order. It is calculated by comparing execution prices with the NBBO midpoint, rather than the relevant NBB or NBO, at the time of order receipt.46

calculated, for buy orders, as double the amount of difference between the execution price and the midpoint of the NBB and NBO at the time of order receipt and, for sell orders, as double the amount of difference between the midpoint of the NBB and NBO at the time of order receipt and the execution price. 47The analysis in section VII.B.4 below uses one minute to reflect the increase in trading speed in the years since Rule 605 was adopted. 48See, e.g., Hasbrouck Treatise at 147 (‘‘The execution cost based on the pretrade bid-ask midpoint (BAM) is also known as the effective cost. Since 2001, the U.S. SEC has required U.S. equity markets to compute effective costs and make summary statistics available on the Web . . . . The rule . . . also requires computation of the realized cost . . . . The difference between effective and realized costs is sometimes used as an estimate of the price impact of the trade. The realized cost can also be interpreted as the revenue of the dealer who sold to the customer . . . and then covered his position at the subsequent BAM.’’). 49Rule 600(b)(9) of Regulation NMS generally defines ‘‘average realized spread’’ as the shareweighted average of realized spreads for order executions calculated, for buy orders, as double the amount of difference between the execution price and the midpoint of the NBB and NBO five minutes after the time of order execution and, for sell orders, as double the amount of difference between the midpoint of the NBB and NBO five minutes after the time of order execution and the execution price. 50The analysis in section VII.B.4 below uses a one-minute period to reflect the increase in trading speed in the years since Rule 605 was adopted. 51Securities Exchange Act Release No. 43590 (Nov. 17, 2000), 65 FR 75414, 75424 (Dec. 1, 2000). 52 Id. 53See, e.g., Harris Treatise at 286 (‘‘Informed traders buy when they think that prices will rise and sell otherwise. If they are correct, they profit, and whoever is on the other side of their trade loses. When dealers trade with informed traders, prices tend to fall after the dealer buys and rise after the dealer sells. These price changes make it difficult for dealers to complete profitable roundtrip trades. When dealers trade with informed traders, their realized spreads are often small or negative. Dealers therefore must be very careful when trading with traders they suspect are well informed.’’). 54The definitions of ‘‘average effective spread’’ and ‘‘average realized spread’’ provided in Rule 600(b)(8) and (9) of Regulation NMS, which are incorporated in Rule 605, prescribe doubling of the amounts by which an order execution price differs from the NBBO midpoint at the time of order receipt (for effective spreads) and five minutes after the time of order execution (for realized spreads). Accordingly, a trading center’s average effective half-spread for marketable orders may be narrower or wider than the NBBO quoted half-spread, depending on the extent
to which execution prices at a trading center are inside, at, or outside NBBO prices. ‘‘Price impact’’ is the extent to which the NBBO midpoint moves against the liquidity provider for a marketable order in a short time period after the order execution. For Rule 605 reporting, the time period is five minutes after the time of order execution. For the analyses of CAT data provided in
section VII.B.4 below, the time period is
one minute after the time of order execution.47 Price impact measures the extent of adverse selection costs faced by a liquidity provider and is closely related to realized half-spread (described next). When price impact and realized half-spread are calculated using the same post-trade time period, the difference between the effective half-spread and the realized half-spread on a trade will equal the price impact of the trade.48 ‘‘Realized half-spread’’ is calculated similarly to the effective half-spread, but, instead of using the NBBO midpoint at the time of order receipt, the realized spread calculation uses the NBBO midpoint a short time period after the execution of a marketable order.49 For Rule 605 reporting, the time period is five minutes after the time of order execution. For the analyses of CAT data provided in section VII.B.4 below, the time period is one minute after the time of order execution.50 When deciding to include realized spread statistics in Rule 605 reports, the Commission stated that the smaller the average realized spread, ‘‘the more market prices have moved adversely to the market center’s liquidity providers after the order was executed,’’ which shrinks the spread ‘‘realized’’ by the liquidity providers.51 The Commission further stated that the average realized spread statistic for market and marketable limit orders potentially could help ‘‘to spur more vigorous competition to provide the best prices to these orders to the benefit of many retail investors.’’ 52 In sum, by capturing the extent of adverse selection costs faced by liquidity providers, realized spreads are designed to provide a more accurate measure of the potential profitability of trading for liquidity providers than do effective spreads.53
2. Examples of Calculating Measures of
Order Execution Quality and Trading Costs When the execution quality and trading cost measures described above are calculated and averaged for a large volume of orders at different trading centers, the results can reveal important information about the nature of the order execution quality and trading costs across different trading centers.
Section VII below, which provides an
economic analysis of Proposed Rule 615, makes extensive use of data analyses using these measures. The following two examples are patterned on those analyses, particularly the empirical finding that the marketable orders of individual investors routed to wholesalers have adverse selection costs (as measured by price impact) that, on average, are approximately 71% lower than the marketable orders routed to national securities exchanges. The examples are intended to illustrate how quantitative measures of order execution quality and trading costs are calculated in these two contexts that are most relevant for understanding the empirical basis for Proposed Rule 615. The examples show how a difference in the adverse selection costs of order flow routed to two different trading centers can result in more price improvement and narrower effective spreads at the trading center with lower adverse selection costs (the wholesaler) than at the trading center with higher adverse selection costs (the exchange), yet still result in wider realized spreads (i.e., spreads realized by the liquidity provider after estimating for adverse selection costs) at the wholesaler than at the exchange. The first example below (‘‘Exchange Example’’) presents the execution of an unsegmented marketable order to buy at a national securities exchange at a price that matches the NBBO, and the second example below (‘‘Wholesaler Example’’) presents the execution of a segmented marketable order to buy of an individual investor at a wholesaler at a price better than the NBBO. The examples use the calculation methodology prescribed by Rule 605 of Regulation NMS, except that statistics are presented for the halfspread associated with a single buy or sell order rather than the full spread statistics prescribed for Rule 605, which are doubled to reflect estimates of round-trip (offsetting buy and sell) trading costs.54 Half-spreads are used to more clearly present the calculations for the single order in each of the examples. The data used for the two examples are labeled as follows: execution price of marketable order (‘‘ExP’’), NBB at time of order receipt (‘‘NBBt0’’), NBO at time of order receipt (‘‘NBOt0’’), NBBO midpoint at time of order receipt (‘‘MPt0’’), and NBBO midpoint 5 minutes after time of order execution (‘‘MPt5’’). The execution quality and trading cost measures for the two examples of marketable orders to buy are calculated as follows:
NBBO quoted half-spread: 1⁄2 × (NBOt0¥NBBt0) NBBO price improvement: NBOt0¥ExP Effective half-spread: ExP¥MPt0 Price impact: MPt5¥MPt0 Realized half-spread: ExP¥MPt5 The data and calculations for the two examples are as follows:

55Public Law 94–29, 89 Stat. 97 (1975). 56Section 11A(a)(3)(B) also provides the Commission the authority to require the SROs, by rule or order, ‘‘to act jointly . . . in planning, developing, operating, or regulating [an NMS] (or a subsystem thereof).’’ 57Section 11A(a)(1) of the Exchange Act. Exchange example Wholesaler example EXP ......................................................................................................... $110.05 .......................................... $110.04. NBBT0 ...................................................................................................... $110.00 .......................................... $110.00. NBOT0 ..................................................................................................... $110.05 .......................................... $110.05. MPT0 ........................................................................................................ $110.025 ........................................ $110.025. MPT5 ........................................................................................................ $110.055 ........................................ $110.035. NBBO PRICE IMPROVEMENT .............................................................. 0 cents ........................................... 1 cent. NBBO QUOTED HALF-SPREAD ........................................................... 2.5 cents ........................................ 2.5 cents. EFFECTIVE HALF-SPREAD .................................................................. 2.5 cents ........................................ 1.5 cents. PRICE IMPACT ....................................................................................... 3 cents ........................................... 1 cent. REALIZED HALF-SPREAD ..................................................................... <0.5 cents> .................................... 0.5 cents. In the Exchange Example and Wholesaler Example, the NBBO is the same at the time of order receipt for both marketable buy orders, but the national securities exchange in the Exchange Example executes the order at the NBO with no NBBO price improvement, while the wholesaler in the Wholesaler Example executes the marketable buy order with NBBO price improvement of one cent. Consequently, the NBBO quoted half-spread is the same for both trades (2.5 cents), but the effective half-spread is wider for the liquidity provider on the national securities exchange (2.5 cents) than for the wholesaler (1.5 cents) because of the 1 cent NBBO price improvement provided by the wholesaler. The price impact of the order routed to the national securities exchange is 3 cents, while the price impact of the order routed to the wholesaler is only 1 cent. Accordingly, the adverse selection cost for the liquidity provider on the national securities exchange was 3 cents, while the adverse selection cost for the wholesaler was 1 cent. The difference in adverse selection costs
leaves the liquidity provider on the national securities exchange in the Exchange Example with a narrower realized half-spread of negative 0.5 cents, while the wholesaler in the Wholesaler Example preserves a positive realized half-spread of 0.5 cents. Stated another way, the wholesaler provided some NBBO price improvement (1 cent), but its adverse selection cost savings compared to the liquidity provider on the national securities exchange was 2 cents, and as a result the wholesaler was able to capture a realized half-spread that was one cent wider than the liquidity provider on the national securities exchange. If, however, the wholesaler had provided NBBO price improvement that matched its cost savings, the individual investor would have received NBBO price improvement of 2 cents rather than 1 cent. In this case, the realized half-spread for both the wholesaler and the liquidity provider on the national securities exchange would have been the same—negative 0.5 cents. In this respect, the Exchange Example and Wholesaler Example highlight the key order-by-order competition objective of Proposed Rule 615. As discussed in section VII.C.2.b below, competition among a wide range of liquidity providers on national securities exchanges is intense and results in realized spreads for unsegmented orders that are narrower than the realized spreads captured by wholesalers for the segmented orders of individual investors. Another way of stating the same point is that wholesalers do not provide average NBBO price improvement that matches their savings in average adverse selection costs from securing the opportunity to trade first with the segmented orders of individual investors. Proposed Rule 615 would enable order-by-order competition to provide the best prices to the segmented marketable orders of individual investors. By providing an opportunity for a wide variety of liquidity providers to compete to provide the best prices for the segmented marketable orders of individual investors, Proposed Rule 615 is designed to expand the level of NBBO price improvement currently provided by wholesalers to match the low adverse selection costs of such orders.
III. Statutory and Regulatory
Background
The development of today’s market structure for NMS stocks has been guided by the Congressional determination set forth in section 11A of the Exchange Act that the United States should have an NMS in which multiple competing markets are linked together through communications and data processing facilities. This section III first will discuss the Exchange Act framework for an NMS. It then will summarize the rules that the Commission has adopted over the years to facilitate the development of an NMS, with particular focus on rules that address the handling and execution of investor orders in NMS stocks. Many aspects of Proposed Rule 615, as described in section IV below, are designed to build on the existing statutory framework and Commission rules discussed in this section III. A. Statutory Framework for an NMS
Section 11A of the Exchange Act,
enacted as part of the Securities Acts Amendments of 1975,55 sets forth the statutory framework for an NMS.
Section 11A(a)(2) directs the
Commission, having due regard for the public interest, the protection of investors, and the maintenance of fair and orderly markets, to use its authority under the Exchange Act to facilitate the establishment of an NMS for securities in accordance with the Congressional findings and objectives set forth in
section 11A(a)(1) of the Exchange Act.56
Section 11A(a)(1)(C) sets forth the
finding of Congress that it is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure five objectives:
(1) economically efficient execution of securities transactions; (2) fair competition among brokers and dealers, among exchange markets, and between exchange markets and markets other than exchange markets; (3) the availability to brokers, dealers, and investors of information with respect to quotations for and transactions in securities; (4) the practicability of brokers executing investors’ orders in the best market; and (5) an opportunity, consistent with the foregoing objectives of efficient execution of securities transactions and practicability of brokers executing investors’ orders in the best market, for investors’ orders to be executed without the participation of a dealer.57 A variety of Exchange Act provisions grant the Commission specific

58 15 U.S.C. 78k–1(c)(1)(E).
59 15 U.S.C. 78k–1(c)(1)(F).
60 15 U.S.C. 78o(c)(5).
61 15 U.S.C. 78f.
62 15 U.S.C. 78f(b)(2).
63 15 U.S.C. 78f(b)(4).
64 15 U.S.C. 78f(b)(5).
65 Id.
66 15 U.S.C. 78f(b)(8).
67 15 U.S.C. 78s(b)(1).
68See 15 U.S.C. 78c(b)(26) (defining ‘‘selfregulatory organization’’ to include, among other things, any national securities exchange or registered securities association). 69Section 19(b)(1) of the Exchange Act defines a ‘‘proposed rule change’’ to be any proposed change in, addition to, or deletion from the rules of an SRO. 15 U.S.C. 78s(b)(1). Section 3(a)(27) of the Exchange Act generally defines ‘‘rules’’ to include the constitution, articles of incorporation, bylaws, and rules, or instruments corresponding to the foregoing and the stated policies, practices, and interpretations of an exchange, association, or clearing agency as the Commission, by rule, may determine to be necessary or appropriate in the public interest or for the protection of investors to be deemed to be rules of such exchange, association, or clearing agency. 15 U.S.C. 78c(a)(27). Rule 19b–4(b) under the Exchange Act defines ‘‘stated policy, practice, or interpretation’’ to mean, in part, any material aspect of the operation of the facilities of the SRO or any statement made generally available that establishes or changes any standard, limit, or guideline with respect to the rights, obligations, or privileges of persons or the meaning, administration, or enforcement of an existing rule. 17 CFR 240.19b–4(b). 70See 15 U.S.C. 78s(b)(1). 71 If the Commission does not approve or disapprove a proposed rule change within the required timeframe prescribed by section 19 of the Exchange Act, it is ‘‘deemed to have been approved.’’ 15 U.S.C. 78s(b)(2)(D). 72 15 U.S.C. 78o–3. 73See 15 U.S.C. 78o(b)(8). The Commission has proposed to amend 17 CFR 240.15b9–1, which provides an exemption from association membership for certain exchange members. Securities Exchange Act Release No. 95388 (July 29, 2022), 87 FR 49930 (Aug. 12, 2022) (proposing to replace a de minimis allowance with narrower exemptions from association membership). rulemaking authority in different contexts to fulfill its responsibility to facilitate the establishment of an NMS that assures the five objectives. Three of these Exchange Act authorizations are particularly relevant in the context of rules to address the handling and execution of investor orders in NMS stocks. First, section 11A(c)(1)(E) addresses the routing of orders by broker-dealers. It authorizes the Commission to prescribe rules, as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the Exchange Act to assure that all exchange members and brokers-dealers transmit and direct orders for the purchase or sale of NMS stocks in a manner consistent with the establishment and operation of an NMS.58 Second, section 11A(c)(1)(F) grants rulemaking authority to assure equal regulation of all markets for NMS stocks, as well as of all exchange members and broker-dealers effecting transactions in NMS stocks.59 The meaning of the term ‘‘equal regulation’’ is specified in section 3(b)(36), which provides that
a class of persons or markets is subject to equal regulation if no member of the class has a competitive advantage over any other member thereof resulting from a disparity in their regulation under the Exchange Act which the Commission determines is unfair and not necessary or appropriate in furtherance of the purposes of the Exchange Act. Third, section 15(c)(5) addresses the practices of dealers, such as wholesalers. It authorizes the Commission to prescribe rules setting forth specified and appropriate standards with respect to dealing for dealers (other than specialists registered on a national securities exchange) acting in the capacity of a market maker or otherwise that are necessary or appropriate in the public interest and for the protection of investors, to maintain fair and orderly markets, or to remove impediments to and perfect the mechanism of an NMS.60 In addition to these grants of rulemaking authority to facilitate the development of an NMS, section 6 of the Exchange Act 61 specifically addresses the types of access to trading services that one type of market—a national securities exchange—is required to provide to broker-dealers and market participants. Access to the trading services of a market is essential for that market to be linked together with other markets in an NMS. First, section 6(b)(2) requires that, subject to the provisions of section 6(c) relating to statutory disqualification and other concerns, the rules of the exchange must provide that any registered broker-dealer may become a member of such exchange.62 Brokerdealers generally need to become exchange members, as an initial matter, to obtain access to many of the trading services of an exchange. Second, section 6(b)(4) requires that the rules of the exchange provide for the equitable allocation of reasonable dues, fees, and other charges among its members and issuers and other persons using its facilities.63 This provision recognizes that the opportunity for different market participants to access trading services at a market can be greatly affected by the charges for those services. Third, section 6(b)(5) requires that the rules of the exchange are designed to, among other things, ‘‘remove impediments to and perfect the mechanism of a free and open market and [an NMS], and, in general, to protect investors and the public interest.’’ 64 Section 6(b)(5) further requires that the rules of the exchange are not designed ‘‘to permit unfair discrimination between customers, issuers, brokers, or dealers.’’ 65 These provisions broadly help ensure fair and efficient access to the trading services of national securities exchanges, both by requiring them to act affirmatively to promote high quality markets and by prohibiting them from acting negatively by unfairly discriminating between customers, issuers, or broker-dealers. Finally, section 6(b)(8) requires that ‘‘the rules of the exchange do not impose any burden on competition not necessary or appropriate in
furtherance of the purposes’’ of the Exchange Act.66 This provision further restricts a national securities exchange’s ability to limit access to its trading services in an anti-competitive manner. To help ensure that national securities exchanges operate according to rules consistent with their statutory obligations, section 19(b)(1) of the Exchange Act 67 requires SROs,68 including national securities exchanges, to file with the Commission any proposed rule change.69 The Commission publishes for public comment all SRO proposed rule changes.70 For new or materially modified trading services, a proposed rule change generally cannot become effective, and the national securities exchange cannot implement such rule change, until the Commission has approved it as consistent with the requirements of the Exchange Act.71
Section 15A of the Exchange Act 72
includes many requirements for the rules of a national securities association that are analogous to those prescribed for national securities exchanges. FINRA is currently the only registered national securities association. Brokerdealers that handle customer orders in NMS stocks or trade NMS stocks in the off-exchange market generally must become FINRA members.73 Section 15A does not, however, impose fair access requirements on the broker-dealer members of FINRA. Accordingly, broker-dealers that trade internally are not subject to the statutory access requirements that apply to national securities exchanges under section 6 of the Exchange Act. B. Current Regulatory Components of the NMS for NMS Stocks Over the years since 1975, the Commission has used its Exchange Act

74Securities Exchange Act Release No. 42450 (Feb. 23, 2000), 65 FR 10577 (Feb. 28, 2000) (‘‘Market Fragmentation Concept Release’’). 75 Id. at 10580. 76 Id. (emphasis in original). 77 Id. (emphasis in original). 78Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005) (‘‘Regulation NMS Adopting Release’’). 79 Id. at 37499 (quoting H.R. Rep. 94–123, 94th Cong., 1st Sess. 50 (1975)). The Commission further quoted this legislative history for section 11A of the Exchange Act to emphasize the importance of ensuring that investor orders are able to be executed in a market with the best price: ‘‘‘market fragmentation becomes of increasing concern in the absence of mechanisms designed to assure that public investors are able to obtain the best price for securities regardless of the type or physical location of the market upon which his transaction may be executed.’’’ Id. at 37499 n.13. 80 Id. 81Securities Exchange Act Release No. 90610 (Dec. 9, 2020), 86 FR 18596 (Apr. 9, 2021) (‘‘MDI Adopting Release’’); see also The Nasdaq Stock Market LLC, et al v. SEC, No. 21–1100 (D.C. Cir. May 24, 2022) (upholding these Commission amendments to market data rules adopted in the MDI Adopting Release). The MDI Adopting Release provides a comprehensive discussion of the current arrangements for consolidated market data, as well as the adopted but unimplemented rules to change these current arrangements. 82Currently, these national securities exchanges are: Cboe BYX Exchange, Inc. (‘‘Cboe BYX’’); Cboe BZX Exchange, Inc. (‘‘Cboe BZX’’); Cboe EDGA Exchange, Inc. (‘‘Cboe EDGA’’); Cboe EDGX Exchange, Inc. (‘‘Cboe EDGX’’); Investors Exchange LLC (‘‘IEX’’); Long-Term Stock Exchange, Inc. (‘‘LTSE’’); MEMX LLC (‘‘MEMX’’); MIAX Pearl, LLC (‘‘MIAX PEARL’’); Nasdaq BX, Inc. (‘‘Nasdaq BX’’); Nasdaq PHLX LLC (‘‘Nasdaq Phlx’’); The Nasdaq Stock Market LLC (‘‘Nasdaq’’); NYSE; NYSE American LLC (‘‘NYSE American’’); NYSE Arca, Inc. (‘‘NYSE Arca’’); NYSE Chicago, Inc. (‘‘NYSE CHX’’); and NYSE National, Inc. (‘‘NYSE National’’). The Commission approved rules proposed by BOX Exchange LLC (‘‘BOX’’) for the listing and trading of certain equity securities that would be NMS stocks on a facility of BOX known as BSTX LLC (‘‘BSTX’’), but BSTX is not yet operational. See Securities Exchange Act Release Nos. 94092 (Jan. 27, 2022), 87 FR 5881 (Feb. 2,
2022) (SR–BOX–2021–06) (approving the trading of
equity securities on the exchange through a facility of the exchange known as BSTX); 94278 (Feb. 17, 2022), 87 FR 10401 (Feb. 24, 2022) (SR–BOX–2021–
14) (approving the establishment of BSTX as a
facility of BOX). BSTX cannot commence operations as a facility of BOX until, among other things, the BSTX Third Amended and Restated Limited Liability Company Agreement approved by the Commission as rules of BOX is adopted. Id. at 10407. authority to adopt a series of rules to fulfill its regulatory responsibility to facilitate the establishment of an NMS. In doing so, it particularly has emphasized the importance of promoting competition as a means to protect investors and to achieve the five statutory objectives for an NMS. In its request for comment on issues relating to market fragmentation in 2000,74 for example, the Commission stated that the
section 11A findings and objectives can
be summed up in two fundamental principles. First, the interests of investors (both large and small) are preeminent, ‘‘especially the efficient execution of their securities transactions at prices established by vigorous competition.’’ 75 Second, investor interests are best served by a market structure that, to the greatest extent possible, maintains the benefits of ‘‘both an opportunity for interaction of all buying and selling interest’’ in individual securities and ‘‘fair competition among all types of market centers’’ seeking to provide a forum for the execution of securities transactions.76 The Commission further stated that competition among multiple competing markets can isolate investor orders and that this ‘‘may reduce competition on price, which is one of the most important benefits of greater interaction of buying and selling interest in an individual security.’’ 77 In 2005, the Commission adopted Regulation NMS to consolidate the NMS rules it had previously adopted under
section 11A and to include new rules
designed to modernize and strengthen equity market structure.78 It again emphasized the importance of competition among orders to obtain the best prices for investors, stating that this basic principle was recognized in the legislative history of section 11A:
‘‘Investors must be assured that they are participants in a system which maximizes the opportunities for the most willing seller to meet the most willing buyer.’’ 79 The Commission summed up its approach to achieving an NMS as resisting suggestions that it adopt an approach focusing on a single form of competition that, while perhaps easier to administer, ‘‘would forfeit the distinct, but equally vital, benefits associated with both competition among markets and competition among orders.’’ 80 Four categories of the Regulation NMS rules are particularly important in the context of Proposed Rule 615: (1) consolidated market data; (2) order handling and execution; (3) access to trading centers; and (4) disclosure of order routing practices and order execution statistics.

Rules Addressing Consolidated
Market Data
Several rules under Regulation NMS set forth requirements for consolidated market data, which, as defined in Rule 600(b)(19) and (21) of Regulation NMS, includes information concerning quotations and transactions in NMS stocks. 17 CFR 242.601 (‘‘Rule 601’’) provides for the dissemination of transaction information; 17 CFR 242.602 (‘‘Rule 602’’) provides for the dissemination of quotation information; 17 CFR 242.603 (‘‘Rule 603’’) requires, among other things, the national securities exchanges and national securities associations to act jointly for disseminating consolidated market data; and 17 CFR 242.608 (‘‘Rule 608’’) addresses the joint-NMS plans that currently are responsible for operating the facilities for collecting and disseminating consolidated market data in NMS stocks. In 2020, the Commission adopted a new rule and amended existing rules to establish a new infrastructure for consolidated market data and to update and significantly expand the content of consolidated market data (‘‘MDI Rules’’).81 The MDI Rules have not yet been implemented and, as discussed below, given their unimplemented status, the description of Proposed Rule 615 in section IV below reflects the regulatory structure currently in place for consolidated market data. Section VII below addresses the economic effects of Proposed Rule 615, taking into account both the regulatory structure currently in place and the unimplemented MDI Rules. This section III.B.1 first will briefly summarize the currently implemented regulatory structure for consolidated market data. It then will discuss the status of the implementation of MDI Rules and how it would not affect the operation of and need for Proposed Rule 615. a. Current Regulatory Structure for Consolidated Market Data As stated in section II.B above, consolidated market data currently is collected and disseminated by the centralized SIPs. For quotation information, only the 16 exchanges that currently trade NMS stocks provide quotation information to the SIPs for dissemination in consolidated market data.82 FINRA has the only SRO display-only facility (the ADF) for quotations. No broker-dealer, however, currently uses the ADF to display quotations in NMS stocks in consolidated market data. For transaction information, all of the national securities exchanges that trade NMS stocks and FINRA provide realtime transaction information to the SIPs for dissemination in consolidated market data. Such information includes the symbol, price, and size of the transaction. A notable difference, however, between the transaction information provided by the national securities exchanges and the transaction information provided by FINRA is that the identity of the particular exchange that executed a trade is included in consolidated market data, while the

83Separate from the dissemination of real-time transaction information in consolidated market data, FINRA publishes statistics on trading volume at member firms, including ATSs and wholesalers, that are aggregated on a weekly basis. Publication of the aggregate volume statistics is delayed by two weeks for some NMS stocks and by four weeks for others. The statistics are available at https:// www.finra.org/filing-reporting/otc-transparency. 84The term ‘‘core data’’ is defined in section 600(b)(21) of Regulation NMS. 85The term ‘‘round lot’’ is defined in section 600(b)(82) of Regulation NMS. 86The term ‘‘odd lot information’’ is defined in
section 600(b)(59) of Regulation NMS.
87The term ‘‘depth of book data’’ is defined in
section 600(b)(26) of Regulation NMS.
88The term ‘‘auction information’’ is defined in
section 600(b)(5) of Regulation NMS.
89The term ‘‘competing consolidator’’ is defined in section 600(b)(16) of Regulation NMS. 90The term ‘‘self-aggregator’’ is defined in section 600(b)(83) of Regulation NMS. 91Rule 603(b) of Regulation NMS requires, among other things, every national securities exchange on which an NMS stock is traded and national securities association to make available to all competing consolidators and self-aggregators its information with respect to quotations for and transactions in NMS stocks. 92MDI Adopting Release, supra note 81, 86 FR at 18698–18701. 93 17 CFR 242.614(e). The participants of the effective NMS market data plan(s) filed proposed amendments on Nov. 5, 2021, which were published for comment in the Federal Register. Securities Exchange Act Release Nos. 93615 (Nov. 19, 2021), 86 FR 67800 (Nov. 29, 2021); 93625 (Nov. 19, 2021), 86 FR 67517 (Nov. 26, 2021); 93620 (Nov. 19, 2021), 86 FR 67541 (Nov. 26, 2021); 93618 (Nov. 19, 2021), 86 FR 67562 (Nov. 26, 2021) (‘‘MDI Plan Amendments’’). 94 17 CFR 242.608(b)(2). 95 17 CFR 242.608(b)(2). The Commission instituted proceedings to determine whether to approve or disapprove the MDI Plan Amendments. Securities Exchange Act Release Nos. 94310 (Feb. 24, 2022), 87 FR 11748 (Mar. 2, 2022); 94309 (Feb. 24, 2022), 87 FR 11763 (Mar. 2, 2022); 94308 (Feb. 24, 2022), 87 FR 11755 (Mar. 2, 2022); 94307 (Feb. 24, 2022), 87 FR 11787 (Mar. 2, 2022). 96MDI Adopting Release, supra note 81, 86 FR at 18699–700. 97 During the parallel operation period, the SIPs will continue to disseminate the data that they currently disseminate and competing consolidators will be permitted to offer consolidated market data products, including odd-lot information. Because the round lot definition will be implemented during a later phase consistent with the MDI Adopting Release, the SIPs and competing consolidators will collect, consolidate and disseminate NMS data that will be based on the current national securities exchange definitions of round lot. Id. at 18699– 18701. 98 Id. at 18701. Following the cessation of the operations of the SIPs, the changes necessary to implement the new round lot sizes will be tested for 90 days and then implemented. Id. The Commission also is proposing to accelerate implementation of the round lot sizes. See Securities Exchange Act Release No. 96494 (Dec. 14, 2022) (File No. S7–30–22) (Regulation NMS:
Minimum Pricing Increments, Access Fees, and Transparency of Better Priced Orders) (‘‘Minimum Pricing Increments Proposal’’). The Commission encourages commenters to review that proposal to determine whether it might affect their comments on this proposing release. 99See supra note 93. 100Securities Exchange Act Release Nos. 95848 (Sept. 21, 2022), 87 FR 58544 (Sept. 27, 2022); 95849 (Sept. 21, 2022), 87 FR 58592 (Sept. 27, 2022); 95850 (Sept. 21, 2022), 87 FR 58560 (Sept. 27, 2022); 95851 (Sept. 21, 2022), 87 FR 58613 (Sept. 27, 2022). identity of the particular FINRA member responsible for reporting a trade, such as a wholesaler or other type of broker-dealer, is not included in consolidated market data.83 b. Unimplemented MDI Rules When implemented, the MDI Rules will modify the current regulatory structure for consolidated market data in two respects. First, they will enhance the content of consolidated market data by defining three new data elements as ‘‘core data’’ 84—(1) information about better priced quotations in higher priced stocks (to be implemented through a new definition of ‘‘round lot’’ 85 and the inclusion of certain ‘‘odd-lot information’’),86 (2) information about quotations that are outside of the bestpriced quotations (to be implemented through a new ‘‘depth of book data’’ definition),87 and (3) information about orders that are participating in auctions (to be implemented through a new definition of ‘‘auction information’’).88 As discussed below in section III.B.1.b.ii, the MDI Rules will enhance the content of consolidated market data, but the enhanced content of consolidated market data still will not include all of the quotation information currently available to market participants that purchase proprietary data feeds that are disseminated individually by national securities exchanges. Second, the MDI Rules will enhance the provision of consolidated market data by adopting a new decentralized model that replaces the SIPs with ‘‘competing consolidators’’ 89 and ‘‘self-aggregators.’’ 90 Under the decentralized model, the relevant SROs (national securities exchanges that trade NMS stocks and FINRA) will be required to provide their data directly to multiple competing consolidators and self-aggregators rather than to a centralized SIP.91
i. Implementation of the MDI Rules
In the MDI Adopting Release in 2020, the Commission outlined a phased transition plan for the implementation of the MDI Rules.92 The first step was the filing of amendments to the effective NMS market data plan(s) as required under Rule 614(e) of Regulation NMS.93 The Commission’s approval of such amendments will be the starting point for the rest of the implementation
schedule. While the Commission can
approve NMS plan amendments within 90 days of the date of their publication in the Federal Register if the Commission finds them to be consistent with the standards set forth in Rule 608 of Regulation NMS,94 the Commission may, under rule 608(b)(2)(i), institute proceedings to determine whether to approve or disapprove proposed amendments, which proceedings must conclude within 180 days of notice publication of the proposed amendments but can be extended by an additional 120 days.95 Therefore, the maximum time permitted under rule 608 for Commission action is 300 days. After the Commission finds that the plan amendments required under Rule 614(e) are consistent with the Rule 608 standards and approves such amendments, the next step will be a 180-day development period, during which competing consolidators can register with the Commission. The development period is followed by a 90- day testing period.96 Once the testing period concludes, a 180-day parallel operation period will begin during which the SIPs and the decentralized consolidation model will operate in parallel.97 Within 90 days of the end of the parallel operation period, the operating committee(s) of the effective NMS plan(s), in consultation with relevant market participants, will make a recommendation to the Commission as to whether the SIPs should be decommissioned. The SIPs will only cease operations to the extent that the Commission approves an amendment pursuant to Rule 608 to the effective NMS plan(s) to effectuate such a cessation.98 The plan participants of two effective NMS plans filed the MDI Plan Amendments on November 5, 2021.99 On September 21, 2022, the Commission disapproved the proposed amendments.100 As a result, new proposed amendments pursuant to Rule 608 will need to be developed and filed for implementation of the MDI Rules. The Commission does not believe that the subsequent implementation of the MDI Rules would substantially affect the operation of Proposed Rule 615. In the existing regulatory structure, the national securities exchanges and FINRA would be required to provide the SIPs with the necessary data (including the auction messages specified in Proposed Rule 615(c)(1)) and the quotation and transaction information specified in the proposed definition of ‘‘open competition trading center’’ in Proposed Rule 600(b)(64) of Regulation NMS). When the MDI Rules are subsequently implemented, a

101The MDI Adopting Release states that the benefits of a decentralized model for consolidated market data are gains in efficiency and innovation for delivering consolidated market data, reduced content and latency differentials between consolidated market data and proprietary market data, and increased market resiliency. MDI Adopting Release, supra note 81, 86 FR at 18778. As discussed in section III.B.1.b.ii below, the Commission does not believe that these benefits of the MDI Rules substantially reduce the need to propose Rule 615 to address the goals stated herein. 102See, e.g., id. at 18751 (competing consolidators will not be required to offer consolidated market products that ‘‘include all of the content of expanded core data’’ and market participants ‘‘may choose not to take in all of the new core data elements in every instance.’’). 103See, e.g., id. at 18764 (because fees will depend on future action by the effective NMS system plans, the Commission ‘‘cannot be certain of the level of those fees or whether such fees would provide discounts’’ for those end users who wish to receive subsets of consolidated market data). 104See, e.g., id. at 18773 (the fees for the data content underlying consolidated market data must be ‘‘fair, reasonable and not unreasonably discriminatory’’). 105See, e.g., id. at 18752 (‘‘[a]lthough expanded core data will not contain all of the data contained in proprietary [depth of book] feeds, the Commission believes that it will contain data that will be useful for market participants’’); id. at 18754 (the potentially lower cost of consolidated market data ‘‘will come at the expense of losing the full set of data currently available via proprietary feeds,’’ because the consolidated market data definition ‘‘does not include all data elements currently available via proprietary data feeds.’’). 106 Id. at 18728. 107See, e.g., id. at 18734 n. 1724 (Commission analysis showed that 91.6% of the message volume on exchanges in a sample week came from just 50 firms that use proprietary data feeds). 108 Id. at 18734. 109 Id. at 18793 n. 2386 (commenters agreed that ‘‘switching to new consolidated market data would come with this expense of losing some data compared to the proprietary data feeds,’’ with one stating that it would be ‘‘unable to remain competitive even after the final amendments are in place without continuing to purchase proprietary data feeds.’’); see also id. at 18795 (stating possibility that potential participants in automated market making and other latency sensitive trading businesses could not ‘‘compete effectively without using the data that would remain exclusive to proprietary feeds’’). 110MDI Adopting Release, supra note 81, 86 FR at 18615. 111 Id. at 18753. 112 Id. at 18605 (footnotes omitted). decentralized model would replace the SIPs, and the national securities exchanges and FINRA would provide this information directly to the competing consolidators and selfaggregators pursuant to Rule 603(b)
of Regulation NMS.101 As noted above, auction information is to be included in the expanded content of consolidated market data that can be disseminated by competing consolidators under the MDI Rules. Market participants in the decentralized model will have a choice of whether to purchase consolidated market data products that include auction information, as well as any of the other components of consolidated market data.102 The fees that ultimately are approved for the different components of consolidated market data will affect the extent to which market participants choose to purchase auction information,103 but, as discussed above, the fees are not known at this time. Any fees for auction information will be required to be fair, reasonable, and not unreasonably discriminatory,104 and, as such, the Commission does not anticipate that such fees would be so high as to deter a substantial number of market participants interested in participating in auctions under Proposed Rule 615 from purchasing consolidated data products that include auction information.
ii. Implementation of the MDI Rules
Will Not Substantially Reduce the Need To Propose Rule 615 To Address the Goals Stated Herein As stated in section I above, Proposed Rule 615 is designed to promote orderby-order competition and thereby achieve two primary goals for the benefit of investors—(1) obtain better prices for the execution of the marketable orders of individual investors that currently are segmented at wholesalers, and (2) expand opportunities for such individual investor orders to meet directly with other investor orders without the participation of a dealer (such as a wholesaler). The MDI Rules would not substantially reduce the need to propose Rule 615 to address the goals stated herein. The MDI Rules will enhance the content of consolidated market data and thereby benefit those market participants that currently use SIP data and decide to purchase the enhanced elements of consolidated market data. As the MDI Adopting Release stated, however, implementation of the MDI Rules will not expand the content of data already available to sophisticated market participants that purchase the proprietary data feeds that are individually disseminated by the national securities exchanges.105 The Commission stated its understanding that ‘‘approximately 50 to 100 firms purchase all of the proprietary [depthof-book] feeds from the exchanges and do not rely on the SIP data for their trading.’’ 106 Moreover, these 50 to100 firms that currently use proprietary data feeds play a significant role in the current market structure.107 For example, the MDI Adopting Release stated that ‘‘nearly all orders entered in the [NMS], including retail orders, touch a component (typically the order router of the executing broker) that uses proprietary data in order to reduce execution costs and improve execution quality.’’ 108 Furthermore, the Commission understands that the wholesalers, as six of the highest volume trading firms in the U.S. equity markets, currently pay for and use the proprietary data feeds. One wholesaler submitted a comment on the MDI Rules stating that it would be unable to remain competitive, even after the MDI Rules were implemented, without continuing to purchase proprietary data feeds.109 Statements in the MDI Adopting Release addressing the benefits of the MDI Rules are consistent with a conclusion that the MDI Rules can benefit SIP data users that currently do not purchase the proprietary data feeds, but will not substantially reduce the need to propose Rule 615 to address the goals stated herein. For example, the MDI Adopting Release stated that the ‘‘odd-lot aggregation methodology’’ of the MDI Rules ‘‘would benefit market participants by promoting tighter spreads in all stocks, especially high priced ones.’’ 110 All of the odd lot quotations that will be aggregated, however, were already included in an order-by-order basis in the proprietary data feeds that the Commission understands the wholesalers use. As the MDI Adopting Release stated, the inclusion of odd-lot quote
information in core data will improve transparency and ‘‘reduce information asymmetry between market participants who already receive this information through proprietary [depth-of-book] feeds and market participants who choose to subscribe to this aspect of core data and previously did not receive this information.111 In addition, the MDI Adopting Release states that ‘‘because richer, more timely consolidated market data may enhance the ability of broker-dealers to obtain the most favorable terms reasonably available under the circumstances, including the best reasonably available price and other factors, for their customer orders, broker-dealers should consider the availability of consolidated market data for purposes of evaluating best execution.’’ 112 The availability of additional quotation information in consolidated market data, however, is unlikely to affect the wholesalers’ and retail brokers’ evaluation of best execution because the Commission understands that wholesalers already would be expected, under FINRA

113The MDI Adopting Release referred to this FINRA guidance concerning the relevance of proprietary data feeds to a broker-dealer’s best execution efforts under FINRA rules. Id. at 18605 n. 94 (quoting FINRA Notice to Members 15–46, Guidance on Best Execution Obligations in Equity, Options and Fixed Income Markets at 3 n. 12 (Nov. 2015), available at https://www.finra.org/rulesguidance/notices/15-46 (‘‘FINRA Notice 15–46’’). The relevant portion of FINRA Notice 15–46 provides the following guidance on compliance with FINRA Rule 5310: ‘‘[A] firm that regularly accesses proprietary data feeds, in addition to the consolidated SIP feed, for its proprietary trading, would be expected to also be using these data feeds to determine the best market under prevailing market conditions when handling customer orders to meet its best execution obligations.’’ 114 Id. at 18601. 115See, e.g., id. at 18753 (‘‘the Commission believes, as suggested by commenters, that retail brokers may allow some sophisticated retail investors to directly utilize the expanded content of core data and realize the benefits discussed below’’). 116 Id. at 18601. 117MDI Adopting Release, supra note 81, 86 FR at 18743 (Table 4). 118 Id. at 18753 (‘‘Even though the new round lot definition would expand information on odd-lots that may be priced better than the current NBBO in some stocks, most stocks would not be affected by the new round lot definition.’’) (footnotes omitted). 119 Id. at 18743 (Table 3). 120 Id. (Table 4). For NMS stocks with prices of $1000.01 to $10,000, which represented 4.82% of trading volume, the Commission estimated that, taking into account the new round lot definition, the NBBO spread would be reduced to some extent for 47.7% of the trading day. Id. (Tables 3–4). guidance,113 to use a more complete set of quotation information (i.e., proprietary data feeds) than will be available in the expanded MDI data when evaluating best execution today, and retail brokers use wholesalers as executing brokers to obtain the best terms reasonably available. The MDI Adopting Release also stated that ‘‘as a result of the new round lot definition and the inclusion of odd-lot quotations in core data, retail investors will be able to see, and more readily access, better-priced quotations.’’ 114 Such information will, depending on the fees yet to be determined for such information (as stated above), enable those retail investors that purchase such information (or for those retail investors whose broker-dealers purchase it for them) to see and more readily access better-priced quotations than the current NBBO disseminated by the SIPs. To do so, retail investors will need to direct their own orders to the particular trading center that is displaying a betterpriced quotation. As stated in the MDI Adopting Release, however, most retail investors rely on their broker-dealers for execution of their orders, and the additional quotation information will likely be used by more
sophisticated retail investors that are able to process quotation information and self-direct their orders.115 The MDI Adopting Release also stated that ‘‘through the addition of depth of book data and auction information in core data, the scope of NMS information will, to a greater extent, allow some market participants to trade in a more informed, competitive, and efficient manner.’’ 116 The phrase ‘‘some market participants’’ as discussed above, refers to those market participants that currently rely on SIP data for trading and not the proprietary data feeds. For the marketable orders of individual investors that currently are routed to wholesalers, the expansion of depth of book data in consolidated market data will not affect the information used for their execution because the Commission understands that wholesalers currently use proprietary data feeds for evaluating the best execution of their orders, which include more information than the expanded consolidated market data of the MDI Rules. An aspect of the MDI Rules that will affect the public evaluation of wholesaler order execution quality is smaller round lot sizes for quotations in NMS stocks with prices greater than $250 per share. These quotations determine the NBBO, and smaller round lot sizes can lead to narrower NBBO spreads. As discussed in section II above, the NBBO is a benchmark used to assess the market for an NMS stock, as well as to retrospectively assess the level of execution quality for an order. Accordingly, although implementation of the MDI Rules will not increase the information available to wholesalers in proprietary data feeds, changes in the round lot definition could narrow the NBBO as a public benchmark for the execution quality of the marketable orders of individual investors. The Commission does not believe, however, the smaller round lot sizes for NMS stocks with prices that exceed $250 per share will substantially affect the need for Proposed Rule 615 in terms of improved order execution quality for the marketable orders of individual investors. In particular, Proposed Rule 615 would encompass all NMS stocks, while the new round lot definition will encompass a much smaller range of NMS stocks and trading volume. In the MDI Adopting Release, for example,
Table 3 and Table 4 set out the range of
stocks and volume estimated to be affected by the new round lot definition. This information is summarized below:
Round lot tier Number of
NMS stocks
% Average daily share volume % Average daily dollar volume % Instances of smaller NBBO $0–$250 ........................................................................................................... 9,023 97.12 71.93 n/a $250.01–$1,000 ............................................................................................... 117 2.79 23.24 26.6 $1,000.01–$10,000 .......................................................................................... 16 0.09 4.82 47.7 $10,000+ .......................................................................................................... 1 0.00 0.02 n/a First, as stated in the MDI Adopting Release, ‘‘most stocks, approximately 98.5%, will remain unaffected’’ by the new round lot definition.117 The 98.5% of unaffected NMS stocks with prices of $250 or less represented 97.12% of total NMS stock share volume and 71.93% of total NMS stock dollar volume. Thus, the great majority of NMS stocks and their volume would not be affected by the narrowing of the NBBO benchmark that will result from the new round lot definition in the MDI Rules.118 Second, for the estimated 1.5% of high-priced NMS stocks (over $250) that will be affected by the reduction in round lot sizes, the Commission estimated that most of the dollar volume (23.24% of total NMS stock dollar volume) will occur within the $250.01- $1,000 tier, but in this tier, the NBBO spread will be reduced for only 26.6% of the trading day.119 For the remaining 73.4% of the trading day in these NMS stocks, the NBBO spread in these NMS stocks will be unaffected.120 Accordingly, even for the 1.5% of NMS stocks that will be affected by the revised round lot definition, NBBO spreads were estimated to remain unaffected for the most of the trading day. This conclusion is consistent with statements in the MDI Adopting Release. For example, the MDI Adopting Release states that ‘‘the size of the change in the NBBO spread, conditional

121 Id. at 18744. 122Similarly, the following statement in the MDI Adopting Release is conditional on those instances where the NBBO spread is smaller: ‘‘The Commission believes that, in particular, for securities with a significant amount of dollar trading volume, there will be significant changes to (tightening of) the quoted spread displayed under the new round lot definition.’’ Id. at 18743. 123 Id. at 18747 (section addressing ‘‘effects of internalization on retail order flow’’). 124 Id. (‘‘it may become more difficult for the retail execution business of wholesalers to provide price improvement and other execution quality metrics at levels similar to those provided under the 100 share round lot definition today’’). 125 Id. 126 Id. 127 Id. 128 Id. 129 Id. at 18745 (‘‘the new round lot definition will also improve transaction cost analysis and best execution analysis in higher priced stocks, which are benchmarked against the NBBO’’). 130The Commission also is proposing a new rule addressing the best execution obligations of brokerdealers. See Securities Exchange Act Release No. 96496 (Dec. 14, 2022) (File No. S7–32–22) (Regulation Best Execution) (‘‘Regulation Best Execution Proposal’’). The Commission encourages commenters to review that proposal to determine whether it might affect their comments on this proposal. 131See MDI Adopting Release, supra note 81, 86 FR at 18605. In addition, FINRA has codified a duty of best execution in its rules, requiring a brokerdealer to ‘‘use reasonable diligence to ascertain the best market for the subject security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions.’’ FINRA Rule 5310, ‘‘Best Execution and Interpositioning.’’ 132See MDI Adopting Release, supra note 81, 86 FR at 18605 (quoting Regulation NMS Adopting Release, supra note 78, 70 FR at 37538); see also Geman v. SEC, 334 F.3d 1183, 1186 (10th Cir. 2003) (quoting Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 270 (3d Cir. 1998)) (‘‘[T]he duty of best execution requires that a broker-dealer seek to obtain for its customer orders the most favorable terms reasonably available under the circumstances.’’); and Kurz v. Fidelity Management & Research Co., 556 F.3d 639, 640 (7th Cir. 2009) (describing the ‘‘duty of best execution’’ as ‘‘getting the optimal combination of price, speed, and liquidity for a securities trade’’). 133See Regulation NMS Adopting Release, supra note 78, 70 FR at 37538. 134See id. 135Section 11A(a)(1)(C)(iv) of the Exchange Act; see also supra note 57 and accompanying text. on the NBBO being smaller, will also be substantial.’’ 121 The phrase ‘‘conditional on the NBBO being smaller’’ 122 means that the reduction in size of the half spread is limited to the 1.5% of stocks and their volume that, as discussed above, will be affected by the new odd lot definition. As a result, there will be a significant reduction in half
spread of the NBBO for those stocks, but this reduction is conditional on the minority of the trading day for 1.5% of NMS stocks when NBBO spreads actually will be affected by the new round lot definition. Third and finally, the NBBO as a benchmark for order execution quality does not, as discussed in section II.C above, reflect the availability of prices better than round lot displayed quotations. Such better prices include displayed odd lot quotations and undisplayed orders at national securities exchanges, as well as the availability of NBBO price improvement at wholesalers that is enabled by the low adverse selection costs of the marketable orders of individual investors. In the MDI Adopting Release, the Commission considered whether a narrowing of the NBBO spread would affect the order execution quality of retail investors.123 While it stated that a narrowing of the NBBO spread would, by definition, reduce the level of NBBO price improvement if execution prices for retail investors remained the same,124 the Commission stated that ‘‘retail investors might or might not’’ experience an improvement in execution quality, ‘‘as measured by execution prices,’’ from wholesalers.125 The Commission stated that a retail broker commented that retail investors would not receive better execution prices under the new round lot sizes because wholesalers already offer price improvement to retail investors that exceeds the potential improvements in the NBBO from the new round lot size.126 Another commenter stated that all investors, including retail investors, would experience reduced execution costs from a tighter NBBO no matter where the execution took place.127 The Commission concluded that it was ‘‘uncertain’’ whether the execution quality that retail investors receive from wholesalers would change if the NBBO spread narrows because the effect ‘‘would depend on how the change in the NBBO compared to the current price improvement offered by wholesalers,’’ as well as on ‘‘changes in the degree of price improvement wholesalers will offer in stocks with tighter NBBOs, which is uncertain.’’ 128 As stated above, the Commission understands that wholesalers already would be expected, under FINRA guidance, to use proprietary data feeds, which contain a fuller set of quotations than will be included in the new round lot definition, when, among other things, evaluating best execution. Consequently, the new round lot definition will not change the quotation data used by wholesalers to determine prices for executing the orders of individual investors, but rather will change the NBBO as benchmark for analysis of order execution quality at wholesalers.129 Moreover, narrowing the NBBO as a benchmark for execution quality of wholesalers will affect all wholesalers equally. For example, if the average NBO for an NMS stock declined by two cents, the NBO as a benchmark would reduce the calculation of NBBO price improvement by two cents for all wholesalers and therefore leave
them in the same relative position when compared to each other. The Commission does not believe that implementation of the new round lot definition in the MDI Rules will substantially affect the need for Proposed Rule 615 in terms of an improvement in the order execution quality of the marketable orders of individual investors.
2. Rules Addressing Order Handling and
Execution
Broker-dealers owe their customers a duty of best execution when handling and executing customer orders.130 This duty of best execution derives from common law agency principles and fiduciary obligations, and is incorporated in SRO rules and enforced through the antifraud provisions of the Federal securities laws.131 The Commission has stated that ‘‘the duty of best execution generally requires brokerdealers to execute customers’ trades at the most favorable terms reasonably available under the circumstances, i.e., at the best reasonably available price.’’ 132 Broker-dealers should periodically assess the quality of competing markets to assure that order flow is directed to the markets providing the most beneficial terms for their customer orders.133 In doing so, broker-dealers must take into account price improvement opportunities, and whether different markets may be more suitable for different types of orders or particular securities.134 After the enactment of section 11A in 1975, which included as an objective the practicability of brokers’ executing investor orders in the best market,135 the Commission adopted rules that prescribe requirements for the handling and execution of orders in NMS stocks in certain contexts. These rules were often designed, at least in part, to promote best execution of investors’ orders. Three rules in Regulation NMS, discussed below, specifically address the handling and execution of orders in NMS stocks—17 CFR 242.604 (‘‘Rule 604,’’ also known as the ‘‘Limit Order Display Rule’’), 17 CFR 242.611 (‘‘Rule 611,’’ also known as the ‘‘Order Protection Rule’’), and 17 CFR 242.612 (‘‘Rule 612,’’ also known as the ‘‘SubPenny Rule’’).

136Regulation NMS Adopting Release, supra note 78, 70 FR at 37570. Modifications included conforming terms to those adopted with Regulation NMS, such as changing references from ‘‘covered security’’ to ‘‘NMS stock.’’ Id. at 37572. 137Rule 604(b)(1) provides exceptions for, among other things, orders executed immediately upon receipt and odd lot orders. 138See Securities Exchange Act Release No. 37619A (Sep. 6, 1996), 61 FR 48290, 48290 (Sep. 12, 1996) (Order Execution Obligations) (adopting final rules to require the display of customer limit orders and amending a rule governing publication of quotations) (‘‘1996 Order Handling Release’’); Rule 604(a). 139See 1996 Order Handling Release, supra note 138, 61 FR at 48293. 140 Id. at 48292. The Commission also adopted amendments to require a market maker to publish quotations for any listed security when it is responsible for more than 1% of the aggregate trading volume for that security and to make publicly available any superior prices that a market maker privately quotes through certain electronic communications networks (‘‘ECNs’’). Id. at 48292. Also, at the same time it adopted the Limit Order Display Rule in 1996, the Commission deferred action on a proposed rule to address the handling of customer market orders of less than block size, referred to as the ‘‘Price Improvement Rule.’’ Id. at
48322. This proposed rule would have required
specialists and OTC market makers to provide their customer market orders an opportunity for price improvement. The proposal included a nonexclusive safe harbor to satisfy the price improvement obligation that included exposing the customer order for 30 seconds at an improved price in a published quotation. The proposal sought to improve opportunities in auction and dealer markets for market orders to interact directly with other market orders and public limit orders, consistent with the goals of an NMS. Id. 141Rule 600(b)(70) defines ‘‘protected bid’’ or ‘‘protected offer’’ as a quotation in an NMS stock that: (i) is displayed by an automated trading center; (ii) is disseminated pursuant to an effective NMS plan; and (iii) is an automated quotation that is the best bid or best offer of a national securities exchange, or the best bid or best offer of a national securities association. 142Rule 600(b)(71) defines ‘‘protected quotation’’ as a protected bid or a protected offer. As stated in
section II.B.1 above, no FINRA member currently
uses the ADF, its facility for displaying quotations, to disseminate quotations in consolidated market data. Today, only exchanges display protected quotations under Rule 611. 143Regulation NMS Adopting Release, supra note 78, 70 FR at 37505. 144 Id. at 37508. 145 Id. In response to the Commission’s proposal to adopt Regulation NMS, The Nasdaq Stock Market, Inc. (n.k.a. Nasdaq) submitted data to show that the trade-through rates for Nasdaq stocks in some trading centers had dropped from the Fall of 2003 to the Fall of 2004, and that the reduction during that time was a result of fewer independently operating ECNs. The Commission stated ‘‘[i]t is unlikely that ECN consolidation could have caused such a major reduction in tradethrough rates at securities dealers when they execute their customer orders internally.’’ Id. (footnote omitted). 146 17 CFR 242.612(a). Paragraph (b) of Rule 612 sets forth a minimum increment of $0.0001 for prices less than $1.00 per share. a. Limit Order Display Rule The Limit Order Display Rule was originally adopted in 1996 as Rule 11Ac1–4 and redesignated as Rule 604 with the adoption of Regulation NMS in
2005.136 It establishes minimum display
requirements for customer limit orders that are not executed immediately, which, as discussed in section II.C above, can be referred to as ‘‘nonmarketable’’ limit orders. In contrast to marketable limit orders, non-marketable limit orders cannot be executed immediately at the NBBO. Rule 604 requires specialists and OTC market makers to display the price and full size of customer limit orders when these orders represent buying and selling interest that is at a better price than a specialist’s or OTC market maker’s public quotation.137 Specialists and OTC market makers also must increase the size of their quotation for a particular security to reflect a limit order of greater than de minimis size when the limit order is priced equal to the specialist’s or OTC market maker’s disseminated quotation and that quotation is equal to the NBBO.138 In adopting Rule 604, the Commission observed that the enhanced transparency of such orders would increase the likelihood that customer limit orders would be executed because contra-side market participants would have a more accurate picture of trading interest in a given security, and that the increased visibility would enable market participants to interact directly with limit orders, rather than rely on the participation of a dealer for execution.139 The Commission also stated that the display requirement (together with other amendments being made at the time) would help ensure the disclosure of customer and market maker buying and selling interest that had, prior to adoption of Rule 604, been hidden from many market participants.140 b. Order Protection Rule In 2005, the Commission adopted the Order Protection Rule as Rule 611 of Regulation NMS. Rule 611(a) applies to ‘‘trading centers,’’ which is defined broadly in Rule 600(b)(95) as a national securities exchange or national securities association that operates an SRO trading facility, an ATS, an exchange market maker, an OTC market maker, or any other broker or dealer that executes orders internally by trading as principal or crossing orders as agent. Rule 611(a)(1) requires trading centers to implement written policies and procedures reasonably designed to prevent trade-throughs—the execution of an order at a price that is inferior to the price of a ‘‘protected quotation.’’ 141 To be protected, a quotation must be immediately and automatically accessible up to its full displayed size, must be the best-priced quotation (highest bid to buy and lowest offer to sell) in round lot sizes of an exchange or FINRA, and must be disseminated in consolidated market data.142 Accordingly, Rule 611 provides for intermarket price protection only of an exchange’s or FINRA’s best bid and offer (‘‘BBO’’). It does not establish time priority among the same-priced quotations at different trading centers, nor does it protect ‘‘depth-of-book’’ quotations (quotations with prices outside an exchange’s or FINRA’s BBO) or odd lot quotations (quotations with sizes of less than one
round lot). In adopting Rule 611, the Commission stated that strong intermarket price protection offers greater assurance, on an order-by-order basis, to investors who submit market orders that their orders in fact will be executed at the best readily available prices, which can be difficult for investors, particularly individual investors, to monitor.143 One of the Commission’s concerns when adopting Rule 611 was the internalization of individual investor orders by broker-dealers. The Commission observed that the great majority of internalized trades are the small trades of individual investors, and that, in 2003, nearly 1 out of every 30 of these trades, of which there are millions, appears to have been executed at a price inferior to an automated and accessible quotation.144 The Commission stated that Nasdaq’s data submitted in response to the Rule 611 proposal appeared to indicate a need for regulatory action to reinforce the fundamental principle of best price for all NMS stocks.145
c. Sub-Penny Rule
Also in 2005, the Commission adopted the Sub-Penny Rule as Rule 612 of Regulation NMS to establish a minimum pricing increment for NMS stocks. Specifically, paragraph (a) of Rule 612 provides that no national securities exchange, national securities association, ATS, vendor, or broker or dealer shall display, rank, or accept from any person a bid or offer, an order, or an indication of interest in any NMS stock priced in an increment smaller than $0.01 if that bid or offer, order, or indication of interest is priced equal to or greater than $1.00 per share.146 Rule 612 does not, however, prohibit a subpenny trade by a wholesaler or other internalizing broker-dealer, as long as the trade did not result from an impermissible sub-penny quotation,

147The Commission also is proposing to amend Rule 612 regarding sub-penny trading. See Minimum Pricing Increments Proposal, supra note
98. The Commission encourages commenters to
review that proposal to determine whether it might affect their comments on this proposing release. 148Regulation NMS Adopting Release, supra note 78, 70 FR at 37556 (the Commission stated that subpenny executions due to price improvement are generally beneficial to retail investors). 149The regulatory framework for ATSs is discussed in section III.B.3 below. 150Neither Rule 612 nor any other Commission rule or interpretation states that exchanges and ATSs may execute midpoint orders at a sub-penny amount (e.g., if the NBBO is 10.00–10.01 to execute at the mid-point price of 10.005). However, the Commission has stated that Rule 612 will not prohibit a sub-penny execution resulting from a midpoint or volume-weighted algorithm or from price improvement, so long as the execution did not result from an impermissible sub-penny order or quotation. Regulation NMS Adopting Release, supra note 78, 70 FR at 37556. Undisplayed ‘‘floating’’ midpoint orders (i.e., orders that re-price when the exchange BBO changes), for example, are permissible under Rule 612, and the Commission has approved numerous rule proposals by national securities exchanges for their use. See, e.g., Securities Exchange Act Release Nos. 89563 (Aug. 14, 2020), 85 FR 51510 (Aug. 20, 2020) (SR– PEARL–2020–03) (order approving proposed rule change by MIAX PEARL to establish rules governing the trading of equity securities, including a midpoint peg order type); and 78101 (June 17, 2016), 81 FR 41142 (June 23, 2016) (File No. 10–
222) (order approving IEX’s registration as a
national securities exchange, including the exchange’s inclusion of a midpoint pegged order type in its rulebook). 151Several exchanges operate RLPs. These are programs for retail orders seeking liquidity that allow market participants to supply liquidity to such retail orders by submitting undisplayed orders priced at least $0.001 better than the exchange’s protected best bid or offer. Each program results from a Commission approval of a proposed rule change made on Form 19b-4 combined with a conditional exemption, pursuant to section 36 of the Exchange Act, from Rule 612 to enable the exchange to accept and rank (but not display) the sub-penny orders. See, e.g., Securities Exchange Act Release Nos. 85160 (Feb. 15, 2019), 84 FR 5754 (Feb. 22, 2019) (SR–NYSE–2018–28) (approving the NYSE RLP on a permanent basis and granting the exchange a limited exemption from the Sub-Penny Rule to operate the program); 86194 (June 25, 2019), 84 FR 31385 (July 1, 2019) (SR–BX–2019–011) (approving Nasdaq BX’s retail price improvement program on a permanent basis and granting the exchange a limited exemption from the Sub-Penny Rule to operate the program). 152 Id. See also Securities Exchange Act Release No. 73702 (Nov. 28, 2014), 79 FR 72049 (Dec. 4,
2014) (SR–BX–2014–048) (approving Nasdaq BX’s
(f/k/a NASDAQ OMX BX Inc.) establishment of its retail price improvement program on a pilot basis). In granting the original exemption from Rule 612, the Commission stated that the vast majority of ‘‘marketable retail orders’’ are internalized by OTC market makers, and that retail investors can benefit from such arrangements to the extent that OTC market makers offer them price improvement over the NBBO. This price improvement is typically offered in sub-penny amounts. The Commission explained that OTC market makers typically select a sub-penny price for a trade without quoting at that exact amount or accepting orders from retail customers seeking that exact price; and that exchanges—and exchange member firms that submit orders and quotations to exchanges—cannot compete for ‘‘marketable retail order flow’’ on the same basis, because it would be impractical for exchange electronic systems to generate sub-penny executions without exchange liquidity providers or retail brokerage firms having first submitted subpenny orders or quotations, which the Sub-Penny Rule expressly prohibits. The Commission explained that the limited exemption granted to operate the retail price improvement program should promote competition between exchanges and OTC market makers in a manner reasonably designed to minimize the problems that the Commission identified when adopting the SubPenny Rule. Id. at 72053. 153See Regulation NMS Adopting Release, supra note 78, 70 FR at 37538. The rules discussed in this
section address requirements that apply to trading
centers providing access to their services. Exchange Act Rule 15c3–5, in contrast, addresses access, but in the context of risk management controls for broker-dealers with market access. 154See supra notes 61–66 and accompanying text. order, or indication of interest.147 For example, Rule 612 does not prevent wholesalers, after they receive an order from a broker, from choosing to execute that order in a transaction at a subpenny price. This includes a trade executed at a price that is a sub-penny increment better than the best displayed quotation in consolidated market data.148 This sub-penny trading exception is not available to market participants on exchanges and ATSs,149 in contrast, because those trading centers operate by accepting, matching, and executing orders from market participants. Exchanges and ATSs, with limited exceptions, may only execute orders at a sub-penny price if the price is the NBBO midpoint.150 Also, exchanges with retail liquidity programs (‘‘RLPs’’) have been granted an exemption from Rule 612 to provide executions in tenths of a penny.151 The Commission has granted exemptions for these programs to promote competition between exchanges and OTC market makers (which, as discussed above, includes wholesalers).152 As discussed in section VII below, however, the great majority of marketable orders of individual investors continue to be routed first to wholesalers.
3. Rules Addressing Access to Trading
Centers
As stated above, access to trading centers and their services is a critically important component of the NMS as a means to link trading centers together in a unified system. For example, the Regulation NMS rules addressing the display of quotations, the display of customer limit orders, and protection of customer orders cannot achieve their objectives if market participants do not have fair and efficient means to access those trading centers that display quotations and execute orders.153 For purposes of assessing access requirements in today’s NMS, trading centers for NMS stocks can be divided into three distinct regulatory categories:
national securities exchanges, NMS Stock ATSs, and internalizing brokerdealers (including wholesalers). As discussed below, the statutory access requirements and the Commission’s access rules currently apply to exchanges and ATSs, as well as to FINRA members that display quotations in consolidated market data through FINRA’s ADF (of which there currently are none). In contrast, broker-dealers that do not display quotations in consolidated market data and that trade outside of an ATS, such as wholesalers, are not subject to any fair access requirements under the Exchange Act or Commission rules. While subject to Commission and SRO rules for brokerdealers, internalizing broker-dealers are not prohibited from restricting access to their trading mechanisms and the investor orders that they internalize. An internalizing broker-dealer is not required, for example, to provide other market participants, including institutional investors and liquidity providers on exchanges, with any opportunity to compete to provide the best prices to the individual investor orders that the broker-dealer executes internally. a. Access Rules for National Securities Exchanges As stated in section III.A above, the Exchange Act directly requires national securities exchanges to provide fair access in four contexts.154 Section 6(b)(2) specifies that exchange rules must allow ‘‘any’’ broker-dealer registered with the Commission, unless subject to a specified disqualification, to become a member of the exchange.
Section 6(b)(4) requires that exchange
rules provide for the ‘‘equitable’’ allocation of ‘‘reasonable’’ dues, fees, and other charges among members, issuers, and other persons using exchange facilities. Section 6(b)(5) broadly requires that exchange rules be designed, among other things, to remove impediments to and perfect the mechanism of a free and open market and an NMS, and that exchange rules are not designed to permit unfair discrimination between customers, issuers, brokers, or dealers. And section 6(b)(8) requires that exchange rules do not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. In addition to these broad statutory requirements for all national securities exchanges, the Commission has adopted 17 CFR 242.610 (‘‘Rule 610’’) of Regulation NMS, which addresses access to displayed quotations.

155Rule 600(b)(89) defines an ‘‘SRO trading facility’’ as a facility operated by or on behalf of a national securities exchange or a national securities association that executes orders in a security or presents orders to members for execution. 156See Regulation NMS Adopting Release, supra note 78, 70 FR at 37539. Rule 610(c) also limits the fees that can be charged for accessing an exchange’s best-priced displayed quotations, and Rule 610(d) addresses locking and crossing quotations. 157See Regulation ATS Adopting Release, 63 FR 70844, supra note 27. ‘‘Regulation ATS’’ consists of 17 CFR 242.300 through 242.304 (‘‘Rule 300’’ through ‘‘Rule 304’’ under the Exchange Act). 158 17 CFR 240.3a1–1. 159 In 2018, the Commission amended Regulation ATS with respect to the requirements that apply to NMS Stock ATSs. Securities Exchange Act Release No. 83663 (July 18, 2018), 83 FR 38768 (Aug. 7,
2018) (‘‘ATS–N Adopting Release’’).
160A fill-or-kill order is an order with instructions to cancel the order if it cannot be executed in its full size. 161Regulation ATS Adopting Release, supra note 27, 63 FR at 70872 (footnote omitted). 162See id. at 70873. 163See supra note 29 and accompanying text. 164See Regulation NMS Adopting Release, supra note 78, 70 FR at 37540 (discussing Rule 610, which addresses means of access to quotations). The Regulation NMS Adopting Release refers to National Association of Securities Dealers (‘‘NASD’’) members. NASD was the predecessor association to what today is FINRA. 165See Regulation NMS Adopting Release, supra note 78, 70 FR at 37502–03; see also id. at 37539– 43. Specifically, Rule 610(a) prohibits any national securities exchange that operates an SRO trading facility 155 from imposing unfairly discriminatory terms that would prevent or inhibit any person from obtaining efficient access through a member of the national securities exchange to the quotations in an NMS stock displayed through its SRO trading facility. This provision is designed to prohibit national securities exchanges from limiting ‘‘piggyback access’’ as a means by which nonmembers obtain access to exchange quotations through the services of an exchange member.156 Piggyback access, for example, allows non-members to obtain access to a national securities exchange’s quotations without the need to obtain (and pay for) direct connectivity to the exchange. b. Access Rules for NMS Stock ATSs In 1998, the Commission initiated a new regulatory regime for ATSs with the adoption of Regulation ATS.157 An ATS is a trading system that falls within the definition of exchange in Section 3(b)(1) of the Exchange Act, but is exempted from such definition by Rule 3a1–1 under the Exchange Act if the trading system complies with Regulation ATS.158 For an NMS Stock ATS,159 Regulation ATS requires, among other things, that the NMS Stock ATS must register with the Commission as a broker-dealer and must file a Form ATS–N, a publicly available document that includes detailed disclosures about the NMS Stock ATS’s operations. In addition, Regulation ATS includes two separate types of access requirements that potentially can apply to an NMS Stock ATS. First, Rule 301(b)(3) imposes order display and execution access requirements on an NMS Stock ATS that displays orders to any person and had 5% or more of average daily volume reported in an NMS stock during four of the preceding six calendar months. Similar to Rule 610, the ‘‘execution access’’ requirement of Rule 301(b)(3) is limited to access to displayed quotations in consolidated market data. As stated above in section III.B.1, FINRA’s ADF is a facility for broker-dealers (including ATSs) to display quotations in consolidated market data. Currently, no NMS Stock ATS that displays quotations uses the ADF to display its quotations in consolidated market data, and no NMS Stock ATS is subject to the execution access requirement of Rule 301(b)(3).
Second, Rule 301(b)(5) imposes ‘‘fair access’’ requirements with respect to an NMS stock in which the NMS Stock ATS had 5% or more of the average daily volume reported during four of the preceding six calendar months. This fair access requirement requires an NMS Stock ATS (1) to establish written standards for granting access to trading on its systems, (2) to not unreasonably prohibit or limit any person in respect to access to services offered by such ATS by applying the written access standards in an unfair or discriminatory manner, (3) to maintain records of grants, denials, and limitations of access, and (4) to report the information required by Form ATS–R on grants, denials, and limitations of access. When it adopted Regulation ATS, the Commission emphasized that the fair access requirements of Rule 301(b)(5) apply to a far broader range of services than the ‘‘execution access’’ requirements of Rule 301(b)(3), which are limited to access to quotations. Specifically, the Commission stated that although it was adopting rules to require ATSs with significant trading volume to publicly display their best bid and offer and provide equal access to those orders, direct participation in ATSs offers benefits in addition to execution against the best bid and offer. The Commission gave as an example that direct participants could enter limit orders into the system, rather than just execute against existing orders on a fillor-kill basis,160 and that direct participants could view all orders, not just the best bid or offer, which provides important information about the depth of interest in a particular security. The Commission further observed that some ATSs also allowed direct participants to enter ‘‘reserve’’ orders which hide the full size of an order from view. Because of these advantages to direct participants in an ATS, access to the best bid and offer through an SRO provided an incomplete substitute. Therefore, the Commission adopted rules to require most ATSs that have a significant percentage of overall trading volume in a particular security to comply with fair access standards.161 In sum, the fair access requirements of Rule 301(b)(5) encompass all of the trading services of an NMS Stock ATS. When adopting these requirements, the Commission emphasized that an ‘‘alternative trading system must apply [fair access] standards fairly and is prohibited from unreasonably prohibiting or limiting any person with respect to trading in any equity securities.’’ 162 Currently, only a single NMS Stock ATS discloses on its Form ATS–N that it is subject to these fair access requirements for securities that are available for trading on its platform.163 NMS Stock ATSs that are not subject to fair access requirements are not prohibited from unfairly discriminating with respect to the trading services they offer broker-dealers and other market participants.
c. Access Rules for ADF Participants
As stated in section III.B.2 above, Rule 611 protects the best-priced displayed quotations of FINRA members that use the ADF to display quotations in consolidated market data (though no FINRA member currently uses the ADF to do so). In adopting Rule 611, the Commission recognized that assuring fair and efficient access to FINRA members displaying quotations in the ADF would be essential, given that other market participants were required by rule to not trade through such quotations.164 The ADF falls within the definition of an ‘‘SRO display-only facility’’ in Rule 600(b)(88) because it merely displays the quotations of its participants and neither executes orders itself nor presents orders to ADF participants for execution. Instead, market participants must obtain their own means of access to ADF participants to trade with ADF protected quotations. Accordingly, the Commission adopted Rule 610(b) to promote such access to ADF participants.165 Rule 610(b)(2) imposes

166Regulation NMS Adopting Release, supra note 78, 70 FR at 37549. 167 Id. 168 Id. 169 Id. 170The rules that the Commission originally adopted were designated as Rule 11Ac1–6 and Rule 11Ac1–5. The Commission re-designated Rule 11Ac1–6 as Rule 606 and Rule 11Ac1–5 as Rule 605 when it adopted Regulation NMS in 2005. Regulation NMS Adopting Release, supra note 78, 70 FR at 37538. The term ‘‘market center,’’ as defined in Rule 600(b)(46) of Regulation NMS, is somewhat narrower than trading center. Market centers include, for example, national securities exchanges, ATSs, and OTC market makers (including wholesalers), but do not include the broad catch-all category of trading center that encompasses any broker-dealer that executes orders internally as principal or agent. 171Securities Exchange Act Release No. 43590 (Nov. 17, 2000), 65 FR 75414, 75427 (Dec. 1, 2000). The Commission enhanced the order routing disclosure requirements of Rule 606 when it amended the rule in 2018. Securities Exchange Act Release No. 84528 (Nov. 2, 2018), 83 FR 58338 (Nov. 19, 2018). 172A ‘‘non-directed order’’ is defined in Rule 600(b)(56) of Regulation NMS to mean any order from a customer other than a directed order, and a ‘‘directed order’’ is defined in Rule 600(b)(27) of Regulation NMS to mean an order from a customer that the customer specifically instructed the brokerdealer to route to a particular venue for execution. 173Rule 605(a)(1). The Commission also is proposing to amend the order execution quality disclosures required by Rule 605. See Securities Exchange Act Release No. 96493 (Dec. 14, 2022) (File No. S7–29–22) (Disclosure of Order Execution Information). The Commission encourages commenters to review that proposal to determine whether it might affect their comments on this proposing release. 174The applicability of paragraph (a) of Proposed Rule 615 to ‘‘internally’’ executed transactions is designed to accommodate the practice of some trading centers that both execute orders internally and obtain executions of orders externally by seeking liquidity at other trading centers. Cf. Rule 600(b)(95) of Regulation NMS (definition of ‘‘trading center’’ includes ‘‘any other broker or dealer that executes orders internally by trading as principal or crossing orders as agent’’). the same piggyback access requirement that applies to exchanges under Rule 610(a), thereby assuring that market participants can obtain indirect access to an ATS’s or broker-dealer’s quotations in the ADF. In addition, however, Rule 610(b)(1) imposes an access requirement that is particularly tailored to address concerns presented by FINRA members (including NMS Stock ATSs) displaying quotations in the ADF. Specifically, Rule 610(b)(1) requires that any trading center that displays quotations in NMS stocks through an SRO display-only facility must provide a level and cost of access to such quotations that is substantially equivalent to the level and cost of access to quotations displayed by
SRO trading facilities (such as national securities exchanges). The Commission emphasized that the phrase ‘‘level and cost of access’’ would encompass both (1) the policies, procedures, and standards that govern access to quotations of the trading center, and (2) the connectivity through which market participants can obtain access and the cost of such connectivity.166 The Commission further stated that trading centers that choose to display quotations in an SRO display-only facility would be required to bear the responsibility of establishing the necessary connections to afford fair and efficient access to their quotations, and the nature and cost of these connections for market participants seeking to access the trading center’s quotations would need to be substantially equivalent to the nature and cost of connections to SRO trading facilities.167 In addition to these heightened access requirements for FINRA members (including NMS Stock ATSs) that display quotations in the ADF, the Commission stated that FINRA, as the self-regulatory authority responsible for enforcing compliance by ADF participants with the requirements of the Exchange Act, would need to evaluate the connectivity of ADF participants to determine whether they meet the requirements of Rule 610(b)(1).168 The Commission also stated that the addition of a new ADF participant would constitute a material aspect of the operation of FINRA’s facilities, and thus require the filing of a proposed rule change pursuant to
section 19(b) of the Exchange Act that
would offer an opportunity for public notice and comment.169
4. Disclosure of Order Routing Practices
and Order Execution Statistics Rule 606 of Regulation NMS requires broker-dealers to publish quarterly reports on their routing of customer orders in NMS stocks, and Rule 605 of Regulation NMS requires market centers to make data files publicly available on a monthly basis that include a variety of statistics on their execution of orders in NMS stocks.170 When it originally adopted the two rules in 2000, the Commission stated that, by increasing the visibility of order execution and routing practices, the rules were ‘‘intended to empower market forces with the means to achieve a more competitive and efficient [NMS] for public investors.’’ 171 Rule 606 requires broker-dealers to disclose, among other things, the percentage of non-directed customer orders routed to different trading centers, as well as the financial inducements offered by these trading centers to attract order flow.172 Information must be provided for four types of orders—market orders, marketable limit orders, non-marketable limit orders, and other orders. The enhanced disclosures include a requirement to disclose net aggregate amounts of PFOF received from trading centers or amounts paid to them (such as transaction fees on exchanges), both as a total dollar amount and an amount per 100 shares. Rule 605 requires market centers to disclose standardized statistics about the execution quality they achieve for ‘‘covered orders,’’ as defined in Rule 600(b)(22) of Regulation NMS.173 In general, the definition of covered orders excludes order types for which the customer requests special handling that could detract from the goal of achieving comparable statistics for similar order types across different market centers. Unlike the Rule 606 disclosures, the Rule 605 data files are not designed to be human-readable and instead consist of a large volume of detailed statistics for each of the NMS stocks in which a market center receives covered orders. The data files are published in a format that is designed to be downloaded and processed with analysis software, such as a spreadsheet program, which then can be used to generate summary reports for viewing.
IV. Description of Proposed Rule 615
A. Overview of Order Competition Requirement Paragraph (a) of Proposed Rule 615 sets forth the rule’s core competition requirement. It states that a restricted competition trading center shall not execute a segmented order internally 174 until after a broker-dealer has exposed such order to competition at a specified limit price in a qualified auction operated by an open competition trading center. As discussed below in this section IV: (1) segmented order, open competition trading center, restricted competition trading center, and qualified auction are new terms proposed to be defined in Rule 600(b) of Regulation NMS; (2) certain exceptions to the order competition requirement are set forth in paragraph (b) of Proposed Rule 615; (3) the requirements for a qualified auction are specified in paragraph (c) of Proposed Rule 615; and (4) the requirements with respect to segmented orders that would be imposed on open competition trading centers, originating brokers, all brokerdealers, and national securities exchanges are set forth in paragraphs (d) through (g) of Proposed Rule 615. The term ‘‘segmented order,’’ as proposed to be defined in Proposed Rule 600(b)(91) of Regulation NMS, is a

175As discussed in IV.B.1 below, the proposed definition of ‘‘segmented order’’ would exclude very active traders whose orders are likely to impose a much higher level of adverse selection costs on liquidity providers than the less-active accounts that are more typical of individual investors. This is done by limiting the proposed definition of ‘‘segmented orders’’ to orders for accounts in which the average daily number of trades executed in NMS stocks was less than 40 in each of the six preceding calendar months. 176As discussed in section IV.B.1 below, the proposed definition of ‘‘segmented order’’ does not include a limit price component. Compliance with the order competition requirement for limit orders would vary depending on the relation of any limit price and an execution price to the NBBO. For example, segmented orders that have a limit price, or are executed at a price, equal to or more favorable for the segmented order than the NBBO midpoint or better, would have an exception under paragraph (b)(3) or (b)(4) of Proposed Rule 615(b). Segmented orders with a limit price beyond the NBBO midpoint (higher for segmented orders to buy and lower for segmented orders to sell) could still qualify for the exception in Proposed Rule 615(b)(3) if they were executed at the NBBO midpoint or better (i.e., such an order would have been executed at a more favorable price for the segmented order than its limit price). 177 If the segmented order is not executed in the qualified auction, however, the wholesaler could choose to execute the segmented order internally at the specified limit price or better. 178See infra section VII.C.2.b.i (the fade probability of the NBBO prices goes from an average of 1.8% at 25 milliseconds after an internalized individual investor order, to 2.8% at 100 milliseconds, and to 4.6% at 300 milliseconds). key term determining the scope of Proposed Rule 615 and is designed to encompass those orders of individual investors with relatively low adverse selection costs.175 In addition, paragraphs (b)(2) and (b)(3) of Proposed Rule 615 would provide exceptions for larger orders ($200,000 or more) and orders that are executed at favorable prices for individual investors (orders executed at the NBBO midpoint or better); paragraph (b)(4) would provide an exception for limit orders that have a limit price that is equal to or more favorable for the segmented order than the NBBO midpoint (i.e., nonmarketable segmented orders with a limit price that is equal to or lower than the midpoint for buy orders and equal to or higher than the NBBO midpoint for sell orders); and paragraph (b)(5) would provide an exception for orders sized less than one share and for the fractional component, if any, of a segmented order if no qualified auction is available to execute the fractional share or fractional component.176 The purpose of the order competition requirement is to expose segmented orders to competition to provide the best prices on an
order-by-order basis and thereby minimize the transaction costs incurred by individual investors when they use marketable orders. Proposed Rule 615 would allow flexibility for broker-dealers, wholesalers, and other restricted competition trading centers in how they comply with the rule. A broker-dealer could choose, subject to its best execution responsibilities as discussed further below, to route a segmented order directly to a qualified auction, to an open competition trading center, or to a national securities exchange. Alternatively, a broker-dealer could route such segmented order to another destination, such as a routing brokerdealer, a wholesaler, or other restricted competition trading center, which, in turn, could route the segmented order to a qualified auction, to an open competition trading center, or to a national securities exchange. For illustrative purposes, the following is one example of how a segmented order could be handled and executed in compliance with Proposed Rule 615. Assume that a broker-dealer routed a customer’s segmented order to a wholesaler. The wholesaler that received the segmented order could select a price at which it was willing to execute a segmented order internally. Before executing internally, however, the wholesaler would be required to submit the segmented order to a qualified auction with a specified limit price. As discussed further below, the specified limit price is not a price at which the wholesaler is guaranteeing to execute (i.e., it is not a ‘‘reserve’’ price or a ‘‘backstop’’ of the segmented order).177 Rather, the specified limit price would inform auction responders on how to price their orders and also, if the segmented order did not receive an execution in the qualified auction, would be the price (or better) at which the wholesaler or other restricted competition trading center subsequently could execute the segmented order as soon as reasonably possible. The wholesaler that submitted the segmented order to a qualified auction would have a choice of whether to participate in the qualified auction by submitting its own auction response. The wholesaler could, for example, use its selected price for execution of the segmented order as the specified limit price in the qualified auction or, alternatively, the wholesaler could pick a less aggressive price as the specified limit price for the qualified auction and participate in the qualified auction by submitting an auction response with its more aggressive selected price. The open competition trading center operating the qualified auction would widely disseminate an auction message, which would include the specified limit price, in consolidated market data that would invite auction responses. During the qualified auction, the full range of market participants with the technological capability of responding to a fast (sub-second) auction, such as exchange market makers and institutional investors through their broker-dealers’ smart order
routers (‘‘SORs’’), would have an opportunity to compete to provide the best price for the segmented order by submitting auction responses. If all or part of the segmented order could be executed in the qualified auction at the specified limit price or better, the open competition trading center operating the qualified auction would execute the segmented order pursuant to the execution priority rules set by the open competition trading center running the qualified auction, consistent with the execution priority requirements of Proposed Rule 615(c)(5). If the segmented order did not receive a full execution in the qualified auction, the unexecuted order, or unexecuted portion thereof, would be canceled back to the wholesaler, who could, as soon as reasonably possible, execute the segmented order, or unexecuted portion thereof, internally at a price that was equal to or better for the segmented order than the specified limit price. As discussed below, the wholesaler would not, however, be required to execute the unexecuted segmented order or unexecuted portion of the segmented order at the specified limit price. Any unexecuted segmented order, or any unexecuted portion thereof, would continue to be subject to the order competition requirements of Proposed Rule 615(a). Given the absence of a ‘‘reserve price’’ or ‘‘backstop’’ requirement, a segmented order would not have certainty of an execution in a qualified auction at a price equal to the NBBO or better, but the marketable orders of individual investors orders today also do not have certainty of execution for orders routed to wholesalers. As shown in Table 7 in
section VII.B.4 below, 1.67% of
marketable order shares in NMS stocks (and 3.61% of marketable order shares in non-S&P 500 stocks) receive executions at prices that are outside the NBBO at the time the wholesaler received the order. This low percentage of orders executed outside the NBBO when routed to wholesalers is consistent with the low probability that the NBBO will move away from individual investor orders in the very short time period of a qualified auction.178 For the reasons discussed in
section VII.C.2.b.i below, the
Commission does not believe that

179See Section 11A(a)(1)(C)(v) of the Exchange Act. 180The revised specified limit price set by the wholesaler would have to be consistent with the terms of the order, such as the limit price set by the customer, if any, as well as with the wholesaler’s best execution responsibilities. 181See infra section IV.B.2 (discussing the proposed definition of ‘‘continuous order book’’). 182See Proposed Rule 600(b)(87) and discussion in section IV.B.3 below. 183Section III.B.2 above discusses the Exchange Act provisions that currently prohibit a national securities exchange from unfairly restricting access.
Section IV.B.2 below discusses the proposed access
requirement for any open competition trading center that is not a national securities exchange (i.e., an NMS Stock ATS). In many cases, an open competition trading center also would be a national securities exchange. As discussed in section IV.B.2 below, however, some national securities exchanges would not meet the definition of an open competition trading center. 184As discussed in sections IV.D and IV.G below, open competition trading centers and national securities exchanges would not be allowed to operate a mechanism limited, in whole or in part, to segmented orders, including RLPs, barring an exception from Proposed Rule 615. See infra notes 258, 259 and accompanying text. 185See, e.g., infra section VII.C.1.b (discussing anticipated benefits of improved execution quality for retail orders exposed in qualified auctions). segmented orders would have significantly greater risk of inferior execution prices under Proposed Rule 615 than currently provided by wholesalers, but the variability of execution prices could increase. In sum, Proposed Rule 615 would allow segmented orders to continue to be executed internally by a wholesaler or other restricted competition trading center, but not until after the execution price had been exposed to order-byorder competition in a fair and open qualified auction. In addition, qualified auctions would give the trading interest of other investors, particularly institutional investors, an opportunity to interact directly (without the participation of a dealer) with, and thus execute against, the marketable orders of individual investors. When investor orders are able to interact directly at a fully competitive price without the intermediation of a wholesaler or other dealer, two investors (both the buyer and the seller) are able to benefit mutually from a single trade, thereby promoting the NMS objective that, consistent with the objectives of economically efficient execution of securities transactions and the practicability of brokers executing investors’ orders in the best market, investors’ orders have an opportunity to be executed without the participation of a dealer.179 Proposed Rule 615 does not limit the types of broker-dealers that would be permitted to submit segmented orders for execution in a qualified auction. For example, a retail broker that currently routes segmented orders directly to a wholesaler could instead route such orders directly to a qualified auction with a specified limit price selected by the retail broker. Such specified limit price would need to be consistent with its best execution responsibilities and the terms of the order as set by the customer. If the segmented order did not receive an execution in the auction at the specified limit price, the retail broker could, as soon as reasonably possible, route the segmented order to a wholesaler with a representation that the segmented order had cleared (i.e., not received an execution in) a qualified auction at that price. The
wholesaler then could, in compliance with Proposed Rule 615, as soon as reasonably possible, execute the segmented order internally at the specified limit price or better. If a segmented order did not receive an execution in a qualified auction (regardless of whether submitted to the auction by a retail broker, a wholesaler, or other broker-dealer), a wholesaler that received such order following the conclusion of a qualified auction would not be required by Proposed Rule 615 to execute the order internally. If a wholesaler chose not to execute the order internally following the conclusion of a qualified auction, the segmented order, as with all segmented orders, would need to be further handled in compliance with Proposed Rule 615. For example, (1) the wholesaler could return the order to the retail broker or other broker-dealer for further handling (such as resubmission to a qualified auction with a revised specified limit price); (2) the wholesaler itself could resubmit the segmented order to a qualified auction with a revised specified limit price; 180 or (3) the wholesaler could route the order directly to an open competition trading center or national securities exchange (as national securities exchanges are not restricted competition trading centers subject to Proposed Rule 615(a)) for an immediate execution on its continuous order book. The decision on how to handle segmented orders that clear qualified auctions without executions also would be governed by the relevant best execution responsibilities of retail brokers and wholesalers. As indicated in the above example and subject to relevant best execution responsibilities, a broker-dealer responsible for obtaining the execution of a segmented order has the option of routing the order directly to the continuous order book 181 of an open competition trading center or national securities exchange for execution, without exposure in a qualified auction. The definition of restricted competition trading center would exclude all open competition trading centers and all national securities exchanges.182 They would be excluded because both of these types of trading centers either are not permitted by the Exchange Act currently, or would not be permitted by Proposed Rule 615, to unfairly restrict access to their continuous order books.183 Consequently, segmented orders routed directly to the continuous order books of open competition trading centers and national securities exchanges would be subject to competition to provide the best prices on an order-by-order basis, and thus would not be isolated.184 Importantly, however, all relevant broker-dealer best execution responsibilities would govern the extent to which segmented orders could be routed to an open competition trading center or national securities exchange without first clearing a qualified auction. As discussed in section III.B.2 above, best execution generally requires a broker-dealer to obtain the best terms reasonably available for
customer orders. Because liquidity providers can profitably offer better prices to segmented orders of individual investors with low adverse selection costs as compared to the prices they can offer other types of order flow, trading mechanisms that offer such segmentation, as would a qualified auction, are quite likely to obtain better prices for segmented orders than other trading mechanisms, such as the continuous order book of an open competition trading center or national securities exchange, that commingle all types of order flow.185 A broker-dealer would need to consider the opportunity for better prices in its best execution analysis. There may be market conditions when a best execution analysis could indicate that a broker-dealer should route segmented orders directly to the continuous order book of an open competition trading center or national securities exchange. One example could be a ‘‘fast market’’—when publicly quoted prices are moving rapidly away when a broker-dealer receives a marketable order (that is, rapidly up in price for orders to buy or rapidly down in price for orders to sell). In these market conditions, the broker-dealer could determine that best prices could be obtained by immediately attempting to execute segmented orders against the NBBO on an open competition trading center or national securities exchange,

186Rule 600(b) of Regulation NMS sets forth defined terms. Rule 600(b) would be amended to insert new defined terms used in Proposed Rule 615, and existing defined terms would be renumbered accordingly. Cross references to Rule 600(b) throughout the rules and regulations under the Exchange Act would also be amended to reflect the new numbering. 187 17 CFR 240.15l 1(b)(1) (defining ‘‘retail customer’’ as, among other things, as a natural person who receives a recommendation of any securities transaction from a broker-dealer and uses the recommendation primarily for personal, family, or household purposes). Proposed Rule 615 does not incorporate all of the definition of ‘‘retail customer’’ in Regulation BI, because that definition is limited to when there is a recommendation to a retail customer. Proposed Rule 615, in contrast, is designed to promote competition for individual investor orders, regardless of whether such investor is self-directed. Moreover, Proposed Rule 615 is focused on limiting the extent to which an account may generate orders with a high level of adverse selection costs. As discussed below, Proposed Rule 615 includes a trading activity threshold designed to address this policy concern. The definition of ‘‘retail investor’’ for purposes of 17 CFR 249.641 (‘‘Form CRS’’) (Relationship Summary for Brokers and Dealers Providing Services to Retail Investors) is also limited to ‘‘natural persons’’ and defines ‘‘retail investor’’ as a natural person, or the legal representative of such natural person, who seeks to receive or receives services primarily for personal, family or household purposes. In the context of Form CRS, the term ‘‘retail investor’’ is used in connection with disclosures to prospective customers, and as in the context of Regulation BI, relates to the relationship between an investor and a financial professional. See Securities Exchange Act Release No. 86031 (June 5, 2019), 84 FR 33318, 33345 (July 12, 2019) (adopting Regulation Best Interest: The Broker-Dealer Standard of Conduct) (’’Regulation BI Adopting Release’’). Because Proposed Rule 615 is intended to improve competition for individual investor orders, and is not related to the relationship between an investor and a financial professional, the Commission is not proposing to include the phrase ‘‘primarily for personal, family, or household purposes’’ in the definition of segmented order. For purposes of Proposed Rule 615, limiting segmented orders to orders for the accounts of natural persons, and specifically those with less than 40 trades in NMS stocks in each of the preceding 6 months, is intended to address adverse selection costs and is not related to the purposes for which a natural persons may be seeking the services of a brokerdealer. 188See supra note 151 (generally describing exchange RLPs). 189E.g., IEX Rule 11.190(b)(15) (providing, among other things, that ‘‘[a] Retail order must reflect trading interest of a natural person’’ and that ‘‘[a]n order
from a retail customer can include orders submitted on behalf of accounts that are held in a corporate legal form—such as an Individual Retirement Account, Corporation, or a Limited Liability Company—that have been established for the benefit of an individual or group of related family members, provided that the order is submitted by an individual.’’); and Nasdaq, Equity 7, section 118 (defining a ‘‘Designated Retail Order’’ as originating from a ‘‘natural person’’ and explaining that ‘‘[a]n order from a ‘natural person’ can include orders on behalf of accounts that are held in a corporate legal form—such as an Individual Retirement Account, Corporation, or a Limited Liability Company—that has been established for the benefit of an individual or group of related family members, provided that the order is submitted by an individual’’). 190FINRA Rule 7620A (defining a ‘‘Retail Order’’ as originating from a ‘‘natural person’’ and explaining that ‘‘[a]n order from a ‘natural person’ can include orders on behalf of accounts that are held in a corporate legal form, such as an Individual Retirement Account, Corporation, or a Limited Liability Corporation that has been established for the benefit of an individual or group of related family members, provided that the order is submitted by an individual’’). 191Proposed Rule 600(b)(91)(iii). 192 Given the proposed broad definition of ‘‘group of related family members’’ in Proposed Rule 600(b)(91), an account held in legal form on behalf of a group of related family members could include some accounts with an extensive portfolio of NMS stocks. The second prong of the definition of segmented order, however, would exclude accounts with average daily trades of 40 or more and likely would exclude many accounts with large portfolios. 193Some SRO rules, for example, prohibit the use of any computerized technology for submitting retail orders. See, e.g., NYSE Rule 7.44(a)(3) (defining ‘‘retail order’’ in the context of NYSE’s Continued rather than first submitting segmented orders to qualified auctions when market conditions suggest that auction would be unlikely to generate better prices than the NBBO. Proposed Rule 615 is designed to give broker-dealers sufficient flexibility to obtain best execution of individual investor orders in the full range of market conditions. B. Coverage of Proposed Rule 615

Definition of Segmented Order
The term ‘‘segmented order,’’ as proposed to be defined in Proposed Rule 600(b)(91) 186 of Regulation NMS, would have two parts. First, the order for an NMS stock must be for an account of a natural person, or an account held in legal form on behalf of a natural person or group of related family members. Second, for such an account, the average daily number of trades executed in NMS stocks must be less than 40 in each of the preceding six calendar months. The intent of the proposed definition is to encompass the marketable orders of individual investors with expected low adverse selection costs that retail brokers currently route to wholesalers for handling and execution. These orders already are segmented in practice. The proposed definition’s limitation to ‘‘natural persons’’ draws on the approach in existing rules designed to identify the orders of individual investors. For example, the definition of ‘‘retail customer’’ in the Commission’s Regulation Best Interest (‘‘Regulation BI’’) is limited to a ‘‘natural person.’’ 187 Moreover, several national securities exchanges operate programs for trading ‘‘retail’’ orders that are limited to accounts of natural persons or certain accounts on behalf of natural persons.188 The proposed definition of segmented order is closely related to these rules,189 as well as to FINRA’s fee
schedule for Nasdaq’s Trade Repository
Facility.190 Patterning the definition of segmented order on existing SRO rules is designed to leverage market knowledge and to facilitate compliance with Proposed Rule 615. This would help reduce the costs of compliance because broker-dealers would already be familiar with identifying orders as for the accounts of natural persons, or for related accounts, in these other contexts. In addition to the accounts of natural persons themselves, the definition would, again consistent with SRO rules, cover accounts held in legal form on behalf of natural persons or groups of related family members. For purposes of the definition of ‘‘segmented order,’’ a ‘‘group of related family members’’ would be defined broadly to include a group of natural persons with any of the following relationships: child, stepchild, grandchild, great grandchild, parent, stepparent, grandparent, great grandparent, domestic partner, spouse, sibling, stepbrother, stepsister, niece, nephew, aunt, uncle, mother-in-law, father-in-law, son-in-law, daughter-inlaw, brother-in-law, or sister-in-law, including adoptive and foster relationships; and any other natural person (other than a tenant or employee) sharing a household with any of the foregoing natural persons.191 This definition is designed to be broad so as not to restrict the types of arrangements that may be set up to benefit family groups, including individual retirement accounts, corporations, and limited liability companies for the benefit of related family members.192 The second part of the proposed definition of segmented orders focuses on the frequency of trading in an account. It would limit the average daily number of trades executed in NMS stocks in an account to less than 40 for each of the six preceding calendar months. This part of the proposed definition would exclude very active traders whose orders are likely to impose a much higher level of adverse selection costs on liquidity providers than the less-active accounts that are more typical of individual investors. For example, very active traders may use sophisticated trading tools, such as application programming interfaces (APIs) and computer algorithms, to submit their orders. These tools can enable highly active trading strategies that impose much higher adverse selection costs on liquidity providers than the manual placement of orders by a natural person. Rather than prohibiting any opportunity for investors to use potentially beneficial trading tools,193 however, the proposed

RLP to require that ‘‘the order does not originate from a trading algorithm or any other computerized methodology’’). 194Analysis of Consolidated Audit Trail data for all orders originated from an account marked as held for the benefit of an Individual Customer, Jan. 1, 2022, through June 30, 2022. This analysis counted any order associated with one or more trades or fills in an order lifecycle. For the Consolidated Audit Trail, account type definitions are available in Appendix G to the CAT Reporting Technical Specifications for Industry Members (https://catnmsplan.com), for the field name ‘‘accountHolderType.’’ Account types represent the beneficial owner of the account for which an order was received or originated, or to which the shares or contracts are allocated. Possible types are:
Institutional Customer, Employee, Foreign, Individual Customer, Market Making, Firm Agency Average Price, Other Proprietary, and Error. An Institutional Customer account is defined by FINRA Rule 4512(c) as a bank, investment adviser, or any other person with total assets of at least $50 million. An Individual Customer account means an account that does not meet the definition of an ‘‘institution’’ and is also not a proprietary account. Therefore, the CAT account type ‘‘Individual Customer’’ includes natural persons as well as corporate entities that do not meet the definitions for other account types. 195 Id. 196 Id. 197 In other contexts, national securities exchanges currently characterize certain types of orders according to the level of activity associated with a market participant’s account. With respect to trading in listed options, several exchanges include the concept of ‘‘Professional’’ order, and these orders, which must be identified as such, are distinguished from other customer orders. For example, pursuant to Cboe Exchange, Inc. (‘‘CBOE’’) Rule 1.1, ‘‘Professional’’ means any person or entity that is not a broker or dealer in securities and places more than 390 orders in listed options per day on average during a calendar month for its own beneficial account(s). Under CBOE’s rules, all Professional orders are distinguished from other public customer orders (i.e., orders for persons other than broker-dealers), must be marked as such, and are handled by CBOE’s trading platform in the same manner as broker-dealer orders unless otherwise specified. See CBOE Rule 1.1. See also NYSE Arca Rule 1.1; Nasdaq, Options 1, section 1(a)(47); and BOX Rule 100(a)(52). 198See infra section IV.B.5. definition specifies a maximum level of trading activity as a means to limit the level of adverse selection costs. The proposed level is supported by an analysis of the distribution of order activity across accounts reported to the Consolidated Audit Trail as being held for the benefit of an ‘‘Individual Customer’’ for the first six months of
2022.194 Across this period, slightly
more than 99.9% of Individual Customer accounts originated, on an average daily basis, 40 or fewer orders associated with a trade. The median number of daily-average orders associated with a trade from accounts at or below this threshold was less than one.195 The median number of dailyaverage orders associated with a trade from accounts above this threshold was approximately 68.196 Accordingly, the threshold in the proposed rule is designed to capture the overwhelming majority of individual investor accounts that could benefit from strengthened competition for their orders, while excluding accounts that might impose a high level of adverse selection costs on liquidity providers. Including orders highly likely to impact short-term price changes in qualified auctions could detract from the quality of execution prices for segmented orders as a whole.197 Specifically, including orders with high adverse selection costs in qualified auctions would increase the overall level of adverse selection costs of the order flow submitted to qualified auctions. Because auction responders could not know in advance whether any particular order was likely to impose high adverse selection costs, they would need to adjust the prices of all their auction responses to reflect the higher level of adverse selection costs of qualified auction order flow as a whole. The proposed definition of segmented order does not have a size limitation and therefore encompasses orders of all sizes, whether large or small. As discussed in section IV.B.5 below, however, the execution of large orders with sizes of $200,000 or more would be eligible for an exception from the order competition requirement of Proposed Rule 615(a). Such orders would, however, remain segmented orders and, if consistent with a broker-dealer’s best execution responsibilities, could be submitted for execution in a qualified auction. Orders with small sizes would also be included in the proposed definition of segmented orders and would be subject to the order competition requirement. These include both odd lot orders with a size of less than one round lot (generally less than 100 shares) and orders with a fractional share component (less than one share). As discussed further below, while orders for less than one share and orders for more than one share with a fractional share component would also fall within the proposed definition of a segmented order, Proposed Rule 615 would include an exception for orders for less than one share and for the fractional component of a segmented order, if there is no qualified auction available for such orders.198 Finally, the proposed definition of a segmented order does not include a limit price component. All segmented orders that are market orders would be subject to the order competition requirement prior to execution because, by definition, such orders are instructed to be executed immediately at the best available prices. For segmented orders that are limit orders,
compliance with the order competition requirement would depend on the relation of the segmented order’s limit price to the NBBO at the time it was received by the restricted competition trading center. For segmented orders with limit prices that are equal to or more favorable for the segmented order than the NBBO midpoint at the time of receipt (lower for buy orders and higher for sell orders), execution of the order would qualify for the exceptions from the order competition requirement in paragraphs (b)(3) and (b)(4) of Proposed Rule 615. Given the favorable price at which these non-marketable orders would be executed, however, they often may be publicly displayed as a means to attract contra-side trading interest (as well as to comply with Rule 604 of Regulation NMS). Segmented orders with a limit price that is less favorable for the segmented order than the NBBO midpoint at the time of receipt (i.e., segmented buy orders with a limit price higher than the NBBO midpoint and segmented sell orders with a limit price lower than the NBBO midpoint) often would not be executed at the NBBO midpoint or better (and therefore would not qualify for the exceptions in paragraphs (b)(3) or (b)(4) of Proposed Rule 615(b)(3)). Those orders not executed at the NBBO midpoint or better necessarily will pay a half-spread of some amount on the transaction (i.e., orders executed beyond the NBBO midpoint, by definition, are paying a spread), even if it is less than the full NBBO half-spread. These include segmented orders that are marketable and a subset of nonmarketable limit orders with limit prices that are beyond the NBBO midpoint but within the far-side NBBO (lower than the national best offer for segmented orders to buy and higher than the national best bid for segmented orders to sell) (hereinafter referred to as ‘‘beyond-the-midpoint non-marketable limit orders’’). A broker-dealer responsible for handling this subset of segmented orders that are nonmarketable would need to determine how to achieve best execution of such orders. Under the limit order display requirements of Rule 604 of Regulation NMS, as discussed in section III.B.2.a above, such an order generally would need to be immediately displayed (which would narrow the NBBO spread) or immediately executed. To immediately execute the order, a restricted competition trading center would need to comply with the order competition requirement of Proposed Rule 615(a).

199The Commission is proposing that for purposes of Regulation NMS, which would include Proposed Rule 615, NMS Stock ATS, as would be defined in Proposed Rule 600(b)(59), will have the meaning provided in 17 CFR 242.300(k) (Rule 300(k) of Regulation ATS). 200A trading center that operates a qualified auction for segmented orders necessarily would fall within the definition of an exchange under section 3(a)(1) of the Exchange Act [15 U.S.C. 78c(a)(1)], and 17 CFR 240.3b–16(a) (‘‘Rule 3b–16(a)’’) thereunder, because it would be bringing together the orders of multiple buyers and sellers using established non-discretionary methods (i.e., the qualified auction trading facility) under which such orders would interact and the buyers and sellers would agree upon terms of a trade. If a trading center falls within the definition of an exchange, it either must register as an exchange or comply with an exemption to such registration, such as the exemption for ATSs under Regulation ATS. 201 15 U.S.C. 78c(a)(36). In discussing equal regulation in the context of Exchange Act Section 11A(c)(1), the Commission stated that the legislative history of section 3(a)(36) emphasizes that equal regulation ‘‘is a competitive concept intended to guide the Commission in its oversight and regulation of the trading markets and the conduct of the [s]ecurities industry.’’ See Securities Exchange Act Release No. 42208 (Dec. 1999), 64 FR 70613, 70623 n.80 (Dec. 17, 1999) at 70623 n.80 (Concept Release on Market Information Fees and Revenues) (quoting S. Rep. No. 94–75, 94th Cong., 1st Sess. 7 (1975) at 94). 202The Commission has expressed, in other contexts, its belief that the regulatory differences between NMS Stock ATSs and national securities exchanges may create a competitive imbalance between two functionally similar trading centers, and sought to address those concerns by more closely aligning certain requirements for NMS Stock ATSs with those of national securities exchanges. See, e.g., ATS–N Adopting Release, supra note 159, 83 FR at 38775–76. 203As of Sept. 30, 2022, there were 32 NMS Stock ATSs that had filed an effective Form ATS–N with the Commission.
2. Definition of Open Competition
Trading Center
The term ‘‘open competition trading center,’’ as proposed to be defined in Rule 600(b)(64), determines the scope of coverage of Proposed Rule 615 in two important respects. First, it identifies those trading centers that would be authorized to operate qualified auctions. Second, it conversely specifies those trading centers that would be subject to the order competition requirement of paragraph (a) of Proposed Rule 615 because a ‘‘restricted competition trading center’’ is defined as any trading center other than an open competition trading center or a national securities exchange. The proposed definition of open competition trading center is designed to address three primary concerns. First and foremost, trading centers that operate qualified auctions must offer sufficient access, transparency, and trading by a wide range of market participants to support the goal of fair competition in auctions to provide the best prices for investor orders. Second, the proposed definition of open competition trading center seeks to establish as level a regulatory playing field as possible regarding Proposed Rule 615 between the national securities exchanges and NMS Stock ATSs 199 that are eligible to operate a qualified auction, while recognizing the distinct regulatory regimes for national securities exchanges under the Exchange Act and for NMS Stock ATSs under Regulation ATS.200 As described in section III.A above, section 11A(c)(1)(F) of the Exchange Act grants rulemaking authority to the Commission to assure equal regulation of all markets for NMS stocks, with equal regulation defined in section 3(a)(36) to mean that no member of a class has a competitive advantage over any other member of a class resulting from a regulatory disparity that the Commission determines is unfair and not necessary or appropriate in furtherance of the purposes of the Exchange Act.201 Qualified auctions would be a new trading mechanism, mandated by rule in some contexts, that could be operated by both national securities exchanges and NMS Stock ATSs, and open competition trading centers would be a new class of market participants. Because national securities exchanges and NMS Stock ATSs operating as open competition trading centers would fall within the same class of market participant, and given the functional similarity between these two types of trading centers, neither type should have a competitive advantage in operating qualified auctions that is attributable to an unfair and unnecessary regulatory disparity.202 Third, the proposed definition of open competition trading center is designed to address a concern that qualified auctions, as a new mandatory mechanism for execution of segmented orders, should not further exacerbate the fragmentation of trading interest in NMS stocks among different trading centers that already characterizes the NMS. As discussed in section VII.B.1 below, trading centers for NMS stocks include 16 national securities exchanges, 32 NMS Stock
ATSs,203 6 wholesalers, and more than 230 other broker-dealers. Allowing only national securities exchanges and NMS Stock ATSs that meet the prescribed transparency and volume thresholds to meet the proposed definition of open competition trading center is also designed to prevent additional complexity and connectivity costs to market participants arising from the introduction of qualified auctions. Such trading centers that meet the proposed definition are likely to have already attracted a wide variety of market participants with the established connectivity necessary to promote vigorous competition in qualified auctions. Given the differing regulatory regimes for national securities exchanges and NMS Stock ATS that were described in
section III above, the elements of the
proposed definition of open competition trading center vary for national securities exchanges and NMS Stock ATSs. As discussed in section IV.D below, paragraph (d) of Proposed Rule 615 would prohibit both national securities exchanges and NMS Stock ATSs from operating a qualified auction if they do not meet the elements of the definition of an open competition trading center. a. National Securities Exchanges As discussed in section III.A above, the Exchange Act sets forth a comprehensive regulatory regime for national securities exchanges with a variety of requirements that address, among other things, access and competition. For example, national securities exchanges must allow any registered broker-dealer to become a member, subject to the limitations of
section 6(c) of the Exchange Act, and
their rules cannot impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. The Commission has crafted the proposed definition of open competition trading center for national securities exchanges having taken into account that such exchanges already are subject by statute to this regulatory regime. The proposed definition of open competition trading center for national securities exchanges has four elements. First, such an exchange would be required to operate a trading facility that is an automated trading center and displays automated quotations that are disseminated in consolidated market data pursuant to Rule 603(b) of Regulation NMS. The terms ‘‘automated trading center’’ and ‘‘automated quotation’’ are defined in Rule 600(b)(8) and Rule 600(b)(7) of Regulation NMS. Each is an element of the definition of a ‘‘protected bid or protected offer’’ in Rule 600(b)(70), which are eligible for protection against trade-throughs pursuant to Rule 611 of Regulation NMS. Rule 603(b) provides for the dissemination of consolidated market data by SROs. This element of the proposed definition of an open competition trading center would help ensure transparency of quotations and fair and efficient access to such quotations. It is also designed to ensure that qualified auctions are held on lit

204As discussed in section IV.B.2.b below, NMS Stock ATSs operating as open competition trading centers would be subject to the same volume threshold. 205See, e.g., Cboe, U.S. Historical Market Volume Data, available at https://cboe.com/us/equities/ market_statistics/historical_market_volume/. 206See infra note 276 and accompanying text. 207Also, because national securities exchanges must file with the Commission proposed changes to their rules, an exchange’s adoption of rules for operating qualified auctions would be subject to public notice, comment, and Commission review, as well as Commission oversight. See 15 U.S.C. 78s(b). 208Under Rule 600(b)(88), the term ‘‘SRO displayonly facility’’ means a facility operated by or on behalf of a national securities exchange or national securities association that displays quotations in a security, but does not execute orders against such quotations or present orders to members for execution. As discussed above in section III.B.3, FINRA’s ADF is the only SRO display-only facility, but currently has no participating members. 209See Regulation NMS Adopting Release, supra note 78, 70 FR at 37543 (addition of ADF participant would constitute a change to a material aspect of FINRA’s facilities that would require the filing of a proposed rule change). trading centers, and that the requirements for open competition trading centers are consistent between national securities exchanges and NMS Stock ATSs. Also, incorporating the requirements for an automated trading center and automated quotations would help ensure that such exchange has the necessary technology to run qualified auctions efficiently. Second, a national securities exchange would be required to provide transaction reports identifying it as the venue of execution that are disseminated in consolidated market data pursuant to Rule 603(b). Identifying the venue of execution would help market participants assess where liquidity for an NMS stock can be found in the NMS, including for qualified auctions. Current arrangements for disseminating consolidated market data provide this execution venue information for exchanges, but not, as discussed below, for NMS Stock ATSs. This requirement is designed to provide a parallel requirement for national securities exchanges and NMS Stock ATSs operating qualified auctions, and require the identification of the venue of execution by rule for national securities exchanges operating as open competition trading centers. Third, a national securities exchange would be required to have had an average daily share volume of 1.0 percent or more of the aggregate average daily share volume for all NMS stocks as reported by an effective transaction reporting plan during at least four of the preceding six calendar months.204 The proposed 1.0 percent threshold across all NMS stocks, and not merely for a single NMS stock, is designed to help ensure that, prior to operating a qualified auction, the national securities exchange has
attracted a wide range of market participants with connectivity to such exchange already in place that would be sufficient to support vigorous competition in qualified auctions to provide the best prices for segmented orders. As of September 30, 2022, 6 of the 16 national securities exchanges trading NMS stocks reported less than 1% of share volume in NMS stocks.205 Five of these (Nasdaq BX, Nasdaq Phlx, NYSE American, NYSE CHX, and NYSE National), however, were part of exchange groups with other national securities exchanges that reported more than 1% of share volume in NMS stocks. Any exchange that was below the 1% threshold, even if it were part of a group of exchanges with some exchanges that meet the threshold, would not meet the definition of an open competition trading center and could not operate a qualified auction. The one remaining national securities exchange that reported less than 1% of share volume in NMS stocks was LTSE, with less than 0.01% of share volume in NMS stocks. The 1% threshold also would impose a hurdle for a new entrant that wished to register as a national securities exchange to become an open competition trading center. In the absence of a minimum volume threshold, however, the introduction of qualified auctions as a new trading mechanism mandated by regulation could lead to the entry of multiple new national securities exchanges intended solely to operate qualified auctions, which could result in either (1) a substantial increase of connectivity costs and complexity for market participants to connect to every open competition trading center, or (2) a refusal of many market participants to incur such costs and complexity, which could detract from the level of competition to provide the best prices for segmented orders at open competition trading centers with relatively few connected market participants. The 1% threshold is designed to be low enough to help ensure that the core competition objective of Proposed Rule 615 is achieved through qualified auctions operated by multiple national securities exchanges, while being high enough to demonstrate that a national securities exchange has attracted a sufficient level of interest from market participants to avoid unduly exacerbating the already substantial level of fragmentation in NMS stocks. Given that only a small percentage of marketable orders of individual investors currently are routed to national securities exchanges, the competitive opportunity to operate qualified auctions that would enable their members and members’ customers to interact with low-cost marketable order flow is likely to be an attractive new line of business. If, for example, a single national securities exchange began operating qualified auctions, it would have a monopoly on the business, which would be quite likely to attract multiple additional competitors. It therefore is likely that each of the three exchange groups associated with CBOE, Nasdaq and NYSE would select one of their national
securities exchanges to operate qualified auctions,206 and the three non-group national securities exchanges that exceed the 1% threshold would operate qualified auctions as well. Fourth and finally, a national securities exchange would be required to operate pursuant to its own rules providing that such exchange will comply with the proposed requirements for qualified auctions in paragraph (c) of Proposed Rule 615. This element would help to ensure that the operation of a qualified auction would be fully described in the exchange’s rules and that the exchange’s compliance with those rules would be subject to the examination and enforcement tools in place for exchange rules.207 Market participants therefore would be able to reference the rules of a national securities exchange to determine whether it operates a qualified auction and the material terms of such auctions, including the hours of operation. b. NMS Stock ATSs As discussed above in section III.B, NMS Stock ATSs are subject to a quite different set of statutory and regulatory requirements than national securities exchanges. The definition of open competition trading center for NMS Stock ATSs would reflect these differences and includes seven elements. First, an NMS Stock ATS would be required to display quotations through an SRO display-only facility (currently, the only such facility is FINRA’s ADF) in compliance with Rule 610(b) of Regulation NMS.208 To add an NMS Stock ATS as a new ADF participant, FINRA would need to file a proposed rule change that, after an opportunity for public notice and comment and review by the Commission, became effective pursuant to section 19(b) of the Exchange Act and Rule 19b–4 thereunder.209 An NMS Stock ATS, by displaying quotations in the ADF that

210NMS Stock ATSs generally have subscribers, unlike national securities exchanges with selfregulatory responsibilities for members. The proposed definition of ‘‘subscriber’’ in Rule 600(b)(100) of Regulation NMS is a cross-reference to the definition of ‘‘subscriber’’ in 17 CFR 242.300(b) (Rule 300(b) of Regulation ATS). The Regulation ATS definition is being proposed to be used in this context to leverage industry experience and help minimize compliance costs. 211Proposed Rule 600(b)(64)(ii)(D)(1). 212Pursuant to Exchange Act section 6(c)(2), a national securities exchange may, and in cases in which the Commission, by order, directs as necessary or appropriate in the public interest or for the protection of investors shall, deny membership to any registered broker or dealer or natural person associated with a registered broker or dealer, and bar from becoming associated with a member any person, who is subject to a statutory disqualification. If a national securities exchange knowingly allows a registered broker-dealer with a statutory disqualification to become a member, or should have known in the exercise of reasonable care, section 6(c)(2) further requires the national securities exchange to file notice with the Commission. 213See, e.g., Regulation ATS Adopting Release, 63 FR at 70858 (discussing when ATS regulation may not be appropriate and stating that ‘‘it may be necessary for the Commission’s greater oversight authority over registered exchanges to apply’’). 214An NMS Stock ATS must disclose on its Form ATS–N whether it can exclude, in whole or in part, any subscriber from the ATS’s services, and if so, it must provide a summary of the conditions for excluding, in whole or in part, a subscriber from those services. Form ATS–N, Part III, Item 3.a. Consequently, an NMS Stock ATS would be required to disclose its policies and procedures for excluding a broker-dealer on its Form ATS–N. Additionally, an NMS Stock ATS that is subject to the fair access requirements of Rule 301(b)(5) (see supra section III.B.3), must also disclose a list of all persons granted, denied, or limited access to the ATS during the quarterly period covered by the report, and, among other things, the nature of any denial or limitation of access. Form ATS–R, Instruction 8 and Item 7. 215Pursuant to Exchange Act section 6(c)(3), a national securities exchange may deny membership to, or condition the membership of, a registered broker or dealer if such broker or dealer does not meet such standards of financial responsibility or operational capability or such broker or dealer or any natural person associated with such broker or dealer does not meet such standards of training, experience, and competence as are prescribed by the rules of the exchange. FINRA provides to the SIPs, would have established an ability to disseminate information in consolidated market data, as would be required for auction messages under Proposed Rule 615(c)(1). In addition, as discussed in
section III.B above, Rule 610(b) imposes
heightened connectivity obligations on an NMS Stock ATS that displays quotations in the ADF, which would help assure that market participants have fair and efficient access to any NMS Stock ATS that wished to operate a qualified auction. This requirement is not needed for national securities exchanges, which, as discussed in
section III.A above, are subject to a
series of Exchange Act access requirements. Second, an NMS Stock ATS would be required to operate as an automated trading center and display automated quotations that are disseminated in consolidated market data pursuant to Rule 603(b) of Regulation NMS. This element matches an element of the proposed definition of open competition trading center for national securities exchanges and is proposed for the same reason. Third, an NMS Stock ATS would be required to identify the NMS Stock ATS as the venue of execution in transaction reports that are disseminated in consolidated market data pursuant to Rule 603(b). As discussed above, this element also would be required for national securities exchanges and is designed to help market participants assess where liquidity can be found in the NMS for a particular NMS stock. In contrast to the transaction reports of national securities exchanges, the transaction reports of off-exchange venues that FINRA currently provides for dissemination in consolidated market data do not identify the particular FINRA member (including both NMS Stock ATSs and brokerdealers) that reported the trade. For NMS Stock ATSs that display quotations in the ADF and operate qualified auctions, full post-trade transparency concerning the identity of the NMS Stock ATS that executed trades, including the execution of segmented orders in qualified auctions, would be needed to promote fair competition among markets and the practicability of broker-dealers determining the best market for executing customer orders. For example, real-time dissemination of a transaction report indicating that an NMS Stock ATS had executed a segmented order in an NMS stock in a qualified auction could assist broker-dealers in identifying where to route segmented orders, as well as market participants in identifying where they could interact with segmented orders in qualified auctions. Accordingly, if Proposed Rule 615 were adopted, an NMS Stock ATS would not be able to meet the definition of an open competition trading center unless the effective NMS plans for NMS stocks were conformed to provide for the collection and dissemination of an identification of the NMS Stock ATS as the venue of execution in its transaction reports. Fourth, an NMS Stock ATS would be required to permit any registered brokerdealer to become a subscriber,210 except those with statutory disqualifications or financial responsibility or operational capability concerns. This element parallels the Exchange Act section 6(b)(2) requirement that, subject to the provisions of section 6(c), a national securities exchange must permit any registered broker-dealer to become a member. It thereby would help ensure that all market participants seeking to trade on an NMS Stock ATS, whether they be broker-dealers trading proprietarily or investors trading through the services of a broker-dealer, would have access to the NMS Stock ATS in the same manner as they have access to national securities
exchanges. An NMS Stock ATS could not, however, permit a registered broker-dealer subject to a statutory disqualification to become a subscriber.211 In contrast, national securities exchanges may, subject to Commission oversight, allow a registered broker-dealer with a statutory disqualification to become a member.212 The stricter standard for NMS Stock ATSs is appropriate because, as nonSROs, they are not subject to the same level of Commission oversight as national securities exchanges.213 For example, section 6(c)(2) of the Exchange Act provides that a national securities exchange must file notice with the Commission not less than thirty days prior to admitting any person to membership, if the exchange knew, or in the exercise of reasonable care should have known, that such person was subject to a statutory disqualification. An NMS Stock ATS is not subject to this notice requirement. An NMS Stock ATS could, however, pursuant to written policies and procedures, prohibit any registered broker-dealer from becoming a subscriber, or impose conditions upon such a subscriber, that did not meet specified standards of financial responsibility and operational capability.214 This ability to prohibit or limit subscribers is patterned on the ability of national securities exchanges under section 6(c)(3)(A) of the Exchange Act,215 which also permits a national securities exchange to deny or condition membership to a broker-dealer that has engaged, and is reasonably likely to engage again, in acts or practices inconsistent with just and equitable principles of trade. It would not be appropriate for NMS Stock ATSs, as non-SROs, to have this disciplinary authority over its subscribers. Fifth, an NMS Stock ATS would be required to provide equal access among all subscribers of the NMS Stock ATS and the registered broker-dealer of the NMS Stock ATS to all services that are related to a qualified auction operated by the NMS Stock ATS under Proposed Rule 615(c) and to any continuous order book operated by the NMS Stock ATS.

216As discussed above, in comparison, national securities exchanges are also required to file proposed rule changes to establish or modify trading services, which must be published for public comment. See supra notes 68–71, 207, and accompanying text. 217See, e.g., ATS–N Adopting Release, supra note 159, 83 FR at 38841. 218 17 CFR 242.301(b)(5)(i). 219As discussed below in section IV.C.5, a displayed order resting on the continuous order book would have priority over an equally-priced auction response, and an undisplayed order resting on the continuous order books would have priority if it provided a better price for a segmented orders than an auction response. 220A 1% volume threshold in NMS stocks is also one of the thresholds used to determine whether an NMS Stock ATS is an SCI entity subject to the requirements of 17 CFR 242.1000 through 242.1007 (‘‘Regulation SCI’’). See 17 CFR 242.1000 paragraph (1)(ii) of ‘‘SCI alternative trading system or SCI ATS’’ definition, and ‘‘SCI entity’’ definition. Among other things, each SCI entity is required to comply with the capacity, integrity, resiliency, availability, and security requirements of Rule 1001 of Regulation SCI. In adopting a volume threshold for NMS Stock ATSs for purposes of Regulation SCI, the Commission recognized that certain ATSs play an important role in today’s securities markets, and that higher volume ATSs collectively represent a significant source of liquidity for NMS stocks, with some ATSs having similar and, in some cases, greater trading volume than some national securities exchanges. See Securities Exchange Act Release No. (Nov. 19, 2014), 73639 79 FR 72252, 72262 (Dec. 5, 2014) (adopting Regulation SCI and related amendments to Regulation ATS). This equal access element would require an NMS Stock ATS to provide access on the same terms and conditions among all subscribers and the registered broker-dealer of the NMS Stock ATS. It therefore would impose a more stringent standard on NMS Stock ATSs than the ‘‘no unfair discrimination’’ standard for national securities exchanges under
section 6(b)(5) of the Exchange Act. The
more stringent standard is designed to reflect the different statutory and regulatory regimes for NMS Stock ATSs and national securities exchanges and particularly to help achieve the goal of equal regulation, as defined in section 3(b)(36) of the Exchange Act and described in section III.A above. For example, as discussed in section III above, national securities exchanges must comply with a variety of statutory requirements that are not applicable to NMS Stock ATSs. While they fall within the statutory definition of an exchange, NMS Stock ATSs have been exempted from compliance with the statutory requirements for registered national securities exchanges if they are registered as a broker-dealer and comply with Regulation ATS. Among other things, the rules for all national securities exchanges (1) must be designed affirmatively to remove impediments to and perfect the mechanism of a free and open market and an NMS; (2) must not be designed to permit unfair discrimination between customers, issuers, or broker-dealers; and (3) must not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act.216 Each of the foregoing requirements promotes the objective of ensuring fair and efficient access to the trading services of national securities exchanges, which is essential for promoting fully competitive pricing in qualified auctions, but none applies to NMS Stock ATSs. While they must file amendments to Form ATS–N, the amendments are not published for public comment and do not require Commission approval prior to implementation. Moreover, the standards for access to NMS Stock ATSs are much more limited than those that apply to national securities exchanges.217 An NMS Stock ATS must comply with the fair access requirement of Rule 301(b)(5) only for a particular NMS stock in which it exceeds 5% of volume.218 As discussed above in sections II.B and III.B.3.b, only one NMS Stock ATS discloses on its Form ATS– N that it is subject to this fair access requirement for securities that are available for trading on its platform. Most importantly, in light of the core order competition requirement of Proposed Rule 615, Regulation ATS does not impose any requirement on NMS Stock ATSs that is equivalent to
section 6(b)(8) of the Exchange Act,
which prohibits national securities exchanges from imposing any burden on competition not necessary or appropriate in furtherance of the provisions of the Exchange Act. Given that NMS Stock ATSs currently are subject to different requirements for promoting fair and efficient access to their trading services than are national securities exchange, the Commission believes an NMS Stock ATS should be required to meet a more stringent standard to help ensure equal regulation regarding Proposed Rule 615 and sufficient access and transparency for a wide range of market participants. Accordingly, an NMS Stock ATS would, if it wished to operate a qualified auction under Proposed Rule 615, be required to provide equal access to all trading services related to its qualified auctions, as well as to all trading services related to a continuous order book operated by the NMS Stock ATS. The extension of equal access to services related to a continuous order book is needed because, as discussed in
section IV.C below, such a book would
be required to be integrated with qualified auctions.219 The proposed equal access requirement is designed to help ensure a level playing field regarding Proposed Rule 615 for competition among national securities exchanges and NMS Stock ATSs and thereby promote the Exchange Act principle of equal regulation. Specifically, consistent with the NMS objective in section 11A(1)(C)(ii) of promoting fair competition among markets, neither type of trading center should have a significant regulatory advantage for operating qualified auctions that could drive volume in such auctions to either type, whether it be national securities exchanges or NMS Stock ATSs. Sixth, an NMS Stock ATS would be required to have had an average daily share volume of 1.0 percent or more of the aggregate average daily share volume for NMS stocks as reported by an effective transaction reporting plan during at least four of the preceding six calendar months.220 The methodology for this calculation would be the same as prescribed for application of the fair access requirements of ATSs by Rule 301(b)(5)(i)(A) of Regulation ATS, except that the numerator and denominator in the percent calculation is volume in all NMS stocks, rather than in any particular NMS stock. As with the fair access requirement, the proposed methodology is designed to encompass NMS Stock ATSs that have demonstrated a consistent historical level of volume. To promote fair competition and equal regulation, this proposed element is the same as that proposed for national securities exchanges and is proposed for the same primary reasons—(1) to help ensure that an NMS Stock ATS has attracted a wide range of market participants with connectivity already in place that would be sufficient to support vigorous competition in qualified auctions to provide the best prices for segmented orders; and (2) to avoid exacerbating the costs and complexity of fragmentation that already exists of trading interest in NMS stocks. Seventh and finally, an NMS Stock ATS would be required to operate pursuant to an effective Form ATS–N that sets forth the operations of the qualified auction and compliance by the NMS Stock ATS with the requirements of Proposed Rule 615(c) for a qualified auction, as well as with all of the other elements of the definition of open competition trading center for NMS Stock ATSs that are discussed above. This proposed disclosure element is designed to ensure that an NMS Stock ATS fully discloses material operating

221Proposed Rule 600(b)(87).
222See supra note 208.
223See supra section II.B.
224See supra note 200 and accompanying text. 225Proposed Rule 600(b)(69). 226The broker-dealer functions specifically enumerated in the proposed definition of originating broker are included in the list of responsibilities that FINRA requires its members to allocate for accounts that are carried on an omnibus or fully disclosed basis. See infra note 227. See also Securities Investment Advisers Act Release No. 5429 (June 5, 2019), 84 FR 33681 (July 12, 2019) (clarifying the scope of the broker-dealer exclusion from the definition of ‘‘investment adviser’’ under the Investment Advisers Act of 1940 for brokerdealers whose performance of advisory services is ‘‘solely incidental’’ to the conduct of its business as a broker-dealer and for which the broker-dealer ‘‘receives no special compensation’’); and Regulation BI Adopting Release, supra note 187, at 33358 (discussing disclosure requirements for broker-dealers related to ‘‘monitoring the performance of the retail customer’s account’’). 227FINRA Rule 4311 addresses the allocation of responsibilities between members for accounts that are carried on an omnibus or fully disclosed basis. FINRA Rule 4311(c)(1) specifies the minimum requirements for carrying agreements in which accounts are carried on a fully disclosed basis. FINRA Rule 4311(c)(1) (‘‘Each carrying agreement in which accounts are to be carried on a fully disclosed basis shall specify the responsibilities of each party to the agreement, including at a minimum the allocation of the responsibilities set forth in paragraphs (c)(1)(A) through (I) and (c)(2) of this Rule.’’); FINRA Rules 4311(c)(1)(A) through (I) (‘‘(A) Opening and approving accounts. (B) Acceptance of orders. (C) Transmission of orders for execution. (D) Execution of orders. (E) Extension of credit. (F) Receipt and delivery of funds and securities. (G) Preparation and transmission of confirmations. (H) Maintenance of books and records. (I) Monitoring of accounts.’’); FINRA Rule 4311(c)(2) (prescribing the requirements for how each carrying agreement in which accounts are to be carried on a fully disclosed basis must allocate responsibility for the safeguarding of funds and securities, and the preparing and transmitting of statements of accounts to customers). FINRA Rules are available at https://www.finra.org/rulesguidance/rulebooks/finra-rules. 228The phrase ‘‘provided for dissemination in consolidated market data’’ reflects that, while national securities exchanges send quotation and transaction information directly to the SIPs, NMS Stock ATSs would provide such information to the ADF operated by FINRA, which would send the information to the SIPs. practices to the public on Form ATS–N, and that these operating practices are subject to the examination and enforcement tools in place for NMS Stock ATSs. Market participants therefore would be able to reference the Form ATS–N of an NMS Stock ATS to determine whether it operates a qualified auction and the material terms of such
auctions, including the hours of operation.
3. Definition of Restricted Competition
Trading Center
The proposed definition of restricted competition trading center 221 encompasses any trading center that is neither an open competition trading center nor a national securities exchange. Some national securities exchanges may not meet all of the elements of the proposed definition of an open competition trading center, such as the minimum 1% volume threshold. Nevertheless, all national securities exchanges, as well as open competition trading centers, would be excluded from the definition of restricted competition trading center because both these types of trading centers either are not permitted by the Exchange Act (in the case of all national securities exchanges) or would not be permitted by Proposed Rule 615(d)(1) and its incorporation of the proposed definition of an open competition trading center (in the case of NMS Stock ATSs) to unfairly restrict access to their platforms. Currently, no NMS Stock ATS displays quotations in the ADF. Unless this changes,222 no NMS Stock ATS would meet the proposed definition of an open competition trading center, and therefore all would be restricted competition trading centers. The three other types of broker-dealer trading centers are exchange market makers, OTC market makers (including wholesalers), and internalizing brokerdealers.223 These broker-dealers, as stated in section IV.B.2 above, could not operate a qualified auction without falling within the Exchange Act definition of exchange.224 Unless such a broker-dealer became an NMS Stock ATS and met all of the elements of the proposed definition of an open competition trading center, it would fall within the definition of a restricted competition trading center and would be subject to the order competition requirements of Proposed Rule 615(a).
4. Definition of Originating Broker
As discussed in section IV.E below, originating brokers would perform several vital functions under Proposed Rule 615, including making the original determination that an order falls within the definition of a segmented order and identifying the order as such when routed for execution. The proposed definition of originating broker 225 reflects these important functions. It would cover any broker with responsibility for handling a customer account, including, but not limited to, opening and monitoring the customer account and accepting and transmitting orders for the customer account.226 As such and as discussed further below, there may be more than one originating broker for a particular customer account. The Commission understands that broker business practices can vary widely in terms of how customer accounts are handled. Some brokers may perform this entire function internally, while others may work with additional brokers to handle customer orders. A single broker that is solely responsible for the handling of a customer account would be an originating broker. To the extent that multiple brokers perform different functions for a customer account (sometimes referred to as ‘‘introducing brokers,’’ ‘‘carrying brokers,’’ or ‘‘clearing brokers’’), each such broker would be an originating broker. In addition, as discussed further in section IV.E below, different types of brokers enter into agreements with one another to allocate certain responsibilities with respect to their handling of customer accounts.227 As discussed in section IV.C.1 below, paragraph (c)(1)(ii) of Proposed Rule 615 specifies that, if multiple brokers for a segmented order fall within the proposed definition of originating broker, the broker responsible for approving the opening of accounts for customers (commonly performed by an introducing broker) would be required to be identified in auction messages under Proposed Rule 615(c)(1).
5. Exceptions
Paragraph (b) of Proposed Rule 615 sets forth five exceptions from the order competition requirement of paragraph (a). The first exception is for a segmented order that is received and executed by a restricted competition trading center during a time period when no open competition trading center is operating a qualified auction for the segmented order. This exception would be necessary to enable segmented orders to trade during such a time period, since compliance with Proposed Rule 615 would otherwise be impossible if no qualified auction were available. Proposed Rule 615 does not specify any particular time period during which an open competition trading center must operate a qualified auction. Given, however, the requirement in paragraph (c)(3) of Proposed Rule 615 that auction messages must be provided for dissemination in consolidated market data,228 a qualified auction could not operate at any time when the facilities for disseminating consolidated market data were not operating. As discussed in
section III.B above, such facilities
currently are operated by the SIPs. The current SIP hours of operation are from 4 a.m. to 8 p.m. eastern time on trading days for the U.S. equity markets. While the trade-through restrictions of Rule 611 of Regulation NMS apply only

229See Rule 600(b)(94) of Regulation NMS (limiting definition of trade-through to regular trading hours); Rule 600(b)(77) of Regulation NMS (defining regular trading hours). 230See FINRA Rule 2265 (Extended Hours Trading Risk Disclosure) (requiring disclosure to customers of the risks of extended hours trading, including the risks of lower liquidity and wider spreads). 231See, e.g., Rule 604(b)(4) of Regulation NMS (providing an exception for orders of block size from required limit order display) and Rule 600(b)(12) of Regulation NMS (defining ‘‘block size’’ as, in part, an order for a quantity of stock having a market value of at least $200,000). 232Proposed Rule 615(b)(5). 233See infra section VII.B.2.a for a discussion of the routing of individual investor orders in today’s market structure. during regular trading hours of 9:30 a.m. to 4:00 p.m. eastern time,229 the order competition requirement of Proposed Rule 615(a) is needed for additional hours given the enhanced risks for individual investors. Unlike Rule 611, Proposed Rule 615 is narrowly targeted on protecting the interests of individual investors and the risks they face when using marketable orders to trade in NMS stocks. These include the risks of lower liquidity and wider spreads that are particularly significant in after-hours trading and that qualified auctions could address effectively.230 The second exception from Proposed Rule 615 would be for large orders with a market value of at least $200,000 calculated with reference to the NBBO midpoint when the order is received by a restricted competition trading center. This exception is designed to address the heightened liquidity need of large orders that often may be more appropriately addressed outside of a qualified auction. The $200,000 threshold is the same dollar amount as in other Regulation NMS rules to exclude orders or trades that are so large as to warrant different treatment than smaller orders.231 A specific methodology for calculating market value (NBBO midpoint at time of order receipt) is prescribed to provide additional clarity for restricted competition trading centers on complying with Proposed Rule 615 that should be readily implementable when qualified auctions are operating. The $200,000 threshold is designed to except orders that may be difficult to execute efficiently in qualified auctions at prices that generally would be at or within the NBBO. While these large orders are eligible for an exception, they still would meet the definition of a ‘‘segmented order’’ and could be routed for execution in a qualified auction if the broker-dealer handling the order determines that such routing would promote best execution of the segmented order. The third exception, provided by Proposed Rule 615(b)(3), is for segmented orders that are executed by a restricted competition trading center at a price that is equal to the NBBO midpoint or more favorable for the segmented order (i.e., the NBBO midpoint or lower for
segmented orders to buy or the NBBO midpoint or higher for segmented orders to sell), as determined with reference to the NBBO at the time the segmented order was received by the restricted competition trading center. For trades at these prices, an investor would either be paying no spread (with a price at the NBBO midpoint) or earning a spread (with a buy order executed at a price lower than the NBBO midpoint and a sell order executed at a price higher than the NBBO midpoint). In such circumstances, the submission of a segmented order to a qualified auction would not be necessary to obtain a competitive price for such order. The fourth exception, provided by Proposed Rule 615(b)(4), is for segmented orders that are limit orders with a limit price selected by the customer that is equal to or more favorable for the segmented order than the midpoint of the national best bid and national best offer when the segmented order is received by the restricted competition trading center. This exception is designed so that when the customer has selected a limit price that will result in a favorable execution, submission of the segmented order to a qualified auction would not be necessary to obtain a competitive price. This exception would work in conjunction with the third exception for executions of segmented orders at a price equal to the midpoint or more favorable to the segmented order. As discussed above in section IV.B.1, this exception would not apply to beyondthe-midpoint non-marketable limit orders. Finally, the fifth exception, provided by Proposed Rule 615(b)(5), is for the fractional share component of a segmented order. Fractional share orders typically are submitted by individual investors in dollar sizes rather than share sizes, and often are referred to as ‘‘cash orders.’’ If the dollar size of an order is less than the share price for an NMS stock (such as a $200 order for a $450 stock), the size of the order will be less than one share. If the dollar size of the order is greater than the share price for an NMS stock (such as a $1000 order for a $450 stock), the size of the order will be greater than one share and have a fractional share component. While these orders for less than one share and orders for more than one share or with a fractional share component would fall within the definition of segmented order, they raise practical difficulties for executing in qualified auctions because currently, most trading centers, including all national securities exchanges, only accept orders with whole share sizes and do not accept orders for less than one share or orders with a fractional share component. The Commission is concerned that applying the requirements of Proposed Rule 615 to orders for less than one share and orders for more than one share with a fractional component would interfere with broker-dealers willingness to accept such customer orders. For these reasons, Proposed Rule 615 would provide an exception for orders less than one
share and the fractional component of a segmented order, if no qualified auction is available for such orders. Specifically, the rule would provide an exception if the segmented order is received and executed by the restricted competition trading center during a time period when no open competition trading center is operating a qualified auction for the segmented order that accepts orders that are not entirely in whole shares, and the customer selected a size for a segmented order that is not entirely in whole shares of an NMS stock, in which case any portion of such segmented order that is less than one whole share of the NMS stock, and only such portion, would not be subject to the order competition requirement of Proposed Rule 615(a).232 As is the case with each of the exceptions, a broker-dealer’s responsibilities with respect to best execution of a segmented order, including the fractional share portion of a segmented order, would remain in effect. The exception would only address whether the segmented order, or fractional portion thereof, is required to be exposed in a qualified auction. Proposed Rule 615 does not provide an exception for orders directed by a customer to a particular restricted competition trading center for execution. Currently, 98% of the marketable orders of individual investors routed to wholesalers are not directed to any particular trading center, with the investor instead relying on their broker-dealer, and their brokerdealer’s best execution responsibilities, for order routing.233 Moreover, because the rule would only apply to the internalization of segmented orders by a restricted competition trading center, customers could continue to direct segmented orders to any trading center

234Proposed Rule 600(b)(81).
235A number of exchanges, for example, currently operate auctions for orders in listed options. See, e.g., CBOE Rule 5.37 (Automated Improvement Mechanism (‘‘AIM’’ or ‘‘AIM Auction’’)). These auctions are not mandated by Commission rule, and trading in listed options varies in important respects from trading in NMS stocks. For example, there are far more series of listed options than NMS stocks, which contributes to a market structure in which market makers dominate liquidity provision (a ‘‘quote-driven’’ market), rather than the ‘‘orderdriven’’ market that characterizes NMS stocks. Proposed Rule 615 is designed to achieve policy objectives that are particular to mandatory auctions in NMS stocks. See also supra section I (discussing the difference between the markets for listed options and NMS stocks). 236Rule 600(b)(19) defines consolidated market data to include, among other things, core data, consolidated across all national securities exchanges and national securities associations. Rule 600(b)(21) defines core data to include, among other things, auction information with respect to quotations for, and transactions in, NMS stocks. 237See supra section III.B.1 (discussing rules addressing dissemination of consolidated market data). 238 In addition to participating in qualified auctions by submitting auction responses, institutional investors could interact with segmented orders by submitting orders, including undisplayed NBBO midpoint orders, to the continuous order book of an open competition trading center that operates qualified auctions. As discussed below in section IV.C.5, any better-priced order resting on the continuous order book would have priority over lesser-priced auction responses to trade with segmented orders in a qualified auction. that was not a restricted competition trading center (i.e., an open competition trading center or national securities exchange, which are excluded from the definition of restricted competition trading center) without their orders being subject to the requirement for exposure in a qualified auction. Segmented orders directed to a restricted competition trading center would need to comply with Proposed Rule 615 and, absent an exception, be exposed to competition in a qualified auction. Any delay would be limited, however, to a very short, sub-second time period (as specified in Proposed Rule 615(c)(2)) and would give individual investors an opportunity to obtain fully competitive prices for their segmented order, as well as give other market participants, including institutional investors, an opportunity to interact with segmented orders.
C. Qualified Auction Requirements
The term ‘‘qualified auction’’ is proposed to be defined in Proposed Rule 600(b) of Regulation NMS as an auction that is operated by an open competition trading center pursuant to paragraph (c) of Proposed Rule 615.234 Paragraph (c), in turn, sets forth a series of specific requirements for qualified auctions, which could be operated only by national securities exchanges and NMS Stock ATSs that meet the definition of an open competition trading center. Given that routing segmented orders to qualified auctions would be mandated by rule in some contexts, these auctions should be operated in a manner that primarily promotes the core order competition objective of Proposed Rule 615.235 The proposed requirements for qualified auctions are designed to achieve this competition objective.

Auction Messages
Proposed Rule 615(c)(1) specifies the requirements for an auction message that announces the initiation of a qualified auction for a segmented order. The first is that the message must be provided for dissemination in consolidated market data pursuant to Rule 603(b) of Regulation NMS. As stated in section III.B.1 above, the Commission has adopted amendments to Regulation NMS that expand the information required to be included in consolidated market data, which would include auction information.236 Because these amendments have not yet been implemented, if Proposed Rule 615 is adopted, the effective NMS plans for NMS stocks would need to be conformed to provide for the collection and dissemination of auction messages pursuant to Proposed Rule 615(c)(1)(i). The wide dissemination of qualified auction messages in consolidated market data would help ensure the broadest possible participation of market participants in qualified auctions and the best prices for segmented orders. The phrase ‘‘provided for dissemination in consolidated market data’’ reflects that, while national securities exchanges send quotation and transaction information directly to the SIPs, NMS Stock ATSs would provide such information to the ADF operated by FINRA, which would send the information to the SIPs.237 The primary purpose of an auction message is to promote competition by soliciting potential auction responses from a wide spectrum of market participants. The inclusion of the auction messages in consolidated market data, rather than being limited to the proprietary data feed of a national securities exchange or NMS Stock ATS, is designed to help achieve this purpose. In addition, wide dissemination of auction messages would help address some of the problems raised by the current level of fragmented trading interest in NMS stocks. For example, market participants that wish to interact with segmented orders would not need to predict the trading center to which segmented orders are likely to be routed and post a resting order in that trading center in advance of the arrival of a segmented order. Rather, market participants would be able to direct their auction responses to the particular open competition trading center that disseminated the auction message signaling that a segmented order was available for interaction. Qualified auctions therefore may be useful, for example, to institutional investors that currently seek to trade with marketable order flow using resting undisplayed orders, often priced at the NBBO midpoint, that are intended to minimize information leakage concerning the typically large trading interest of institutional investors. Today, these market participants must select one or more trading centers on which to rest their orders based on predictions of the frequency and level of adverse selection costs of the marketable order flow with which they may interact at a particular trading center. With qualified auctions, such market participants would know the
specific open competition trading centers where they could interact directly with segmented order flow that had low adverse selection costs. The Commission anticipates that qualified auctions thereby could benefit investors on both sides of the trades in qualified auctions—segmented orders could receive highly favorable prices (such as a ‘‘no spread’’ execution at the NBBO midpoint) and institutional investors would have a much greater opportunity to interact with the low-cost order flow of individual investors than they have today.238 Information leakage would be limited because, as discussed below, an institutional investor’s auction response would not be displayed, and, if the institutional investor traded in a qualified auction, the only displayed information would be a transaction report that maintained the anonymity of the parties to the transaction. Proposed Rule 615(c)(1) also specifies the information content of an auction message, including disclosure that the auction is for a segmented order, the identity of the open competition trading center, NMS stock symbol, side (buy or sell), size, limit price, and identity of the originating broker for the segmented order. For auction responders, all of this information is necessary or useful in deciding whether to respond to the auction message and, if so, at what price. The fact that the order is a segmented order would indicate that the order is likely to have low adverse

239Table 12, infra, section VII.B.5.
240See, e.g., FINRA Rule 4311(c)(1)(A); supra note 227 and accompanying text. 241See infra section VII.B.2 discussing why certain orders are segmented because they are lowcost flow. 242See infra section IV.E discussing potential procedures for an originating broker to assure that its identity will not be disclosed. 243See, e.g., Securities Exchange Act Release No. 91423 (Mar. 26, 2021), 86 FR 17230 (Apr. 1, 2021) (SR-CboeBYX–2020–021) (order approving Cboe BYX’s proposed rule change for periodic auctions in NMS stocks with a 100 millisecond auction period); Nasdaq PHLX Rule 3, section 13(b)(1)(D) (providing that the time period for PHLX’s Price Improvement XL Mechanism (‘‘PIXL’’) auctions in listed options will be no less than 100 milliseconds and no more than one second). selection costs compared to other marketable order flow, such as orders routed to the continuous order books of national securities exchanges. Moreover, the identity of the originating broker likely would convey additional information concerning the level of adverse selection costs that an auction responder could expect. Data analysis indicates that adverse selection costs can vary substantially among different retail brokers.239 Knowing the identity of the originating broker would therefore be a significant piece of information in pricing an auction response. Accordingly, if only some market participants knew the identity of the originating broker, other potential responders may not participate due to fear of the winner’s curse (winning the least advantageous auctions and losing the most advantageous auctions because of an information disadvantage). Limited participation could harm the competitiveness of qualified auctions. Paragraph (c)(1)(ii) of Proposed Rule 615 specifies that, if multiple brokerdealers fall within the proposed definition of originating broker, it would be the broker-dealer responsible for approving the opening of accounts with customers 240 (commonly performed by an introducing broker) that would be required to be identified by an open competition trading center in auction messages under Proposed Rule 615(c)(1). The business model of brokerdealers (including the types of services they offer and the nature of the commissions and fees they charge) determines the types of customers that broker-dealers will attract, and different business models may be associated with lower or higher adverse selection costs. As between an introducing broker and a clearing broker, it is the introducing broker that typically determines the business model for attracting customers. For this reason, knowing the identity of the introducing broker associated with a segmented order (i.e., the broker typically with responsibility for approving the opening of the customer account) likely would be more important for market participants in assessing the potential adverse selection costs of trading with a segmented order than knowing the identity of other broker-dealers that may handle
the segmented order during its lifecycle. Because the types of orders that would meet the definition of ‘‘segmented order’’ are generally associated with lower adverse selection costs,241 most originating brokers with responsibility for approving the opening of customer accounts likely would choose to have their identity disclosed in auction message. The Commission recognizes, however, that some originating brokers or their customers may not wish to have the identity of the originating broker for a segmented order publicly disseminated. Proposed Rule 615(c)(1)(iii) therefore would provide a choice for the originating broker. It could either allow its identity to be disclosed in an auction message or it could withhold this information by certifying that it has established, maintained, and enforced written policies and procedures reasonably designed to assure that its identity will not be disclosed, directly or indirectly, to any person that potentially could participate in the qualified auction or otherwise trade with the segmented order. If the originating broker makes this certification, paragraph (c)(1)(iii) would prohibit disclosure of the identity of the originating broker in the auction message.242 Proposed paragraph (c)(1)(iii) would also require that the certification be communicated to the open competition trading center conducting the auction. In addition, proposed paragraph (e)(3), discussed in
section IV.E below, specifies the
requirements for an originating broker that makes the certification, and proposed paragraph (f)(2), discussed in
section IV.F below, specifies certain
trading prohibitions for any brokerdealer with knowledge of where a segmented order is to be routed for execution. The overriding purpose of these proposed requirements is to help ensure fair competition among auction responders and persons that could otherwise trade with the segmented order. If one or more auction responders or persons that could otherwise trade with the segmented order knew the identity of the originating broker, but others did not, those that knew would have a substantial information advantage in pricing their orders over those that did not. The proposed requirements would give originating brokers a choice on whether to disclose their identity, while at the same time promoting fair competition among auction responders and persons that could otherwise trade with the segmented order, both when such identity is disclosed and when it is not. Under Proposed Rule 615(c)(1), (e)(3), and (f)(2), either all auction responders and persons that could otherwise trade with the segmented order would know the identity of the originating broker, or no auction responder or person that could otherwise trade with the segmented order would be permitted to know the identity of the originating broker. In either event, the fairness of qualified auctions would not be impacted.
2. Auction Responses
Proposed Rule 615(c)(2) specifies that the time period for a qualified auction must be no shorter than 100 milliseconds (1/10th of a second) and no longer than 300 milliseconds (3/ 10ths of a second) after an auction message is provided for dissemination in consolidated market data. The intent of these limits is to help ensure that a wide variety of market participants will have the technological capacity to submit responses to fast automated auctions, while also helping to assure that the execution of segmented orders is not unduly delayed. Several national securities exchanges operate auctions that fall within these time periods, which indicates that the time periods are workable with technologies that currently are available to market participants (i.e., the fact that multiple national securities exchanges already operate auctions in these time frames indicates that market participants generally would be able to submit auction responses within the specified time periods).243 The Commission anticipates individual investors would manually submit to their brokers the great majority of segmented orders. Proposing to limit the auction length to no more than 300 milliseconds is designed to promote competition to obtain the best prices for segmented orders, but without a delay long enough to be inconsistent with an investor’s intent to trade immediately at the best available prices. Paragraph (c)(2) would further require that auction responses remain undisplayed during the time frame of the auction and not be disseminated thereafter. This proposed requirement is designed to prevent the market participants with the fastest systems

244Table 7, infra, section VII.B.4.
245The Commission also is proposing to amend rules addressing fees and rebates more generally. See Minimum Pricing Increments Proposal, supra note 98. The Commission encourages commenters to review that proposal to determine whether it might affect their comments on this proposing release. from obtaining an advantage by observing the pricing of auction responses and submitting their auction responses near the end of the time period for the auction. It also is designed to prevent information leakage, both during auctions themselves and by analyzing historical auction data, concerning the trading interest of market participants, particularly institutional investors, that submit auction responses.
3. Pricing Increment
Under Proposed Rule 615(c)(3), segmented orders and auction responses must be priced in an increment of no less than $0.001 (or 0.1 cent) if their prices are $1.00 or more per share, in an increment of no less than $0.0001 (or
0.01 cent) if their prices are less than
$1.00 per share, or at the midpoint of the NBBO. These proposed increments are designed to balance the objectives of being sufficiently narrow to allow frequent price improvement for segmented orders (the wider the pricing increment, the greater the minimum amount of price improvement that is required, which could limit the frequency of price improvement), while being sufficiently wide to prevent market participants from attempting to gain execution priority by pricing their auction responses in very small increments. An analysis of current wholesaler trading in NMS stocks indicates that 18.64% of the price improved shares of wholesaler principal transactions received price improvement of less than 0.1 cent.244 Accordingly, the 0.1 cent price increment for qualified auctions would allow much of the existing price improvement to continue in qualified auctions. Moreover, as discussed in
section IV.C.5 below, one of the
prescribed execution priority requirements for qualified auctions in paragraph (c)(5) of Proposed Rule 615 is that the auction responses of customers, including institutional investors, would have priority over the auction responses of broker-dealers at the same price, thereby furthering the NMS objective of promoting direct interaction of investor orders without the participation of a dealer. A smaller pricing increment (such as 0.05 cent per share (or 1/20th of a cent per share) would allow more price improvement, but also would double the number of increments at which auction responses could be priced, which would enable execution priority advantages at the larger number of increments. The objective of promoting direct interaction of investor orders could be undermined if brokerdealers with the most sophisticated algorithmic trading strategies could submit auction responses with very small pricing increments designed to obtain execution priority.
4. Fees and Rebates
Proposed Rule 615(c)(4) sets forth a number of requirements that would govern the fees and rebates of open competition trading centers with respect to qualified auctions.245 In general, these requirements are designed to provide reasonable compensation for operating a qualified auction, while maximizing an opportunity for competitive forces to generate the best possible prices for segmented orders. Qualified auctions would be a new business line for open competition trading centers (both national securities exchanges and NMS Stock ATSs), which would provide them an opportunity to compete to attract the marketable orders of individual investors that, as discussed in section VII.B.2 below, are mostly routed to, and executed by, wholesalers in the current market structure. Accordingly, the proposed requirements for fees and rebates are designed to provide sufficient financial incentives for open competition trading centers to operate qualified auctions, but the primary objective of such requirements is to promote the regulatory objectives of Proposed Rule 615—better prices for individual investors and an enhanced opportunity for investors to interact directly with the marketable orders of individual investors. First, no fee could be charged for submission or execution of a segmented order, or for submission of an auction response. Second, the fee for execution of an auction response could not exceed $0.0005 per share for auction responses priced at $1.00 per share or more, could not exceed 0.05% of the auction response price per share for auction responses priced at less than $1.00 per share, and otherwise would have to be the same rate for executed auction responses in all auctions. Third and similarly, any rebate for the submission or execution of a segmented order or for the submission or execution of an auction response could not exceed $0.0005 per share for segmented orders or auction responses priced at $1.00 per share or more, cannot exceed 0.05% of the segmented order or auction response price per share for segmented orders or auction responses priced at less than $1.00 per share, and otherwise must be the same rate for segmented orders in all auctions and must be the same rate for auction responses in all auctions. Proposed Rule 615 would prohibit fees for the submission or execution of segmented orders in a qualified auction. As discussed in section II above, the trading economics of executing segmented orders, particularly their low adverse selection costs, has led to a market structure where restricted competition trading centers generally do not charge fees to the broker-dealers that route such orders and, indeed, often offer PFOF to retail brokers in return for routing such orders. With Proposed Rule 615, routing segmented orders to qualified auctions would often, absent an exception, be mandated by rule—a restricted competition trading center generally would be prohibited from executing a segmented order internally without first
routing such order to a qualified auction. The Commission believes that broker-dealer compliance with a new rule requiring the routing of segmented orders to qualified auctions in certain circumstances should not lead to the imposition of fees by trading centers on broker-dealers that are not charged for the execution of such orders today. Instead, as discussed below, open competition trading centers could fund their operation of qualified auctions by imposing fees on auction responses that execute against segmented orders. In this respect, the market participants that benefit from the opportunity to trade with segmented orders, with their low adverse selection costs, would pay the open competition trading center for that trading service. With respect to auction responses, no fee could be charged for the submission of an auction response that is not executed. Such a practice potentially could be used to deter a wide range of market participants from participating in qualified auctions and thereby dampen competition to provide the best prices for segmented orders. Fees could be charged for executed auction responses, consistent with the cap on such fees, which, for most NMS stocks, would be 0.05 cent per share, also known as 5 ‘‘mils.’’ The proposed 5 mils cap on fees is designed to be sufficient to provide reasonable compensation to an open competition trading center. For example, an analysis of financial data for national securities exchanges indicates that average total net capture (the difference between fees levied and rebates paid) for such exchanges is

246See infra section VII.C.1.a (discussing effects of 5 mils cap on competition to supply liquidity to the marketable orders of individual investors). 247 Id. (net capture for the executions of orders during continuous trading hours (but not opening or closing auctions) priced at $1.00 per share or greater is likely close to 2 mils). 248 ‘‘Affiliate’’ is proposed to be defined in Proposed Rule 600(b)(3) of Regulation NMS to mean, with respect to a specified person, any person that, directly or indirectly, controls, is under common control with, or is controlled by, the specified person. ‘‘Control’’ is proposed to be defined in Proposed Rule 600(b)(23) of Regulation NMS to mean the power, directly or indirectly, to direct the management or policies of a broker, dealer, or open competition trading center, whether through ownership of securities, by contract, or otherwise. A person is presumed to control a broker, dealer, or open competition trading center if that person: (1) is a director, general partner, or officer exercising executive responsibility (or having similar status or performing similar functions); (2) directly or indirectly has the right to vote 25% or more of a class of voting securities or has the power to sell or direct the sale of 25% or more of a class of voting securities of the broker, dealer, or open competition trading center; or (3) in the case of a partnership, has contributed, or has the right to receive upon dissolution, 25% or more of the capital of the broker, dealer, or open competition trading center. Proposed Rule 600(b)(3) and Proposed Rule 600(b)(23). These definitions are substantially the same as the definitions of ‘‘affiliate’’ and ‘‘control’’ prescribed for purposes of an NMS Stock ATS’s disclosures about its operations on Form ATS–N with the following modifications: the Form ATS–N definition of ‘‘affiliate’’ uses a separately defined term ‘‘Person’’ instead of the statutory definition of ‘‘person,’’ and Form ATS–N defines ‘‘control’’ as applicable to the ‘‘broker-dealer of the alternative trading system’’ instead of as applicable to a ‘‘broker, dealer, or open competition trading center.’’ It is appropriate to use substantially similar definitions of ‘‘affiliate’’ and ‘‘control’’ in the context of Proposed Rule 615 because, for purposes of Form ATS–N, the Commission defined such terms for use with respect to disclosures designed to enable market participants to better evaluate how relationships between certain persons could affect the handling of orders on a particular NMS Stock ATS. See ATS– N Adopting Release, supra note 159, 83 FR at
88318. The substantially similar proposed
definitions, as used in the context of Proposed Rule 615, are similarly designed to recognize that relationships among certain persons may impact the handling of orders, and are designed to help ensure that the execution priority rules of an open competition trading center do not undermine full competition among auction responders in qualified auctions by favoring related parties that were involved in routing and executing the order at the open competition trading center. currently around 4 mils for all trading types.246 Accordingly, the proposed 5 mils fee cap would provide a revenue source to fund qualified auctions that is consistent with their revenue to fund their other trading services, particularly their services during continuous trading hours.247 In addition, pursuant to Proposed Rule 615(c)(4), any fee charged for execution of an auction response must be the same rate for all auctions (i.e., an open competition trading center would not be permitted to charge different fees for auctions for different securities, nor would an open competition trading center be permitted to charge different fees to different market participants or different classes of market participants, such as preferential fees based on volume). This proposed uniform rate for fees is designed to promote a level playing field among all potential market participants that may wish to trade with segmented orders. It would, for example, prohibit any volume discount that could give the largest participants an economic advantage in pricing their auction responses compared to other market participants. The uniform rate also would prevent a fee discount for the executed auction response of a broker-dealer that routed the segmented order to the qualified auction. The proposed requirements for rebates mirror the requirements for fees in terms of the 5 mils cap and the requirement of a uniform rate for all auctions. In particular, rebates could not exceed the maximum fee for qualified auctions. The equivalent proposed 5 mils cap on rebates is designed to limit cross-subsidization of qualified auctions by the largest open competition trading centers in ways that would not be available to smaller competitors, because larger competitors may have more or larger alternative revenue sources. The uniform rate of rebates for all auctions is designed, as with the uniform rate of fees, to level the playing field among larger and smaller brokerdealers. The proposed requirements for rebates differ from those for fees, however, in that open competition trading centers would have discretion on whether to offer rebates for the submission of segmented orders and of auction responses, as well as the execution of segmented orders and of auction responses. If such rebates were offered, however, they would have to be a uniform rate among all auctions to promote a level playing field and fair competition among broker-dealers and among auction responders.
5. Auction Execution Priority
Proposed Rule 615(c)(5) would specify five requirements for the execution priority of auction responses and orders resting on the continuous order book of an open competition trading center, which can be divided into three categories. The first two would specify affirmative requirements for how priority among auction responses must be handled; the second two would specify negative requirements for how priority among auction responses cannot be handled; and the fifth requirement would address how qualified auctions must be integrated with a continuous order book operated by an open competition trading center. These five requirements would not exhaust all possible contexts for which additional priority rules may be needed, and, as discussed below, open competition trading centers would have flexibility to develop additional priority rules as long as such rules are consistent with the requirements in Proposed Rule 615(c)(5). Pursuant to Proposed Rule 615(c)(5)(i), the first affirmative requirement would be price priority— the most favorable price for a segmented order would have priority of execution (the lowest priced auction response to a segmented order to buy and the highest priced auction response to a segmented order to sell). Price priority maximizes competitive incentives to obtain the best prices for segmented orders. Pursuant to Proposed Rule 615(c)(5)(ii), the second affirmative requirement would be customer priority. ‘‘Customer’’ is defined in Rule 600(b)(23) of Regulation NMS to mean any person that is not a broker-dealer. When two auction responses have the best price, and one is submitted for the account of a customer and one is submitted for the account of a brokerdealer, the customer’s auction response would be required to have priority. In such a case, the segmented order of an investor would interact directly with the auction response of another investor without the participation of a dealer, thereby promoting the NMS objective set forth in section 11A(a)(1)(C)(v) of the Exchange Act. Pursuant to Proposed Rule 615(c)(5)(iii), the first negative requirement for execution priority would be the prohibition of time priority, subject only to an auction response being received by an open competition trading center within the time period prescribed in paragraph (c)(2) of Proposed Rule 615. Prohibiting time priority for equally priced auction responses eliminates the incentive for a speed race that otherwise could reward market participants with resources to spend the most on sophisticated, lowlatency trading systems and connectivity. Pursuant to Proposed Rule 615(c)(5)(iv), the second negative requirement for execution priority would be a prohibition against favoring the broker-dealer that routed the segmented order to the auction, the originating broker for the segmented order, the open competition trading center operating the auction, or any affiliate of the foregoing persons.248 This requirement is designed to help maintain a level
playing field among market participants submitting auction

249Proposed Rule 600(b)(22).
250Trades executed in qualified auctions would not qualify for an exception from the trade-through requirements of Rule 611 of Regulation NMS, which are discussed in section III above. Accordingly, if a qualified auction did not generate a price that was at or within the best-priced protected quotations, the open competition trading center would, absent an exception, be prohibited by Rule 611 from executing the segmented order. If a restricted competition trading center subsequently decided to execute such segmented order, it would need, absent an exception, to comply both with the tradethrough requirements of Rule 611 and with Proposed Rule 615(a) by immediately executing the segmented order at a price that was equal to or better for the segmented order than the specified limit price in the qualified auction. 251As discussed above in section IV.B.2, national securities exchanges must file proposed rules with the Commission to reflect material changes in their rules, while NMS Stock ATSs must update their Form ATS-Ns to reflect material changes in their rules. 252Proposed Rule 615(b); Proposed Rule 615(d)(2)(i) through (v). Specifically, a segmented order executed through such system of an open competition trading center would be required to: (1) be received and executed during a time period when no open competition trading center is operating a qualified auction for the segmented order; (2) have a market value of at least $200,000 calculated with reference to the midpoint of the NBBO when the segmented order was received by the open competition trading center; (3) be executed by the open competition trading center at a price that is equal to or more favorable for the segmented order than the midpoint of the NBBO when the segmented order was received by the open competition trading center; (4) be a limit order with a limit price selected by the customer that is equal Continued responses and thereby focus competition in the auctions on providing the best prices for segmented orders. Assigning priority to any firm associated with the handling of the orders or their affiliates would be one means for an open competition trading center to attempt to attract order flow by rewarding the firms that control such flow coming from the customer, which could undermine competition among auction responders to provide the best prices in qualified auctions. Given that Proposed Rule 615 would require segmented orders to be routed to qualified auctions in some contexts, the competition among open competition trading centers to attract segmented orders should be focused on generating the best prices for investors. Finally, the execution priority requirements set forth in paragraph (c)(5)(v) of Proposed Rule 615 address how auction responses would be required to be integrated with the continuous order book of an open competition trading center. A continuous order book is proposed to be defined in Rule 600(b) of Regulation NMS as a system that allows orders for NMS
stocks to be accepted and executed on a continuous basis.249 This definition would exclude single-priced auctions that are limited to a specified time, such as the opening and closing auctions of the primary listing exchanges, and that are not continuously available for trading based on the initiative of market participants or the open competition trading center. As discussed above, all open competition trading centers would operate as automated trading centers displaying automated quotations and therefore would have facilities in which orders from market participants are accepted and executed on a continuous basis. The proposed execution priority requirements primarily are designed to balance the objectives of obtaining the best prices for segmented orders and maintaining fair competition both in qualified auctions and on continuous order books.250 The first such requirement is that orders resting on the continuous order book of the open competition trading center operating the qualified auction, whether displayed or undisplayed, would have priority over auction responses at a less favorable price for the segmented order. This is another application of the principle of price priority that underlies proposed paragraph (c)(5)(i). The second requirement is that displayed orders resting on the continuous order book would be required to have priority at the same price over auction responses, while, in turn, auction responses would be required to have priority at the same price over undisplayed orders resting on the continuous order book. Rewarding the display of orders serves the purpose of promoting public price transparency, consistent with the NMS objective in
section 11A(a)(1)(C)(iii) of the Exchange
Act. As between undisplayed orders and auction responses, however, giving priority to auction responses at the same price would encourage participation in qualified auctions, thereby promoting the core order competition objective of Proposed Rule 615. Moreover, unlike displayed orders that can be executed immediately because they present a known opportunity to trade for market participants, undisplayed orders on continuous order books are not known to other market participants and potentially create a risk of gaming behavior by broker-dealers with knowledge of segmented orders that could undermine competition in qualified auctions. As discussed in
section IV.F below, this potential
gaming behavior is prohibited in paragraph (f) of Proposed Rule 615. Assigning priority to auction responses over undisplayed orders at the same price would help address the root incentives for such behavior. While Proposed Rule 615(c) sets forth a series of execution priority requirements for qualified auctions, open competition trading centers also would have flexibility to develop additional execution priority rules for their auction mechanism, as long as they were consistent with the proposed requirements. As one example, Proposed Rule 615(c) does not prescribe execution priority when an open competition trading center receives multiple best priced responses for the account of customers because multiple possibilities would be consistent with the objectives of Proposed Rule 615. An open competition trading center would be free to develop rules for assigning execution priority among such customer responses, as long as they were consistent with Proposed Rule 615(c).251 Moreover, Proposed Rule 615 allows flexibility for open competition trading centers in a variety of other contexts. For example, it does not specify whether an open competition trading center may or may not simultaneously operate multiple qualified auctions for the same NMS stock, and if so, the execution priority required for auction responses across such auctions. Proposed Rule 615 also would not impose requirements for auction responses, other than the requirement in paragraph (c)(1) that an auction message initiating a qualified auction would be required to invite ‘‘priced’’ auction responses. D. Open Competition Trading Center Requirements Paragraph (d) of Proposed Rule 615 sets forth requirements for national securities exchanges and NMS Stock ATSs that intend to act as open competition trading centers that operate qualified auctions for segmented orders. First, it would prohibit a national securities exchange or NMS Stock ATS from operating a qualified auction unless the exchange or ATS meets the definition of open competition trading center and complies with the provisions of Proposed Rule 615 for qualified auctions, which were discussed in
section IV.B.2 and IV.C above. Second,
it would prohibit an open competition trading center from operating a system, other than a qualified auction, that is limited in whole or in part to the execution of segmented orders, unless any segmented order executed through the system meets requirements that parallel those specified for an exception in paragraph (b) of Proposed Rule
615.252 This proposed prohibition is

to or more favorable for the segmented order than the midpoint of the national best bid and national best offer when the segmented order is received by the open competition trading center; or (5) be received and executed by the open competition trading center during a time period when no open competition trading center is operating a qualified auction for the segmented order that accepts orders that are not entirely in whole shares, and be a size, selected by the customer, that is not entirely in whole shares of an NMS stock, in which case any portion of such segmented order that is less than one whole share of the NMS stock, and only such portion, may be executed through such system. 253See 17 CFR 240.17a–3(a) (requiring brokerdealers to make and keep, among other things, current blotters containing an itemized daily record of all purchases and sales of securities and the account for which each such purchase and sale was effected). 254 17 CFR 242.613 (Rule 613 of Regulation NMS) requires each national securities exchange and national securities association to jointly file an NMS plan governing the creation, implementation, and maintenance of a consolidated audit trail (‘‘CAT’’) which is reported to a central repository. The rule specifies the type of data to be collected and reported. Pursuant to Rule 613(c)(7), any CAT plan participant or broker-dealer that receives, originates, or handles orders in NMS stocks must report certain information regarding those orders, including the ‘‘material terms’’ of each order. Rule 613(j)(7) defines ‘‘material terms of an order’’ to include ‘‘any special handling instructions.’’ Because Proposed Rule 615 would mandate special handling for segmented orders, the identification of the order as a segmented order, any exceptions applicable to its handling, and the identity of the originating broker or an indication of a certification of anonymity would be required by current Rule 613 to be reported as material terms in each event in the lifecycle. identical to the prohibition in paragraph (g) of Proposed Rule 615 that would apply to all national securities exchanges, regardless of whether they meet the definition of an open competition trading center, and is discussed further in section V.G below. E. Originating Broker Requirements Paragraph (e) of Proposed Rule 615 sets forth three requirements for originating brokers. First, an originating broker would be required to establish, maintain, and enforce written policies and procedures reasonably designed to identify the orders of customers as segmented orders. Given that the order competition requirement of paragraph (a) would apply solely to segmented orders, it is imperative that customer orders be properly identified as such by the originating broker, which will have the knowledge of its customer accounts necessary to make such identification. As discussed above in section IV.B.1, the first part of the proposed definition of segmented order relating to the
nature of the account is based on existing SRO rules and, accordingly, is designed to facilitate ease of compliance by originating brokers. The second part of the proposed definition relating to frequency of trading in an account would be based on customer trading information that originating brokers are required to maintain.253 Second, an originating broker would be prohibited from routing a customer order identified as a segmented order without also identifying the order to the routing destination as a segmented order.254 This requirement would work together with an analogous requirement in paragraph (f) of Proposed Rule 615 for all broker-dealers that route segmented orders that is discussed in
section IV.F below. Together, the
proposed requirements are designed to ensure that a segmented order continues to be identified as such throughout the routing chain from origination through execution. Proper marking of segmented orders would be essential for a restricted competition trading center to know that it must comply with the order competition requirement of paragraph (a). The proposed identification requirements of paragraph (e) for originating brokers and paragraph (f) for all broker-dealers are designed to assure that no segmented order reaches a restricted competition trading center without the proper identification. If there is more than one originating broker for a segmented order, the broker that carries the individual investor’s customer account would likely be the originating broker that maintains the policies and procedures to identify segmented orders as such, as well as identifies and marks the orders. Third, an originating broker that makes the certification referred to in paragraph (c)(1)(iii) of Proposed Rule 615 would be required to establish, maintain, and enforce written policies and procedures reasonably designed to assure that the identity of the originating broker will not be disclosed, directly or indirectly, to any person that potentially could participate in the qualified auction or otherwise trade with the segmented order. As discussed in section IV.C.1 above, knowing the identity of an originating broker could provide a significant information advantage to a market participant when pricing an auction response if other market participants did not have this information. The effect of the certification referred to in paragraph (c)(1)(iii) of Proposed Rule 615 would be that either all responders in a qualified auction would know the identity of the originating broker (if the certification is not made) or no responders in a qualified auction would know the identity of the originating broker (if the certification is made). In the absence of an appropriate certification from an originating broker, an open competition trading center would be required to identify the originating broker in the auction message disseminated in consolidated market data. The ‘‘written policies and procedures’’ requirement of proposed paragraph (e)(3) specifies the responsibility of an originating broker in making such a certification. As one potential example of such policies and procedures, an originating broker could provide that such originating broker will route all the segmented orders of its customers directly to an open competition trading center for a qualified auction, without disclosing the existence of such orders to any other person. Another potential example would be for the originating broker to use a single broker for routing segmented orders to open competition trading centers for qualified auctions, and the single executing broker represents in writing that it will not participate in any qualified auction for the segmented orders or otherwise trade with the
segmented orders, and that it will not disclose the existence of such segmented orders to any other person. As mentioned in section IV.B.4 above, broker business practices can vary in terms of how customer accounts are handled, and there may be multiple originating brokers for a segmented order. In addition, such brokers currently enter into agreements with one another to allocate certain responsibilities with respect to the handling of customer accounts, such as those referred to as carrying agreements. The Commission has designed Proposed Rule 615 to preserve brokers’ existing flexibility to allocate responsibilities among themselves. Accordingly, paragraph (e)(4) of Proposed Rule 615 provides that, where there are multiple originating brokers for a segmented order, an originating broker shall not be deemed to be in violation of the provisions of paragraph (e)(1) through (3) arising solely from a failure to meet a responsibility that was specifically allocated by prior written agreement to another originating broker. F. Broker-Dealer Requirements Paragraph (f) of Proposed Rule 615 sets forth two requirements for all broker-dealers with respect to segmented orders. First, pursuant to proposed paragraph (f)(1), a brokerdealer that receives an order identified as a segmented order would be prohibited from routing such order without identifying the order to the routing destination as a segmented order. As discussed in section IV.E above, this requirement is designed to work together with an analogous requirement for originating brokers to

255As discussed elsewhere in this release, both of these types of trading centers are subject to rigorous requirements for access and competition, and they therefore would not be prohibited from executing a segmented order without it being submitted to a qualified auction. In addition to the applicable proposed requirements under Proposed Rule 615, a broker-dealer still would be required to satisfy its best execution responsibilities if bypassing a qualified auction and routing a segmented order directly to an open competition trading center or a national securities exchange. 256The technical specifications of the NMS plans for disseminating consolidated market data include sale condition modifiers for trade reports that specify various types of trades, including some auction trades. 257Proposed Rule 615(b); Proposed Rule 615(d)(2)(i) through (v); Proposed Rule 615(g)(1) through (5); and supra note 252 and accompanying text. Specifically, a segmented order executed through such system of a national securities exchange would be required to: (1) be received during a time period when no open competition trading center is operating a qualified auction for the segmented order; (2) have a market value of at least $200,000 calculated with reference to the Continued help assure that no segmented order reaches a restricted competition trading center, even if routed through multiple broker-dealers or trading centers, without being properly identified as a segmented order. Second, paragraph (f)(2) of Proposed Rule 615 sets forth a requirement for all broker-dealers, which includes originating brokers, that is designed to prevent gaming behavior that could undermine fair competition in qualified auctions and on continuous order books. In particular, it would prohibit a broker-dealer with knowledge of where a segmented order is to be routed from submitting an order, or enabling an order to be submitted by any other person, to the continuous order book of an open competition trading center or of a national securities exchange that could have priority to trade with the segmented order at such open competition trading center or national securities exchange. The prohibition of paragraph (f)(2) is designed to address two types of potential gaming behavior by brokerdealers. First, absent this proposed prohibition, a broker-dealer with knowledge that a segmented order is to be routed to a qualified auction could submit, or enable another person to submit (such as by providing information to another person), to the open competition trading center conducting such auction a displayed contra-side order that was priced at or better than the specified limit price of the segmented order. As discussed in
section IV.C above, displayed orders on
the continuous order book of an open competition trading center could have priority to trade with a segmented order ahead of equally priced auction responses. The submission of contraside orders to a continuous order book to avoid participating in a qualified auction, however, could undermine fair competition in the qualified auction and therefore would be prohibited by paragraph (f)(2). A second type of gaming behavior prohibited by paragraph (f)(2) of Proposed Rule 615 relates to segmented orders that are not routed to qualified auctions, but rather to a continuous order book of an open competition trading center or a national securities exchange. As stated in section IV.A above, the order competition requirement of paragraph (a) of Proposed Rule 615 does not apply to an open competition trading center or to a national securities exchange, regardless of whether such exchange is an open competition trading center, and therefore, a broker-dealer could route a segmented order directly to an open competition trading center or a national securities exchange.255 However, there remains an incentive for a broker-dealer to seek to trade with a segmented order outside of the fair competition of a qualified auction by submitting a contra-side order at the same time it submits the segmented order (i.e., a ‘‘paired order’’) to a continuous order book of an open competition trading center or national securities exchange with the expectation of executing against the segmented order. Paragraph (f)(2) is designed to address this potential by prohibiting a broker-dealer with knowledge of where a segmented order is to be routed from submitting, or enabling any other person to submit (such as by providing information to another person), an order to an open competition trading center or a national securities exchange that could have priority to trade with the segmented order. In addition to the requirements for broker-dealers set forth in Proposed Rule 615, all other existing obligations of broker-dealers for customer orders, including best execution discussed in
section III.B above, would continue to
apply. For example, an important consideration for broker-dealers in handling a segmented order would be the relative performance of qualified auctions at different open competition trading centers in terms of their order execution quality. Broker-dealers with best execution responsibilities for segmented orders generally should consider the available information on execution quality for segmented orders at different qualified auctions. To provide broker-dealers with relevant information on qualified auctions, if Proposed Rule 615 is adopted, the effective NMS plans for NMS stocks would need to be conformed to provide for the collection and dissemination of a sale condition in transaction reports for national securities exchanges and NMS Stock ATSs indicating that the transaction was executed in a qualified auction under Proposed Rule 615(c).256 G. National Securities Exchange Requirements Exchanges are excluded from the proposed definition of a restricted competition trading center because, as discussed in section III.B above, they are subject to the extensive Exchange Act requirements for access and competition. Accordingly, the order competition requirement of paragraph (a) of Proposed Rule 615 does not apply to a national securities exchange, regardless of whether such exchange meets the definition of an open competition trading center. To the extent consistent with their best execution responsibilities, brokerdealers would be permitted to route segmented orders directly to any national securities exchange without first routing the order to a qualified auction. One potential example of when such a direct route could be consistent with best execution is a fast market when prices are moving rapidly away from a segmented order (prices increasing for buy orders and prices decreasing for sell orders). In this example, a broker-dealer could determine that obtaining a better price in a qualified auction than a displayed quotation is unlikely, and the brokerdealer could route a segmented order directly to execute against the best available price available at a national securities exchange or an open competition trading center. Competition in qualified auctions, however, could be undermined if national securities exchanges and open competition trading centers were permitted to siphon segmented order flow away from qualified auctions by operating trading mechanisms that were limited, in whole or in part, to segmented orders. Accordingly, paragraphs (d)(2) (as discussed above) and (g) of Proposed Rule 615 would prohibit all open competition trading centers and national securities exchanges from operating a system, other than a qualified auction, that is limited, in whole or in part, to the execution of segmented orders, unless any segmented order executed through such system qualifies for exceptions that are the same as those in Proposed Rule 615(b).257 This prohibition would apply

midpoint of the NBBO when the segmented order was received by the national securities exchange; (3) be executed by the national securities exchange at a price that is equal to or more favorable for the segmented order than the midpoint of the NBBO when the segmented order was received by the national securities exchange; (4) be a limit order with a limit price selected by the customer that is equal to or more favorable for the segmented order than the midpoint of the national best bid and national best offer when the segmented order is received by the national securities exchange; or (5) be received and executed by the national securities exchange during a time period when no open competition trading center is operating a qualified auction for the segmented order that accepts orders that are not entirely in whole shares, and be a size, selected by the customer, that is not entirely in whole shares of an NMS stock, in which case any portion of such segmented order that is less than one whole share of the NMS stock, and only such portion, may be executed through such system. 258As discussed in section III.B.2.c, RLPs are exchange trading mechanisms limited to retail orders, as defined in the exchanges’ rules. 259 IEX’s RLP, for example, only permits retail liquidity provider orders to be midpoint peg orders. See Securities Exchange Act Release No. 93217 (Sep. 30, 2021), 86 FR 55663 (Oct. 6, 2021) (order approving an exemption from Rule 602 of Regulation NMS for IEX’s retail price improvement program and describing that IEX’s program is different because retail liquidity provider orders can only be midpoint peg orders); IEX Rules 11.190(b)(14) (Retail Liquidity Provider Order) and
11.232 (Retail Price Improvement Program). IEX has
rules that will also permit orders in its RLP to be executed at prices better than the NBBO midpoint. See Securities Exchange Act Release No. 94884 (May 10, 2022), 87 FR 29768 (May 16, 2022) (SR– IEX–2022–04). to many of the RLPs currently operated by national securities exchanges.258 An example of a trading system that would not be prohibited under paragraphs (d)(2) and (g), however, would be one that is limited to the execution of segmented orders at prices equal to the NBBO midpoint, which would qualify for the exception in Proposed Rule 615(g)(3).259
V. Request for Comment
The Commission generally requests comment from the public on all aspects of Proposed Rule 615, including its objectives and its terms to achieve those objectives. The Commission also generally requests comment on the proposed definitions to be added to Rule 600 and their use in the context of Proposed Rule 615. More specific requests for comment are set forth below. With respect to any comments, the Commission notes that they are of the greatest assistance to this rulemaking initiative if accompanied by supporting data and analysis of the issues addressed in those comments.

The Commission requests comment
on the operation and effectiveness of Proposed Rule 615. Would exposing segmented orders to competition in qualified auctions be likely to generate better prices for individual investors than are provided by current brokerdealer routing practices? Would the likelihood of better prices vary across different types of NMS stocks, such as those with different levels of liquidity and trading volume? Do commenters believe that the wide dissemination of auction messages for qualified auctions in NMS stocks would be likely to affect trading or quoting behavior in NMS stocks during the time period of the auction and, if so, would such an effect promote or detract from obtaining the best possible price for segmented orders in the qualified auctions?
Proposed Rule 615(c)(2) would
prohibit display of auction responses. In the case of an execution in a qualified auction, a transaction report maintaining the anonymity of the parties would be displayed in consolidated market data. Does the proposed prohibition sufficiently mitigate the possibility of information leakage for participants in a qualified auction? Are there different or additional requirements that would better mitigate the possibility of information leakage?
Is focusing on the accounts of
natural persons, as well as accounts held in legal form on behalf of a natural person or group of related family members, and the level of trading activity in such accounts an appropriate approach to identify orders that are included, and those that are excluded, from the proposed definition of a segmented order?
Should the proposed definition of
‘‘group of related family members’’ be more or less inclusive, and if so, in what regard?
Should the level of trading activity
used to determine which accounts are associated with segmented orders be lower or higher than 40 trades per day? Is the six-month time frame is appropriate? If other metrics would be more appropriate, please explain why and, if possible, provide data to support your position.
Should any large orders be entirely
excluded from the definition of segmented order and therefore not eligible to trade in qualified auctions, as opposed to the rule proposal which would provide an exception for orders of $200,000 or more and that allows a choice of whether to submit such orders to qualified auctions?
The proposed definition of an open
competition trading center would require national securities exchanges to operate as an SRO trading facility that is an automated trading center and displays automated quotations that are disseminated in consolidated market data? Is this requirement appropriate or should it be modified in any respect?
Is requiring a minimum level of
trading volume for national securities exchanges to qualify as open trading competition centers an appropriate means to achieve the objectives of Proposed Rule 615? If so, should the 1% level should be lower or higher? For example, should the 1% level be lowered to enable additional national securities exchanges to compete for segmented orders by operating qualified auctions, or should the 1% be increased to help limit the potential costs of market fragmentation? Are the other parameters of the volume threshold appropriate to achieve the objective of ensuring that qualified auctions are offered by trading centers that have sufficient volume to provide vigorous competition? Is average daily volume during at least 4 of the preceding 6 calendar months an appropriate parameter, or are there more appropriate parameters? Is there another approach that would be more effective to help limit the potential costs of market fragmentation that could be associated with the requirements of Proposed Rule 615?
Under the proposal, national
securities exchanges would be required to operate pursuant to their own rules providing that such exchanges would comply with the requirements for qualified auctions. Would this requirement provide sufficient notice to market participants concerning the operation of qualified auctions by national securities exchanges?
Should an NMS Stock ATS, to
meet the proposed definition of an open competition trading center, be required to display quotes through an SRO display-only facility? Also, should an NMS Stock ATS be required to operate as an automated trading center and display automated quotations that are disseminated in consolidated market data?
Do commenters believe that
identifying an NMS Stock ATS as the venue of execution in transaction reports that are disseminated in consolidated market data would be helpful to market participants when assessing qualified auctions?
Should an NMS Stock ATS be
required to permit any registered brokerdealer to become a subscriber, except for a broker-dealer that is subject to a statutory disqualification or, pursuant to written policies and procedures, does not meet standards of financial responsibility or operational capability?
Is an equal access standard
appropriate for NMS Stock ATSs to meet the definition of an open competition trading center and operate qualified auctions? Alternatively,

should other approaches be used to achieve the objective of a level playing field regarding Proposed Rule 615 between NMS Stock ATSs and national securities exchanges, given their different statutory and regulatory regimes? For example, should the existing fair access requirement in Rule 301(b)(5) of Regulation ATS be used instead of the proposed equal access requirement? Are there other aspects of access to an NMS Stock ATS operating as an open competition trading center offering qualified auctions that should be addressed by Proposed Rule 615?
14. Is requiring a minimum level of
trading volume for NMS Stock ATSs an appropriate means to achieve the objectives of Proposed Rule 615? If so, should the 1% volume threshold should be lower or higher? Are the other parameters of the volume threshold appropriate to achieve the objective of ensuring that qualified auctions are offered by trading centers that have sufficient volume to provide vigorous competition? Is average daily volume during at least 4 of the preceding 6 calendar months an appropriate parameter, or are there more appropriate parameters? Is there another approach that would be more effective to help limit the potential costs of market fragmentation that could be associated with the requirements of Proposed Rule 615?
15. Would market participants have
sufficient notice concerning the operation of qualified auctions by NMS Stock ATSs if they operate pursuant to an effective Form ATS–N that evidences compliance with the requirements for a qualified auction in Proposed Rule 615(c) and with the other provisions of the proposed definition of an open competition trading center?
16. Are there any other requirements,
beyond those specified in the proposed definition of an open competition trading center, that national securities exchanges or NMS Stock ATSs should meet to be eligible to qualify as open competition trading centers and operate qualified auctions?
17. Should national securities
exchanges that do not meet the proposed definition of an open competition trading center be excluded, as proposed, from the definition of a restricted competition trading center based on their statutory requirements relating to access and competition?
18. Does the proposed definition of
originating broker appropriately capture the brokers that would make the determination of whether an order falls within the definition of a segmented order, as well as the broker that would be required to be identified in auction messages? Instead of allowing originating brokers to choose whether to be identified in auction messages, should Proposed Rule 615, as a means to promote greater uniformity of execution quality for segmented orders from different originating brokers, prohibit any identification of the originating broker in auction messages and require originating brokers to certify that their identity will not be disclosed for all segmented orders? Should originating brokers for a segmented order, other than the broker responsible for approving the opening of accounts with customers, be identified in the auction message? Should carrying or clearing brokers that are an originating broker for a segmented order also be disclosed in an auction message? Would such information be useful to market participants’ decisions whether to submit auction responses and at what prices?
19. Are the five proposed exceptions
in paragraph (b) of Proposed Rule 615 appropriate? Should additional exceptions be included, such as an exception for orders directed by the customer to a particular trading center?
20. Instead of providing an exception
for executions of segmented orders during a time period when no open competition trading center is operating a qualified auction, should the execution of segmented orders during such a time period be prohibited? Is market value an appropriate approach to identifying large trades that should be excepted from Proposed Rule 615? If so, should the threshold amount of $200,000 be lower or higher? For example, do commenters believe that segmented orders in NMS stocks with a market value of up to $200,000 could be executed efficiently in qualified auctions at prices that mostly would be at or within the NBBO? If not, what market value should be used to achieve this objective and should it vary based on the trading characteristics of a particular NMS stock?
21. Would it be appropriate for
Proposed Rule 615(b) to include an exception for executions at a price less favorable to the segmented order than a midpoint execution, so long as the segmented order is executed at a price with a specified amount of price improvement? If so, what would be the appropriate level of price improvement?
22. Is it appropriate for Proposed Rule
615(b) to include an exception for executions of a segmented order with a limit price selected by the customer that is equal to or more favorable for the segmented order than the midpoint of the national best bid and national best offer when the segmented order is received by the restricted competition trading center? Should there be an exception for a wider range of limit orders, in addition to, or instead of this proposed exception? For example, should there be an exception for all nonmarketable limit orders (i.e., any buy limit order with a price less than the NBO and any sell limit order with a price greater than the NBB)?
23. Is it appropriate for Proposed Rule
615(b) to include the exception for executions of segmented orders where no qualified auctions are being offered for orders that are not entirely in whole shares, and the customer selected a size for a segmented order that is not entirely in whole shares of an NMS stock, in which case any portion of such segmented order that is less than one whole share of the NMS stock, and only such portion, would not be subject to the order competition requirement of paragraph (a) of Proposed Rule 615? Would a broker-dealer’s best execution responsibilities be sufficient to ensure that the fractional portion of the segmented order is executed in the best market available? Do commenters believe that, if Proposed Rule 615 were adopted, open competition trading centers would offer qualified auctions that accommodate fractional shares? If not, should a broker-dealer be required to round up a segmented order with a fractional component before submitting the order to a qualified auction, with the broker-dealer required to accept the rounded up portion of the order? Or would broker-dealers be less willing to offer their customers transactions in fractional shares if rounding up were required?
24. Should auction messages be
required to include the side (buy or sell) of a segmented order? For example, if side were not included in auction messages, market participants could be allowed to provide auction responses for one or both sides, with only auction responses on the opposite side of the segmented order considered for execution. Do commenters believe that such an approach would limit the extent to which quoted price might move away from segmented orders during the pendency of a qualified auction?
25. Should the minimum or
maximum time periods for qualified auctions be shorter or longer? Should a restricted competition trading center be permitted to execute a segmented order that was not executed in a qualified auction at the specified limit price as soon as reasonably possible, or should there be a specified time period for execution?
26. Should the pricing increment be
smaller or larger than the proposed 0.1

260See supra note 254 (discussing the type of data to be collected and reported pursuant to the CAT NMS Plan). 261 44 U.S.C. 3501 et seq. 262Supra section IV.C. cent for segmented orders and auction responses with prices of $1.00 or more per share? Would, for example, the potential benefit for segmented orders of a smaller pricing increment, such as
0.05 cent, outweigh the potential cost of
less direct interaction of investor orders without the participation of a dealer?
27. Does Proposed Rule 615(c)(4)
appropriately address the fees and rebates for qualified auctions? Is the proposed prohibition of any fee for the submission or execution of segmented orders appropriate? Should the proposed 5 mil cap on fees for executed auction responses priced at $1.00 per share or more be higher or lower? Should the proposed 5 mil cap on rebates for segmented orders priced at $1.00 per share or more be higher or lower? Is it appropriate to require that the rates for fees and rebates be flat in all auctions?
28. Are the execution priority
requirements specified in Proposed Rule 615(c)(5) appropriate? Should auction responses of customers have priority over auction responses of broker-dealers at the same price? Is it appropriate to prohibit execution priority terms that favor the broker-dealer that routed the segmented order, the originating broker for the segmented order, and the open competition trading center operating the auction, as well as affiliates of the foregoing persons? Should the requirements for execution priority of orders resting on the continuous order book of an open competition trading center be modified? Should displayed orders on the continuous order book have priority over auction responses at the same price? Should auction responses have priority over undisplayed orders on the continuous order book at the same price?
29. Should an open competition
trading center be permitted to give execution priority advantages to market makers that accept objective affirmative obligations, such as public quoting obligations or an obligation to fill segmented orders at the relevant NBBO if such orders do not otherwise receive an execution in qualified auctions? For example, Table 7 in section VII.B.4 below shows that 1.67% of marketable order shares are executed by wholesalers at prices outside the NBBO at the time the wholesaler received the order. Do commenters believe that, if Rule 615 were adopted as proposed, a larger percentage of marketable orders of individual investors would be executed at prices outside the NBBO when the order is received by a trading center?
30. Should the broker routing a
segmented order to a qualified auction be required to execute the order, or any unexecuted portion thereof, at the specified limit price or some other price if the segmented order is not executed in full in the auction?
31. Should there be parameters for
what the specified limit price selected by a broker routing a segmented order to a qualified auction could be? For example, should the specified limit price be required to be within a range that is tied to the midpoint of the NBBO at the time the segmented order is received?
32. Should an open competition
trading center be permitted to operate multiple qualified auctions in the same NMS stock simultaneously?
33. Should open competition trading
centers have flexibility to determine aspects of qualified auctions that are not specified by Proposed Rule 615? Are there additional aspects for qualified auctions that should be specified by rule? For example, are there additional aspects of execution priority that should be specified by rule or, alternatively, that open competition trading centers should have greater flexibility to determine?
34. Should open competition trading
centers and national securities exchanges be allowed to continue to operate trading systems, other than qualified auctions, that are limited, in whole or in part, to the execution of segmented orders and that do not fall within one of the five exceptions in Proposed Rule 615(d)(2) and (g)? For example, should national securities exchanges be permitted to continue to operate RLPs that do not qualify for one of the exceptions in Proposed Rule 615(g)? Are there other types of limited trading facilities operated by national securities exchanges or open competition trading centers that should be permitted?
35. Is it appropriate, as provided in
Proposed Rule 615(f)(4), to prohibit broker-dealers with knowledge of where a segmented order is to be routed for execution from submitting, or enabling the submission, of an order to the continuous order book of an open competition trading center that could trade with that segmented order? Do commenters believe that this prohibition could significantly interfere with broker-dealer handling of customer orders and, if so, would limiting the prohibition to the proprietary orders of a broker-dealer and its affiliates be consistent with the purposes of Proposed Rule 615?
36. Does Proposed Rule 615(e)(4)
provide sufficient clarification as to which broker-dealer would be subject to the obligations of Proposed Rule 615(e) when there are multiple originating brokers for a segmented order and such originating brokers have in place a written agreement that allocates their responsibilities with respect to customer orders?
37. Does Rule 613 of Regulation NMS
and the Consolidated Audit Trail NMS Plan require adequate reporting of all elements of this proposed rule so that regulators can evaluate compliance and study its effectiveness?260
VI. Paperwork Reduction Act Analysis
Certain provisions of Proposed Rule 615 contain ‘‘collection of information’’ requirements within the meaning of the Paperwork Reduction Act of 1995 (‘‘PRA’’).261 The Commission is submitting these collections of information to the Office of Management and Budget (‘‘OMB’’) for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the agency displays a currently valid control number. The title of the new collection of information is ‘‘Order Competition Rule.’’ The requirements of this collection of information would be mandatory for originating brokers, brokers and dealers that route segmented orders, national securities exchanges and NMS Stock ATSs that operate qualified auctions as open competition trading centers, and national securities associations that provide auction message information for dissemination in consolidated market data. A. Summary of Collection of Information Proposed Rule 615 and the proposed related amendments would create burdens under the PRA by creating the new collections of information described below for market participants that handle or execute segmented orders, or operate qualified auctions to provide competition for segmented orders.

Auction Messages
Proposed Rule 615 would require an open competition trading center to comply with the requirements of paragraph (c) for operation of a qualified auction for segmented orders.262 Pursuant to paragraph (c)(1), an open competition trading center operating a qualified auction would be required to provide an auction message announcing

263As discussed above in section IV.C.1, the identity of the originating broker is not required to be disclosed, however, if the originating broker makes the requisite certification. 264Supra section IV.E. 265Supra section IV.C.1. 266Supra section IV.B.2, and IV.D. 267Supra section I. 268Supra section IV.C.1. the initiation of a qualified auction for a segmented order for dissemination in consolidated market data. Each auction message shall invite priced auction responses to trade with a segmented order and shall include, among other things, the identity of the originating broker.263
2. Identifying and Marking Segmented
Orders a. Identification of Segmented Orders Paragraph (e)(1) would require originating brokers to establish, maintain, and enforce written policies and procedures reasonably designed to identify the orders of customers as segmented orders. b. Marking Segmented Orders Paragraph (e)(2) of Proposed Rule 615 would require originating brokers to identify a segmented order as such to any destination the broker routes the order. Additionally, pursuant to paragraph (f)(1) of Proposed Rule 615, no broker-dealer that receives an order identified as a segmented order shall route the order without identifying the order as a segmented order to the routing destination. Thus, originating brokers and other broker-dealers that route segmented orders would be required to mark segmented orders as such.
3. Originating Broker Certification
Pursuant to paragraph (e)(3), if the originating broker for a segmented order that is the originating broker responsible for approving the opening of accounts with customers determines to make the certification referenced in paragraph (c)(1)(iii) of Proposed Rule 615, the originating broker shall establish, maintain, and enforce the required policies and procedures reasonably designed to assure that the identity of the originating broker will not be disclosed.264 As discussed above, the certification must also be communicated to the open competition trading center operating the qualified auction.265 The Commission believes that broker-dealers would likely use order marking systems to communicate to an open competition trading center whether an originating broker has made the certification referenced in Proposed Rule 615(c)(1)(iii). Accordingly, the originating broker with responsibility for transmitting orders for a customer’s account would mark segmented orders to indicate that the certification has been made, and other broker-dealers that receive and route such orders would also mark such orders accordingly. As discussed below, the Commission believes that broker-dealers would have an initial burden to modify their systems to be able to mark segmented orders as such, and an ongoing burden to mark segmented orders. The Commission also believes that broker-dealers would include in those systems modifications, the ability to communicate whether an originating broker has made the referenced certification, and on an ongoing basis would include the certification information, as applicable, when marking segmented orders. Thus, the Commission believes that the initial burden for broker-dealers to modify their systems to mark orders as segmented orders and the ongoing burden to mark segmented orders as such, as discussed below, would subsume the burden to mark orders to communicate when the certification has been made and therefore estimates no additional costs associated with communication of the certification.
4. NMS Stock ATS Policies and
Procedures To Exclude Subscribers Pursuant to paragraph (d)(1) of Proposed Rule 615, a national securities exchange or NMS Stock ATS shall not operate a qualified auction for segmented orders unless it meets the definition of open competition trading center in Proposed Rule 600(b)(64).266 For an NMS Stock ATS to qualify as an open competition trading center eligible to operate a qualified auction, Proposed Rule 600(b)(64)(ii)(D) would require the NMS Stock ATS to permit any registered broker or dealer (other than a broker or dealer subject to a statutory disqualification) to become a subscriber of the ATS. The NMS Stock ATS could, however, pursuant to written policies and procedures, prohibit a broker or dealer from being or becoming a subscriber, or impose conditions on a broker or dealer subscriber, that does not meet standards of financial responsibility or operational capability, as are prescribed by the written policies and procedures. Thus, to be able to exclude a broker-dealer from becoming a subscriber (other than a broker or dealer subject to a statutory disqualification), or imposing conditions on such a subscriber, the NMS Stock ATS would be required to have written policies and procedures. B. Proposed Use of Information As discussed above,267 Proposed Rule 615 is designed to benefit individual investors by enhancing the opportunity for their orders to receive more favorable prices than they receive in the current market structure, as well as to benefit investors generally by giving them an opportunity to interact directly with a large volume of individual investor orders that are mostly inaccessible to them in the current market structure, by requiring that individual investor orders be exposed to order-by-order competition in fair and open auctions designed to obtain the best prices before such orders could be internalized by wholesalers or any other type of trading center that restricts order-by-order competition.

Auction Messages
The auction messages provided under paragraph (c)(1) of Proposed Rule 615 would be disseminated in consolidated market data and would be used by market participants to determine whether to submit auction responses. As discussed above, the wide dissemination of these auction messages would promote competition by soliciting potential auction responses from a wide spectrum of market participants.268
Identifying and Marking Segmented
Orders a. Identification of Segmented Orders The requirements of paragraph (e)(1) of Proposed Rule 615 are designed to ensure that originating brokers are able to properly identify segmented orders. Specifically, written policies and procedures established pursuant to Proposed Rule 615(e)(1) would help a broker develop a process, relevant to its customers and the nature of its business, for properly identifying the orders of its customers as segmented orders. Further, the maintenance of written policies and procedures would generally: (1) assist a broker-dealer in supervising and assessing its compliance with Proposed Rule 615; and (2) assist the Commission and SRO staff in connection with examinations and investigations. b. Marking Segmented Orders Marking segmented orders as such pursuant to paragraphs (e)(2) and (f)(1) of Proposed Rule 615 would inform other market participants that the orders must be handled in accordance with the requirements of Proposed Rule 615, which, as discussed above, is designed

269As discussed above, the disclosure of the identity of the originating broker in an auction message, absent the corresponding certification, is designed to help ensure fair competition among auction responders and persons that could otherwise trade with the segmented order, while giving originating brokers a choice as to whether or not to disclose their identity. Supra section IV.C.1. 270Supra section IV.B.2. 271 Id. 272Supra section IV.B.2. to provide competition for individual investor orders in fair and open auctions.
3. Originating Broker Certification
Written policies and procedures established pursuant to Proposed Rule 615(e)(3) would help a broker develop a process, relevant to the nature of its business, to ensure that its identity will not be disclosed and to support its certification. Further, the maintenance of written policies and procedures would generally: (1) assist a broker in supervising and assessing its compliance with Proposed Rule 615(e)(3); and (2) assist the Commission and SRO staff in connection with examinations and investigations. Communication of the certification to the relevant open competition trading center would enable the open competition trading center to comply with the requirements of Proposed Rule 615(c)(1) that an auction message disclose the identity of the originating broker for a segmented order, unless the originating broker has made the requisite certification.269
4. NMS Stock ATS Policies and
Procedures To Exclude Subscribers To qualify as an open competition trading center, an NMS Stock ATS would be required to permit any registered broker-dealer (other than a broker-dealer subject to a statutory disqualification) to become a subscriber of the NMS Stock ATS, and must provide equal access among all subscribers of the NMS Stock ATS.270 These requirements are designed to help ensure a level playing field regarding Proposed Rule 615 for competition among NMS Stock ATSs and national securities exchanges, in light of the different regulatory regimes for each. Similar to the requirements for national securities exchanges, under Proposed Rule 600(b)(64)(ii)(D), NMS Stock ATSs could exclude a registered brokerdealer, or impose conditions on a broker-dealer becoming a subscriber, that does not meet certain standards of financial responsibility or operational capability, but may only do so pursuant to written policies and procedures. While national securities exchanges must prescribe rules, consistent with the Exchange Act, for denying membership to a broker-dealer, the requirements applicable to NMS Stock ATSs are less stringent.271 Requiring NMS Stock ATSs to establish written policies and procedures would help an NMS Stock ATS to develop a process for identifying registered broker-dealers that should be excluded because they do not meet certain standards, and would help level the competitive playing field regarding Proposed Rule 615 between NMS Stock ATSs and national securities exchanges. Further, the written policies and procedures would generally: (1) assist an NMS Stock ATS in supervising and assessing its compliance with the access requirements of proposed Rule 600(b)(64)(ii)(D); and (2) assist the Commission and SRO staff in connection with examinations and investigations.
C. Respondents
A summary of the Commission’s initial estimates of the number of respondents for each collection of information requirement is set forth below:
COLLECTION OF INFORMATION—ORDER COMPETITION RULE Description of burden Rule Applicable respondents Number of respondents Dissemination of Auction Messages ....................... Rule 615(c)(1) ......... National securities exchanges operating qualified auctions. 6
National securities associations .............................. 1
NMS Stock ATSs operating qualified auctions ....... 3
Total .................................................................. ................................. .................................................................................. 10
Policies and Procedures to Identify Segmented Orders. Rule 615(e)(1) ......... Originating broker-dealers with responsibility for identifying segmented orders. 157 Identification of Segmented Orders by Originating Brokers. Rule 615(e)(2) ......... Originating broker-dealers with responsibility for identifying segmented orders. 157 Marking of Segmented Orders:
Marking of Segmented Orders by Originating Brokers. Rule 615(e)(2) ......... Originating broker-dealers with responsibility for marking segmented orders. 157 Marking of Segmented Orders by Broker-Dealers. Rule 615(f)(1) .......... Broker-dealers that route orders identified as segmented orders. 25
Total ........................................................... ................................. .................................................................................. 182
Policies and Procedures for Rule 615(c) Certification. Rule 615(e)(3) ......... Originating broker-dealers certifying that they established, maintained, and enforced policies and procedures reasonably designed to assure that their identity will not be disclosed. 20 NMS Stock ATS Policies and Procedures to Exclude Subscribers. Rule 615(d)(1) ......... NMS Stock ATSs operating qualified auctions that may exclude subscribers. 3

Auction Messages
As discussed above,272 the open competition trading centers that would be required to provide auction messages for dissemination in consolidated market data pursuant to paragraph (c)(1) of Proposed Rule 615 would be national securities exchanges and NMS Stock ATSs that meet certain requirements and are eligible to operate qualified auctions for segmented orders. As is currently the case for quotation and trading information in NMS stocks, auction information would be provided by national securities exchanges and FINRA, as the only national securities association, to the SIPs for

273Supra sections III.B.1 and IV.C.1.
274Supra section IV.B.1. In addition to providing consolidated market data, national securities exchanges also sell their individual proprietary market data products, and their depth of book (‘‘DOB’’) products typically include, among other things, information about orders participating in auctions, including auction order imbalances. See, e.g., Nasdaq Rule 123(a)(1)(B) available at https:// listingcenter.nasdaq.com/rulebook/nasdaq/rules/ Nasdaq%20Equity%207#section_123_nasdaq_ depth-of-book_data (defining Nasdaq’s ‘‘Nasdaq TotalView’’ data product); and https:// www.nyse.com/market-data/real-time/integratedfeed (describing NYSE’s ‘‘NYSE Integrated’’ data product). 275Supra note 82 and accompanying text. 276CBOE Holdings, Inc. is the parent company of Cboe BYX, Cboe BZX, Cboe EDGA, and Cboe EDGX; Nasdaq, Inc. is the parent company of Nasdaq BX, Nasdaq PhlX, and Nasdaq; Intercontinental Exchange, Inc. is the parent company of NYSE, NYSE American, NYSE Arca, NYSE CHX, and NYSE National. 277The remaining four national securities exchanges that trade NMS stocks are IEX, LTSE, MEMX, and MIAX PEARL, which is a subsidiary of MIAX International Holdings, Inc. Of these, based on examination of data related to national securities exchanges, for the month ended Nov. 30, 2022, only LTSE did not report more than 1% of share volume in NMS stocks. Proposed Rule 600(b)(64) requires a national securities exchange to have had an average daily share volume for NMS stocks of 1% or more during at least four of the preceding 6 calendar months to qualify as an open competition trading center eligible to operate a qualified auction. See Cboe, U.S. Historical Market Volume Data, available at: https://cboe.com/us/equities/ market_statistics/historical_market_volume/. 278NMS Stock ATSs must publicly disclose information about their trading system and services, including differences in access, on Form ATS–N. Links to Form ATS–N filings are available on the Commission’s website at https://www.sec.gov/ divisions/marketreg/form-ats-n-filings.htm. See also ATS–N Adopting Release, supra note 159, 83 FR at 38886 n.1292 and accompanying text (discussing the dark trading model adopted by most NMS Stock ATSs). 279The Commission bases this estimate on the following considerations. While currently no NMS Stock ATS would qualify as an Open Competition Trading Center, there is currently one NMS Stock ATS that discloses that it crosses the 5% volume threshold for fair access under Regulation ATS for securities that are available for trading on its platform. This NMS Stock ATS may choose to make the necessary modifications to operate as an Open Competition Trading Center. In addition, given the low-cost nature of segmented order flow that is likely to be attractive to market participants, the Commission estimates that two additional NMS Stock ATSs would choose to make the necessary modifications to operate as Open Competition Trading Centers. 280Supra section IV.B.4. 281Supra section
IV.B.1. 282Supra section IV.B.4. 283FOCUS Reports, or ‘‘Financial and Operational Combined Uniform Single’’ Reports, are monthly, quarterly, and annual reports that broker-dealers are generally required to file with the Commission and/or SROs pursuant to Exchange Act Rule 17a–5. See 17 CFR 240.17a–5. 284The data is obtained from FOCUS Reports,
Part II filed for the second quarter of 2022.
285 Information on the number broker-dealers that carry public customer accounts is from brokerdealers’ responses on their most recently available FOCUS Report Form X–17A–5 Schedule I. Because ‘‘public customer accounts’’ may hold orders other than segmented orders, for example institutional customers would also fall within the definition of ‘‘public customer’’ for purposes of FOCUS Report Form X–17A–5 Schedule I, 157 is likely an overestimate. dissemination in consolidated market data.273 Given that all national securities exchanges already have systems and processes for providing information for dissemination in consolidated market data as well as systems and processes for disseminating certain auction information,274 the Commission estimates that it is likely that 6 of the 16 national securities exchanges that trade NMS stocks would choose to qualify as open competition trading centers and operate qualified auctions. Of the 16 registered national securities exchanges currently trading NMS stocks,275 12 are part of one of 3 corporate affiliate groups, and the Commission estimates that one of the national securities exchanges from each of the three corporate groups would likely choose to operate qualified auctions.276 Of the four other national securities exchanges that currently trade NMS stocks, the Commission estimates that three exchanges would likely choose to operate qualified auctions.277 The Commission also estimates that some, but not all NMS Stock ATSs would chose to operate qualified auctions for segmented orders. One of the requirements of Proposed Rule 615 is that an open competition trading center must meet the definition set forth in Proposed Rule 600(b)(64), which would require that an NMS Stock ATS permit any registered broker or dealer (other than a broker or dealer subject to a statutory disqualification) to become a subscriber and provide equal access among all subscribers. To qualify as an open competition trading center, Proposed Rule 600(b)(64) would also require an NMS Stock ATS to display quotations through an SRO display-only facility and operate as an automated trading center that displays automated quotations disseminated in consolidated market data. Given that NMS Stock ATSs often differentiate between groups or classes of subscribers with respect to access to services and most have adopted a ‘‘dark’’ trading model,278 of the 32 NMS Stock ATSs, the Commission estimates that approximately three are likely to make the business model modifications necessary to meet the open competition trading center definition and be eligible to operate qualified auctions.279 As discussed above, broker-dealers provide certain NMS stock information to FINRA through its facilities, and FINRA provides information for dissemination in consolidated market data. To qualify as open competition trading centers, the three NMS Stock ATSs would have systems and processes in place to display quotations disseminated in consolidated market data.
These ATSs would provide auction message information to FINRA, and FINRA would transmit the information for dissemination in consolidated market data. The Commission requests comment on its estimates of the number of exchanges and NMS Stock ATSs that would become open competition trading centers operating qualified auctions, including whether the estimates should be lower or higher.
2. Identifying and Marking Segmented
Orders
As discussed above, Proposed Rule 615 would impose certain obligations on originating brokers, and all other broker-dealers, with respect to their handling of segmented orders. Proposed Rule 600(b)(69) defines ‘‘originating broker’’ to mean any broker with responsibility for handling a customer account,280 and Proposed Rule 600(b)(91) defines ‘‘segmented order’’ as an order for the account of a natural person (or an account held on behalf of a natural person or group of related family members) that meets certain trading volume thresholds.281 Most segmented orders are handled by large, customer-facing broker-dealers that accept orders from customers and then route these orders to various execution centers. Also, as discussed above, in
section IV.B.4, broker business practices
can vary widely in terms of how customer accounts are handled, with some brokers performing the entire function internally and others allocating various responsibilities of an originating broker to other brokers-dealers such as carrying or clearing brokers. Those originating brokers who have been assigned responsibilities that include the transmission of orders for execution would need to identify and mark segmented orders as such to comply with Proposed Rule 615.282 Based on FOCUS Report data,283 the Commission estimates that as of June 30, 2022 there were 3,498 registered broker-dealers,284 and of these there were 157 reporting that they carry public customer accounts 285 that would likely be subject to the requirements of paragraphs (e)(1) and (2) of Proposed Rule 615. Paragraph (f)(1) of Proposed Rule 615 would also require every broker-dealer that receives a segmented order and routes that order to identify the order as such. This would include broker-dealers

286This estimate is based broker-dealers’ responses on their most recently available FOCUS Report Form X–17A–5 Schedule I, showing that there are 25 broker-dealers that effect public customer transactions in equity securities on a national securities exchange or OTC that do not carry public customer accounts. 287The Commission estimates that there are approximately 157 broker-dealers that carry at least one customer account trading in NMS stocks, and 1,110 broker-dealers that introduce at least one customer account trading in NMS stocks. The estimate of 157 broker-dealers that carry at least one customer account trading in NMS stocks and options is based on the number of broker-dealers that report carrying at least one customer account on their 2021 FOCUS Report Form X–17A–5
Schedule I; and the estimate of 1,110 broker-dealers
that introduce at least one customer account trading in NMS stocks and options is based on estimates using broker-dealers’ FDIDs identified in CAT data during the 2021 calendar year. As CAT data includes information only about NMS stocks and options, broker-dealers that introduce or carry customer accounts trading in other assets classes are not included in these numbers. 288These broker-dealers are likely to be larger broker-dealers that have customers who are more informed traders. Lower-volume broker-dealers with fewer orders are not likely to have this type of customer. that act as wholesalers that would be required to route a segmented order to be exposed in a qualified auction at a price prior to executing it, or that route the order to another execution center; and any other broker-dealer, including originating broker-dealers assigned responsibilities that include identifying and marking orders, that routes segmented orders. The Commission estimates that approximately 25 brokerdealers that do not also carry customer accounts would route retail orders.286 a. Identification of Segmented Orders As discussed above, the Commission estimates that there are 157 originating brokers that would be required to establish, maintain, and enforce written policies and procedures reasonably designed to identify customer orders as segmented orders pursuant to paragraph (e)(1) of Proposed Rule 615. While there are additional broker-dealers, such as introducing brokers, that would meet the definition of ‘‘originating broker,’’ only those broker-dealers carrying customer accounts are likely to have been allocated responsibility for routing orders and therefore would have burdens and costs associated with implementing the requirements of paragraph (e)(1) of Proposed Rule 615. The Commission requests comment on whether its estimate of the number of brokers that would fall within the scope of Proposed Rule 615(e)(1), including whether the estimate should be higher or lower. b. Marking Segmented Orders As discussed above, the Commission estimates that there would be 157 originating brokers that would be required to identify segmented orders as such prior to routing those orders pursuant to Proposed Rule 615(e)(2). Additionally, the Commission estimates that there would be an additional 25 broker-dealers that route customer orders, and would not also be originating brokers in the scope of paragraph (e)(2), that would be required, pursuant to Proposed Rule 615(f)(1) to identify any segmented orders received as such, when routing the order to a routing destination. The Commission requests comment on its estimate of the number of brokerdealers that would fall within the scope of paragraphs (e)(2) and (f)(1) of Proposed Rule 615, including whether the estimate should be higher or lower.
3. Originating Broker Certification
It is likely that most originating brokers with segmented orders would choose to be identified as the originating broker of a segmented order because that information would be used by market participants to help predict the level of adverse selection costs associated with order flow from a given originating broker. Thus, originating brokers known to be associated with lower adverse selection costs would likely want auction responders to know their identity. Based on a review of data related to broker-dealers, the Commission estimates that there are approximately 1,267 broker-dealers that would meet the definition of ‘‘originating broker’’ and that have responsibility for monitoring customer accounts.287 These broker-dealers would be required to maintain the policies and procedures required by paragraph(e)(3) of Proposed Rule 615 if they choose not to have their identity disclosed in auction messages. While it is very difficult for the Commission to know how many originating brokers would choose to certify that they established, maintained, and enforced written policies and procedures reasonably designed to assure that their identity will not be disclosed to any person that potentially could participate in the qualified auction or otherwise trade with the segmented order routed by the originating broker, the Commission preliminarily estimates that 20 of the 1,267 originating brokers would choose not to disclose their identity and would be required to establish, maintain and enforce the written policies and procedures required by paragraph (e)(3) of Proposed Rule 615. While segmented orders, by definition, are limited to orders for accounts with an average daily number of trades in NMS stocks of less than 40 in each of the six preceding months, and thereby likely associated with lower adverse selection costs, there may be some broker-dealers that have order flow associated with higher levels of adverse selection costs or who have customers or business models that preference anonymity.288 As discussed above, the originating broker with responsibility for transmitting orders for a customer’s account would likely also mark segmented orders to indicate that the certification has been made, and other broker-dealers that receive and route such orders would also need to mark such orders accordingly. The same broker-dealers that would mark orders as segmented orders pursuant to paragraphs (e)(2) and (f)(1) of Proposed Rule 615, discussed above in section VI.C.2.b, would also likely mark orders, as applicable, to communicate the certification to the open competition trading center. The Commission requests comment on its estimate of the number of originating brokers that would certify that they have established, maintained, and enforced written policies and procedures reasonably designed to assure that the identity of the originating broker will not be disclosed, including whether the estimate should be higher or lower. The Commission also requests comment
on whether it is reasonable to estimate that such certifications would be communicated to open competition trading centers via order marking and that the same brokerdealers that would mark orders as segmented orders would also mark orders for the purpose of communicating such certifications to the open competition trading centers operating qualified auctions.
4. NMS Stock ATS Policies and
Procedures To Exclude Subscribers As discussed above, of the 32 NMS Stock ATSs, the Commission estimates that approximately 3 would operate qualified auctions. To do so, those NMS Stock ATSs would need to meet the definition of open competition trading center, and as such, would be required to have written policies and procedures to prohibit any registered broker or dealer from being or becoming a subscriber, or impose conditions upon a such a subscriber, that does not meet the standards of financial responsibility or operational capability of the NMS Stock ATS. The Commission anticipates that all three NMS Stock ATSs operating qualified auctions would have standards

289This estimate is based on a review of NMS Stock ATS disclosures on Form ATS–N. 290The Commission estimates the monetized initial burden for this requirement to be $78,580:
(Compliance Manager at $344 for 105 hours) + (Attorney at $462 for 70 hours) + (Sr. Systems Analyst at $316 for 20 hours) + (Operations Specialist at $152 for 25 hours) = 220 initial burden hours, at a monetized cost of $78,580. Throughout this section VI.D, the Commission derived estimates for in-house personnel costs on per hour figures from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified to account for an 1,800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead. 291The Commission estimates the monetized ongoing, annual burden for this requirement to be $118,560: (Compliance Manager at $344 for 192 hours) + (Attorney at $462 for 48 hours) + (Sr. Systems Analyst at $316 for 96 hours) = 336 initial burden hours, at a monetized cost of $118,560. 292Supra notes 290 and 291. 293The requirements of Rule 610(b) for trading centers that choose to display quotations in NMS stock are existing requirements under Regulation NMS, and the requirements of Rule 603(b) pertaining to the display of quotations from trading centers that qualify as automated trading centers, are existing requirements that are not modified by Proposed Rule 615 and the proposed new definitions under Rule 600 and do not constitute new collections of information. 294Proposed Rule 600(b)(64)(ii). 295Supra notes 290 and 291. 296The Commission estimates the monetized ongoing, annual burden for this requirement to be $785,800: $78,580 × (6 national securities exchange

1 registered securities association + 3 NMS stock
ATSs) = $785,800.
297The Commission estimates the monetized ongoing, annual burden for this requirement to be $1,185,600: $118,560 × (6 national securities exchange + 1 registered securities association + 3 NMS stock ATSs) = $1,185,600. for financial responsibility or operational capability for their subscribers.289 The Commission requests comment on whether its estimate that all NMS Stock ATSs operating qualified auctions would have standards for financial responsibility or operational capability for their subscribers is reasonable. D. Burdens

Auction Messages
As discussed above, the estimated six national securities exchanges operating as open competition trading centers operating qualified auctions would be required to collect and provide the information necessary to generate auction messages in consolidated market data. These entities currently operate auctions for which messages are disseminated in their proprietary data feeds, and already provide other information regarding NMS stocks for dissemination in consolidated market data. The auction messages would be a new data element that the national securities exchanges would have to make available for inclusion in the dissemination of consolidated market data. Because the national securities exchanges currently collect and calculate data necessary to generate other elements of consolidated market data, and also currently provide auction information to subscribers of proprietary data, the requirements of Rule 615(c)(1) would likely impose minimal initial and ongoing burdens on these respondents, including any changes to their systems. The Commission estimates that a national securities exchange would require an average of 220 initial burden hours of legal, compliance, information technology, and business operations personnel time to prepare and implement a system to collect and provide the information necessary to generate auction messages for dissemination in consolidated market data, at a monetized cost per exchange of $78,580.290 And each national securities exchange would incur an annual average burden on an ongoing basis of 336 hours to collect and provide auction messages, at a monetized cost per exchange of $118,560.291 Proposed Rule 615(c)(1) would also require auction messages initiating qualified auctions held on NMS Stock ATSs operating as open competition trading centers to be provided for dissemination in consolidated market data. As discussed above, like national securities exchanges, FINRA already collects information from broker-dealers for dissemination in consolidated market data, and the addition of auction message information as a new data element would impose approximately the same burdens and costs on FINRA as for national securities exchanges.292 To qualify as an open competition trading center eligible to operate qualified auctions, an NMS Stock ATS would need to display quotations through an SRO display-only facility in compliance with Rule 610(b); display automated quotations disseminated in consolidated market data pursuant to Rule 603(b); 293 and provide trade reports identifying the NMS Stock ATS as the venue of execution that are disseminated in consolidated market data pursuant to Rule 603(b).294 These ATSs would need to have systems in place to collect and calculate such information and transmit the information to FINRA for dissemination in consolidated market data. It is likely that NMS Stock ATSs that run qualified auctions would be operated by large, sophisticated broker-dealers that have in place systems that could
be modified to collect and disseminate auction message information. The Commission estimates that the burdens and costs to these NMS Stock ATSs to modify their systems to also provide auction information for dissemination in consolidated data would be minimal, and would be the same as those for national securities exchanges and FINRA.295 The Commission estimates the initial total aggregate burden and cost for all 10 respondents would be 2,220 hours, at a monetized cost of $785,800,296 and the ongoing total burden and cost would be 3,360 hours, at a monetized cost of $1.12 million.297 A summary of the initial and ongoing burdens and costs described above is set forth below:
TOTAL ESTIMATED BURDEN ASSOCIATED WITH PROVIDING AUCTION MESSAGES IN CONSOLIDATED MARKET DATA Respondents Burden hours per respondent Aggregate burden hours Monetized cost per respondent Aggregate monetized cost Total Initial Burden ............................................................... 10 220 2,220 $78,580 $785,800 Total Ongoing Burden .......................................................... 10 336 3,360 118,560 1,185,600 The Commission requests comment on whether there would be different or additional burdens or costs for open competition trading centers to provide the information necessary to generate auction messages in consolidated market data. The Commission also requests comment on whether the burdens and costs for NMS Stock ATSs to provide the information necessary to generate auction messages in consolidated market data would be different from those for national securities exchanges.

298Supra section IV.B.1 (discussing the definition of segmented order, which is designed to facilitate compliance and minimize the costs of compliance) and note 253 and accompanying text. 299The Commission estimates the monetized initial burden for this requirement to be: (Attorney at $462 for 40 hours) + (Compliance Counsel at $406 for 10 hours) + (Deputy General Counsel at $663 for 5 hours) + (Chief Compliance Officer at $589 for 5 hours) = 60 initial burden hours and a monetized cost of $28,800. 300The Commission’s estimates of the relevant wage rates for outside legal services takes into account staff experience, a variety of sources including general information websites, and adjustments for inflation. The Commission estimates that the average hourly rate for legal services is $496/hour. This cost estimate is therefore based on the following calculation: (10 hours of review) × ($496/hour for outside counsel service) = $4,960 in outside counsel costs. 301This estimate is based on the following calculation: (60 burden hours of review per brokerdealer) × (157 broker-dealers) = 9,420 aggregate burden hours. 302This estimate is based on the following calculation: ($28,800 per broker-dealer) × (157 broker-dealers) = $4,521,600. 303This estimate is based on the following calculation: ($4,960 for outside costs per brokerdealer) × (157 broker-dealers) = $778,720 in outside counsel costs. 304The Commission estimates the monetized ongoing, annual burden for this requirement to be:
(Attorney at $462 for 4 hours) + (Compliance Counsel at $406 for 4 hours) + (Intermediate Business Analyst at $251 for 4 hours) = 12 ongoing burden hours and $4,476. 305These estimates are based on the following calculations: (12 burden hours per broker-dealer) × (157 broker-dealers) = 1,884 aggregate ongoing burden hours; and $4,476 per broker-dealer × 157 broker-dealers = $702,732.
2. Identifying and Marking Segmented
Orders a. Policies and Procedures To Identify Segmented Orders As discussed above, the 157 brokerdealers that would need to identify and mark orders to comply with paragraphs (e)(1) and (e)(2) of Proposed Rule 615 likely already would have policies and procedures to classify orders for compliance with SRO rules and other regulatory requirements, and would have access to the information that would enable them to identify orders as being for the account of a natural person or a group of related family members and to monitor the level of trading activity in the accounts of their customers, as well as systems and processes for marking orders.298 For example, these broker-dealers either themselves collect data from their customers, or receive such information through an introducing broker for whom they are providing services. These broker-dealers will also be familiar with how to adapt their systems and processes to identify which customer accounts meet the proposed volume requirements that would cause their orders to meet the definition of segmented order in Proposed Rule 600(b)(89) and to accommodate the new order marks. While most broker-dealers likely have capabilities to identify the characteristics of their customers’ orders that would be necessary to identify orders as segmented orders, they would not have written policies and procedures regarding the identification of segmented orders, which would be a new classification for a subset of customer orders, as would be required by Proposed Rule 615(e)(1). The Commission estimates that, to initially comply with this obligation, brokerdealers would employ a combination of in-house and outside legal and compliance counsel to update existing policies and procedures. Initial Burdens and Costs The Commission estimates that each of the 157 broker-dealers that would be subject to the collection of information under Proposed Rule 615(e)(1) would incur an initial average internal burden of 40 hours for in-house legal and 10 hours for in-house compliance counsel to update existing policies and procedures to comply with paragraph (e)(1) of Proposed Rule 615, and an initial in-house burden of 5 hours each for a General Counsel and a Chief Compliance Officer to review and approve the updated policies and procedures, for a total of 60 burden hours, at a monetized cost of $28,800.299 In addition, the Commission estimates a cost of $4,960 for outside counsel to review the updated policies and procedures on behalf of a brokerdealer.300 The Commission therefore estimates the aggregate initial burden for originating brokers to be 9,420 burden hours 301 at a monetized cost of $4.52 million,302 and the aggregate initial cost for outside counsel to be $778,720 to establish policies and procedures as required by Proposed Rule 615(e)(1).303 Ongoing Burdens and Costs The Commission estimates that broker-dealers would review and update their policies and procedures for compliance with Proposed Rule 615 on an annual
basis, and that they would perform the review and update using inhouse personnel. The Commission estimates that each broker-dealer would annually incur an internal burden of twelve hours to review and update existing policies and procedures of 4 hours for legal personnel, 4 hours for compliance personnel, and 4 hours for business-line personnel at a monetized cost of $4,476.304 The Commission therefore estimates an ongoing, aggregate burden for broker-dealers of 1,884 hours, at a monetized cost of $702,732.305 A summary of the initial and ongoing burdens and costs described above is set forth below:
TOTAL ESTIMATED OUTSIDE COSTS TO ESTABLISH POLICIES AND PROCEDURES TO IDENTIFY SEGMENTED ORDERS Respondents Outside cost per respondent Aggregate outside cost Total Initial Outside Costs ........................................................................................................... 157 $4,960 $778,720 TOTAL ESTIMATED BURDEN TO ESTABLISH AND MAINTAIN POLICIES AND PROCEDURES TO IDENTIFY SEGMENTED ORDERS Respondents Burden hours per respondent Aggregate burden hours Monetized cost per respondent Aggregate monetized cost Total Initial Burden ............................................................... 157 60 9,420 $28,800 $4,521,600 Total Ongoing Burden .......................................................... 157 12 1,884 4,476 702,732

306As discussed above, these broker-dealers would also mark orders, as applicable, to communicate that an originating broker certifies that it established, maintained, and enforced the requisite policies and procedures to assure that its identity would not be disclosed. 307Supra sections IV.B.1 and IV.E. 308The Commission estimates the monetized initial burden for this requirement to be: (Sr. Programmer at $368 for 160 hours) + (Sr. Database Administrator at $379 for 40 hours) + (Sr. Business Analyst at $305 for 40 hours) + (Attorney at $462 for 20 hours) = 260 initial burden hours and a monetized cost of $95,480. 309The Commission estimates the monetized initial burden for this requirement to be: (Sr. Business Analyst for 15 hours at $305 per hour) + (Compliance Manager for 20 hours at $344 per hour) + (Attorney for 15 hours at $462 per hour) = 50 initial burden hours at a monetized cost of $18,385. 310The Commission’s estimate is based on prior estimates for the cost of systems modifications to capture additional order handling information. Securities Exchange Act Release No. 84528 (Nov. 2,
2018) 83 FR 58338 (Nov. 19, 2018) at 58383, n.492
and accompanying text.
311This cost estimate is based on the following calculation: (260 initial burden hours at a monetized cost of $95,480) × (52 broker-dealers) = 13,520 initial burden hours and a monetized cost of $4,964,960. 312This cost estimate is based on the following calculation: ($35,000 in third-party service provider costs per broker-dealer) × (105 broker-dealers) = $3,675,000 in aggregate outside third-party provider costs. 313The Commission estimates the aggregate monetized initial burden for this requirement to be:
(50 initial burden hours at a monetized cost of $18,385) × (105 broker-dealers) = 5,250 initial burden hours and a monetized cost of $1,930,425. 314This estimate is based on industry sources of the cost to program systems to add a new marking classification and adjusted for inflation. See, e.g., Securities Exchange Act Release No. 94313 (Feb. 25, 2022), 87 FR 14950, 14976 (Mar. 16, 2022) (proposing amendments to Regulation SHO) (‘‘Regulation SHO Amendment Proposal’’). 315This cost estimate is based on the following calculation: ($170,000 system project costs per broker-dealer) × (157 originating broker-dealers + 25 routing broker-dealers) = $30,940,000 in aggregate system project costs. 316This estimate is based on CAT data for individual investor stock orders handled by wholesalers during Q1 2022. See Tables 7 and 10, infra, sections VII.B.4 and VII.B.5 (showing a total of approximately 271,310,000 orders handled during the period). Because as discussed in section VII.B.4 below, this number excludes certain orders, it likely significantly understates the total number of individual investor orders handled by wholesalers. We have therefore doubled the number for purposes of our estimate, and multiplied by four to arrive at an estimated annual number of segmented orders of 2,170,480,000. 317This figure was calculated as follows:
2,170,480,000 ‘‘segmented orders’’ orders requiring order marking divided by 182 broker-dealers. The Commission requests comment on whether there would be different or additional burdens or costs for originating brokers to establish and maintain written policies and procedures to identify segmented orders. b. Identifying and Marking Segmented Orders As discussed above, the Commission estimates that there are 157 brokerdealers that would need to mark segmented orders as such to comply with paragraph (e)(2) of Proposed Rule 615, and an additional 25 broker-dealers that would not be required to comply with the marking requirements of paragraph (e)(2) of Proposed Rule 615, but would be required to mark orders prior to routing as required by paragraph (f)(1) of Proposed Rule 615.306 Initial Burdens and Costs For purposes of complying with Proposed Rule 615(e)(2), for an originating broker to identify whether a customer order meets the definition of ‘‘segmented order’’ and must be marked accordingly, a broker-dealer would first need to establish mechanisms to proactively and systematically identify which orders for NMS stocks are for the account of customers that are natural persons or held in a legal form on behalf of a natural person or group of related family members; and of those, which are orders for an account in which the average daily number of trades in NMS stocks was less than 40 in each of the six preceding months.307 For purposes of this analysis, and as discussed above, the Commission believes that most broker-dealers already collect information about their customers’ accounts, or receive information about customer accounts from an introducing broker, and would already have an existing technological infrastructure in place, and the Commission assumes that such infrastructure would need to be modified to effect compliance with Proposed Rule 615. Acknowledging that costs and burdens may vary greatly according to the size or complexity of the brokerdealer and that some broker-dealers would implement the changes in-house, while others would engage a third party vendor. The Commission estimates that approximately one third of the 157 broker-dealers (or 52) would implement the changes in-house, while the remaining 105 would engage a thirdparty vendor. The Commission expects that the modification of a brokerdealer’s existing technology performed in-house would require 260 hours at a monetized cost of $95,480.308 The Commission estimates that the burden for a broker-dealer engaging a thirdparty to implement the modifications would be 50 hours at a monetized cost of $18,385,309 and $35,000 for the thirdparty service provider to perform the necessary work.310 The aggregate burden for those broker-dealers to modify existing technology to identify segmented orders that perform the modification in-house would therefore be 13,520 burden hours, at a monetized cost of $4,964,960; 311 and the aggregate costs and burdens for those brokerdealers
employing a third-party service provider would be $3,675,000 312 and 5,250 burden hours, at a monetized cost of $1,930,425.313 For purposes of compliance with Proposed Rule 615(f)(1), a segmented order received by a routing brokerdealer would already have been identified as such by the originating broker pursuant to Proposed Rule 615(e)(2). Like originating brokerdealers, these 25 broker-dealers, would however, need to modify their systems to enable them to mark orders as segmented orders prior to routing such orders to a routing destination. The Commission estimates that the 157 originating brokers and the additional 25 routing broker-dealers would each incur ongoing burdens to mark orders as ‘‘segmented orders’’ (and as applicable to communicate an originating broker’s certification), which are discussed further below, as well as initial, one-time technology project costs to update their existing order marking systems. The Commission estimates the initial one-time technology project costs for originating brokers to add the ‘‘segmented order’’ and certification marks to their existing marking systems to comply with paragraph (e)(2) of Proposed Rule 615, and the initial one-time technology project costs for routing broker-dealers to add the ‘‘segmented order’’ and certification marks to their existing marking systems to comply with paragraph (f)(1) of Proposed Rule 615, to be $170,000 per broker-dealer,314 for a an aggregate total cost of $30.94 million.315 Ongoing Burdens and Costs The Commission estimates that a total of approximately 2.2 billion ‘‘segmented orders’’ would be entered annually.316 This would make the average number of annual ‘‘segmented order’’ order marks by each of the 182 broker-dealers to be
11.9 million.317 Each instance of
marking an order as a ‘‘segmented order,’’ and as applicable to communicate that an originating broker has certified that it has established, maintained, and enforced the requisite policies and procedures to assure that its identity will not be disclosed, is estimated to take between approximately 0.00001158 and 0.000139 hours (0.042 and 0.5 seconds) to

318The upper end of this estimate—0.5 seconds— is based on the same time estimate for marking sell orders ‘‘long’’ or ‘‘short’’ under Rule 200(g) of Regulation SHO. See Regulation SHO Amendment Proposal, supra note 314, 87 FR at 14975 (citing Securities Exchange Act Release No. 50103 (July 28, 2004), 69 FR 48008, 48023 (Aug. 6, 2004) (‘‘Regulation SHO Adopting Release’’). See also Securities Exchange Act Release No. 48709 (Oct. 28,
2003) 68 FR 62972, 63000 n. 232 (Nov. 6, 2003) and
Securities Exchange Act Release No. 59748 (Apr. 10, 2009), 74 FR 18042, 18089 (Apr. 20, 2009) (providing the same estimate—0.5 seconds—for marking sell orders ‘‘short exempt’’ under Rule 200(g) of Regulation SHO)). The lower end of this estimate—0.042 seconds—is based on a Commission estimate that computing speeds are twelve times faster today than they were in 2007. Regulation SHO Amendment Proposal, supra note 314, 87 FR at 14975, 15000 (stating that according to an industry performance evaluation for server processors, computing speed has increased by at least 12 times since 2007 (the earliest year in the data and citing Year on Year Performance (for server processors), PassMark Software Pty. Ltd., available at https://www.cpubenchmark.net/yearon-year.html). 319These figures were calculated as follows:
(11,925,714 ‘‘segmented orders’’ orders per brokerdealer) × (0.00001158 hours) = 138.10 hours; and (11,925,714 ‘‘segmented orders’’ orders per brokerdealer) × (0.000139 hours) = 1,657.67 hours. 320These figures were calculated as follows:
(2,170,480,000 ‘‘segmented orders’’ orders requiring order marking) × (0.00001158 hours) = 25,134.16 hours; and (2,170,480,000 ‘‘segmented orders’’ orders) × (0.000139 hours) = 301,696.70 hours. 321See, e.g., Regulation SHO Amendment Proposal, supra note 314, 87 FR at 14975 (discussing estimated marking requirements to comply with Rule 200(g) of Regulation SHO which requires broker-dealers to mark sell orders ‘‘long,’’ ‘‘short,’’ or ‘‘short exempt’’). complete.318 Thus, it would take each of the 182 broker-dealers between approximately 138 to 1,658 hours to mark segmented orders annually; 319 and the Commission estimates the aggregate burden to be between approximately 25,134 and 301,697 hours.320 This estimate is based on a number of factors, including: previously estimated burdens for the current marking requirements of other Federal securities rules and regulations; 321 that broker-dealers should already have the necessary mechanisms and procedures in place and already be familiar with processes and procedures to comply with other marking requirements under Federal securities rules and regulations (such as the requirements of Rule 200(g) of Regulation SHO); and that brokerdealers should be able to continue to use the same or similar mechanisms, processes and procedures to comply with Proposed Rule 615. A summary of the estimated initial and ongoing burdens and costs described above is set forth below:
TOTAL ESTIMATED INITIAL BURDENS AND COSTS TO IDENTIFY SEGMENTED ORDERS Respondents Burden hours Monetized cost per respondent Third-party cost Aggregate burden hours Aggregate cost Initial Burden to Modify In-house ............................... 52 260 $95,480 .................... 13,520 $4,964,960 Initial In-house Burden in connection with use of Third-party .............................................................. 105 50 18,385 .................... 5,250 1,930,425 Outside Costs for Third-party Services ..................... 105 .............. .................... $35,000 ........................ 3,675,000 TOTAL ESTIMATED INITIAL SYSTEM MODIFICATION COSTS TO MARK SEGMENTED ORDERS Respondents Cost per respondent Aggregate cost Initial Technology Costs .............................................................................................................. 182 $170,000 $30,940,000 TOTAL ESTIMATED ONGOING BURDEN TO MARK SEGMENTED ORDERS Originating brokers with individual accounts and routing brokers Annual segmented orders Annual segmented orders per originating broker Estimated burden hours per segmented order Total annual industry burden hours Annual burden per originating broker 182 ....................... 2,170,480,000 11,925,714 0.00001158 to 0.000139 ........... 25,134 to 301,697 ..................... 138.10 to 1,657.68. The Commission requests comment on whether there would be different or additional burdens or costs for brokers to identify and mark segmented orders as such. Would the burdens and be lower or higher? Are broker-dealers more likely to perform these function in-house, or use third-party service providers? Should the estimated cost to employ a third-party service provider be lower or higher?
3. Originating Broker Certification
Those originating brokers that do not want their identity to be disclosed in the auction message initiating a qualified auction would be required to establish, maintain and enforce written policies and procedures reasonably designed to assure that the identity of the originating broker will not be disclosed, directly or indirectly, to any person that potentially could participate in the qualified auction or otherwise trade with the segmented order. The Commission believes that originating brokers choosing to make certifications referred to in Proposed Rule 615(c)(1)(iii) would be familiar with how to adapt their systems and processes to assure that the identity of the originating broker is not disclosed, in compliance with the requirements of Proposed Rule 615(e)(3). The Commission acknowledges that policies and procedures may vary greatly by broker-dealer, given the differences in size and the complexity of broker-dealer business models. Accordingly, the Commission believes that the need to update policies and procedures, as well as the ongoing compliance costs, might also vary greatly. Initial Burdens and Costs The Commission estimates that there would be 20 broker-dealers that would chose to make a Proposed Rule 615(c)(1)(iii) certification. To initially comply with the obligation to establish written policies and procedures to comply with Proposed Rule 615(e)(3), broker-dealers would employ a combination of in-house and outside

322The Commission estimates the monetized ongoing, annual burden for this requirement to be:
(Attorney at $462 for 40 hours) + (Compliance Counsel at $406 for 10 hours) + (Deputy General Counsel at $663 for 5 hours) + (Chief Compliance Officer at $589 for 5 hours) = 60 initial burden hours and $28,800. 323This cost estimate is based on the following calculation: (10 hours of review) × ($496 per hour for outside counsel service) = $4,960 in outside counsel costs. 324This estimate is based on the following calculation: (60 burden hours of review per brokerdealer) × (20 broker-dealers) = 1,200 aggregate burden hours. 325This estimate is based on the following calculation: ($28,800 per broker-dealer) × (20 broker-dealers) = $576,000. 326This estimate is based on the following calculation: ($4,960 for outside costs per brokerdealer) × (20 broker-dealers) = $99,200 in outside counsel costs. 327The Commission estimates the monetized ongoing, annual burden for this requirement to be:
(Attorney at $462 for 4 hours) + (Compliance Counsel at $406 for 4 hours) + (Compliance Counsel at $406 for 4 hours) + (Intermediate Business Analyst at $251 for 4 hours) = 12 ongoing burden hours and $4,476. 328This estimate is based on the following calculation: (12 burden hours of review per brokerdealer) × (20 broker-dealers) = 240 aggregate burden hours. 329The Commission estimates the monetized ongoing, annual burden for this requirement to be:
($4,476 per broker-dealer) × 20 broker-dealers = $89,520. 330This belief is based on a review of NMS Stock ATS disclosures on Form ATS–N. 331See supra note 214 and accompanying text. As discussed above, currently only one NMS Stock ATS discloses that it meets the fair access threshold. Supra section IV.B.2.b. legal and compliance counsel to update their existing policies and procedures. The Commission estimates that each of these 20 broker-dealers would incur a one-time average internal burden of 40 hours for in-house legal and 10 hours for in-house compliance counsel to update existing policies and procedures to comply with paragraph (e)(3) of Proposed Rule 615, and a one-time burden of 5 hours each for a General Counsel and a Chief Compliance Office to review and approve the updated policies and procedures, for a total of 60 burden hours.322 In addition, the Commission estimates a cost of $4,960 for outside counsel to review the updated policies and procedures on behalf of a broker-dealer.323 The Commission therefore estimates the aggregate initial burden for originating brokers to be 1,200 burden hours 324 at a monetized cost of $576,000,325 and the aggregate total cost for outside counsel to be $99,200 to establish policies and procedures as required by Proposed Rule 615(e)(3).326 Ongoing Burdens and Costs The Commission estimates that broker-dealers would review and update their policies and procedures for compliance with Proposed Rule 615 on an annual basis, and that they would perform the review and update using inhouse personnel. The Commission estimates that each broker-dealer would annually incur an internal burden of twelve hours to review and update existing policies and procedures: four hours for legal personnel, four hours for compliance personnel, and four hours for in-line business personnel, at a monetized cost of $4,476.327 The Commission therefore estimates an ongoing, aggregate burden for brokerdealers of approximately 240 hours 328 and a monetized cost of $89,520.329 The ongoing burden to communicate certifications is included with the cost for ‘‘segmented order’’ marking discussed above in section VI.D.2.b. A summary of the estimated initial and ongoing burdens and costs described above in this section VI.D.3 are set forth below:
TOTAL ESTIMATED OUTSIDE COSTS TO ESTABLISH POLICIES AND PROCEDURES REASONABLY DESIGNED TO ASSURE THAT THE ORIGINATING BROKER OF A SEGMENTED ORDER WILL NOT BE DISCLOSED Respondents Outside cost per respondent Outside aggregate cost Initial Outside Costs ......................................................................................................... 20 $4,960 $99,200 TOTAL ESTIMATED BURDEN TO ESTABLISH AND MAINTAIN POLICIES AND PROCEDURES REASONABLY DESIGNED TO ASSURE THAT THE ORIGINATING BROKER OF A SEGMENTED ORDER WILL NOT BE DISCLOSED Respondents Burden hours per respondent Aggregate burden hours Monetized cost per respondent Aggregate monetized cost Initial Burden ........................................................................ 20 60 1,200 $28,800 $576,000 Ongoing Burden ................................................................... 20 12 160 4,476 89,520 The Commission requests comment on whether there would be different or additional burdens or costs for originating brokers to establish and maintain written policies and procedures reasonably designed to assure that its identity will not be disclosed. For example, do brokers have existing policies and procedures related to ensuring confidentiality in other contexts that could be expanded upon or are there are additional burdens and costs associated with review of a broker’s internal systems that should be factored into the Commission’s estimate? Are originating broker’s likely to perform the function of establishing and maintaining these policies and procedures in-house or would they employ third-party service providers, such as outside counsel? Would originating brokers also have costs to modify their internal systems to prevent disclosure of the identity of the originating broker in support of a Proposed Rule 615(c)(1)(iii) certification or other costs in support of such a certification?
4. NMS Stock ATS Policies and
Procedures for Excluding Subscribers The Commission believes that NMS Stock ATSs—in particular those whose broker-dealer operators are large, multiservice broker-dealers—generally have,330 and likely maintain in writing, standards of financial responsibility and operational capability for subscribers to their system, and also generally have policies and procedures for admitting new persons as subscribers or limiting access to services. NMS Stock ATSs are not, however, currently required to have written policies and procedures for granting access to their trading system, unless they meet the fair access threshold of Rule 301(b)(5).331 NMS Stock ATSs are, however, required to disclose on Form ATS–N whether there are any conditions the ATSs requires a person to satisfy to become a subscriber and whether there are any limitations

332See supra note 214.
333The Commission based its estimate on the burden hour estimate provided in connection with the adoption of amendments to Rule 301(b)(10), which as amended requires all ATSs to maintain in writing their safeguards and procedures to protect subscribers’ confidential trading information, as well as the oversight procedures to ensure such safeguards and procedures are followed. See ATS– N Adopting Release, supra note 278, 83 FR at 38868. 334This estimate is based on the following:
(Compliance Attorney at $406 for 7 hours) + (Sr. Compliance Examiner at $264 for 1 hour) = 8 burden hours and a monetized cost of $3,106. 335These estimates are based on the following calculations: (8 burden hours per NMS Stock ATS) × (3 NMS Stock ATSs) = 24 burden hours; and ($3,106 per NMS Stock ATS) × (3 NMS Stock ATSs) = $9,318. 336The Commission estimates the monetized ongoing burden for this requirement to be:
(Compliance Attorney at $406 for 4 hours) + (Sr. Compliance Examiner at $264 for 4 hours) = 8 initial burden hours and a monetized cost of $2,680). 337These estimates are based on the following calculations: (8 burden hours per NMS Stock ATS) × (3 NMS Stock ATSs) = 24 burden hours; and at ($2,680 per NMS Stock ATS) × 3 NMS Stock ATSs = $8,040. on access to services.332 The Commission therefore estimates that the burdens and cost for an NMS Stock ATS to comply with Proposed Rule 600(b)(64)(ii)(D) to qualify as an open competition trading center eligible to operate a qualified auction pursuant to Proposed Rule 615(d)(1) to be minimal. The Commission acknowledges that policies and procedures may vary greatly by NMS Stock ATS, given the differences in size and the complexity of business models. Accordingly, the Commission would expect that the need to update policies and procedures, as well as the ongoing compliance costs, might also vary. As discussed above, the Commission estimates that three NMS Stock ATSs may determine to modify their systems to operate as open competition trading centers and operate qualified auctions. To comply with this obligation, these NMS Stock ATSs would likely employ in-house legal and compliance counsel.333 Initial Burdens and Costs For NMS Stock ATSs that have not recorded in writing their policies and procedures to prohibit any registered broker or dealer from being or becoming a subscriber, or impose conditions upon such a subscriber, that does not meet the standards of financial responsibility or operational capability as are prescribed by such written policies and procedures, the Commission estimates the initial burden and cost for an NMS Stock ATS that choses to comply with Proposed Rule 600(b)(64)(ii)(D) to be minimal. The Commission estimates that the initial burden for an NMS Stock ATS to review its existing policies and procedures for consistency with the proposed rule, to make modifications as appropriate, and to put the policies and procedures in writing would be approximately 8 hours, at a monetized cost of $3,106.334 Thus, the Commission estimates the aggregate initial burden to be 24 hours, at a monetized cost of $9,318.335 Ongoing Burdens and Costs For purposes of this analysis, the Commission has assumed that NMS Stock ATSs would review and update their policies and procedures for compliance with Proposed Rule 600(b)(64)(ii) on an annual basis, and that they would perform the review and update using in-house personnel. The Commission estimates that each NMS Stock ATS would annually incur an internal burden of 8 hours to review and update existing policies and procedures, made up of four hours for legal personnel and four hours for compliance personnel, at a monetized cost of $2,680.336 The Commission therefore estimates an ongoing, aggregate burden for NMS Stock ATSs of approximately 24 hours at a monetized cost of $8,040.337 A summary of the estimated initial and ongoing burdens and costs described
above is set forth below:
TOTAL ESTIMATED BURDEN TO ESTABLISH AND MAINTAIN POLICIES AND PROCEDURES TO EXCLUDE SUBSCRIBERS BASED ON FINANCIAL RESPONSIBILITY OR OPERATIONAL CAPABILITY STANDARDS Respondents Burden hours per respondent Aggregate burden hours Monetized cost per respondent Aggregate monetized cost Initial Burden ........................................................................ 3 8 24 $3,106 $9,318 Ongoing Burden ................................................................... 3 8 24 2,680 8,040 The Commission is requesting comment on whether NMS Stock ATSs that would operate as open competition trading centers operating qualified auctions would have different or additional burdens and costs to maintain written policies and procedures to exclude a broker-dealer subscriber, or impose conditions on such a subscriber, that does not meet standards of financial responsibility and operational capability. E. Collection of Information Is Mandatory The collections of information required by Proposed Rule 615(c)(1) would be mandatory for national securities exchanges and NMS Stock ATSs that operate qualified auctions, and the one national securities association. The collections of information required by Proposed Rule 615(e)(1) and (2) would be mandatory for broker-dealers that meet the proposed definition of ‘‘originating broker.’’ The collection of information required by Proposed Rule 615(e)(3) would be mandatory for originating brokers that communicate a certification to an open competition trading center pursuant to Proposed Rule 615(c)(1). The collection of information required by Proposed Rule 615(f)(1) would be mandatory for broker-dealers that receive and route segmented orders. The collection of information required by Proposed Rule 615(d)(1), in conjunction with Proposed Rule 600(b)(64)(ii)(D), would be mandatory for NMS Stock ATSs that operate as open competition trading centers and prohibit any broker or dealer from becoming a subscriber, or impose conditions upon such a subscriber, based on standards of financial responsibility or operational capability. F. Confidentiality of Information Collected The Commission would not typically receive confidential information as a result of Proposed Rule 615 or the related proposed amendments. To the

338See, e.g., 5 U.S.C. 552 et seq.; 15 U.S.C. 78x (governing the public availability of information obtained by the Commission). 339Supra note 278. extent that the Commission receives— through its examination and oversight program, through an investigation, or by some other means records or disclosures from a broker-dealer that relate to or arise from Proposed Rule 615 or the related amendments that are not publicly available, such information would be kept confidential, subject to the provisions of applicable law.338

Auction Messages
As discussed above, auction messages initiating a qualified auction would be publicly disseminated in consolidated market data. These messages would include the identity of the open competition trading center, symbol, side, size, limit price, and identify of the originating broker, unless the originating broker made the certification specified in paragraph (c)(1)(iii) of Proposed Rule 615.
Identifying and Marking Segmented
Orders
The identification of an order as a segmented order would be made available to any destination to which the order has been routed. The information would also be available to the Commission and its staff, and to other regulators.
Originating Broker Certification
If an originating broker determines to make a certification referred to in paragraph (c)(1)(iii) of Proposed Rule 615, such certification must be communicated to the open competition trading center operating the applicable qualified auction, and any interim broker-dealer routing a segmented order associated with a certification would also need to be made aware of the certification for purposes of communicating the certification to the open competition trading center. The information would also be available to the Commission and its staff, and to other regulators. Also, the originating broker’s written policies and procedures pursuant to Proposed Rule 615(e)(3) would be available to the Commission and its staff, and to other regulators.
NMS Stock ATS Policies and
Procedures To Exclude Subscribers An NMS Stock ATSs’ written policies and procedures to comply with Proposed Rule 600(b)(64)(ii)(D), if necessary, to qualify as an open competition trading center eligible to operate a qualified auction pursuant to Proposed Rule 615(d)(1) would be available to the Commission and its staff, and to other regulators. As described above, NMS Stock ATSs are also required to publicly disclose certain information on Form ATS–N.339 G. Retention Period for Recordkeeping Requirements Proposed Rule 615 and the related amendments, would not establish any new record retention requirements. National securities exchanges and national securities associations are required to retain records and information pursuant to 17 CFR 240.17a–1 (‘‘Rule 17a–1’’), and brokerdealers are required to retain records and information pursuant to 17 CFR 240.17a–4 (‘‘Rule 17a–4’’). H. Request for Comments The Commission requests comment on whether the estimates for burden hours and costs are reasonable. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments to: (1) evaluate whether the proposed collections of information are necessary for the proper performance of the functions of the Commission, including whether the information would have practical utility; (2) evaluate the accuracy of the Commission’s estimate of the burden of the proposed collections of information; (3) determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected; and (4) determine whether there are ways to minimize the burden of the collections of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology. Persons submitting comments on the collection of information requirements should direct them to the Office of Management and Budget, Attention:
Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Washington, DC 20503, and should also send a copy of their comments to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090, with reference to File Number S7–31–22. Requests for materials submitted to OMB by the Commission with regard to this collection of information should be in writing, with reference to File Number S7–31–22 and be submitted to the Securities and Exchange Commission, Office of FOIA/PA Services, 100 F Street NE, Washington, DC 20549–2736. As OMB is required to make a decision concerning the collection of information between 30 and 60 days after publication, a comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication.

340See 15 U.S.C. 78c(f).
341See 15 U.S.C. 78w(a)(2).
342See, e.g., SIFMA Insights, Gauging the New Normal for Volatility, Volumes, Market Levels & Retail Investor Participation (May 2021), available at https://www.sifma.org/wp-content/uploads/2021/ 05/SIFMA-Insights-Market-Structure-Survey-FINALFOR-WEB.pdf; see also Jennifer J. Schulp, GameStop and the Rise of Retail Trading, 41 Cato J. 511 (2021). For example, one study estimates that retail market share has increased from around 23% (as a percentage of share volume) in Jan. 2020 to around 34% by July 2021; see Rosenblatt Securities, How Can the Buy Side Interact with Retail Flow? (Feb. 14, 2022), available at https://www.rblt.com/ market-reports/how-can-the-buy-side-interact-withretail-flow. 343See analysis in infra Table 3. In the current market structure, retail brokers provide wholesalers with large blocks of orders, leaving it to the discretion of wholesalers how to execute each order, consistent with their best execution responsibilities. Broker-dealers are required to provide best execution for customer orders, both pursuant to common law and FINRA rules. See discussion of broker-dealer best execution responsibilities in supra section III.B.2. The obligation for wholesalers to provide best execution is required under FINRA Rule 5310 (Best Execution and Interpositioning). See also supra note 133. The Commission is also separately proposing a new rule addressing the best execution obligations of brokerdealers. See Regulation Best Execution Proposal, supra note 130. The Commission encourages commenters to review that proposal to determine whether it might affect their comments on this proposal. 344See infra section VII.B.4 for analysis and discussion of the potential adverse execution quality effects from the isolation of individual investor marketable orders. 345See analysis in Table 19 and corresponding discussion in infra section VII.C.1.b. This estimate accounts only for potential changes in individual order transaction costs and assumes the PFOF wholesalers currently pay to retail brokers would be converted into additional price improvement for the individual investor order, and does not include costs that may arise in the form of potential increases in (or the return of) commissions retail brokers charge to individual investors or other reductions in the services that retail brokers currently offer. See infra note 514 for further discussion. 346See infra note 533. 347See infra note 535. 348See analysis in Table 19 and corresponding discussion in infra section VII.C.1.b. 349As discussed above, Proposed Rule 615 covers only NMS stocks, and as such, the economic analysis includes quantitative and qualitative analysis of only NMS stocks. 350Commission analysis of CAT data in infra
Table 20 found that, on average, 51% of the shares
of individual investor marketable orders internalized by wholesalers are executed at prices less favorable than the NBBO midpoint. Out of these individual investors shares that were executed at prices less favorable than the midpoint, on average, 75% of these shares could have hypothetically executed at a better price against the non-displayed liquidity resting at the NBBO midpoint on exchanges and NMS Stock ATSs. See infra section VII.C.1.b for further discussion on the analysis in Table 20. 351See discussion in supra section III.A.
VII. Economic Analysis
A. Introduction
The Commission is mindful of the economic effects that may result from Proposed Rule 615, and the amendments proposed in this release (the ‘‘Proposal’’), including the benefits, costs, and the effects on efficiency, competition, and capital formation. Exchange Act section 3(f) requires the Commission, when it is engaged in rulemaking pursuant to the Exchange Act and is required to consider or determine whether an action is necessary or appropriate in the public interest, to consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.340 In addition, Exchange Act section 23(a)(2) requires the Commission, when making rules pursuant to the Exchange Act, to consider among other matters the impact that any such rule would have on competition and not to adopt any rule that would impose a burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act.341 The following economic analysis identifies and considers the costs and benefits— including the effects on efficiency, competition, and capital formation— that may result from the Proposal. Investors participate in capital markets to save for the future, to diversify, and to maximize returns given a desired level of risk, among other reasons. This participation can involve both trades based on information and trades based on liquidity needs. Many individuals participate indirectly in equity markets, such as through mutual funds or through pension funds. However, many individuals participate directly in equity markets, and this direct participation has grown in recent years.342 While some of this direct participation may be transitory, forces operating over the long run, such as technological improvements, may lead the trend to continue. This increase in participation, coming on top of various other trends discussed below, motivates concern over the current isolation of retail orders. At present, the vast majority of retail orders (over 90% of marketable NMS stock orders) are routed to wholesalers, where they are frequently executed in isolation, on a captive basis.343 This execution is subject to competitive forces that apply at the level of average execution quality. Execution of these orders is not subject to order-by-order competition that occurs when order interactions are subject to exchange protocols. The empirical analysis below suggests that this results in suboptimal execution quality compared to an alternative market structure in which the marketable orders of individual investors were subject to order-by-order competition.344 While wholesalers generally achieve price improvement relative to the NBBO, Commission analysis indicates that there is the potential for individual investors to receive additional price improvement in line with the low adverse selection risk of individual investor order flow. While acknowledging there is substantial uncertainty in the eventual outcome,
the Commission estimates that qualified auctions as designed by the Proposal would result in additional price improvement for the marketable orders of individual investors that could reduce the average transactions costs of these orders by 0.86 basis points (‘‘bps’’) to 1.31 bps.345 The Commission estimates that segmented orders that would be eligible to be included in qualified auctions could account for 7.3%346 to 10.1%347 of total executed dollar volume. Given this estimate, the Commission preliminarily estimates that the Proposal could potentially result in a total average annual savings in individual investor transaction costs ranging from $1.12 billion to $2.35 billion.348 These estimated gains would be generated primarily through increased competition to supply liquidity to marketable orders of individual investors, which in turn would lower transaction costs for individual investors, potentially enhance order execution quality for institutional investors, and improve price discovery. More generally, it would broaden the set of market participants that directly interact with individual investor orders of NMS stocks.349 For example, Commission analysis indicates that there is often liquidity available at the NBBO midpoint on exchanges or NMS Stock ATSs when a wholesaler executes the marketable orders of individual investors at prices less favorable (for the customer) than the NBBO midpoint.350 Qualified auctions would act as a coordination mechanism and make the submitters of these resting midpoint orders aware there was an individual investor order they could potentially trade with. By increasing competition and enhancing the direct exposure of individual investor orders to a broader spectrum of market participants, the Proposal would help achieve the objectives for an NMS set forth in
section 11A of the Exchange Act.351
The Proposal could have additional benefits with respect to trading costs, liquidity, and capital formation, though the Commission acknowledges that these are uncertain. The large

352See discussion of potential changes in retail broker commissions in infra section VII.C.2.b.ii. 353See supra note 186 and corresponding text discussing the definition of ‘‘segmented order.’’ 354 If NMS Stock ATSs opted to operate qualified auctions, they may also incur costs to update their business models and systems in order to meet the requirements to be an open competition trading center. See infra section VII.C.2.e. 355See discussion on the effects of the Proposal on exchange LOB liquidity in infra section VII.C.2.g. 356The regulatory baseline includes the changes to the current arrangements for consolidated market data in the MDI Rules; but those amendments have not been implemented, so they likely have not affected market practice. See supra section III.B.1 and infra section VII.B.7. Where implementation of the changes may affect certain numbers in the baseline, the description of the baseline below notes those effects. percentage of individual investor orders executed off-exchange confers a substantial competitive advantage on wholesalers and other market makers with a significant presence both on and off-exchange, as they observe order flow more quickly and in a more granular fashion than others. This advantage contributes to asymmetric information and increased adverse selection on exchanges. Such adverse selection may reduce market quality for all participants and may ultimately reduce efficiency and lower capital formation. The Commission acknowledges considerable uncertainty in the costs that would arise from Proposed Rule 615, due to whether the current market practice of routing through wholesalers would persist. First, the Proposal would likely cause wholesalers and some retail brokers to incur significant adjustment costs to their operations, as well as a possible decline in profitability. The Proposal could also result in costs to individual investors, such as some retail brokers potentially resuming charging commissions for NMS stock trades, although the likelihood of this may be low.352 There may also be an increase in trading costs for retail broker customers that carry greater adverse selection risks and individual investors whose orders would not meet the definition of a segmented order because they averaged 40 or more daily trades in NMS stocks over the six preceding calendar months.353 Retail brokers could also experience costs from wholesalers reducing the amount of PFOF they pay to retail brokers or from reducing or charging for the order handling services they offer to retail brokers, which could ultimately be passed on to individual investors. Open competition trading centers would also face costs associated with creating qualified auctions, as would broker-dealers and trading centers that would incur costs related to establishing policies and procedures for identifying and handling segmented orders and identifying the originating retail brokers that submit segmented orders.354 There would also be compliance costs
faced by the respective NMS plans and FINRA to update the consolidated market data feed and ADF to broadcast qualified auction messages. There may also be a decrease in displayed liquidity if qualified auctions attract liquidity away from exchange Limit Order Books (‘‘LOBs’’). However, because the majority of individual investor orders are already segmented from exchange LOBs, there is the potential that the effect of qualified auctions on LOB liquidity may not be significant.355 The Commission recognizes that there would likely be significant competitive effects associated with the introduction of qualified auctions as mandated by Proposed Rule 615. Qualified auctions could reduce wholesaler market share for the execution of the orders of individual investors, which could result in the transfer of revenue and profit from wholesalers to other market participants that end up supplying more liquidity to the marketable orders of individual investors. Proposed Rule 615 could also affect competition in the market for trading services by enhancing the competitive position of exchanges and ATSs that operate qualified auctions relative to wholesalers as well as exchanges and ATSs that do not meet the criteria to operate qualified auctions. The introduction of qualified auctions would likely lead to a reduction of PFOF in equity markets, which in turn may weaken the competitive position of retail brokers that are dependent on PFOF revenue but strengthen the competitive position of retail brokers that are not. In addition, Proposed Rule 615 could also increase competition for market access among routing brokerdealers if the competitive position of wholesalers declines, and retail brokers that had previously relied on wholesalers for routing services, choose to route their own orders to qualified auctions. The Commission has considered the economic effects of the Proposal and wherever possible, the Commission has quantified the likely economic effects of the Proposal. The Commission is providing both a qualitative assessment and quantified estimates of the potential economic effects of the Proposal where feasible. The Commission has incorporated data and other information to assist it in the analysis of the economic effects of the Proposal. However, as explained in more detail below, because the Commission does not have, and in certain cases does not believe it can reasonably obtain, data that may inform the Commission on certain economic effects, the Commission is unable to quantify certain economic effects. Further, even in cases where the Commission has some data, quantification is not practicable due to the number and type of assumptions necessary to quantify certain economic effects, which render any such quantification unreliable. The Commission’s inability to quantify certain costs, benefits, and effects does not imply that the Commission believes such costs, benefits, or effects are less significant. The Commission requests that commenters provide
relevant data and information to assist the Commission in quantifying the economic consequences of the Proposal. B. Baseline The baseline against which the costs, benefits, and the effects on efficiency, competition, and capital formation of the Proposal are measured consists of the existing routing practices and execution quality for the marketable orders of individual investors, the current state of interactions between institutional investors and the orders of individual investors, and the current business practices of retail brokers. These aspects of the baseline are framed by the statutory and regulatory baseline described above.356

357Commission analysis of broker-dealer Rule 606 report order routing data in infra Table 3 indicates that retail brokers route over 90% of their marketable orders to wholesalers. 358Wholesalers, similar to OTC market makers and exchange liquidity suppliers must establish connections with the numerous venues in which they wish to operate and provide liquidity. They also typically design smart order routers that can locate and provide liquidity in real time, as well as maintain fast data processing capabilities that enable them to respond to market conditions while abiding by the relevant trade execution regulations. Wholesalers also face the costs associated with price risk. As wholesalers trade against market participants, they takes positions at the opposite side, accumulating inventory. Holding inventory exposes wholesaler profits to inventory (price) risk, where the value of inventory, and hence, that of the wholesaler’s holdings may fluctuate as security prices vary. Scaling up the size of the business to ensure steady incoming flow from opposite sides of the markets is a common strategy pursued by wholesalers. This strategy enables them to execute buy and sell transactions, offsetting order flow from opposite sides, reducing the possibility of accumulating prolonged unwanted inventory. However, among other costs, scaling up requires more comprehensive, efficient connectivity networks and adds to the costs of establishing and maintaining such networks. 359See discussion in infra section VII.B.5.a. 360See analysis in infra Table 10. 361Wholesalers and other liquidity providers (including other market-makers) face adverse selection risk when they accumulate inventory, for example by providing liquidity to more informed traders, because of the risk of market prices moving away from wholesalers and other market makers before they are able to unwind their positions. Wholesalers and other market makers are usually not privy to the motives or information of the investors with whom they are trading. As such, should the liquidity provider trade with an investor possessing short-lived price information about the security price, it is exposing its inventory to adverse selection risk. Hence, liquidity providers, including wholesalers and other market-makers normally choose their trading strategies to minimize their interaction with order flow with increased adverse selection risk. Wholesalers do this by attracting marketable orders of individual investors, known to be the order flow with the lowest adverse selection risk. 362See infra note 405 and corresponding discussion. Adverse selection risk is based on various characteristics of the order, including the identity of the originating broker. 363See analysis in infra Table 10. 364See infra Table 6 and infra Table 7 and corresponding discussion in section VII.B.4 for a comparison of exchange and wholesaler execution quality. 365See supra notes 47–48 and accompanying text for a definition and discussion
of price impact as a measure of adverse selection risk. By measuring the difference between the NBBO midpoint at the time of execution and the NBBO midpoint some fixed period of time after the transaction (e.g., one minute), price impact measures the extent of adverse selection costs faced by a liquidity provider. For example, if a liquidity provider provides liquidity by buying shares from a trader who wants to sell, thereby accumulating a positive inventory position, and then wants to unwind this inventory position by selling shares in the market, it will incur a loss if the price has fallen in the meantime. In this case, the price impact measure will be positive, reflecting the liquidity provider’s exposure to adverse selection costs. 366See also results in Thomas Ernst & Chester Spatt, Payment for Order Flow and Asset Choice (last revised Mar. 13, 2022) (unpublished manuscript), available at https://ssrn.com/ abstract=4056512 (retrieved from SSRN Elsevier database) (hereinafter ‘‘Ernst and Spatt Working Paper’’). See supra note 46 and accompanying text for a definition and discussion of effective halfspreads. The effective half-spread is calculated by comparing the trade execution price to an estimate of the stock’s value (i.e., the midpoint of the prevailing NBBO at the time of order receipt) and thus captures how much more than the stock’s estimated value a trader has to pay for the immediate execution of their order. The effective spread will be smaller (or less positive) when the execution price is closer to the NBBO midpoint, reflecting price improvement received on that order. See, e.g., Bjorn Hagstro¨mer, Bias in the Effective Bid-Ask Spread, 142 J. Fin. Econ. 314 (2021). For the remainder of this analysis, we will use the term ‘‘effective spread’’ to refer to the ‘‘effective half-spread’’ as defined in supra section II.D.1. 367See supra notes 49–50 and accompanying text for a definition and discussion of realized halfspreads. See, e.g., Securities Exchange Act Release No. 43590 (Nov. 17, 2000), 65 FR 75423–75424 (Dec. 1, 2000) (Disclosure of Order Execution and Routing Practices) (‘‘The smaller the average realized spread, the more market prices have moved adversely to the market center’s liquidity providers after the order was executed, which shrinks the spread ‘realized’ by the liquidity providers. In other words, a low average realized spread indicates that the market center was providing liquidity even though prices were moving against it for reasons such as news or market volatility.’’); see also Larry Harris, Trading and Exchanges: Market Microstructure for Practitioners (2003) at 286. See infra note 420 discussing the limitations of realized spreads for estimating the profits earned by market makers. For the remainder of this analysis, we will use the term ‘‘realized spread’’ to refer to the ‘‘realized half-spread’’ as defined in supra section II.D.1. 368See infra sections VII.B.4 and VII.B.5. Retail brokers route most of
their customers’ marketable order flow to wholesalers.357 Wholesalers do not typically directly charge retail brokers for their order routing and execution services. In fact, they may pay some retail brokers for the opportunity to handle their order flow with PFOF. Typically, wholesalers’ vertical integration of routing and execution services for the orders of individual investors provides them flexibility with regard to their handling of order flow. They utilize sophisticated algorithmic trading technology to deliver their services.358 In particular, wholesalers determine which orders to internalize (i.e., execute in a principal capacity) and which to execute in a riskless principal or agency capacity.359 Commission analysis indicates that wholesalers internalize over 90% of the dollar volume from individual investor marketable orders that are routed to them and executed.360 The wholesaler business model relies in part on the ability to segment the order flow of individual investors, which typically have lower adverse selection risk than the orders of other types of market participants.361 Wholesalers are market makers that can identify orders with low adverse selection risk.362 Through segmentation, wholesalers typically internalize marketable orders with lower adverse selection risk and generally execute them at prices better than the current NBBO, i.e., because of segmentation, wholesalers are typically able to execute the marketable orders of individual investors at better prices than these orders would receive if they were routed to an exchange. An analysis of marketable NMS stock orders presented in Table 10 below indicates that the orders that wholesalers internalize present lower adverse selection risk and receive higher execution quality relative to marketable orders wholesalers receive and execute in a riskless principal or agency capacity.363 Furthermore, results from Table 13 below show that wholesalers internalize a lower share of orders from retail brokers with the highest adverse selection risk. Additional results 364 show that, relative to orders executed on exchanges, orders internalized by wholesalers are associated with lower price impacts (i.e., lower adverse selection risk),365 lower effective half-spreads (i.e., higher price improvement),366 and higher realized half-spreads (i.e., higher potential profitability).367 Though wholesaler internalization generates price improvement for individual investors relative to the NBBO, the Commission posits that the potential isolation of marketable order flow routed to wholesalers results in suboptimal price improvement for individual investor orders relative to what the Commission estimates would be achieved under the Proposal. Specifically, due to the isolation of this order flow by wholesalers from orderby-order competition, the amount of price improvement individual investors receive does not fully compensate for the lower adverse selection risk of their orders. Commission
analyses presented below provide results that support this point.368 The baseline section below is organized as follows. The baseline first discusses relevant features of trading services, including segmentation and interactions between institutional and retail order flows. Next, the baseline presents the Commission’s empirical findings on execution quality. The

369Most of these 16 registered securities exchanges are owned by three exchange groups. Currently, the CBOE exchange group owns: Cboe BYX Exchange, Inc. (‘‘Cboe BYX’’), Cboe BZX Exchange, Inc. (‘‘Cboe BZX’’), Cboe EDGA Exchange, Inc. (‘‘Cboe EDGA’’), and Cboe EDGX Exchange, Inc. (‘‘Cboe EDGX’’); the Nasdaq exchange group owns: Nasdaq BX, Inc. (‘‘Nasdaq BX’’), Nasdaq PHLX LLC (‘‘Nasdaq Phlx’’), and The Nasdaq Stock Market LLC (‘‘Nasdaq’’); and the NYSE exchange group owns: NYSE, NYSE American LLC (‘‘NYSE American’’), NYSE Arca, Inc. (‘‘NYSE Arca’’), NYSE Chicago, Inc. (‘‘NYSE CHX’’), and NYSE National, Inc. (‘‘NYSE National’’). Other registered securities exchanges that trade NMS stocks and do not belong to one of these exchange groups include: Investors Exchange LLC (‘‘IEX’’), Long-Term Stock Exchange, Inc. (‘‘LTSE’’), MEMX LLC (‘‘MEMX’’), and MIAX Pearl, LLC (‘‘MIAX PEARL’’).The Commission approved rules proposed by BOX Exchange LLC (‘‘BOX’’) for the listing and trading of certain equity securities that would be NMS stocks on a facility of BOX known as BSTX LLC (‘‘BSTX’’), but BSTX is not yet operational. See Securities Exchange Act Release Nos. 94092 (Jan. 27, 2022), 87 FR 5881 (Feb. 2,
2022) (SR–BOX–2021–06) (approving the trading of
equity securities on the exchange through a facility of the exchange known as BSTX); 94278 (Feb. 17, 2022), 87 FR 10401 (Feb. 24, 2022) (SR–BOX–2021–
14) (approving the establishment of BSTX as a
facility of BOX). BSTX cannot commence operations as a facility of BOX until, among other things, the BSTX Third Amended and Restated Limited Liability Company Agreement approved by the Commission as rules of BOX is adopted. Id. at 10407. 370See supra section II.B for further details on the types of trading centers that execute trades in NMS stocks. See also Form ATS–N Filings and Information (for a list of ATSs that trade NMS stocks and have a Form ATS–N filed with the Commission), available at https://www.sec.gov/ divisions/marketreg/form-ats-n-filings.htm. Some academic studies attribute the fragmented nature of the market for NMS stocks, in part, to certain provisions of Regulation NMS. See, e.g., Maureen O’Hara & Mao Ye, Is Market Fragmentation Harming Market Quality?, 100 J. Fin. 459 (2011); Amy Kwan, Ronald Masulis & Thomas H. McInish, Trading Rules, Competition for Order Flow and Market Fragmentation, 115 J. Fin. 330 (2015). 371The six OTC market makers that are classified as wholesalers for purposes of this release are the OTC market makers to which the majority of marketable orders originating from retail brokers were routed as identified from information from retail broker Rule 606(a)(1) reports from Q1 2022. These market makers also reported executing a significant percentage of shares routed to them on their Rule 605 reports. Rule 606(a)(1) requires broker-dealers to produce quarterly public reports containing information about the venues to which the broker-dealer regularly routed non-directed orders for execution, including any payment relationship between the broker-dealer and the venue, such as any PFOF arrangements. See 17 CFR 242.606(a)(1).
section ends with a discussion of retail
broker services and rules addressing consolidated market data.

Competition for Liquidity Provision
in NMS Stocks
Investors trade for a variety of reasons, whether because of informational advantages or because of hedging and liquidity needs. In an idealized competitive market, these investors would meet and trade amongst themselves, without the need of an intermediary. In such cases, trades would occur at the midpoint and neither side would pay the spread. In real-life markets, not all investors meet at the same time. Furthermore, investors may avoid trading with one another if they believe their counterparty has information that they do not, as opposed to trading for liquidity reasons. Moreover, investors often utilize the technology and services of a brokerdealer in order to find and interact efficiently with the trading interest of other investors. For these reasons, there are broker-dealers who incur fixed costs for routing orders and charge a spread for acting as a dealer and supplying liquidity when end investors are not available to directly trade with each other. Market centers compete to attract order flow from these broker-dealers. As shown in Table 1, in Q1 of 2022, NMS stocks were traded on 16 registered securities exchanges,369 and offexchange at 32 NMS Stock ATSs and at over 230 other FINRA members, including OTC market makers.370 OTC market makers include the 6 wholesalers that internalize the majority of individual investor marketable orders.371 These numerous market centers match traders with counterparties, provide a framework for price negotiation and/or provide liquidity to those seeking to trade.
TABLE 1—NMS STOCK TRADED SHARE VOLUME PERCENTAGE OF ALL NMS STOCKS BY MARKET CENTER TYPE
Market center type Venue cnt Share volume (percent) Off-exchange share volume (percent)
Exchanges ................................................................................................................................... 16 59.7 ........................
NMS Stock ATSs ......................................................................................................................... 32 10.2 25.2 Wholesalers a ............................................................................................................................... 6 23.9 59.4 Other FINRA Members ................................................................................................................ 232 6.3 15.6 This table reports the percentage of all NMS stock executed share volume and the percentage of NMS stock share volume executed off-exchange for different types of market centers for Q1 2022. Venue Cnt lists the number of venues in each market center category. Share Volume Pct is the percentage of all NMS stock share volume (on plus off-exchange) executed by the type of market center. Off-Exchange Share Volume Pct is the percentage of off-exchange share volume executed by the type of market center. Exchange share volume and total market volume are based on CBOE Market Volume Data on monthly share volume executed on each exchange and share volume reported in FINRA Trade Reporting Facilities (TRFs).b NMS Stock ATS, wholesaler and FINRA member share volume are based on monthly FINRA OTC Transparency data on aggregated NMS stock trading volume executed on individual ATSs and over-the-counter at Non-ATS FINRA members.c Off-Exchange Share Volume Pct is calculated by dividing the NMS Stock ATS, wholesaler and FINRA member share volume from the FINRA Transparency Data by the total TRF share volume reported in CBOE Market Volume Data. aSee supra note 371 for details regarding how FINRA member OTC market makers are classified as wholesalers for purposes of this release. b Cboe, U.S. Historical Market Volume Data, available at https://cboe.com/us/equities/market_statistics/historical_market_volume/. Trade Reporting Facilities (TRFs) are facilities through which FINRA members report off-exchange transactions in NMS stocks, as defined in SEC Rule 600(b)(47) of Regulation NMS. See https://www.finra.org/filing-reporting/trade-reporting-facility-trf. cFINRA OTC (Non-ATS) Transparency Data Monthly Statistics, available at https://otctransparency.finra.org/otctransparency/OtcData; FINRA ATS Transparency Data Monthly Statistics, available at https://otctransparency.finra.org/otctransparency/AtsBlocksDownload. The FINRA OTC (Non-ATS) Transparency Data may not contain all share volume transacted by a wholesaler or FINRA member because FINRA aggregates security-specific information for firms with ‘‘de minimis’’ volume outside of an ATS and publishes it on a non-attributed basis. Market centers’ primary customers are broker-dealers that route their own orders or their customers’ orders for execution. Market centers may compete with each other for these broker-dealers’ order flow on a number of dimensions, including execution quality. They also may innovate to differentiate themselves from other trading centers to attract
more order flow. While registered exchanges cater to a broader spectrum of investors, ATSs and OTC market makers, including wholesalers, tend to focus more on providing trading services to either institutional or individual investor orders.
Table 1 displays NMS stock share
volume percentage by market center

372Of the six wholesalers identified in Q1 2022, two accounted for approximately 66% of wholesalers’ total executed share volume of NMS stocks. One study finds that the concentration of wholesaler internalization, as measured by the Herfindahl-Hirschman Index (HHI) of share volume executed across wholesalers, has increased from 2018 to 2021. See Edwin Hu & Dermot Murphy, Competition for Retail Order Flow and Market Quality (last revised Oct. 7, 2022) (unpublished manuscript), available at https://ssrn.com/ abstract=4070056 (retrieved from Elsevier database). 373The share volume reported for wholesalers in FINRA OTC Transparency Data includes both individual investor orders executed by wholesalers in a principal capacity as well as other orders executed by wholesalers in a principal capacity, such as institutional orders executed on their SDPs. It does not include share volume that they executed in a riskless principal capacity or share volume that was routed and executed at another market center. 374See SIFMA Insights, Analyzing the Meaning Behind the Level of Off-Exchange Trading (Sept. 2021), available at https://www.sifma.org/wpcontent/uploads/2021/09/SIFMA-InsightsAnalyzing-Off-Exchange-Trading-09-2021.pdf. The study found off-exchange trading to be 44.2% of total YTD trading volume as of Sept. 2021. 375See NYSE Data Insights, Market Volume and Off-Exchange Trading: More than a Retail Story (June 15, 2020), available at https://www.nyse.com/ data-insights/market-volume-and-off-exchangetrading. In particular, the study found that, for stocks priced lower than $5, off-exchange trading market share increased from 45.4% in Oct. 2019 to 54.8% in June 2020, and that ATS market share decreased from 14.2% to 11.5% of consolidated average daily volume and non-ATS OTC market share increased from 20.5% to 27.8% over the same time period. 376See, e.g., Gunjan Banerji, Buying or Selling Stocks? It Isn’t Always Easy, Wall St., J., Jan. 2, 2020, showing a greater than 90% reduction in the number of shares available at the best prices in the SPDR S&P 500 ETF from 2007 to 2018, as one example of the overall reduction in market liquidity. Furthermore, in a comment letter to the Commission responding to comments on an SRO proposed rule change, an exchange found that the COVID crisis lead to a further substantial decrease in the depth of liquidity at the NBBO, as the average displayed quote size declined by 69% from Jan. to Mar. 2020 for S&P 500 stocks. See Letter from John Ramsay, Chief Market Policy Officer, Investors Exchange LLC to Ms. Vanessa Countryman, Secretary, U.S. Securities and Exchange Commission, dated May 10, 2020 (File No. SR–IEX– 2019–15), available at https://www.sec.gov/ comments/sr-iex-2019-15/sriex201915-7169827- 216633.pdf. 377See Hitesh Mittal & Kathryn Berkow, The Good, The Bad & The Ugly of Payment for Order Flow (May 3, 2021), available at https://bestex research.com/the-good-the-bad-the-ugly-ofpayment-for-order-flow/. 378Mitigating
this information asymmetry is that off-exchange trades also print to a consolidated post-trade tape, though with latency compared with on-exchange trades. 379A study estimates that the volume of individual investor orders executed by wholesalers accounted for approximately 16% to 17% of consolidated share volume during Q1 2022. See Rosenblatt Securities, An Update on Retail Market Share in US Equities (June 24, 2022), available at https://www.rblt.com/market-reports/trading-talkan-update-on-retail-market-share-in-us-equities. However, wholesalers are not completely focused on individual investor order flow and some do offer services to institutional order flow. See infra section VII.B.3 for a discussion of their interaction with institutional order flow. 380See supra note 37 (citing Jennifer Hadiaris, Cowen Market Structure: Retail Trading—What’s going on, what may change, and what can you do about it?, Cowen (Mar. 23, 2021), available at https://www.cowen.com/insights/retail-tradingwhats-going-on-what-may-change-and-what-caninstitutional-traders-do-about-it/). Further, wholesalers are also not subject to a statutory or regulatory requirement to provide fair access. See supra section III.B.3 for further discussion of requirements that do and do not apply to wholesalers. 381See Rule 602 of Regulation NMS. 382ATSs typically compete for institutional order flow by offering innovative trading features such as distinct trading protocols and segmentation options. They may also compete on fees. In addition, they could include their ATS access in the broader set of bundled services that the broker-dealer director of the ATS offers to their institutional investors. type for Q1 2022. Exchanges execute approximately 60% of total share volume in NMS stocks, while offexchange market centers execute approximately 40%. The majority of offexchange share volume is executed by wholesalers, who execute almost one quarter of total share volume (23.9%) 372 and about 60% of off-exchange share volume.373 NMS Stock ATSs execute approximately 10% of total NMS stock share volume and 25% of off-exchange share volume. Other FINRA members, besides wholesalers and ATSs, execute approximately 15% of off-exchange share volume. There is evidence that the percentage of trading volume executed off-exchange has been increasing over time. One industry group study found that volume traded off-exchange as a percent of total volume has increased since 2018, when off-exchange trading was 36.8% of total volume.374 According to another study by an exchange, an increase in orders executed by off-exchange venues other than ATSs has been the driving factor behind this increase in off-exchange trading, which has been particularly significant for lower-priced stocks.375 At the same time, some have highlighted a decline in liquidity displayed at or near the NBBO on exchanges.376 Industry participants have raised concerns regarding a ‘‘monopolistic environment,’’ in which information
offexchange becomes sufficiently concentrated and determinative as to widen spreads on exchange.377 For example, a liquidity provider deciding whether to rest an order on the book would face the possibility of a wholesaler or other off-exchange market maker gleaning information from the posted liquidity to determine a price to execute off-exchange that accounts for the lack of adverse selection risk in offexchange flow.378 This limits the execution possibilities on exchange. On the other hand, any posted liquidity (which grants an option to liquidity demanders or to those engaged in latency arbitrage) is vulnerable to being ‘‘picked off’’—namely executed against exactly when the price is (in the case of a resting buy order) moving lower or (in the case of a sell order) moving higher. These dynamics lower the incentives to post liquidity on exchange. Exchanges (via their rules) and ATSs determine how orders compete with each other, wherein liquidity suppliers set prices and wait for execution at their prices by liquidity demanders. This interaction between liquidity providers and demanders encompasses order-byorder competition. Unlike exchanges, for which each exchange’s rules determine competition in a nondiscretionary fashion, wholesalers execute or route orders in a discretionary fashion.379 While some orders may be routed to a central limit order book against which institutional investors may execute (on the discretion of the wholesaler), institutional investors generally consider order flow routed to a wholesaler to be ‘‘inaccessible.’’ 380 As a proxy for expected execution quality, quoted prices are a dimension on which exchanges compete to attract order flow. Specifically, exchanges are required to post the best bid and ask prices available on the exchange at that time,381 and broker-dealers can observe those prices and choose to route orders to the exchange posting the best prices at a given point in time. However, others who provide trading services, such as ATSs and OTC market makers, do not usually compete on this dimension.382 In other words, wholesalers generally do not compete for order flow by posting competitive prices the way exchanges do. They do not display or otherwise advertise the prices at which they are willing to internalize individual investor orders at a given point in time. This suggests that wholesalers attract order flow by offering retail brokers more than just competitive prices at a point in time on a specific order. Instead, wholesalers generally attract order flow by offering to on average execute orders at prices that are better than displayed prices. Additionally, wholesalers bundle their market access services with execution services, thereby vertically fully integrating order handling and execution services for their retail broker customers.
2. Segmentation of Individual Investor
Order Flow
Individual investor orders typically carry lower adverse selection risk, in
part because individual investors may

383While this characterization of individual orders is generally true, there are also individual investors that are highly sophisticated and informed of market conditions. See infra section VII.B.5.b for an empirical analysis and discussion of variation in execution quality based on variation in adverse selection risk of retail broker order flow. 384See supra section III.B.2.b. 385See supra section I for a definition of segmentation. 386See infra section VII.B.2.c. 387For example, Rule 612 does not prevent wholesalers, after they receive an order from a broker, from choosing to execute that order in a transaction at a sub-penny price. See supra note 148 and corresponding discussion. 388See infra note 406 for a discussion of the informational advantages that routing can provide to wholesalers. 389Providing market access can mean rerouting customer orders and it can also involve sponsoring access for the broker to send customer orders directly to a market center. 390The number of broker-dealers providing access is thus limited due to the expenses of being an exchange member and ATS subscriber. In addition, membership on an exchange also gives the brokerdealer access to exchange-provided order routers that re-route orders to other exchanges at a perorder fee. Thus, membership on one exchange can effectively provide access, though not directly, to all exchanges. 391Although some retail brokers are members of exchanges, they may still prefer to rely on wholesalers’ expertise for the handling and routing of their customers’ orders. 392 Individual investors and professional traders relying on displayed screens to access financial markets generally do not have access to these lowlatency (algorithmic, high speed) technologies. 393See infra section VII.B.2.b for further discussion of wholesaler internalization. 394 In Table 2, average payment rates reported in Rule 606 reports for PFOF brokers in S&P 500 stocks and non-S&P 500 stocks in Q1 2022 are broken down by trading venue and order type, with rates given in cents per 100 shares. 395Furthermore, wholesaler rates for nonmarketable orders are more than double the rates for marketable orders, averaging 27.1 cents per hundred shares compared to 13 cents for market orders and 12.6 cents for marketable limit orders. Additionally, Table 2 shows that the average payment rates PFOF brokers receive from routing Continued have less information on market conditions than other market participants and in part because their orders tend to be small. Both of these factors make individual investor orders less likely to be followed by orders in the same direction.383 The lower adverse selection risk of individual investor orders makes them more valuable for segmentation by liquidity providers that want to execute these orders in a principal capacity, since they are less costly to liquidity providers such as wholesalers to execute (i.e., have lower price impacts) than orders with higher adverse selection risk. Due to
this lower cost, wholesalers are able to provide price improvement to these orders and still earn higher profits, as discussed in supra section II.D.2. Regulation NMS allows an order to be executed off-exchange, provided that an off-exchange trading venue executes the order at a price equal to the NBBO or better.384 To the extent that a liquidity provider is able to segment 385 low-risk individual investor order flow, this order flow can be executed against with higher profitability for the liquidity provider. Since exchanges are limited in their ability to segment order flow (with the exception of retail liquidity programs),386 the ability of off-exchange venues to segment orders is one reason why orders are routed off-exchange. Furthermore, off-exchange trading venues are often more flexible in determining prices than national securities exchanges.387 The ability to segment is one reason why many individual investor orders are executed off-exchange. Another reason is potential efficiency in outsourcing routing services. Maintaining market access at many venues is costly, so broker-dealers have an incentive to use the services of other broker-dealers who maintain market access at most, if not all, market centers. Wholesalers are the dominant providers of market access for retail brokers and bundle their market access services with execution services. Yet another reason arises from economies of scale stemming from the information that can be gleaned from large quantities of individual orders.388 Because of the profitability in these segmented orders, wholesalers will sometimes pay for them, a practice known as payment for order flow. For some retail brokers, this may create an additional incentive for routing to the wholesalers. a. Routing and Market Access Most individual investor orders are non-directed, so individual investor order routing choices are largely made by retail brokers. Specifically, retail brokers choose how to access the market in order to fill their individual investor customers’ orders. Many broker-dealers that handle customer accounts, including many retail brokers, do not directly access national securities exchanges or ATSs for their orders, relying on other broker-dealers to facilitate market access for them.389 For example, only members of exchanges or subscribers to (or owners of) ATSs can directly access those particular market centers.390 As a result, some brokerdealers that are exchange members or ATS subscribers/owners provide access to other brokers-dealers by rerouting their customer orders to these market centers. The broker-dealers (including wholesalers) who provide market access can choose to compete on a number of dimensions, such as by charging lower fees or paying for order flow, by facilitating better execution quality, and by providing other valued services.391 Retail brokers may route to wholesalers because the cost of sending orders to wholesalers is lower than the various alternatives available to
their customers for market access. While some broker-dealers have SORs,392 exchange memberships, and ATS subscriptions, and are thus able to provide market access to retail brokers, these other broker-dealers incur costs in handling order flow for retail brokers in the form of exchange access fees, ATS access fees, and administrative and regulatory costs such as recordkeeping and the risk management controls of Rule 15c3–5. While wholesalers could incur some of these marginal costs as well, they benefit on the margin from individual investor order flow because they have the option to internalize the most profitable of that order flow, i.e., the individual investor orders with the lowest adverse selection risk.393 This ability to capture, identify, and internalize profitable orders from individual investors allows wholesalers to provide market access to retail brokers at low explicit cost, either by providing PFOF or by not charging retail brokers explicitly for market access. This service of obtaining market access on behalf of retail brokers assists retail brokers by allowing them to avoid routing expenses (even in cases where the wholesaler further routes the order instead of internalizing) or costly liquidity searches, and may increase retail brokers’ reliance on wholesalers beyond any payment they receive for routing their order flow to wholesalers. Indeed, Table 2 shows that retail brokers who accept PFOF (‘‘PFOF brokers’’) pay less to route their orders to wholesalers than to route them elsewhere.394 In fact, they are paid to route their order flow to wholesalers for every order type reported in the table. On average, rates paid by wholesalers for both market and marketable limit orders are higher than those paid by alternative venues, with wholesalers paying an average of 13 cents per 100 shares for market orders and 12.6 cents for marketable limit orders across S&P 500 and non-S&P 500 stocks during Q1
2022. In contrast, exchanges, on average,
charged PFOF brokers when they routed their marketable order flow to exchanges. This likely indicates that most of the volume that PFOF brokers sent to exchanges was routed to makertaker exchanges (where fees are assessed on marketable orders).395 Furthermore,

non-marketable limit orders to wholesalers is greater than the average rates they receive from routing them to exchanges. This may be driven by wholesalers passing through exchange rebates for these orders, for which they may receive higher volume-based tiering rates compared to retail brokers, back to broker-dealers. 396Table 3 summarizes order routing decisions of 43 of the most active retail brokers about nondirected orders; see infra note 466. Routing choices are summarized separately for 14 PFOF brokers in equity markets and non-PFOF brokers. Note that some brokers do not accept PFOF for orders in equities but do accept PFOF for orders in options. Consistent with Rule 606, routing statistics are aggregated together in Rule 606 reports based on whether the stock is listed in the S&P500 index. Rule 606 reports collect routing and PFOF statistics based on four different order types for NMS stocks:
(1) market orders, resulting in immediate execution at the best available price; (2) marketable limit orders, resulting in immediate execution at the best price that is not worse that the order’s quoted limit price; (3) non-marketable limit orders whose quoted limit price less aggressive than the NBBO, often preventing immediate execution; and (4) all other orders. See supra note 371 for a summary of the requirements of Rule 606(a)(1) of Regulation NMS since retail brokers that do not accept PFOF (‘‘non-PFOF brokers’’) also incur fees when they route marketable orders to exchanges, they are also incentivized to route their marketable order flow to wholesalers, who do not charge them explicit costs to route and execute their orders.
TABLE 2—AVERAGE RULE 606 PAYMENT RATES FOR Q1 2022 TO PFOF BROKERS BY TRADING VENUE TYPE
Market orders Marketable limit orders Nonmarketable limit orders Other orders
S&P 500 ........................ Exchange .............................................................
OTC Market Maker—Wholesaler ........................
Other ....................................................................
¥5.9
15.2
4.5
¥23.9
21.8
¥0.6
30.9
41.1
¥0.6
20.8
24.1
7.5
Non-S&P 500 ................. Exchange .............................................................
OTC Market Maker—Wholesaler ........................
Other ....................................................................
¥14.9
12.5
1.5
¥15.3
11.8
¥3.7
17.9
24.6
¥4.6
16.5
10.1
1.5
Combined ...................... Exchange .............................................................
OTC Market Maker—Wholesaler ........................
Other ....................................................................
¥12.4
13.0
1.7
¥15.7
12.6
¥3.7
19.3
27.1
¥4.5
17.1
11.9
2.0
This table shows the average payment rates (in cents per 100 shares) made from different types of trading venues in Q1 2022 to 14 retail PFOF brokers from wholesalers based on their Rule 606 reports. The table breaks out average rates from exchanges, wholesalers, and other trading venues for market orders, marketable limit orders, non-marketable limit orders, and other orders in S&P 500 stocks and non-S&P 500 stocks. Other venues include any other venue to which a retail broker routes an order other than a wholesaler or an exchange. The 43 brokerdealers were identified from the 54 retail brokers used in the CAT retail analysis (see infra note 466). This analysis uses the retail broker’s Rule 606 report if it publishes one or the Rule 606 report of its clearing broker if it did not publish a Rule 606 report itself (the sample of 43 brokerdealer Rule 606 reports include some broker-dealers that were not included in the CAT analysis because some clearing broker Rule 606 reports are included). Some broker-dealers reported handling orders only on a not held basis and did not have any Rule 606.
Table 3 reflects that wholesalers
dominate the business of providing market access for retail brokers and indicates that PFOF is a factor in retail broker routing decisions.396 Data from
Table 3 indicates that orders of
individual investors for NMS stocks are primarily routed to wholesalers, although a small fraction of individual investor orders are routed to exchanges and other broker-dealers providing market access or other market centers (i.e., ATSs), some of which may be affiliated with the broker that received the original order.
TABLE 3—RETAIL BROKER ORDER ROUTING IN NMS STOCKS FOR Q1 2022, COMBINING PFOF AND NON-PFOF
BROKERS
Venue type Market
(percent)
Marketable limit
(percent)
Nonmarketable limit
(percent)
Other
(percent)
Total
(percent)
Panel A: Non S&P 500 Stocks Other .................................................................................... 6.0 4.7 3.1 1.5 3.6 Exchange ............................................................................. 0.2 5.5 22.5 0.8 8.5 Wholesaler ........................................................................... 93.9 89.8 74.4 97.6 87.9 Total .............................................................................. 26.5 12.6 33.6 27.3 100.0 Panel B: S&P 500 Stocks Other .................................................................................... 6.6 5.9 1.8 1.7 3.6 Exchange ............................................................................. 0.2 4.6 25.1 0.8 9.1 Wholesaler ........................................................................... 93.3 89.6 73.1 97.5 87.3 Total .............................................................................. 30.6 9.6 33.5 26.4 100.0 This table aggregates Rule 606 reports from retail brokers and shows the percentage of market orders, marketable limit orders, non-marketable limit orders, and other orders that retail brokers route to different types of venues in Q1 2022. Other venues include any other venue to which a retail broker routes an order other than a wholesaler or an exchange. Order type classifications are based on the order types brokerdealers are required to include in their Rule 606 reports. I

397See infra Table 14.
Table 3 aggregates routing information from 43 broker-dealer Rule 606 reports from Q1 2022. The 43 broker-dealers were identified from the
54 retail brokers used in the CAT retail analysis (see infra note 466). This analysis uses the retail broker’s Rule 606 report if it publishes one or the Rule 606 report of its clearing broker if it did not publish a Rule 606 report itself (the sample of 43 broker-dealer Rule 606 reports include some broker-dealers that were not included in the CAT analysis because some clearing broker Rule 606 reports are included). Some brokerdealers reported handling orders only on a not held basis and did not have any Rule 606 reports. Because Rule 606 only include percentages of where their order flow is routed and not statistics on the number of orders, the reports are aggregated together using a weighting factor based on an estimate of the number of non-directed orders each broker-dealer routes each month. The number of orders is estimated by dividing the number of non-directed market orders originating from a retail broker in a given month (based on estimates from CAT data) by the percentage of market orders as a percent of non-directed orders in the retail broker’s Rule 606 report (the weight for a clearing broker consists of the aggregated orders from the introducing brokers in the CAT retail analysis that utilize that clearing broker).
TABLE 4—RETAIL BROKER ORDER ROUTING IN NMS STOCKS FOR MARCH 2022
Venue type Market
(percent)
Marketable limit
(percent)
Nonmarketable limit
(percent)
Other
(percent)
Total
(percent)
Panel A: Non-S&P 500 Stocks Non-PFOF Brokers Other .................................................................................... 24.1 22.3 4.2 41.6 16.0 Exchange ............................................................................. <0.1 25.3 80.8 19.7 39.8 Wholesaler ........................................................................... 76.0 52.4 15.0 38.8 44.2 Total .............................................................................. 38.4 12.4 44.2 5.0 100.0 PFOF Brokers Other .................................................................................... <0.1 1.2 2.8 0.3 1.1 Exchange ............................................................................. 0.2 1.5 5.8 0.2 2.1 Wholesaler ........................................................................... 99.7 97.3 91.4 99.5 96.8 Total .............................................................................. 24.1 12.7 31.5 31.8 100.0 Panel B: S&P 500 Stocks Non-PFOF Brokers Other .................................................................................... 24.8 27.0 3.2 23.4 15.4 Exchange ............................................................................. <0.1 19.6 83.2 8.2 39.0 Wholesaler ........................................................................... 75.2 53.4 13.6 68.3 45.6 Total .............................................................................. 39.0 9.2 43.8 8.0 100.0 PFOF Brokers Other .................................................................................... <0.1 0.5 1.3 0.3 0.6 Exchange ............................................................................. 0.2 0.9 3.4 0.3 1.3 Wholesaler ........................................................................... 99.8 98.6 95.3 99.5 98.2 Total .............................................................................. 28.4 9.7 30.7 31.2 100.0 This table aggregates Rule 606 reports from PFOF and non-PFOF retail brokers and separately shows the percentage of market orders, marketable limit orders, non-marketable limit orders, and other orders PFOF brokers and non-PFOF brokers route to different types of venues in Q1
2022. PFOF brokers are retail brokers that receive payments for routing marketable orders to wholesalers. Other venues include any other venue
to which a retail broker routes an order other than a wholesaler or an exchange. Order type classifications are based on the order types brokerdealers are required to include in their Rule 606 reports.
Table 4 aggregates routing information from PFOF and non-PFOF broker-dealer Rule 606 reports from Q1 2022. Fourteen retail brokers are
identified as PFOF brokers that receive payments for routing orders in NMS stocks to wholesalers. Non-PFOF brokers are identified as retail brokers that do not receive monetary compensation when they route orders in NMS stocks to wholesalers. The 43 broker-dealers were identified from the 54 retail brokers used in the CAT retail analysis (see infra note 466). This analysis uses the retail broker’s Rule 606 report if it publishes one or the Rule 606 report of its clearing broker if it did not publish a Rule 606 report itself (the sample of 43 broker-dealer Rule 606 reports include some broker-dealers that were not included in the CAT analysis because some clearing broker Rule 606 reports are included). Some broker-dealers reported handling orders only on a not held basis and did not have any Rule 606 reports. Because Rule 606 only include percentages of where their order flow is routed and not statistics on the number of orders, the reports are aggregated together using a weighting factor based on an estimate of the number of non-directed orders each broker-dealer routes each month. The number of orders is estimated by dividing the number of non-directed market orders originating from a retail broker in a given month (based on estimates from CAT data) by the percentage of market orders as a percent of non-directed orders in the retail broker’s Rule 606 report (the weight for a clearing broker consists of the aggregated orders from the introducing brokers in the CAT analysis that utilize that clearing broker). CAT data analysis indicates that about 80% of the share volume and about 74% of the dollar volume of individual investor marketable orders that were routed to wholesalers and executed comes from PFOF brokers.397 Data from
Table 4 indicate that, while retail
brokers who accept PFOF from wholesalers tend to send more of their orders to those wholesalers, wholesalers even dominate the market access services for non-PFOF brokers, though non-PFOF brokers route a significantly lower fraction (i.e., 75.2% to 76%) of their market orders to wholesalers, compared to 99.7% to 99.8% of market orders for PFOF brokers. Moreover, nonPFOF brokers route 24.1% to 24.8% of their market orders to other nonexchange market centers, e.g., ATSs,

398Rule 606 reports require that broker-dealers separate their disclosure information for S&P 500 stocks, non-S&P 500 stocks, and options. 399See infra section VII.B.4 for a full discussion of Table 5 and section VII.B.5 for a discussion of how the Commission preliminarily believes that the execution quality of orders routed to wholesalers could be even better if most of such orders were not isolated from order-by-order competition. 400The E/Q ratio is the ratio of a stock’s effective spread over quoted spread. A lower value indicates smaller effective spreads (i.e., trading costs) as a percentage of the quoted spread. 401See analysis in infra Table 10. 402See analysis in infra Table 10. 403 Id. See also supra note 365 for a definition and discussion of price impact as a measure of adverse selection risk. 404See infra Table 10 in section VII.B.5.a for analysis indicating that individual investor orders wholesalers internalize have lower adverse selection risk and earn higher economic profits, as measured by price impacts and realized spreads, than orders wholesalers effectively reroute. 405While these provide a few examples of information that could be used by wholesalers, the Commission lacks information on what information wholesalers actually use. Further, while the analysis presented here shows associations between characteristics, price impacts, and internalization, the analysis cannot determine that the expected price impact based on a particular characteristic caused the wholesaler to internalize the order. 406Having aggregate information on retail order flow could help the wholesaler assess the direction of the market, which could also be beneficial for business lines beyond the firm’s wholesaler business. 407See, e.g., NYSE Rule 7.44 (concerning RLPs). 408See, e.g., description of NYSE Retail Liquidity program, available at https://www.nyse.com/ while PFOF brokers route less than 1% of their market orders to these market centers. However, regardless of whether the retail broker accepts PFOF, the order type, or the S&P500 index inclusion of the stock,398 Table 3 shows that retail brokers route over 87% of their customer orders to wholesalers. This result suggests that, while PFOF is an important factor in retail brokers routing decisions, wholesalers likely also compare favorably to other market access centers (including retail brokers pursuing their own market access) along other dimensions. The routing behavior in Table 4 may, in part, reflect a tendency of non-PFOF brokers to route individual investor orders to market centers such as their own ATSs for midpoint execution and the lack of an affiliated ATS for PFOF brokers. However, even broker-dealers with their own ATSs do not route the majority of their individual investor order flow to those ATSs and typically do not internalize order flow. Further, retail brokers with membership on multiple exchanges primarily route their marketable orders to wholesalers. These results could point
to a lower marginal cost of routing to wholesalers relative to other routing and execution alternatives.
Table 5 below shows that wholesalers
appear to compare favorably to exchanges in the execution quality of orders routed to them, suggesting that execution quality could be another key factor in the decision of retail brokers to route to wholesalers.399 In particular, marketable orders routed to wholesalers appear to have higher fill rates, lower effective spreads, and lower E/Q ratios.400 These orders are also more likely to receive price improvement and, conditional on receiving price improvement, receive greater price improvement when routed to wholesalers as compared to exchanges. In addition, wholesalers may provide additional valuable services to retail brokers that route order flow to them. Based on staff experience, the Commission understands that wholesalers are more responsive to retail brokers that provide them with order flow, including, for example, following customer instructions not to internalize particular orders. More broadly, wholesalers appear to provide retail brokers with a high degree of consistency with regard to execution quality. More specifically, while wholesalers receive order flow from retail brokers that contains variation in quoted spreads and adverse selection risk, wholesalers can target an average level of price improvement across this heterogeneous order flow, resulting in a relatively consistent degree of execution quality. b. Wholesaler Internalization Wholesalers provide market access for retail brokers and generally choose to internalize the order flow they receive from these brokers,401 thereby vertically integrating (i.e., bundling) their market access and execution services. This vertical integration helps wholesalers achieve a competitive advantage in both market access and execution services. Wholesalers are distinct from other broker-dealers that provide market access and execution services, in that they focus on marketable order flow from individual investors and internalize the large majority of orders routed to them. Wholesalers determine which orders to execute internally and which to reroute to other trading venues, often using a riskless principal transaction. For example, after receiving an order from a retail broker, a wholesaler may send a principal marketable order similar to the retail broker order to an exchange and, upon execution of the principal order at the exchange, provide the same execution terms to the original retail broker order. Alternatively, a wholesaler can achieve the same economic result by rerouting the original order in an agency capacity as well. In this way, the wholesaler is providing the market access service, but another market center is providing the execution service. Commission analysis shows that wholesalers internalize over 90% of the executed dollar value in NMS stocks from the marketable order flow routed to them by retail brokers, which amounts to more than 80% of share volume.402 Results also show that the marketable NMS stock orders wholesalers choose to internalize have less adverse selection
risk: orders that wholesalers execute in a principal capacity have a price impact of 0.9 bps, compared to a price impact of 4.6 bps for those executed via other methods.403 These results stem from the incentives wholesalers face. As dealers, wholesalers will wish to hold inventory that is not subject to short-term adverse price moves. Because orders with greater adverse selection risk will, on average, be followed by adverse price moves, wholesalers will on average internalize fewer of these orders.404 Wholesalers employ algorithms to predict price impact using information to which only they have access, such as the identity of the retail broker, and information any market center would have, such as order characteristics and stock or market characteristics.405 Indeed, Table 12 shows significant variation in average price impacts across retail brokers. Because wholesalers know which retail brokers sent them the order, they can use that information in combination with other information to make internalization and pricing decisions.406 The results in Table 13 support this conclusion, indicating that wholesalers internalize a higher percentage of individual investor orders from retail brokers whose customers’ orders on average exhibit lower price impact.
c. Exchange Retail Liquidity Programs
Retail liquidity programs provide an on-exchange means of segmentation. Indeed, the RLPs offered by many registered exchanges are specifically set up to segment the marketable order flow of individual investors,407 allowing liquidity suppliers to interact with this order flow without the risk that their orders will trade against the marketable orders of other market participants that may impose greater adverse selection risk. The pricing increments, both for quoting and trading, in RLPs, are usually 0.1 cents,408 although some

publicdocs/nyse/markets/liquidity-programs/RLP_ Fact_Sheet.pdf. 409See, e.g., IEX retail liquidity program, available at https://exchange.iex.io/products/retailprogram/. 410See, e.g., NYSE Price List, available at https:// www.nyse.com/publicdocs/nyse/markets/nyse/ NYSE_Price_List.pdf; NYSE Arca Trading Fee, available at https://www.nyse.com/publicdocs/ nyse/markets/nyse-arca/NYSE_Arca_Marketplace_ Fees.pdf; and IEX Exchange Fee Schedule, available at https://exchange.iex.io/resources/trading/feeschedule/. 411RLPs operate under an exemption from Rule 612, and are therefore allowed to use sub-penny pricing. As part of this exemption, however, they are only eligible for individual investors to execute against and cannot display quotes. See supra note 152 for further discussion. 412See supra note 151 regarding the purpose and operation of RLPs. 413See Rosenblatt Securities, How Can the Buy Side Interact With Retail Flow? (Feb. 14, 2022) available at https://www.rblt.com/market-reports/ how-can-the-buy-side-interact-with-retail-flow. 414Unlike wholesalers, liquidity suppliers in RLP programs are not aware of the identity of the retail broker that the individual investor originated from. Therefore, they are not able to offer tighter spreads to individual investor orders from retail brokers whose orders on average have lower adverse selection risk. Instead, liquidity suppliers in RLP need to price their quotes based on the average expected adverse selection risk of all orders routed to the RLP. See, e.g., Lawrence R. Glosten & Paul R. Milgrom, Bid, Ask, and Transaction Prices in a Specialist Market With Heterogeneously Informed Traders, 14 J. Fin. Econ. 71 (1985). 415Wholesalers and OTC market makers can execute orders themselves or instead further route the orders to other venues. An SDP always acts as the counterparty to any trade that occurs on the SDP. See Where Do Stocks Trade?, FINRA (Dec. 3, 2021), available at https://www.finra.org/investors/ insights/where-do-stocks-trade for further discussion. 416See Rosenblatt Securities, Rosenblatt’s 2022 US Equity Trading Venue Guide (May 24, 2022), available at https://www.rblt.com/market-reports/ rosenblatts-2021-us-equity-trading-venue-guide-2. The study also found that SDPs accounted for approximately 10% of off-exchange trading volume in Q1 2022. 417See, e.g., Robert H. Battalio, Brian C. Hatch & Mehmet Saglam, The Cost of Exposing Large Institutional Orders to Electronic Liquidity Providers (last revised Nov. 7, 2022) (unpublished manuscript), available at https://ssrn.com/ abstract=3281324 (retrieved from Elsevier database). exchanges have RLP programs that allow liquidity suppliers to quote only at the midpoint.409 RLP programs typically do not charge an access fee to individual investor orders executed in RLP programs.410 Quotes in RLP programs are not displayed.411 Instead, the SIP disseminates a flag indicating the side of the market for which an exchange has an RLP quote available at a price
better than the NBBO available. However, the SIP does not make known the price or the size of the RLP quote, which creates opacity in the liquidity available in RLP programs. The goal of these programs is to compete with wholesalers and to attract marketable order flow of individual investors to trade on national securities exchanges.412 However, it is the Commission’s understanding that the share of individual investor trading volume executed through RLPs is small. For example, in 2021, less than 0.2% of consolidated volume executed in exchange RLP programs.413 This low market share could be the result of several factors. For example, many retail brokers lack direct access to exchanges offering RLPs and the means of indirect access may be too costly for RLPs compared to routing to wholesalers. Further, wholesalers who compete with RLPs lack the incentives to route the individual investor order flow with lower adverse selection risk to the RLPs. If only the individual investor order flow with higher adverse selection risk goes to RLPs, the liquidity providers in RLPs would widen spreads to reflect the increased adverse selection.414 This in turn, makes RLPs less competitive relative to wholesalers. Thus, even retail brokers with exchange membership may find wholesalers more attractive than RLPs for cost or execution quality reasons.
3. Institutional Investor Interactions
With Retail Orders
Several wholesalers operate SDPs through which they execute institutional orders in NMS stocks against their own inventory.415 Because wholesalers also execute individual investor orders against their own inventory, the use of SDPs amounts to an indirect interaction between institutional and individual investor orders. The trading volume on SDPs is economically significant. For example, a study found that in Q1 2022, the SDPs affiliated with the two highest-volume wholesalers accounted for around 3% of consolidated average daily trading volume in NMS stocks.416 Institutional clients often communicate their trading interest to SDPs using Immediate or Cancel Orders (‘‘IOCs’’) or respond to Indication of Interest (‘‘IOIs’’) issued by the SDP. On an SDP, the single dealer, i.e., the wholesaler, is privy to the identities of the counterparties, i.e., institutional investors. One academic paper has found that this information revelation may have adverse execution consequences for the institutional investor.417 On the other hand, there also may be benefits relative to other trading venues. The trading interest of investors who submit IOCs to an SDP for liquidity are only exposed to the single dealer operating a platform. In contrast, submission of the same order to an exchange or an ATS may alert many other market participants to the underlying trade interest, triggering reactions. As such, institutional investors may view SDPs as an opportunity to tap into a pool of liquidity that reduces their orders’ price impact and avoids triggering significant reactions by other market participants.
4. Execution Quality of Individual
Investor Marketable Orders in NMS Stocks

418Rule 605 requires market centers to make available, on a monthly basis, standardized information concerning execution quality for covered orders in NMS stocks that they received for execution. See 17 CFR 242.605. Covered orders are defined in 17 CFR 242.600(b)(22) to include orders (including immediate-or-cancel orders) received by market centers during regular trading hours at a time when a national best bid and national best offer is being disseminated, and, if executed, is executed during regular trading hours, and excludes orders for which the customer requests special handling for execution (such as not held orders). Rule 605 reports are required to contain a number of execution quality metrics for covered orders, including statistics for all NMLOs with limit prices within ten cents of the NBBO at the time of order receipt as well as separate statistics for market orders and marketable limit orders. Under the Rule, the information is categorized by individual security, one of five order type categories (see 17 CFR 242.600(b)(14)), and one of four order size categories, which does not include orders for less than 100 shares or orders greater than or equal to 10,000 shares (see 17 CFR 242.600(b)(11)). As such, Rule 605 does not require reporting for orders smaller than 100 shares, including odd-lot orders. Rule 605 requires market centers to report execution quality information for all covered orders that the market center receives for execution, including orders that are executed at another venue (i.e., because they are effectively rerouted to another trading center by the market center). 419The following filters were applied to the Rule 605 data to remove potential data errors:
Observations where the total shares in covered orders were less than the sum of the canceled shares, share executed at the market center, and share executed away from the market center were deleted; Observations with missing order size code, order type code, total covered shares, or total covered orders were deleted; Realized and effective spread values are set to missing values if the total shares executed at and away from the market center are zero; and Per share dollar realized spreads, per share dollar effective spreads, and per share dollar price improvements were winsorized at 20% of the volume weighted average price of the stock for the month as calculated from NYSE Daily TAQ data. 420See supra note 365 and accompanying text for a definition and discussion of price impact. Table 5 estimates the average price impact associated with marketable orders routed to wholesalers to be 1.2 bps. This means that for a $10 stock the NBBO midpoint would move up (down) by an average of
0.12 cents in the five minutes following the
execution of marketable buy (sell) order. 421Once implemented, the changes to the current arrangements for consolidated market data in the MDI Adopting Release, 86 FR at 18621, may impact the numbers in Table 5, including by reducing those for realized spread, effective spread, and amount of price improvement. The NBBO will narrow in stocks priced greater than $250 because it will be calculated based off a smaller round lot size. This narrower NBBO will decrease price improvement statistics in Rule 605 reports, which is measured against the NBBO. The effects on effective and realized spreads is more uncertain, because they are measured against the NBBO midpoint, which may not change if both the NBB and NBO decrease by the same amount. However, if marketable orders are more likely to be submitted when there are imbalances on the opposite side of the limit order book (i.e., more marketable buy orders are submitted when there is more size on the offer side of the limit order book than the bid side), then the NBBO midpoint may change such that it is closer to the quote the marketable order executes against, which may decrease the effective and realized spreads in stocks above $250 when the MDI Rules are implemented. It is uncertain how likely this NBBO midpoint is to change. It is also uncertain how or to what degree these changes would differ between exchange and wholesaler Rule 605 reports. If both changed similarly, then there would not be changes in relative differences between their reported spread measures. See supra note 356. 422See supra note 366 for a definition and discussion of effective spreads. 423See supra note 367 and accompanying text for a definition and discussion of realized spreads as a measure of the economic profits earned by liquidity providers. See infra note 426 discussing the limitations of realized spreads for estimating the profits earned by market makers. 424The exception to this result is market orders executed on exchanges, which have average higher realized spreads than wholesaler market orders. However, market orders represent only 0.2% of the overall marketable orders executed on exchanges and therefore do not accurately represent exchange realized spreads. More specifically, marketable limit orders executed on exchanges in Q1 2022 had a share volume of 179.10 billion shares while market orders executed on exchanges had a share volume of 0.39 billion shares. See infra Table 5. 425The execution quality information required pursuant to Rule 605 combines information about orders executed at a market center with information on orders received for execution at a market center but executed by another market center; see supra note 407. As such, the execution quality statistics presented in Table 5 include orders that are effectively rerouted by wholesalers. Furthermore, note that Rule 605 does not specifically require market centers to prepare separate execution quality reports for their SDPs, and as such these calculations
reflect all covered market and marketable limit orders in NMS stocks received and executed by wholesalers, including those on SDPs. 426See supra note 367 for the definition of the realized spread. Realized spreads do not measure the actual trading profits that market makers earn from supplying liquidity. In order to estimate the trading profits that market makers earn, we would need to know at what times and prices the market maker executed the off-setting position for a trade in which it supplied liquidity (e.g., the price at which the market maker later sold shares that it bought when it was supplying liquidity). If market makers offset their positions at a price and time that is different from the NBBO midpoint at the time lag used to compute the realized spread measure (Rule 605 realized spread statistics are measured against the NBBO midpoint 5 minutes after the execution takes place), then the realized spread measure is an imprecise proxy for the profits market makers earn supplying liquidity. See Conrad and Wahal (2020) (for discussions showing how realized spreads decline when measured over time horizons and for further discussions regarding how realized spreads are affected when measured over different time horizons). Differences in inventory holding periods of different market makers could also create differences in the trading profits that market makers earn that would not be captured in the realized spread measure if it is estimated over the same time horizon for all market makers. See Lingyan Yang & Ariel Lohr, The Profitability of Liquidity Provision (last revised Feb. 18, 2022) (unpublished manuscript), available at https://ssrn.com/ abstract=4033802. Additionally, realized spread metrics do not take into account any transaction rebates or fees, including PFOF, that a market maker might earn or pay, which would also affect the profits they earn when supplying liquidity. Furthermore, realized spreads also do not account for other costs that market makers may incur, such as fixed costs for setting up their trading infrastructure and costs for connecting to trading venues and receiving market data. 427Marketable orders may not fully execute if there isn’t sufficient liquidity on the exchange to fill the orders within their limit price and/or if they contain other instructions that limit their execution, such as if they are designated as IOC orders or there are instructions not to route the orders to another exchange. The wholesaler business model relies in part on segmentation and internalization of marketable order flow of individual investors, which is characterized by low adverse selection risk. An analysis of the execution quality of market and marketable limit orders handled by wholesalers retrieved from Rule 605 reports 418 and presented in Table 5 419 shows that orders in NMS stocks handled by wholesalers are associated with lower price impact 420 compared to those executed on exchanges, indicating that orders handled by
wholesalers on average have lower adverse selection costs.421 This lower adverse selection cost allows wholesalers to provide these orders with better execution quality, manifested in lower effective spreads 422 and E/Q ratios compared to exchanges. The realized spreads 423 observed in Table 5 424 adjust effective spreads for adverse selection costs (i.e., price impact).425 Thus orders handled by wholesalers have higher realized spreads, despite the fact that they may execute at better prices than those received by and executed on exchanges, as observed by their lower effective spreads in Table 5. Realized spreads are a proxy for the potential economic profit that liquidity suppliers may earn on a trade.426 Therefore, the higher realized spreads earned by wholesalers suggest that the isolation of individual investor orders routed to wholesalers results in wholesalers potentially earning higher economic profits relative to a venue where market makers compete with each other and other market participants to supply liquidity at the individual order level (e.g., an exchange). Additionally, the results in Table 5 show that approximately 79% of the executed dollar volume in marketable orders handled by wholesalers are market orders. The Commission believes that these outcomes reflect the heavy utilization of market orders for NMS stocks by individual investors whose orders are primarily handled by wholesalers, contrary to the heavy utilization of limit orders by other market participants.
Table 5 also highlights significantly
higher fill rates, i.e., the percentage of the shares in an order that execute in a trade, for marketable orders sent to wholesalers as compared to those sent to exchanges.427 Wholesalers execute the vast majority of orders that they receive against their own capital, i.e., they internalize the vast majority of

428See analysis in infra Table 10 and corresponding discussion. 429See supra section IV.B.5 discussing exceptions to the Proposed Rule. 430We estimated the average dollar value of the orders received by wholesalers based on their Rule 605 reports by multiplying the average order size for a stock-month-order-size-category (estimated as the number of total covered shares divided by the number of total covered orders) by the stock’s average monthly VWAP price estimated from NYSE TAQ data. 431Both the wholesaler and exchange average execution metrics in Table 6 are calculated based on weighting by the total wholesaler dollar trading volume in that stock-month. This weighting method calculates averages across stocks similarly for exchanges and wholesalers when aggregating their Rule 605 reports, which helps ensure the averages across stocks are comparable between exchanges and wholesalers. 432A negative average realized spread on exchanges does not necessarily mean that market makers on exchanges are not earning trading profits for supplying liquidity on exchanges. The realized spread observed on exchanges is a mix of liquidity supplied by market makers and limit orders submitted by other traders who may be interested in trading but not earning a spread (e.g., limit or midpoint orders of individual or institutional investors that potentially don’t want to pay the spread to trade). Additionally, as discussed in supra note 426, the realized spread is a proxy and does not measure the actual trading profits that market makers earn from supplying liquidity. It does not include exchange rebates liquidity suppliers may earn and also makes assumptions about the time and price at which the liquidity suppliers exit the position. After accounting for exchange rebates, liquidity suppliers on exchanges could potentially earn average positive trading profits if they exit their positions at a different time or price than the estimated NBBO midpoint at the time horizon used to estimate the realized spread (5 minutes for realized spreads reported in Rule 605). See Conrad and Wahal (2020) for discussions on how realized spreads vary when calculated over different time horizons. orders they receive.428 Wholesalers expose themselves to inventory risk when internalizing order flow, but mitigate this risk by internalizing orders that possess low adverse selection risks.
TABLE 5—COMPARISON OF RULE 605 EXECUTION QUALITY STATISTICS BETWEEN EXCHANGES AND WHOLESALERS FOR
NMS COMMON STOCKS AND ETFS IN Q1 2022 Combined marketable orders Market Marketable limit WH EX WH EX WH EX Average Price ............................................................................ $47.89 $58.14 $56.19 $85.45 $30.66 $58.08 Share Volume (billion shares) ................................................... 106.97 179.49 72.20 0.39 34.77 179.10 Dollar Volume (billion $) ............................................................ $5,122.91 $10,436.02 $4,056.85 $33.53 $1,066.06 $10,402.49 Fill Rate (%) .............................................................................. 69.32% 25.77% 99.79% 58.08% 34.81% 25.77% Effective Spread (bps) .............................................................. 1.81 2.06 1.47 3.29 3.11 2.06 Realized Spread (bps) .............................................................. 0.61 ¥0.38 0.39 2.40 1.43 ¥0.39 Price Impact (bps) ..................................................................... 1.20 2.44 1.08 0.90 1.68 2.45 E/Q ratio .................................................................................... 0.48 1.01 0.40 1.65 0.83 1.01 Pct of Shares Price Improved ................................................... 83.17% 8.78% 88.99% 15.95% 61.01% 8.75% Conditional Amount of Price Improvement (bps) ...................... 2.17 1.50 2.33 1.92 1.24 1.50 This table computes aggregated execution quality statistics for marketable covered orders received by exchanges and wholesalers from Rule 605 reports for Q1 2022 for NMS common stocks and ETFs. See supra note 418 for a definition of covered orders. Individual wholesaler and exchange Rule 605 reports are aggregated together at the stock-month level, into two categories, WH and EX, such that aggregate execution quality data is averaged for, (a) wholesalers (WH) and, (b) exchanges (EX), for each stock during each month. The following metrics were calculated: Average Price is the stock’s average execution price from the Rule 605 data (Dollar Volume/Share Volume), Share Volume is the total executed shares (in billions) from the Rule 605 data. Dollar Volume is the total executed dollar volume (in billions), calculated as the executed share volume from the Rule 605 data multiplied by the stock’s monthly VWAP price, as derived from NYSE Daily Trade and Quote data (TAQ). Fill Rate is the weighted average of the stock-month total executed share volume/total covered shares from the Rule 605 data. Effective Spread is the weighted average of the stock-month percentage effective half spread in basis points (bps). Realized Spread is the weighted average of the stock-month percentage realized half spread in basis points (bps). Price Impact is the weighted average of the stock-month percentage price impact in basis points (bps). E/Q ratio is the weighted average of the stock-month ratio of the effective spread/quoted spread. Pct of Shares Price Improved is the weighted average of the stock-month ratio of shares executed with price
improvement/total executed share volume. Conditional Amount of Price Improvement is the weighted average of the stock-month of the amount of percentage price improvement in basis points (bps), conditional on the executed share receiving price improvement. Aggregated effective and realized percentage spreads are measured in half spreads in order to show the average cost of an individual investor order and are calculated by dividing the aggregated Rule 605 reported per share dollar amount by twice the stock’s monthly volume weighed average price (VWAP), as derived from NYSE Daily Trade and Quote data (TAQ), for trades executed during regular market hours during the month. Percentage price impact is calculated as the aggregated Rule 605 reported per share dollar effective spreads minus per share dollar realized spreads divided by twice the stock’s monthly volume weighed average price (VWAP), as derived from NYSE Daily Trade and Quote data (TAQ). Percentage amount of price improvement is calculated as the aggregated Rule 605 reported per share dollar amount of price improvement divided by the stock’s monthly volume weighed average price (VWAP), as derived from NYSE Daily Trade and Quote data (TAQ). Percentage spreads and amount of price improvement percentages are reported in basis points (bps). The Combined Market and Marketable Limit order type category is constructed for each security-month-order size category by combining the market and marketable limit order categories and computing the total and share weighted average metrics for the order size category for each security-month. The sample includes NMS common stocks and ETFs that are present in the CRSP 1925 US Stock Database, Ctr. Rsch. Sec. Prices, U. Chi. Booth Sch. Bus. (2022). The CRSP 1925 US Indices Database, Ctr. Rsch. Sec. Prices, U. Chi. Booth Sch. Bus. (2022), was used to identify if a stock was a member of the S&P 500. The stock did not have to be in the CRSP 1925 US Indices Database to be included in the analysis. NMS Common stocks and ETFs are identified, respectively, as securities in TAQ with a Security Type Code of ‘A’ and ‘ETF’. For each stock-month-order-type (such that aggregate execution quality data is averaged for, (a) wholesalers and, (b) exchanges, for each stock during each month) the per dollar share weighted measures from Rule 605 reports are aggregated together by shareweighting across different trading venues and order-size categories within the stock-month-order-type and venue type (i.e., trading venue Rule 605 reports for exchanges and wholesalers are aggregated into different categories). Percent values are then calculated for each stock month by dividing by the stock’s monthly volume weighed average price (VWAP). These percentage stock-month values are averaged together into order-type categories (market orders, marketable limit orders, and the combined market and marketable limit order type category, for both wholesalers and exchanges) based on weighting
by the total dollar trading volume for the wholesaler or exchange category in that stock-month-order type, where dollar trading volume is estimated by multiplying the Rule 605 report total executed share volume, i.e., the share volume executed at market center + share volume executed away from the market center, for the stock-month-order type by the stock’s monthly VWAP. See supra note 419 for a discussion of filters that were applied to the Rule 605 data in this analysis. Because segmented orders valued at $200,000 and greater would be excepted from Proposed Rule 615,429 we limit our analysis to Rule 605 order size categories where the average dollar value of orders received by wholesalers was under $200,000.430 Table 6 summarizes Rule 605 data comparing the execution quality of marketable orders (i.e., the combined market and marketable limit order category in Table
5) under $200,000 routed to wholesalers
and exchanges for different security types.431 In Table 6, the average realized spreads for marketable orders routed to exchanges are negative for all security types,432 while orders routed to wholesalers have positive realized spreads in all securities, with larger realized spreads in Non-S&P 500 stocks. The positive realized spreads for marketable orders routed to wholesalers seem to indicate that the amount of price improvement these orders receive in the form of lower effective spreads does not fully offset the lower adverse selection costs they impose on liquidity suppliers (as measured by lower price impacts) compared to negative realized

433Other studies have also used realized spreads to examine competition between liquidity suppliers. See, e.g., Roger Huang & Hans Stoll, Dealer versus auction markets: A paired comparison of execution costs on NASDAQ and the NYSE, 41 J. Fin. Econ. 313 (1996) (finding that in 1991 realized spreads for a sample of NASDAQ stocks were higher than realized spreads for a matched sample of NYSE stocks and concluding that important explanations for the higher spreads observed on NASDAQ were the internalization and preferencing of order flow and the presence of alternative interdealer trading systems, factors that limited dealers’ incentives to narrow spreads); Jonathan Brogaard & Corey Garriott, HighFrequency Trading Competition, 54 J. Fin. & Quantitative Analysis 1469 (2019) (looking at the effects of the entry of new high-frequency traders that compete to supply liquidity on the Canadian Alpha exchange and finding that realized spreads decreased for the marketable orders of non-highfrequency traders after new high-frequency traders entered the market; the study observed that the reduction in realized spreads was not attributable to changes in the price impact of the orders of nonhigh-frequency traders and that the reduction in realized spreads was attributable to increased competition among liquidity suppliers); and Hank Bessembinder & Herbert Kaufman, A crossexchange comparison of execution costs and information flow for NYSE-listed stocks, 46 J. Fin. Econ. 293 (1997) (finding in 1994 that effective bidask spreads for trades in NYSE issues completed on the NYSE are slightly smaller than for trades completed with the NASD dealer market and the regional stock exchanges but the realized bid-ask spreads for trades on the NYSE are lower by a factor of two to three; the authors conclude that this differential is attributable to the successful ’cream skimming’ of uninformed trades by market makers off of the NYSE exchange; the authors also raise concerns as to whether the trades being diverted from the NYSE might have received better execution if they were not diverted and whether existing rules governing order flow effectively fostered competition). 434Wholesaler realized spreads are adjusted to account for the PFOF they pay to retail brokers. Because we are not able to identify the brokerdealer from which the orders originated in Rule 605 reports, we estimate PFOF rates for the Rule 605 data sample by multiplying the estimated PFOF rates retail brokers receive in Table 2 by 74% in order to adjust for an estimated 26% of the marketable order flow wholesalers receive coming from retail brokers that do not accept PFOF, as estimated by the percentage of share volume received from non-PFOF brokers in infra Table 14. The estimated PFOF rates are 12 mils for market orders in S&P 500 stocks, 10 mils for market orders in ETFs and non-S&P 500 stocks, 17 mils for marketable limit order in S&P 500 stocks, and 9 mils for marketable limit orders in ETFs and
nonS&P 500 stocks. For the Rule 605 data sample, the wholesalers’ PFOF adjusted realized spread is computed by subtracting the relevant PFOF rate from a stock’s average dollar realized spread for orders routed to wholesalers and then dividing by twice the stock’s average monthly VWAP price estimated from NYSE TAQ data. 435Estimates of exchange rebates that liquidity suppliers earn on maker-taker venues and the fees they pay on inverted and flat fee venues are assumed as follows: exchange rebates to liquidity suppliers on maker-taker venues are 27 mils; exchange fees for supplying liquidity on inverted venues are 15 mils; exchange fees for supplying liquidity on flat fee venues are 7 mils; and there is no fee on exchanges that do not charge fees and rebates. Exchange rebates are assumed to be 27 mils based on the average rate exchanges pay retail brokers for their non-marketable limit orders in
Table 2. Fee rates for inverted and flat fee venues
(which charge fees to both liquidity suppliers and demanders and do not pay rebates) were estimated based on exchange fee and rebate tables and were adjusted by 3 mils to account for volume-based tiering (for inverted venues) or differences in fees supplying liquidity using displayed vs. nondisplayed orders (for flat fee venues). For both the Rule 605 and CAT data samples (see infra Table 7), a stock’s rebate adjusted exchange realized spread is calculated by adding/subtracting the exchange rebate/fee to/from the average dollar realized spread and then dividing by twice the stock’s average monthly VWAP price estimated from NYSE TAQ data. 436One caveat to the difference in transaction costs on and off-exchange is that, on-exchange execution, to the extent it is driven by institutional order flow, may be accompanied by commissions. While this should not affect the interpretation of realized spreads as marginal profit to liquidity provision, it does reflect the interpretation as either the transaction cost of the customer or marginal profit of the liquidity supplier handling customer order flow. spreads for orders routed to exchanges.433
Table 6 also shows realized spreads
adjusted to reflect share-level PFOF payments paid by wholesalers 434 and rebates paid by exchanges.435 After these respective costs are netted out, although wholesaler realized spreads are reduced and exchange realized spreads increase (i.e., are less negative), wholesaler realized spreads continue to exceed exchange realized spreads. Adjusting for rebates on the one hand and PFOF on the other allows us to estimate a marginal profit to a liquidity supplier in each venue (note that a rebate substitutes one-for-one with a spread, as does PFOF, and in an idealized perfect-competition setting both would be zero). Acknowledging that there may be differences not captured by these measures, this calculation suggests a higher marginal profit for orders off-exchange versus onexchange, and suggests greater onexchange competition.436 While an accounting measure of profit would need to take, say, fixed costs into account, fixed costs alone would not explain the difference as liquidity suppliers on both types of venues may have similar fixed costs.
TABLE 6—RULE 605 WHOLESALER (WH) AND EXCHANGE (EX) EXECUTION QUALITY COMPARISON FOR MARKETABLE
ORDERS UNDER $200,000 FOR Q1 2022 BY SECURITY TYPE All NMS stocks S&P 500 Non-S&P 500 ETF Average Price .................................................................................................. $33.99 $97.03 $13.52 $51.19 WH Share Volume (billion shares) .................................................................. 96.51 15.00 62.32 19.18 WH Dollar Volume (billion $) ........................................................................... $3,280.03 $1,455.40 $842.66 $981.98 EX Share Volume (billion shares) ................................................................... 172.08 39.89 86.67 45.52 EX Dollar Volume (billion $) ............................................................................ $9,025.52 $3,448.64 $1,899.61 $3,677.27 WH Fill Rate (%) .............................................................................................. 69.06% 73.17% 66.65% 65.03% EX Fill Rate (%) ............................................................................................... 27.31% 32.53% 29.56% 17.63% WH Effective Spread (bps) .............................................................................. 2.05 0.72 5.70 0.89 EX Effective Spread (bps) ............................................................................... 3.11 1.45 7.86 1.49 WH Realized Spread (bps) .............................................................................. 0.72 0.30 1.55 0.64 EX Realized Spread (bps) ............................................................................... ¥0.67 ¥0.30 ¥1.97 ¥0.12 WH Realized Spread Adj PFOF (bps) ............................................................. 0.43 0.17 0.86 0.45 EX Realized Spread Adj Rebate (bps) ............................................................ ¥0.001 ¥0.05 ¥0.24 0.28 WH Price Impact (bps) .................................................................................... 1.33 0.42 4.15 0.25 EX Price Impact (bps) ..................................................................................... 3.78 1.74 9.83 1.61 WH E/Q Ratio .................................................................................................. 0.42 0.35 0.49 0.45 EX E/Q Ratio ................................................................................................... 1.00 0.98 1.00 1.01 WH % Pct of Shares Price Improved .............................................................. 84.7% 86.7% 82.5% 83.4% EX % Pct of Shares Price Improved ............................................................... 8.8% 10.9% 9.5% 5.2% WH Conditional Amount of Price Improvement (bps) ..................................... 2.62 1.49 6.27 1.17

437See supra note 407 for a definition of covered orders and a discussion of the order type and size categories included in Rule 605 reporting requirements. 438There is evidence that individual investors tend to use smaller trading sizes. See, e.g., Robert P. Bartlett, Justin McCrary & Maureen O’Hara, The Market Inside the Market: Odd-Lot Quotes (last revised Feb. 11, 2022) (unpublished manuscript), available at https://ssrn.com/abstract=4027099 (retrieved from Elsevier database); Matthew Healey, An In-Depth View Into Odd Lots, Cboe (Oct. 2021), available at https://www.cboe.com/insights/posts/ an-in-depth-view-into-odd-lots/. 439See, e.g., Maureen O’Hara, High Frequency Market Microstructure, 116 J. Fin. Econ. 257 (2015) (‘‘O’Hara 2015’’); Maureen O’Hara, Gideon Saar & Zhuo Zhong, Relative Tick Size and the Trading Environment, 9 Rev. of Asset Pricing Stud. 47 (2019) (‘‘O’Hara et al.’’); Jennifer S. Conrad & Sunil Wahal, The Term Structure of Liquidity Provision, 136 J. Fin. Econ. 239 (2020) (‘‘Conrad and Wahal’’). Conrad and Wahal suggest that a one-minute horizon may be appropriate for small stocks, and a 15-second horizon may be appropriate for large stocks. The following analyses using CAT data will use a one-minute horizon for calculating the realized spread; see supra note 50. 440Rule 605 data is publicly available and the consistency of the results generated by analysis of these data supports the veracity of the results generated by CAT data, despite the fact that CAT data is not publicly available. 441This analysis used CAT data to examine the execution quality of marketable orders in NMS Common stocks and ETFs that belonged to accounts with a CAT account type of ‘‘Individual Customer’’ and that originated from a broker-dealer MPID that originated orders from 10,000 or more unique ‘‘Individual Customer’’ accounts during Jan. 2022. The number of unique ‘‘Individual Customer’’ accounts associated with each MPID was calculated as the number for unique customer account identifiers with an account customer type of ‘‘Individual Customer’’ that originated at least one order during the month of Jan. 2022. The Commission found that 58 broker-dealer MPIDs associated with 54 different broker-dealers originated orders from 10,000 or more unique Individual Customer accounts in Jan. 2022. As discussed in supra note 194, the CAT account type ‘‘Individual Customer’’ may not be limited to individual investors because it includes natural persons as well as corporate entities that do not meet the definitions for other account types. The Commission restricted that analysis to MPIDs that originated orders from 10,000 or more ‘‘Individual Customer’’ accounts in order to ensure that these MPIDs are likely to be associated with retail brokers to help ensure that the sample is more likely to contain marketable orders originating from individual investors. NMS Common stocks and ETFs are identified, respectively, as securities in TAQ with a Security Type Code of
‘‘A’’ and ‘‘ETF.’’
TABLE 6—RULE 605 WHOLESALER (WH) AND EXCHANGE (EX) EXECUTION QUALITY COMPARISON FOR MARKETABLE
ORDERS UNDER $200,000 FOR Q1 2022 BY SECURITY TYPE—Continued All NMS stocks S&P 500 Non-S&P 500 ETF EX Conditional Amount of Price Improvement (bps) ...................................... 2.36 1.04 5.88 1.28 This table compares aggregated execution quality statistics broken out for different security types for marketable covered orders with average order size under $200,000 received by exchanges and wholesalers as reported from Rule 605 reports for Q1 2022 for NMS common stocks and ETFs. See supra note 418 for a definition of covered orders. Individual wholesaler and exchange Rule 605 reports are aggregated together at the stock-month level into two categories, EX and WH. EX shows aggregated statistics from Rule 605 reports from exchanges and WH shows aggregated statistics from Rule 605 reports from wholesalers. Marketable orders are constructed separately for wholesalers and exchanges by combining the Market and Marketable Limit order type categories in Rule 605 reports for each security-month-order size category and computing the total and share weighted average metrics from the combined order types for the order size category for each security-month. See supra Table 5 for the descriptions of the reported metrics: Average Price, Share Volume, Dollar Volume, Fill Rate, Effective spread, Realized spread, Price Impact, E/Q Ratio, Pct Shares Price Improved, and Conditional Amount of Price Improvement. WH Realized Spread Adj PFOF is the weighted average of the stock-month percentage realized half spread in basis points (bps) from wholesaler 605 reports after adjusting for the estimated PFOF paid by the wholesaler using the methodology described in supra note 434. EX Realized Spread Adj Rebate is the weighted average of the stock-month percentage realized half spread in basis points (bps) from exchange 605 reports after adjusting for the estimated rebates (access fees) exchanges pay (charge) to liquidity suppliers using the methodology described in supra note 435. Percentage spreads are measured in half spreads in order to show the average cost of an individual investor order and are calculated by dividing the Rule 605 report per share dollar amount by twice the stock’s monthly VWAP, as derived from NYSE Daily Trade and Quote data (TAQ), for trades executed during regular market hours during the month. Percentage spreads are reported in basis points (bps). The sample includes NMS common stocks and ETFs that are present in the CRSP 1925 US Stock Database, Ctr. Rsch. Sec. Prices, U. Chi. Booth Sch. Bus. (2022). The CRSP 1925 US Indices Database, Ctr. Rsch. Sec. Prices, U. Chi. Booth Sch. Bus. (2022), was used to identify if a stock was a member of the S&P 500. The stock did not have to be in the CRSP 1925 US Indices Database to be included in the analysis. NMS Common stocks and ETFs are identified, respectively, as securities in TAQ with a Security Type Code of ‘A’ and ‘ETF. The exchange and wholesaler metrics in the table are each reported for
the combined marketable order type, which was constructed for this analysis separately for exchange and wholesalers by combining the Market and Marketable Limit order type categories in Rule 605 reports at the stock-month-order-size level and computing the total and share weighted average metrics from the combined order types. For each stock-month, share weighted metrics (for both exchange and wholesalers) are then calculated by share-weighting across different order-size categories based on the number of shares executed (at the market center + away) in wholesalers’ Rule 605 reports in that order-size category. Order size categories with wholesaler average order dollar values greater than or equal to $200,000 were excluded. The average order dollar values were determined for each order-size category stock-month by dividing the wholesaler total number of covered shares in the order size category by the wholesaler total number of covered orders and then multiplying by the stock-month’s average VWAP, as derived from NYSE Daily Trade and Quote data (TAQ). Stock-month values are averaged together (for both wholesalers and exchanges) based on weighting by the total wholesaler dollar trading volume in that stock-month for the combined marketable order type (wholesaler dollar trading volume is estimated by multiplying the Rule 605 report wholesaler total executed share volume, i.e., the share volume executed at market center + share volume executed away from the market center, for the stock-month-order type by the stock’s monthly VWAP). This weighting method calculates averages across stocks similarly for exchanges and wholesalers when aggregating their Rule 605 reports, which helps ensure the averages across stocks are comparable between exchanges and wholesalers. See supra note 419 for a discussion of filters that were applied to the Rule 605 data in this analysis. Because Rule 605 requires market centers to report execution quality statistics only for covered orders that fall within specific order size and type categories,437 a number of order types and sizes that may be particularly relevant for individual investors are excluded from the above analyses, including orders for less than 100 shares.438 Additionally Rule 605 data does not allow us to distinguish between orders that wholesalers execute on a principal basis from those they execute on riskless principal basis, since they are both reported as being executed at the market center. Furthermore, it is not possible in Rule 605 data to distinguish between orders that a wholesaler received from individual investors from those it received from other types of market participants. For example, wholesaler Rule 605 reports may include both individual investor orders that they receive, as well as institutional orders they receive on their SDPs. Lastly, effective and realized spread measures as required to be reported in Rule 605 reports are calculated using a five-minute time horizon, which some
academic literature argues has become inappropriate for a high-frequency environment.439 Therefore, to supplement the analyses using Rule 605 data and test for the robustness of the results 440 that it generated, CAT data 441 was analyzed to look at the execution

442Fractional share orders with share quantity less than one share were excluded from the analysis. The analysis included market and marketable limit orders that originated from one of the 58 retail broker MPIDs and were received by a market center that was associated with one of the six wholesalers CRD numbers (FINRA’s Central Registration Depository number) during some point in the order’s lifecycle. Orders that were received by the wholesaler or executed outside of normal market hours were excluded. Orders were also excluded if they had certain special handling codes so that execution quality statistics would not be skewed by orders being limited in handling by special instructions (e.g., pegged orders, stop orders, post only orders, etc.) Orders identified in CAT as Market and Limit orders with no special handling codes or one of the following special handling codes were included in the analysis: NH (not held), CASH (cash), DISQ (display quantity), RLO (retail liquidity order), and DNR (do not reduce). These special handling codes were identified based on their common use by retail brokers and descriptions of their special handling codes. The marketability of a limit order was determined based on the consolidated market data feed NBBO at the time a wholesaler first receives the order. Limit orders that were not marketable were excluded. The dollar value of an order was determined by multiplying the order’s number of shares by either its limit price, in the case of a limit order, or by the far side quote (i.e., NBO for a market buy order and NBB for a market sell) of the consolidated market data feed NBBO at the time the order was first received by a wholesaler, in the case of a market order. Orders with dollar values greater than or equal to $200,000 were excluded from the analysis. The analysis includes NMS Common Stocks and ETFs (identified by security type codes of ‘A’ and ‘ETF’ in NYSE TAQ data) that are also present in CRSP data. Price improvement, effective spreads, realized spreads, quoted spreads, and price impacts were winsorized if they were greater than 20% of a stock’s VWAP during a stock-week. See
Table 7 for a detailed description of the analysis. 443The Commission analysis used CAT data to
examine the execution quality of market and marketable limit orders in NMS Common Stocks and ETFs that were under $200,000 in value that were received and executed by exchanges during normal market hours in Q1 2022. The analysis employed filters to clean the data and account for potential data errors. The analysis is limited to orders identified in CAT as market and limit orders accepted by exchanges. Orders were excluded from the analysis if they had certain special handling codes, such as post or add-liquidity only orders, midpoint orders, orders that can only execute in opening and closing auctions, orders with a minimum execution quantity, pegged orders, or stop order or stop-loss orders. Orders were also required to execute in normal trades during normal trading hours to be included in the analysis. Normal trades are identified in CAT data by sale conditions ‘‘blank, @, E, F, I, S, Y’’ which correspond to regular trades, intermarket sweep orders, odd lot trades, split trades, and yellow flag regular trades. For orders submitted to exchanges, the NBBO the exchange records seeing at the time of order receipt is used to measure the NBBO and NBBO midpoint for calculating statistics that are based on the time of order receipt (e.g., effective spreads, price improvement, quoted spreads, etc.). The marketability of exchange orders was determined based on the NBBO observed by the exchange at the time of order receipt. The dollar value for a market order was calculated as the price of the far side NBBO quote (NBO for a market buy order and NBB for a market sell) times the shares in the order. The dollar value for a limit order was calculated as the price of the limit order times the number of shares in the order. Orders with dollar values greater than or equal to $200,000 were excluded from the analysis. The consolidated market data feed NBBO was used to calculate statistics that use the NBBO or NBBO one minute after execution (e.g., realized spreads, price impacts, etc). The analysis includes NMS Common Stocks and ETFs (identified by security type codes of ‘A’ and ‘ETF’ in NYSE TAQ data) that are also present in CRSP data. Price improvement, effective spreads, realized spreads, quoted spreads, and price impacts were winsorized if they were greater than 20% of a stock’s VWAP during a stock-week. See Table 7 for a detailed description of the analysis. 444Certain items in Table 7 may also be affected by the MDI rules once they are implemented. See supra notes 356 and 421. 445The relative differences between exchanges and wholesalers in price impacts and realized spreads are even more pronounced with the CAT data, which (unlike 605 data) include odd lots, exclude orders greater than $200,000, and measure realized spreads from 1 minute rather than 5 minutes after execution. 446For CAT data, we estimate the PFOF each retail broker receives based on data from their Q1 Rule 606 reports. For each month we separately estimate the average per share PFOF rate
they receive from wholesalers based on the order type (market and marketable limit orders) and security type (S&P500 and non-S&P500 stocks), which we then combine with the same order and stock type in the CAT data. If a retail broker does not produce a Rule 606 report, then we use the PFOF rates from its clearing broker’s Rule 606 report, if it is available (some retail brokers’ websites disclosed that they share in payments their clearing broker receives for their order flow). A PFOF rate of 20 cents per 100 shares was used for the introducing broker-dealers and clearing broker that reported handled orders on a not held basis and did not disclose PFOF information in their Rule 606 report but disclosed on their website that they received PFOF for their order flow. 20 cents per 100 shares was the PFOF rate that the clearing broker that handles orders on a not held basis disclosed on their website that they received. 447See supra note 435 for discussion of how exchange rebates are calculated. quality of marketable orders of individual investors in NMS Common Stocks and ETFs that were less than $200,000 in value and that executed and were handled by wholesalers during Q1 2022 (‘‘CAT retail analysis’’).442 This was compared to a sample of CAT data examining the execution quality of executed market and marketable limit orders in NMS Common Stocks and ETFs received by exchanges that were less than $200,000 in value over the same time period (‘‘CAT exchange analysis’’).443
Table 7, which reports results from
CAT data, contains some statistics that are not available in Rule 605 reports, including statistics on midpoint executions and sub-penny trades.444 In NMS common stock and ETF orders, wholesalers execute approximately 44% of shares at prices at or better than the NBBO midpoint. However, wholesalers also offer less than 0.1 cents price improvement to approximately 18.6% of shares that they execute. Wholesalers execute more than 65% of shares at subpenny prices, with over 40% of shares being executed at prices with four decimal points (i.e., the fourth decimal place is not equal to zero). Results from this analysis are highly consistent with results from the analysis of Rule 605 data from Table 6. Specifically, wholesalers display lower price impacts and E/Q ratios, indicating that orders internalized by wholesalers receive better execution quality than orders executed on exchanges. Despite this enhanced execution quality, realized spreads of wholesalers exceed those produced by exchanges.445 This finding remains even after netting out PFOF payments made by wholesalers 446 and rebates made by exchanges.447
TABLE 7—WHOLESALER CAT ANALYSIS OF EXCHANGE INDIVIDUAL INVESTOR ORDER EXECUTION QUALITY FOR
MARKETABLE ORDERS IN NMS COMMON STOCKS AND ETFS BY TYPE OF STOCK Variable All SP500 Non-SP500 ETF Panel A: Wholesaler and Exchange Execution Quality Average Price .................................................................................................................................... $29.87 $110.31 $10.52 $53.14 WH Principal Execution Rate ............................................................................................................ 90.44% 93.07% 87.66% 88.12% WH Share Volume (billion shares) ................................................................................................... 87.11 11.63 63.17 12.31 EX Share Volume (billion shares) ..................................................................................................... 281.90 66.98 140.82 74.10 WH Dollar Volume (billion $) ............................................................................................................ $2,601.44 $1,282.62 $664.41 $654.41 EX Dollar Volume (billion $) .............................................................................................................. $16,194.84 $6,479.89 $3,246.09 $6,468.85 WH Effective Spread (bps) ............................................................................................................... 2.11 0.67 6.23 0.76 EX Effective Spread (bps) ................................................................................................................ 3.18 1.52 8.11 1.42 WH Realized Spread (bps) ............................................................................................................... 0.85 0.42 2.00 0.51 EX Realized Spread (bps) ................................................................................................................ ¥1.22 ¥0.28 ¥3.90 ¥0.34 WH Realized Spread Adj PFOF (bps) .............................................................................................. 0.49 0.29 0.99 0.36 EX Realized Spread Adj Rebate (bps) ............................................................................................. ¥0.40 ¥0.06 ¥1.54 0.08

TABLE 7—WHOLESALER CAT ANALYSIS OF EXCHANGE INDIVIDUAL INVESTOR ORDER EXECUTION QUALITY FOR
MARKETABLE ORDERS IN NMS COMMON STOCKS AND ETFS BY TYPE OF STOCK—Continued Variable All SP500 Non-SP500 ETF WH Price Impact (bps) ...................................................................................................................... 1.26 0.25 4.22 0.25 EX Price Impact (bps) ....................................................................................................................... 4.40 1.80 12.00 1.75 WH E/Q Ratio ................................................................................................................................... 0.39 0.32 0.50 0.41 EX E/Q Ratio ..................................................................................................................................... 1.04 1.01 0.98 1.17 Panel B: Wholesaler Price Improvement WH Pct Executed with Price Improvement ....................................................................................... 89.95% 93.33% 85.43% 87.93% WH Conditional Amount Price Improvement (bps) ........................................................................... 2.54 1.47 6.16 0.99 WH Pct Shares Executed at Midpoint or Better ............................................................................... 44.57% 47.37% 39.76% 43.97% WH Pct Shares Executed at Midpoint .............................................................................................. 31.69% 32.47% 28.46% 33.44% WH Pct Shares Executed at NBBO .................................................................................................. 8.38% 5.86% 10.97% 10.69% WH Pct Shares Executed Outside NBBO ........................................................................................ 1.67% 0.81% 3.61% 1.38% WH Pct Shares Executed with <0.1 cent Price Improvement .......................................................... 18.64% 16.62% 20.58% 20.64% WH Pct of Shares Executed as Subpenny Prices ........................................................................... 66.98% 65.10% 64.16% 73.55% WH Pct of Shares Executed at Subpenny Prices without Midpoint Trades .................................... 47.60% 46.82% 47.03% 49.68% WH Pct of Shares Executed at Subpenny Prices with 4 Decimals ................................................. 41.36% 40.80% 41.76% 42.06% This table uses CAT data to compare aggregated execution quality statistics for Q1 2022 broken out for different security types for executed marketable orders with order size under $200,000 in NMS Common Stocks and ETFs received by wholesalers from individual investors to similar orders received by exchanges. Aggregated statistics in the table labeled WH are based on analysis of CAT data of executed marketable orders in NMS Common Stocks and ETFs from individual investors for under $200,000 in value belonging to one of 58 retail broker MPIDs that were handled by one of 6 wholesalers during normal market hours in Q1 2022 (see supra note 442 for additional discussions on the CAT data used in the CAT retail
analysis). Aggregated statistics in the table labeled EX are based on a corresponding analysis of CAT data of executed marketable orders in NMS Common Stocks and ETFs receive by exchanges that were under $200,000 in value and received and executed during normal market hours in Q1 2022 (see supra note 443 for additional discussions on the CAT data used in CAT exchange analysis). The following metrics are calculated for all stocks and for each of the stock-types. EX indicates aggregated statistics for executed marketable orders routed to exchanges and WH indicates aggregated statistics for executed marketable orders from individual investors that were routed to wholesalers. Average Price is the average execution price. WH Principal Execution Rate is the percentage of dollar volume of individual investor trades that a wholesaler executed in a principal capacity. Share Volume is the total executed share volume. Dollar Volume is the total executed dollar volume. Effective Spread is the weighted average of the percentage effective half spread in basis points (bps) (measured as average (execution price—NBBO midpoint at time of order receipt) * average transaction price). Realized Spread is the weighted average of the percentage one minute realized spread in bps (measured as average (execution price—NBBO midpoint one minute after execution) * average transaction price). WH Realized Spread Adj PFOF is the estimated realized spread in bps earned by the wholesaler after adjusting the realized spread for the estimated PFOF they pay to retail brokers (see supra note 446 for further details on adjusting wholesaler realized spreads for PFOF in CAT data). EX Realized Spread Adj Rebate is the estimated realized spread in bps earned by exchange liquidity suppliers after adjusting the realized spread for the estimated exchange rebates they receive or access fees they pay for supplying liquidity (see supra note 435 for further details on adjusting realized spreads for exchange fees and rebates). Price Impact is the weighted average of the percentage one-minute price impact spread in bps (measured as average (NBBO midpoint one minute after execution—NBBO midpoint at time of order receipt)/average transaction price). E/Q Ratio is the weighted average of the ratio of the effective dollar spread divided by its quoted spread at the time of order receipt. WH Pct Executed with Price Improvement is the weighted average of the percentage of share volume that is routed to wholesalers and executed at a price better than the NBBO. WH Conditional Amount Price Improvement is the weighted average amount of percentage price improvement given by wholesalers conditional on the order receiving price improvement in bps (measured for a marketable buy order as average (NBO at time of order receipt—execution price) and measured for a marketable sell order as average (execution price—NBB at time of order receipt) and then dividing the difference by the average transaction price). WH
Pct Share Executed at Midpoint or Better is the weighted average of the percentage of shares that are routed to a wholesaler and executed at prices equal to or better than the NBBO midpoint at the time of order receipt. WH Pct Share Executed at Midpoint is the weighted average of the percentage of shares that are routed to a wholesaler and executed at a price equal to the NBBO midpoint at the time of order receipt. WH Pct Shares Executed at NBBO is the weighted average of the percentage of share volume routed to a wholesaler and executed at the NBBO at the time of order receipt (executed at the NBB for marketable sell orders and the NBO for marketable buy orders). WH Pct Shares Executed Outside NBBO is the weighted average of the percentage of share volume routed to wholesalers and executed at prices outside the NBBO at the time of order receipt (executed at a price less than the NBB for marketable sell orders and a price greater than the NBO for marketable buy orders). WH Pct Shares Executed with <0.1 cent Price Improvement is the weighted average of the percentage of shares that are executed with an amount of price improvement less than 0.1 cents measured against the NBBO at the time of order receipt. WH Pct Shares Executed Subpenny Prices is the weighted average of the percentage of shares that execute at a subpenny price (a dollar execution price with a non-zero value in the third or fourth decimal place). WH Pct Shares Executed at Subpenny without Midpoint Trades is the weighted average of the percentage of shares that execute at a subpenny price (a dollar execution price with a non-zero value in the third or fourth decimal place), excluding executions with subpenny prices that occur at the NBBO midpoint. WH Pct Shares Executed at Subpenny Prices with 4 Decimals is the weighted average of the percentage of shares that execute at a subpenny price where there is a dollar execution price with a non-zero value in the fourth decimal place. Average transaction prices used in calculating the metrics are calculated as the total dollar trading volume divided by the total share trading volume in the category and time period.For the wholesaler (WH) CAT metrics used in the sample, the analysis includes marketable orders for under $200,000 in value that originate from a customer with a CAT account type of ‘‘individual’’ at one of the 58 retail broker MPIDs and are routed to a wholesaler (see supra note 441 for more info on CAT account types and retail broker identification methodology and supra note 442 for more details on how the CAT retail analysis sample was constructed). Fractional share orders with share quantity less than one share were excluded from the analysis. Orders were also excluded if they had certain special handling codes. The marketability of a limit order is determined based on the consolidated market data feed NBBO at the time a wholesaler first receives the order. For the exchange (EX) CAT metrics, executed market and marketable
limit orders received by exchanges during normal market hours over the same period were used to calculate the exchange execution quality statics (see supra note 443 for more details on how the CAT exchange sample was constructed). Exchange orders were filtered if they had certain special handling codes. The marketability of exchange orders was determined based on the NBBO observed by the exchange at the time of order receipt. The dollar value of an order was determined by multiplying the order’s number of shares by either its limit price, in the case of a limit order, or by the far-side quote of the NBBO at the time of order receipt, in the case of a market order. The analysis includes NMS Common Stocks and ETFs (identified by security type codes of ‘A’ and ‘ETF’ in NYSE TAQ data) that are also present in CRSP data from CRSP 1925 US Stock Database, Ctr. Rsch. Sec. Prices, U. Chi. Booth Sch. Bus. (2022). The CRSP 1925 US Indices Database, Ctr. Rsch. Sec. Prices, U. Chi. Booth Sch. Bus. (2022), was used to identify if a stock was a member of the S&P 500. The stock did not have to be in the CRSP 1925 US Indices Database to be included in the analysis. Time of order receipt is defined as the time the wholesaler or exchange first receives the order. Wholesaler metrics based on the time of order receipt are measured against the NBBO from the consolidated market data feed. Exchange metrics based on time of order receipt are measured against the NBBO the exchange reports observing. Realized spreads for both exchange and wholesaler metrics are calculated with respect to the NBBO midpoint from the consolidated market data feed observed one minute after the time of order execution. Separately, for both the exchange and wholesaler samples, total share volume, total dollar volume, average transaction price, percentage volume metrics, and share weighted average dollar per share spread, price impact, and price improvement metrics were calculated at a stock-week-order size category level by aggregating together execution quality statistics calculated for individual orders. The order-size categories were defined as orders less than 100 shares, 100–499 shares, 500–1,999 shares, 2,000–4,999, 5,000–9,999 shares, and 10,000+ shares. For each stock-week-order size category, percentage spread, price impact, and price improvement metrics were calculated by dividing the average dollar per share metric by the average transaction price calculated for each stock-week-order size category. E/Q ratios were calculated for each stock-week-order size category by dividing the average dollar per share effective spread by the average dollar per share quoted spread. Exchange sample metrics for E/Q ratios and percentage spread, price impact, and price improvement metrics for each stock-week-order size category were then merged with the corresponding stock-week-order size category in the wholesaler sample. Weighted averages for both wholesaler and exchange metrics and the
wholesaler percentage volume metrics are then calculated for the security type in the sample by averaging across stock-week-order size category levels based on their total dollar transaction volume during the sample period in the wholesaler CAT sample (i.e., for both exchanges and wholesalers, using the stock’s total dollar trading volume in wholesaler executed transactions as the weight when averaging the share weighted average stock-week- size category values). Weighting the exchange and wholesaler execution metrics by the same weights helps to ensure the samples are comparable across stocks. Total dollar volume and share volume for the exchange and wholesaler samples are calculated by summing across all executions in a security type in each sample. The wholesaler Principal Execution Rate is calculated for a security type in the wholesaler sample by summing the total dollar volume in trades wholesalers executed in a principal capacity across the security type in the wholesaler sample and dividing by the total dollar volume in trades in the security type in the wholesaler sample.

448The analysis in Table 7 shows that 9.6% of executed dollar volume from orders routed to wholesalers may be effectively rerouted and potentially subject to competition at the individual order level. 449 Despite receiving more price improvement, the analyses in supra Table 5, Table 6, and Table 7 show that individual investor orders sent to wholesalers still had significantly positive realized spreads, indicating their price improvement does not fully offset the lower adverse selection costs they pose. Thus, while the higher price impact of orders executed on exchanges compresses exchange realized spreads, one might expect (under competitive conditions) that the lower price impact of orders internalized by wholesalers would pressure wholesalers to provide sufficiently high price improvement such that wholesaler realized spreads would face a similar compression. 450Results also indicate that, after adjusting for exchange rebates, average exchange realized spreads are positive for stocks with average quoted spreads less than 1.1 cents, unlike stocks where average quoted spreads exceed 1.1 cents, which still have negative average realized spreads after adjusting for exchange rebates. It is possible that one-cent minimum tick size on exchanges limits competition in stocks with quoted spreads less than
1.1 cents, leading to higher realized spreads for
these stocks. Furthermore, PFOF-adjusted realized spreads are negative for stocks with quoted spreads less than 1.1 cents, unlike the realized spreads for stocks with wider quoted spreads, indicating that potential marginal economic profit is larger for these stocks. In sum, analyses from Table 6 and
Table 7 show that wholesaler realized
spreads exceed exchange realized spreads for comparable marketable order transactions (e.g., similar stocks and order sizes) on exchanges. If orders internalized by wholesalers were subject to competition from multiple liquidity suppliers at the individual order level,448 we would expect realized spreads to be similar to the realized spreads earned by liquidity providers of similar orders routed to exchanges.449 That is, the wholesaler could respond to the lower price impact (adverse selection risk) of its internalized orders by providing large enough price improvement so that its realized spread (potential profits) matched exchange realized spreads generated by the larger price impact (adverse selection risk) and smaller price improvement of orders executed by liquidity suppliers on exchanges. Since wholesaler price improvement is not commensurate their lower costs (i.e., smaller price impacts due to lower adverse selection risk), their realized spreads exceed exchange realized spreads. Further evidence and granularity regarding the difference between wholesaler and exchange realized spreads are found in Table 8 and Table
9. Table 8 compares the execution
quality between orders routed to wholesalers and exchanges and provides estimates of effective and realized spreads as well as price impacts and E/Q ratios for NMS common stocks and ETFs sorted into buckets based on their average dollar quoted spread. Realized spreads are also adjusted for per-share PFOF payments made by wholesalers and rebates paid by exchanges in order to account for the impact of these costs on potential economic profits. Differences in realized spreads between exchanges and wholesalers appear to be largest in stocks with quoted spreads less than 1.1 cents or stocks with quoted spreads greater than 5 cents (the buckets in which wholesalers earn the largest realized spreads). This appears to be partially driven by orders routed to wholesalers receiving the least price improvement (as measured by the E/Q ratio) in stocks with quoted spreads less than 1.1 cents and orders routed to exchanges receiving the most price improvement in stocks with quoted spreads greater than 5 cents.450
TABLE 8—ESTIMATES OF WHOLESALER AND EXCHANGE EXECUTION QUALITY FOR MARKETABLE ORDERS UNDER
$200,000 BY QUOTED SPREAD RANGE Variable Quoted spread bucket <1.1 cents 1.1–2 cents 2–3 cents 3–5 cent 5+ cents WH Effective Spread (bps) .................................................. 2.74 1.09 1.30 2.00 2.74 EX Effective Spread (bps) ................................................... 3.83 1.48 1.84 2.70 4.54 WH E/Q Ratio ...................................................................... 0.48 0.41 0.34 0.34 0.35 EX E/Q Ratio ....................................................................... 1.05 1.20 1.10 1.04 0.92 WH Price Impact (bps) ........................................................ 1.76 0.73 0.93 1.30 1.43 EX Price Impact (bps) .......................................................... 6.11 2.26 2.47 3.56 5.73 WH Realized Spread (bps) .................................................. 0.99 0.36 0.37 0.69 1.31 EX Realized Spread (bps) ................................................... ¥2.28 ¥0.78 ¥0.63 ¥0.85 ¥1.20 WH Realized Spread Adj PFOF (bps) ................................. ¥0.15 0.12 0.17 0.50 1.22 EX Realized Spread Adj Rebate (bps) ................................ 0.18 ¥0.21 ¥0.16 ¥0.38 ¥0.98 This table uses the CAT retail analysis data and CAT exchange analysis data to estimate exchange and wholesaler effective spreads, price impacts, realized spreads, E/Q ratios and wholesaler and exchange realized spreads after accounting for exchange rebates and PFOF across all NMS stocks and ETFs for marketable orders under $200,000 based on the stock’s average quoted spread. See supra Table 7 for additional details on how the sample and metrics are calculated. Stocks are grouped into buckets based off of their time weighted average quoted spread for a week as measured in NYSE TAQ. Share-weighted percentage metrics are averaged together at the individual stock-week-order size category level for the exchange and wholesaler sample using the methodology in Table 7. Weighted averages for both wholesaler and exchange metrics are then calculated for each quoted spread bucket by averaging across stock-week-order size category levels based on their total dollar transaction volume during the sample period in the wholesaler CAT sample (i.e., for both exchanges and wholesalers, using the stock’s total dollar trading volume in wholesaler executed transactions as the weight when averaging the share weighted average stock-week-order size category values). Weighting the exchange and wholesaler execution metrics by the same weights helps to ensure the samples are comparable across stocks.
Table 9 compares execution quality
between wholesalers and exchanges and provides estimates of the effective and realized spreads as well as price impacts and E/Q ratios for stocks sorted into buckets based on their security type and then sub-sorted into buckets based on their price and, for Non-S&P 500 stocks and ETFs, into liquidity buckets based on their total share trading volume in a week. Once again, realized spreads are adjusted for (per-share) PFOF payments made by wholesalers and rebates paid by exchanges in order to account for their impact on potential economic profits. The results show that differences in realized spreads are larger in stocks with lower liquidity. This suggests that the isolation of individual investor orders due to wholesaler internalizations may result in larger losses in potential price improvement for individual investors on their orders in less liquid stocks.

451Certain items in Table 10 may also be affected by MDI Rules once they are implemented. See supra notes 356 and 421.
TABLE 9—ESTIMATES OF EXECUTION QUALITY FOR MARKETABLE ORDERS UNDER $200,000 BY STOCK TYPE, PRICE
GROUP, AND LIQUIDITY BUCKET Stock type Price group Liquidity bucket WH effective spread (bps) EX effective spread (bps) WH E/Q Ratio EX E/Q Ratio WH realized spread (bps) EX realized spread (bps) WH realized spread Adj PFOF (bps) EX realized spread adj rebate (bps) S&P 500 .......... (1) <$30 ......................... 1.18 2.47 0.45 1.01 0.67 ¥1.39 ¥0.14 ¥0.22 S&P 500 .......... (2) $30–$100 ......................... 0.49 1.32 0.30 1.06 0.12 ¥0.62 ¥0.08 ¥0.18 S&P 500 .......... (3) $100+ ......................... 0.67 1.50 0.31 1.00 0.46 ¥0.15 0.39 ¥0.03 Non-S&P 500 .. (1) <$30 Low .................. 56.26 53.61 0.72 0.94 28.98 ¥0.43 27.66 3.52 Non-S&P 500 .. (1) <$30 Medium ........... 31.70 26.91 0.80 0.96 11.70 ¥8.69 9.91 ¥3.77 Non-S&P 500 .. (1) <$30 High ................. 8.84 10.25 0.65 1.02 2.21 ¥6.61 0.12 ¥1.85 Non-S&P 500 .. (2) $30–$100 Low .................. 22.91 23.60 0.54 0.92 11.83 0.12 11.71 0.57 Non-S&P 500 .. (2) $30–$100 Medium ........... 7.81 10.03 0.44 0.95 4.31 ¥1.03 4.19 ¥0.59 Non-S&P 500 .. (2) $30–$100 High ................. 2.64 4.89 0.38 0.97 0.76 ¥2.48 0.58 ¥1.99 Non-S&P 500 .. (3) $100+ Low .................. 14.86 17.82 0.42 0.88 11.83 2.41 11.81 2.51 Non-S&P 500 .. (3) $100+ Medium ........... 6.79 10.07 0.36 0.90 5.12 0.35 5.08 0.48 Non-S&P 500 .. (3) $100+ High ................. 2.43 5.33 0.30 0.90 1.47 ¥0.56 1.41 ¥0.41 ETF .................. (1) <$30 Low .................. 14.98 19.86 0.67 0.97 12.76 8.61 12.49 9.68 ETF .................. (1) <$30 Medium ........... 11.69 15.23 0.62 0.96 9.52 4.89 9.29 5.96 ETF .................. (1) <$30 High ................. 2.79 4.31 0.55 1.04 1.36 ¥1.39 0.62 0.20 ETF .................. (2) $30–$100 Low .................. 8.06 10.62 0.59 0.94 6.98 4.62 6.88 5.10 ETF .................. (2) $30–$100 Medium ........... 4.22 6.70 0.42 0.93 3.83 1.81 3.75 2.25 ETF .................. (2) $30–$100 High ................. 0.66 1.43 0.40 1.12 0.51 ¥0.41 0.36 0.05 ETF .................. (3) $100+ Low .................. 2.54 4.69 0.39 0.92 2.39 1.05 2.36 1.20 ETF .................. (3) $100+ Medium ........... 1.21 2.34 0.33 0.98 1.17 0.02 1.15 0.16 ETF .................. (3) $100+ High ................. 0.20 0.44 0.39 1.27 0.15 ¥0.10 0.12 ¥0.02 This table uses the CAT retail analysis data and CAT exchange analysis data to estimate exchange and wholesaler effective spreads, realized spreads, E/Q ratios and wholesaler and exchange realized spreads after accounting for exchange rebates and PFOF across all NMS stocks and ETFs for marketable orders under $200,000 based on the stock’s type, VWAP, and traded share volume. See supra Table 7 for additional details on how the sample and metrics are calculated. Stocks are broken out into buckets based on their security type, price, and liquidity. Stock type is based on whether a security is an ETF, or a common stock in the S&P 500 or Non-S&P 500. Price buckets are based on a stock’s average VWAP price over a week as estimated from TAQ (see supra
Table 7 for additional details). Stocks within each security type-price bucket, except S&P 500 stocks, are sorted into three equal liquidity buckets based on the stock’s total share trading volume during the week estimated using TAQ data. Share-weighted percentage metrics are averaged together at the individual stock-week-order-size category level for the exchange and wholesaler sample using the methodology in Table 7. Weighted averages for both wholesaler and exchange metrics are then calculated for each security-typeprice-liquidity bucket by averaging across stock-week-order size category levels based on their total dollar transaction volume during the sample period in the wholesaler CAT sample (i.e., for both exchanges and wholesalers, using the stock’s total dollar trading volume in wholesaler executed transactions as the weight when averaging the share weighted average stock-week-order size category values). Weighting the exchange and wholesaler execution metrics by the same weights helps to ensure the samples are comparable across stocks.
5. Variation in Wholesaler Execution
Quality
The previous section provided evidence that wholesalers earn greater realized spreads relative to exchanges and these differences are larger in less liquid stocks. In the following section, we present additional evidence on the variation in execution quality that wholesalers provide to individual investor orders. a. Principal vs. Non-Principal Capacity
Table 10 uses CAT retail analysis to
summarize how individual investor marketable NMS stock order execution quality varies based on whether the wholesaler executes the order in a principal capacity (i.e., internalizes the order) or effectively reroutes the order (i.e., executes in a riskless principal or handles it in an agency capacity). This analysis supports the interpretation that wholesalers identify and tend to internally execute individual investor orders associated with the lower adverse selection costs.451 Internalized orders have a lower price impact (0.91 bps as compared to 4.63 bps for those effectively rerouted), and lower effective spreads (1.77 compared to 5.36 for other transactions). Wholesalers also earn higher realized spreads on the orders they execute as principal (0.86 bps for principal transactions compared to 0.72 bps earned by those providing liquidity for the riskless principal or agency transactions), despite executing them at lower effective spreads.
TABLE 10—WHOLESALER CAT ANALYSIS OF INDIVIDUAL INVESTOR ORDER EXECUTION QUALITY BY WHOLESALER
EXECUTION CAPACITY
Variable Internalized Effectively rerouted Average Price .......................................................................................................................................................... $33.48 $14.78 WH Orders (million) ................................................................................................................................................. 236.95 34.36 WH Trades (millions) ............................................................................................................................................... 251.32 74.36 WH Share Volume (billion shares) .......................................................................................................................... 70.28 16.83 WH Pct of Executed Share Volume ........................................................................................................................ 80.68% 19.32% WH Dollar Volume (billion $) ................................................................................................................................... $2,352.80 $248.64 WH Pct of Executed Dollar Volume ........................................................................................................................ 90.44% 9.56% WH Effective Spread (bps) ...................................................................................................................................... 1.77 5.36 WH Realized Spread (bps) ...................................................................................................................................... 0.86 0.72 WH Price Impact (bps) ............................................................................................................................................ 0.91 4.63 WH E/Q Ratio .......................................................................................................................................................... 0.35 0.70

452Certain retail brokers tend to have more sophisticated customers than other retail brokers. Order flow from these retail brokers carries greater adverse selection risk, while order flow from retail brokers with generally less sophisticated customers carries less adverse selection risk. For the purposes of this release, the Commission discusses retail brokers as carrying different levels of adverse selection risk, although this is actually a description of the order flow of the customer base of these retail brokers, not the actual retail brokers. 453Certain items in Table 12 may also be affected by the amendments in the MDI Adopting Release once they are implemented. See supra notes 356 and 421.
TABLE 10—WHOLESALER CAT ANALYSIS OF INDIVIDUAL INVESTOR ORDER EXECUTION QUALITY BY WHOLESALER
EXECUTION CAPACITY—Continued Variable Internalized Effectively rerouted WH Pct Executed with Price Improvement ............................................................................................................. 93.37% 57.65% WH Conditional Amount Price Improvement (bps) ................................................................................................. 2.45 3.74 WH Pct Shares Executed at Midpoint or Better ...................................................................................................... 46.05% 30.65% WH Pct Shares Executed at Midpoint ..................................................................................................................... 32.23% 26.53% WH Pct Shares Executed at NBBO ........................................................................................................................ 5.51% 35.49% WH Pct Shares Executed Outside NBBO ............................................................................................................... 1.12% 6.86% WH Pct Shares Executed with <0.1 cent Price Improvement ................................................................................ 20.38% 2.22% The table summarizes execution quality statistics from the CAT retail analysis based on whether the wholesaler executed the individual investor NMS stock order in a principal capacity or in another capacity (i.e., in an agency or riskless principal capacity). The majority of the other transactions are executed by the wholesaler in a riskless principal capacity. See supra Table 7 for additional details on the sample and metrics used in the analysis. Share-weighted percentage metrics are averaged together at the individual execution capacity-stock-week-order-size category level for the wholesaler sample using the methodology in Table 7. Weighted averages for the metrics are then calculated for each execution capacity by averaging across execution capacity-stock-week-order size category levels based on their total dollar transaction volume during the sample period in the wholesaler CAT sample.
Table 11 provides data on the
duration of time to execution for orders routed to wholesalers. While there is substantial variation in time to execution for both internalized orders and orders routed to other market centers, internalized order are executed more quickly, especially for orders with the slowest execution times (i.e., greater than or equal to the 75th percentile). The median execution time for rerouted orders was 24 milliseconds (0.024 seconds), about seven times longer than the median execution time for internalized orders, which equaled 3.6 milliseconds (i.e., 0.0036 seconds). The execution time for the slowest 5% of internalized orders was under 1.3 seconds, substantially faster than the slowest 5% of rerouted orders, which took around two minutes to execute.
TABLE 11—DISTRIBUTION OF SHARE-WEIGHTED TIME-TO-EXECUTION
[in milliseconds]
Execution capacity 5th Pctl 10th Pctl 25th Pctl 50th Pctl 75th Pctl 90th Pctl 95th Pctl Internalized ................... 0.47 0.90 1.56 3.56 8.65 80.69 1,269.03 Effectively rerouted ...... 2.00 4.55 10.38 24.36 2,983.30 35,166.76 119,284.18 This table presents the time-to-execution of orders handled by wholesalers that are either internalized or effectively rerouted. Time-to-execution statistics are share weighed across observations. See supra Table 7 for additional details on the sample. b. Adverse Selection Risk While individual investor NMS stock orders are generally viewed as possessing less adverse selection risk than orders of other investors, there is nevertheless variation in adverse selection risk across this order flow.452
Table 12 shows the distribution of the
average percentage price impact across 58 retail broker MPIDs in the CAT retail analysis in NMS Common Stocks and ETFs.453 The results indicate there is substantial variation in price impact across the order flow from different retail brokers, with the price impact of the 90th percentile retail broker’s orders being approximately 20 times greater than that of the 10th percentile retail broker’s orders and more than 4 times greater than the median retail brokers orders.
TABLE 12—DISTRIBUTION OF INDIVIDUAL RETAIL BROKER-DEALER AVERAGE PERCENTAGE PRICE IMPACT (bps) IN
QUALITY IN NMS COMMON STOCKS AND ETFS DURING Q1 2022 N Mean Std Dev Min 10th Pctl 25th Pctl 50th Pctl 75th Pctl 90th Pctl Max 58 ............. 1.07 2.35 ¥12.34 0.16 0.43 0.83 1.39 3.38 7.00 This table summarizes the distribution of the retail broker MPID’s average price impact for the 58 retail broker MPIDs in the CAT retail analysis in NMS Common Stocks and ETFs. Each Retail Broker MPID’s price impact is determined by share weighting their average percentage price impact half spread within an individual NMS common stock or ETF and then averaging across stocks using the weighting of the dollar volume the retail broker MPID executed in each security (Dollar Volume weighted). See supra Table 7 for additional details on the sample and metrics used in the analysis. NMS Common stocks and ETFs are identified, respectively, as securities in TAQ with a Security Type Code of ‘A’ and ‘ETF’. Analysis suggests that wholesalers tend to provide lower execution quality to retail brokers that have higher adverse selection costs (i.e., price impact). Table 13 sorts the 58 retail broker MPIDs in the CAT retail analysis

454Certain items in Table 13 may also be affected MDI Rules once they are implemented. See supra notes 356 and 421. 455Several recent working papers also found that price improvement varies across retail brokers; see Christopher Schwarz et al., The ‘Actual Retail Price’ of Equity Trades (last revised Sept. 15, 2022) (unpublished manuscript), available at https:// ssrn.com/abstract=4189239 (retrieved from Elsevier database) (‘‘Schwarz et al. (2022)’’); and Bradford Lynch, Price Improvement and Payment for Order Flow: Evidence from A Randomized Controlled Trial (last revised Oct. 3, 2022) (unpublished manuscript), available at https://ssrn.com/ abstract=4189658 (retrieved from Elsevier database) (‘‘Lynch (2022)’’). These studies only included trades that were initiated by the authors, and do not include other trades that were handled by the brokers in their samples. In contrast, the Commission’s analysis is based on the data reflecting all orders routed by 58 brokers. 456Schwarz et. al. (2022) do not find a relationship between the amount of PFOF a retail broker receives and the amount of price improvement their customers’ orders receive. However, they noted that the variation in the magnitude of price improvement they saw across retail brokers was significantly greater than the amount of PFOF the retail broker received, which could indicate their sample was not large enough to observe a statistically significant effect. Similarly, the difference we observe between the effective spreads of PFOF and non-PFOF brokers infra Table 14 is significantly smaller than the differences observed across broker-dealers in supra Table 13. Lynch (2022) reports a broker deriving high PFOF revenues provides small price improvements to customer orders, while a broker deriving low PFOF revenue offers large price improvement. Importantly, both studies only included trades that were initiated by the authors and do not include other trades that were handled by the brokers in their samples, preventing them from examining the attributes of a typical retail order handled by each broker. As such, these studies would not observe the variation in price improvements that reflect differences in the adverse selection risk associated with the order flow of different brokers, and hence, would likely conflate the impacts of PFOF with that of adverse selection risk. That is, these studies cannot control for the possibility that a wholesaler would offer smaller price improvement to order flows with higher adverse selection risk. In contrast, the Commission relies on CAT data to examine the adverse selection risk at the broker level, which is a determinant of the amounts of price improvements that a given wholesaler would offer to different brokers. The regression framework in
Table 15 controls for the adverse selection risk of
the retail broker and finds that is has a negative relationship with the magnitude of price improvement their customers’ orders receive. We also find a negative relationship between the amount of PFOF a broker-dealer receives and the magnitude of the price improvement their customers’ orders receive after controlling for the retail broker adverse selection risk. 457Some brokers that do not accept PFOF for orders in equities accept PFOF for orders in options. Certain items in Table 14 may also be affected by MDI Rules once they are implemented. See supra notes 356 and 421. in NMS Common Stocks and ETFs into quintiles based on their price impact.454 The results indicate that the orders of retail brokers in the higher adverse selection quintiles handled by wholesalers receive worse execution quality, as measured by higher effective spreads and E/Q ratios, than the orders of retail brokers in the lower adverse selection quintiles.455 More specifically, the E/Q ratio of the broker-dealers with the highest price impact (quintile 5) is more than twice as large as the E/Q ratio of the broker-dealers with the lowest price impact (quintile 1).
TABLE 13—EXECUTION QUALITY IN NMS COMMON STOCKS AND ETFS FOR RETAIL BROKERS SORTED INTO QUINTILES
BASED ON THEIR AVERAGE PERCENTAGE PRICE IMPACT (bps) BD Average price impact quintile Avg WH price impact (bps) Avg WH principal execution rate Avg WH effective spread (bps) Avg WH realized spread (bps) Avg WH E/Q ratio 1 ........................................................................................... ¥1.04 88.62(%) 2.86 3.90 0.43 2 ........................................................................................... 0.48 86.63(%) 1.87 1.39 0.46 3 ........................................................................................... 0.79 88.65(%) 2.15 1.36 0.48 4 ........................................................................................... 1.32 83.86(%) 3.48 2.17 0.61 5 ........................................................................................... 3.85 64.01(%) 7.24 3.39 0.88 This table summarizes how execution quality varies in NMS Common Stocks and ETFs based on a retail broker MPID’s price impact by grouping the 58 retail broker MPIDs in the CAT retail analysis in NMS Common Stocks and ETFs into quintiles based on their average price impact. Each Retail Broker MPID’s price impact is determined by share weighting its average percentage price impact within an individual NMS common stock or ETF and then averaging across stocks using the weighting of the dollar volume the retail broker executed in each security (Dollar Volume weighted). Average price impacts, effective spreads, realized spreads, and E/Q ratios are also calculated for each retail broker MPID by share weighting within an individual NMS common stock or ETF and then averaging across stocks using the weighting of the dollar volume the retail broker MPID executed in each security (Dollar Volume weighted). The E/Q ratio is the share weighted average of the ratio of each transaction’s effective spread divided by its quoted spread at the time of order receipt. Retail broker MPIDs are sorted into quintiles based on their average percentage price impact (bps) and then averages for each quintile are determined by equally weighting the average statistic for each retail broker MPID. See supra Table 7 for additional details on the sample and metrics used in the analysis. NMS Common stocks and ETFs are identified, respectively, as securities in TAQ with a Security Type Code of ‘A’ and ‘ETF’. This analysis uses data from prior to the implementation of the MDI Rules and specific numbers may differ following the implementation of the MDI Rules. See infra section VII.B.7.
c. Disparate Treatment of Broker-Dealers
by PFOF
Although wholesalers provide individual investor orders with price improvement relative to exchanges, the magnitude of this price improvement is not uniform across retail brokers. The previous section provided evidence of variation in execution quality based on adverse selection risk. There is also evidence that execution quality varies based on whether the retail broker receives PFOF for NMS stock orders. Commission analysis in this section shows that the PFOF a wholesaler pays to a retail broker affects the price improvement wholesalers provide, and wholesalers provide worse execution quality to broker-dealers whose customers’ orders pose a greater adverse selection risk. 456 Commission analysis presented in
Table 14 compares average execution
quality for PFOF and non-PFOF brokers for marketable orders of individual investors under $200,000 in NMS Common stocks and ETF orders that are routed to wholesalers.457 Results are divided between orders that were executed on a principal basis (i.e., internalized) and those executed via other methods (the majority of which are in a riskless principal capacity).

458They also cannot disentangle the effects of differences in the stocks traded by PFOF and nonPFOF brokers. 459Certain items in this Table 15 may also be affected by the amendments in the MDI Rules once they are implemented. See supra notes 356 and 421. 460Broker-dealer cents per 100 shares PFOF rates (dollar PFOF rates) are determined from their Q1 2022 Rule 606 reports (see supra Table 2) or the Rule 606 reports of its clearing broker reported receiving PFOF in the event that the broker did not publish a Rule 606 report. A PFOF rate of 20 cents per 100 shares was used for the introducing brokerdealers and clearing broker that reported handled orders on a not held basis and did not disclose PFOF information in their Rule 606 report but disclosed on their website that they received PFOF for their order flow. 20 cents per 100 shares was the PFOF rate that the clearing broker that handles orders on a not held basis disclosed on their website that they received. Twenty-two MPIDs belonging to 19 retail brokers were classified as receiving PFOF. Dollar PFOF rates for each retail broker were merged with the corresponding stock (S&P 500 and non-S&P 500) and order type in the CAT sample. For the regressions in Table 15, percentage PFOF rates are estimated in basis points by dividing the PFOF cents per 100 share values from Rule 606 reports (after converting them to dollar per share values) by the stock-week VWAP for the security in the CAT sample. Stock-level controls include average share volume, VWAP, return, average effective spread, average realized spread, and average quote volatility during a week. Market-level controls include market volatility, market return, and the market’s average daily trading volume during week. 461The regression also includes variables to control for differences in execution quality across different wholesalers and across different order size categories. The analysis examines trades in Q1 2022 that wholesalers execute in a principal capacity from market and marketable limit orders from individual investors that are under $200,000 in value and are in NMS Common stocks and ETFs. See supra Table 7 for further discussion on the sample. The unit of observation for the regression is the average execution quality provided to trades that are aggregated together based on having the same stock, week, order type, order size category, wholesaler, and retail broker MPID. The coefficients are estimated by weighting each observation by the total dollar volume of trades executed in that observation.
TABLE 14—COMPARISON OF PFOF AND NON-PFOF BROKER EXECUTION QUALITY IN NMS COMMON STOCKS AND ETFS
Principal transactions Other transactions Non-PFOF PFOF Non-PFOF PFOF Average Price .................................................................................................. $41.79 $31.35 $23.90 $12.47 WH Share Volume (billion shares) .................................................................. 14.32 55.96 3.40 13.43 WH Dollar Volume (billion $) ........................................................................... $598.44 $1,754.36 $81.23 $167.41 Pct of Executed Dollar Volume ....................................................................... 23.00% 67.44% 3.12% 6.44% WH Effective Spread (bps) .............................................................................. 1.50 1.86 4.57 5.75 WH Realized Spread (bps) .............................................................................. 0.88 0.85 0.83 0.66 WH Realized Spread Adj PFOF (bps) ............................................................. 0.88 0.43 0.83 ¥0.55 WH Price Impact (bps) .................................................................................... 0.62 1.01 3.74 5.07 WH E/Q Ratio .................................................................................................. 0.30 0.37 0.78 0.67 WH Pct Executed with Price Improvement ..................................................... 90.59% 94.32% 46.89% 62.87% WH Conditional Amount Price Improvement (bps) ......................................... 2.75 2.34 2.31 4.30 The table summarizes execution quality statistics from the CAT retail analysis in Common Stocks and ETFs based on whether the retail broker MPID receives PFOF from wholesalers (PFOF) or does not (Non-PFOF) and whether the wholesaler executed the individual investor order in a principal capacity or in another capacity (i.e., in an agency or riskless principal capacity). A broker-dealer MPID was determined to be a PFOF broker if the broker-dealer reported receiving PFOF on its Q1 2022 606 report, or if the report of its clearing broker reported receiving PFOF in the event that the broker did not publish a Rule 606 report. Broker-dealers or clearing brokers that handled orders on a not held basis and did not disclose PFOF information in their Rule 606 report were classified as PFOF brokers if disclosures on their websites indicated they received PFOF. Twenty-two MPIDs belonging to 19 retail brokers were classified as receiving PFOF. The majority of the other transactions are executed by the wholesaler in a riskless principal capacity. See supra Table 7 for additional details on the sample and metrics used in the analysis. Share-weighted percentage metrics are averaged together at the individual PFOF-execution capacity-stock-week-order-size category level for the wholesaler sample using the methodology in Table 7. Weighted averages for the metrics are then calculated for each PFOF-execution capacity category by averaging across execution capacity-stock-week-order size category levels based on their total dollar transaction
volume during the sample period in the wholesaler CAT sample. The results in Table 14 show that wholesaler internalized orders (Principal Transactions) originating from PFOF brokers are associated with (1) higher effective spreads, (2) higher E/ Q ratios, and (3) slightly smaller price improvement on orders that achieved at least some price improvement (WH Conditional Amount Price Improvement), relative to wholesaler internalized orders originating from non-PFOF brokers. However, the results also show that orders internalized from non-PFOF brokers also have lower adverse selection risk and similar realized spreads (before PFOF is paid), indicating the lower adverse selection risk could help explain differences in the observed execution quality. Because the results in Table 14 are averages across broker-dealers, they cannot disentangle the effects of PFOF on execution quality from differences in the adverse selection risk of different broker-dealers.458 In order to control for these differences, the Commission analyzed the effects of PFOF and differences in broker-dealer adverse selection risk on execution quality in a regression framework that controls for other factors that could affect the price improvement provided by wholesalers.
Table 15 displays regression results
from Commission CAT retail analysis of NMS Common stock and ETF orders.459 The regression tests whether there is a statistically significant relationship between execution quality and the amount of PFOF a broker-dealer receives and includes several individual stock- and market-level controls 460 as well as the retail broker’s average price impact and size (as measured by percent of executed individual investor dollar volume). Four different measures of execution quality are used for the dependent variable, including E/Q ratio, effective spread, realized spread, and price improvement.461 The results in
Table 15 show that the Table 14 results
indicating brokers that receive PFOF receive inferior execution quality are robust to the inclusion of controls for differences in the type of order flow coming from different broker-dealers.

TABLE 15—REGRESSION ANALYSIS SHOWING RELATIONSHIP BETWEEN EXECUTION QUALITY AND PFOF IN NMS COMMON
STOCKS AND ETFS
Variables (1)
E/Q ratio
(2)
Effective spread
(bps)
(3)
Realized spread
(bps)
(4)
Amount price improvement
(bps)
PFOF Rate ...................................................................................................... 0.0132* ........
[2.82] ..............
0.217* ..........
[6.31] ..............
0.211* ..........
[7.13] ..............
¥0.170*.
[¥5.52]
Stock Share Volume ....................................................................................... 0.0379 ............
[0.51] ..............
¥0.0462 ........
[¥0.14] ..........
¥0.886* .........
[¥1.65] ..........
¥0.533.
[¥2.53].
Stock VWAP ................................................................................................... ¥0.000028 ....
[¥1.06] ..........
0.000233 ........
[0.61] ..............
¥0.000450 ....
[¥0.78] ..........
0.000014.
[0.04].
Stock Return ................................................................................................... ¥0.000273 ....
[¥0.21] ..........
¥0.0200* .......
[¥1.93] ..........
¥0.0120 ........
[¥0.36] ..........
0.00840.
[0.84].
VIX .................................................................................................................. 0.00968* ......
[7.29] ..............
0.0122* ..........
[1.79] ..............
0.0607* ........
[2.85] ..............
¥0.000256.
[¥0.05].
Market Return ................................................................................................. ¥0.00710 ...
[¥2.02] ..........
0.00787 ..........
[0.36] ..............
0.00686 ..........
[0.15] ..............
¥0.0150.
[¥0.96].
Market Dollar Volume ..................................................................................... 0.0306* ........
[9.70] ..............
0.0641* ........
[3.44] ..............
0.164* ..........
[3.07] ..............
¥0.0390*.
[¥2.69].
Stock Avg Effective spread ............................................................................ 0.00700* ......
[3.34] ..............
0.122* ..........
[6.07] ..............
¥0.0455* .......
[¥1.94] ..........
0.00746.
[0.52].
Stock Avg Realized spread ............................................................................ ¥0.00169* .....
[¥1.87] ..........
¥0.00902 ......
[¥1.45] ..........
0.0730* ........
[2.98] ..............
¥0.00552.
[¥1.48].
Stock Quote Volatility ..................................................................................... 0.457 ...........
[2.09] ..............
2.232 ..............
[1.05] ..............
¥1.799 ..........
[¥0.65] ..........
4.458.
[2.03].
Broker-Dealer Average Price Impact .............................................................. 0.145* ..........
[14.74] ............
0.414* ..........
[9.83] ..............
0.316* ..........
[8.50] ..............
¥0.417*.
[¥10.21].
Broker-Dealer Pct Volume .............................................................................. ¥2.45e–05 ....
[¥0.07] ..........
¥0.00207* .....
[¥1.76] ..........
¥0.00546* ..
[¥3.77] ..........
0.000124.
[0.12].
Average Trade Qspread ................................................................................. ¥0.00720* ..
[¥10.12] ........
0.517* ..........
[19.78] ............
0.378* ..........
[10.84] ............
0.392*.
[21.14].
Wholesaler Fixed Effects ................................................................................ Yes ................. Yes ................. Yes ................. Yes. Order Size Category Fixed Effects ................................................................. Yes ................. Yes ................. Yes ................. Yes. Stock Fixed Effects ......................................................................................... Yes ................. Yes ................. Yes ................. Yes. Observations ................................................................................................... 13,365,122 ..... 13,365,122 ..... 13,365,122 ..... 12,453,440. Adjusted R-squared ........................................................................................ 0.279 .............. 0.574 .............. 0.060 .............. 0.594. This table presents the results of a regression analysis examining the effect of retail brokers receiving PFOF from wholesalers on levels of price improvement and the execution quality of their customers’ orders when the wholesaler internalizes the order on a principal basis. The analysis examines trades in Q1 2022 that wholesalers execute in a principal capacity from market and marketable limit orders from individual investors that are under $200,000 in value and are in NMS Common stocks and ETFs. See supra Table 7 for further discussion on the CAT retail sample. The unit of observation for the regression is the average execution quality provided to trades that are aggregated together based on having the same stock, week, order type, order size category, wholesaler, and retail broker MPID. Weighted regression are performed based on the total dollar value executed by the wholesaler in that observation (i.e., total shares executed for all orders that fit within that stockweek-retail broker-wholesaler-order type-order size category). This means that the regression coefficients capture the effect on execution quality on a per-dollar basis. Dependent variables include: the average E/Q ratio of the shares traded; the average percentage effective spread of the shares traded measured in basis points; the average percentage realized spread of the shares traded measured in basis points; and the average percentage value of the amount of price improvement measured in basis points, conditional on the order being price improved. These variables are from the CAT retail analysis and described in supra Table 7. Explanatory variables include: PFOF Rate is the retail brokers’ PFOF rates in bps (the per share rates were determined from retail broker Rule 606 reports and divided by the VWAP of the executed shares in the sample to determine the PFOF rate on a percentage basis, see supra note 460); Broker-Dealer Pct Volume is the retail broker size (in terms of percentage total executed dollar trading volume in the sample); Stock Share Volume is the stock’s total traded share volume during the week
(from TAQ in billions of shares); Stock VWAP is the VWAP of stock trades during the week (from TAQ); Stock Return is the stock’s return during the week (from CRSP 1925 US Stock Database, Ctr. Rsch. Sec. Prices, U. Chi. Booth Sch. Bus. (2022)); VIX is the average value of the VIX index during the week (from CBOE VIX data); Market Return is the average CRSP value weighted market return during the week, Market Dollar Volume is the total market dollar trading volume during the week (from CRSP 1925 US Stock Database, Ctr. Rsch. Sec. Prices, U. Chi. Booth Sch. Bus. (2022)); Stock Avg Effective spread is the stock’s share weighted average percent effective half spread during the week measured in basis points (from TAQ); Stock Avg Realized spread is the stock’s share weighted average percent realized half spread during the week measured in basis points (from TAQ); Stock Quote Volatility is the stock’s average 1 second quote midpoint volatility measured in basis points (from TAQ); Broker-Dealer Average Price Impact is the retail broker’s average price impact over the sample measured in basis points (see supra Table 12 for more details on how the metric is calculated); Average Trade Qspread is the average percentage quoted half spread at the time of order submission for orders in that stock-week-retail broker-wholesalerorder type-order size category measured in basis points; wholesaler fixed effects (i.e., indicator variables for each wholesaler that control for time-invariant execution quality differences related to each wholesaler); order-size category fixed effects (i.e., indicator variables for each ordersize category that control for time-invariant execution quality differences related to order-size category); and individual stock fixed effects (i.e., indicator variables for each stock that control for time-invariant execution quality differences related to individual stocks). The order size categories include less than 100 shares, 100–499 shares, 500–1,999 shares, 2,000–4,999, 5,000–9,999 shares, and 10,000+ shares. Brackets include t-statistics for the coefficients based on robust standard errors that are clustered at the stock level. *, , and * indicate the t-statistics for the coefficients are statistically significant at the 0.01, 0.05, and 0.1 levels, respectively. This analysis uses data from prior to the implementation of the MDI Rules and specific numbers may be different following the implementation of the MDI Rules. See supra note 356 and section VII.B.7.

462While results from the regression analysis indicate that orders routed by PFOF-brokers receive reduced execution quality from wholesalers, there could be ways that PFOF is indirectly passed on to customers by their retail brokers. However, the Commission lacks evidence on the extent to which this is occurring. 463 Data are from Q2 2022, FOCUS Part II
Schedule SSOI. 464This number is estimated using CAT data for
broker-dealers that originated an order from an ‘‘Individual Customer’’ CAT account type in 2021. This larger sample is refined down to a sample of 54 broker-dealers fort the CAT data analysis presented above, beginning in supra Table 7. See supra note 441 for a description of how the sample of 54 brokers was chosen. 465 In NMS stocks in Q1 2022, wholesalers paid $94 million in PFOF for market orders, $53 million for marketable limit orders, $69 million for nonmarketable limit orders, and $19 million for other order types. Regression results in Table 15 support the conclusion that wholesalers provide worse execution quality to brokers that receive more PFOF.462 The coefficients on the PFOF Rate variable indicates that, all else equal, for the orders wholesalers internalize, execution quality declines as the amount of PFOF paid to the retail broker increases. Orders from retail brokers that receive a greater amount of PFOF have higher E/ Q ratios and effective spreads and receive less price improvement. The regression results (as measured by the coefficient on the PFOF Rate variable) indicate that, all else equal, wholesalers earn higher realized spreads on orders for which they pay more PFOF. Note that PFOF is not taken out of the realized spread measure, so the realized spread proxies for wholesaler’s economic profits before any fees are taken out. Regression results in Table 15 also show that the retail broker’s adverse selection risk (as measured by the coefficient on the Broker-Dealer Average Price Impact variable) has a statistically significant effect on the execution quality wholesalers give on trades they internalize. The positive coefficient indicates that wholesalers provide worse execution quality to brokerdealers whose customers’ orders pose a greater adverse selection risk. In sum, Commission analysis indicates that wholesalers deliver execution quality that varies across broker-dealers based on their adverse selection risk. Wholesalers also deliver execution quality that varies based on characteristics of the order (lot size, principal capacity vs. riskless principal or agency capacity, market vs. marketable limit, S&P 500 vs. non-S&P 500). The business model of wholesalers relies on their ability to parse the adverse selection risk of individual investors’ orders based on these numerous characteristics and to deliver some price improvement while still generating the potential for high profits for themselves in the form of a high realized spread. The lack of additional price improvement that could otherwise be provided to individual investors stems from the isolation of marketable orders by wholesalers, which results in a lack of order-by-order competition.
6. Retail Broker Services
Wholesalers do not charge retail brokers for the routing and execution that they provide, and pay a segment of these brokers PFOF for the right to handle their order flow. Proposed Rule 615 could therefore impact retail brokers as well as wholesalers, due to their interdependence. In order to analyze the economic effects of the Proposal on retail brokers, we first provide relevant detail of the retail broker industry. There are approximately 2,440 retail brokers in the U.S., earning quarterly revenues of approximately $86.7 billion and handling 228.9 million customer accounts.463 Retail brokers provide a range of services that assist their customers in the purchase of securities, which include stocks, bonds, mutual funds, ETFs, options, futures, foreign exchange, and crypto asset securities. Proposed Rule 615, however, would cover only NMS stocks, and many customer accounts include assets that include or exclusively contain securities that are not NMS stocks. The Commission does not know what share of these accounts contain exclusively NMS stocks, but estimates that approximately 1,000 retail brokers originated NMS stock orders from individual investors in 2021.464 Retail broker services are sometimes divided into two generally defined categories: ‘‘discount brokers’’ and ‘‘fullservice’’ brokers. Discount brokers typically provide commission-free trading for online purchases of stocks and ETFs, but often charge fees for purchases of other securities. Some discount brokers manage proprietary mutual funds and ETFs, which earn them revenue (based on the funds’ ‘‘expense ratio’’) paid by the investors that purchase these funds. Full-service brokers (as they are commonly called and as used in this release) typically charge commissions and advisory fees, frequently as a share of the client’s total assets under management, in exchange for more detailed financial guidance. Retail brokers distinguish themselves by the range of securities that they sell, as well accessibility and functionality of their trading platform, which can be geared towards less experienced or more sophisticated investors. Discount brokers can also differentiate themselves by providing more extensive customer service as well as tools for research and education on financial markets. a. PFOF Revenue Most marketable orders of individual investors are routed by retail brokers to wholesalers. Wholesalers do not directly charge retail brokers for their order routing and execution and pay PFOF to some of these retail brokers in exchange for this order flow. Wholesalers paid $235 million in PFOF in NMS stocks in Q1 2022.465
Table 16 below indicates that a single
firm received more than 43% of all PFOF stemming from NMS stock orders during Q1 2022. Furthermore, the number one and number four firms on this list merged in 2020, implying that a single firm received slightly more than 55% of all PFOF stemming from NMS stock orders. Along with this firm, the other three firms at the top of this list collectively received almost 94% of all PFOF from NMS stocks.
TABLE 16—TOP BROKER-DEALER RECIPIENTS OF PFOF FROM NMS STOCKS AND TOTAL REVENUE
PFOF received
(Q1 2022-)
Total firm revenue
(Q1 2022-)
PFOF share of revenue
(percent)
Share of total PFOF disbursed (percent) BD1 ............................................................................................................ $101,509,456 $1,766,885,957 5.7 43.12 BD2 ............................................................................................................ 35,019,397 403,037,037 8.7 14.88 BD3 ............................................................................................................ 32,611,006 435,731,084 7.5 13.85 BD4 ............................................................................................................ 28,919,376 1,876,198,891 1.5 12.28 BD5 ............................................................................................................ 22,816,637 94,176,227 24.2 9.69 BD6 ............................................................................................................ 7,810,943 50,207,346 15.6 3.32

TABLE 16—TOP BROKER-DEALER RECIPIENTS OF PFOF FROM NMS STOCKS AND TOTAL REVENUE—Continued
PFOF received
(Q1 2022-)
Total firm revenue
(Q1 2022-)
PFOF share of revenue
(percent)
Share of total PFOF disbursed (percent) BD7 ............................................................................................................ 4,123,125 64,850,454 6.4 1.75 BD8 ............................................................................................................ 835,652 10,855,447 7.7 0.35 BD9 ............................................................................................................ 696,482 9,406,401 7.4 0.30 BD10 .......................................................................................................... 590,124 12,341,917 4.8 0.25 BD11 .......................................................................................................... 268,754 499,731 53.8 0.11 BD12 .......................................................................................................... 145,943 38,249,831 0.4 0.06 BD13 .......................................................................................................... 68,552 19,462,153 0.4 0.03 BD14 .......................................................................................................... 4,122 4,977,874 0.1 0.002 This table includes data from Rule 606 reports and lists all PFOF payments stemming from NMS stock orders paid by wholesalers to brokerdealers. The Commission analyzed Rule 606 reports for the most active 50 broker-dealers, and the summary payments to the fourteen firms in the table above represent all PFOF payments made by wholesalers for NMS stock orders during Q1 2022. The table also contains the total revenue earned by these firms during the same period. The PFOF share of revenue is calculated by dividing PFOF by revenue for each brokerdealer.
Table 16 also reveals that dependence
on PFOF as a source of revenue is not equally shared among these firms. The average PFOF share of revenue of these firms is 9.6%. However, setting aside the disproportionately high PFOF revenue share of 53.8% from the smallest firm (by revenue) on this list, the average share of revenue stemming from PFOF falls to 6.5%. This is almost identical to the median PFOF revenue share of 6.4%. Besides receiving different overall disbursements of PFOF revenue, brokerdealers receive different PFOF rates.
Table 17 below displays the distribution
of PFOF rates (in cents per 100 shares) paid by wholesalers to retail brokers.
TABLE 17—DISTRIBUTION ACROSS PFOF BROKERS OF AVERAGE RULE 606 PAYMENT RATES FROM WHOLESALERS FOR
Q1 2022
[Cents per 100 shares]
Distribution statistic Market orders Marketable limit orders Nonmarketable limit orders Other orders S&P 500 ............................................................................... Average 40.3 37.8 49.7 43.1 Min 7.0 6.5 6.1 4.8 25th Pct 14.4 14.4 15.0 11.5 Median 15.0 16.0 28.6 16.6 75th Pct 22.0 22.4 32.4 22.2 Max 280.7 247.6 338.0 310.8 Non S&P 500 ....................................................................... Average 14.7 11.9 18.5 11.6 Min 6.2 3.3 4.6 2.1 25th Pct 11.1 9.4 13.2 8.2 Median 13.7 10.9 18.2 9.9 75th Pct 18.8 14.4 25.1 17.0 Max 22.7 20.9 28.9 18.6 Combined ............................................................................. Average 16.2 12.7 20.1 13.2 Min 6.3 3.4 4.6 2.5 25th Pct 11.3 9.9 13.6 8.3 Median 13.8 12.1 21.9 10.4 75th Pct 21.5 15.7 28.3 19.1 Max 36.4 21.0 31.0 27.2 This table displays the distribution across retail brokers (that received PFOF from wholesalers) of average PFOF payment rates from wholesalers for Q1 2022 (cents per 100 shares). The data were obtained by analyzing rule 606 Reports from the 14 BDs that accepted PFOF from wholesalers. The table shows the distribution of PFOF rates broken down by S&P 500 and non-S&P 500 stocks, across market orders, marketable limit orders, non-marketable limit orders, and other orders that retail brokers route to different types of venues in Q1 2022. See supra Table 2 for additional details on the sample. PFOF rates vary along several dimensions. For marketable orders, including market and marketable limit orders, the combined median rate in
Table 17 is 12–14 mils, significantly less
than the median rate for the nonmarketable orders median rate of 22 mils. In addition, variation is wider in non-marketable limit orders, with a wider range between the 25th and 75th percentile compared to market and marketable limit orders. It is also evident that the maximum values in S&P 500 stocks, all of which are above 200 mils, are far greater than non-S&P 500 stocks, all of which are below 35 mils, and those higher maximum values may be driven by the fact that two particular firms that get PFOF rates proportional to the bid-ask spread. b. Other Revenues Retail brokers have numerous sources of revenue, including commissions, account management and advisory fees, interest income, as well as PFOF. Retail brokers that currently receive PFOF tend to earn a somewhat larger share of their revenue from interest on margin loans provided to clients. Lending rates tend to be highest for margin amounts under $25,000, and fall successively as

466Statistics on broker-dealer revenues are from their FINRA Supplemental Statement of Income Form for 2021. The sample in this discussion is limited to 54 retail brokers that were identified in the CAT analysis in Table 7. 19 of these 54 brokerdealers were identified as a PFOF broker if they reported receiving PFOF on their Q1 2022 606 report, or if the report of their clearing broker reported receiving PFOF in the event that the broker did not publish a Rule 606 report. Broker-dealers or clearing brokers that handled orders on a not held basis and did not disclose PFOF information in their Rule 606 report were classified as PFOF brokers if disclosures on their websites indicated they received PFOF. The remaining 35 firms comprise the sample of non-PFOF brokers. We use the broad definition of sales as we preliminarily believe that many firms will just mark ‘‘sales’’ if they have both retail and institutional activity. However, we note that this may capture some broker-dealers that do not have retail activity, although we are unable to estimate that frequency. 467The MDI Rules expanded the data that will be made available for dissemination within the national market system (‘‘NMS data’’). See 17 CFR 242.600(b)(59); MDI Adopting Release, 86 FR at 18613. 468For more information about the implementation timeline for the MDI Rules, see supra section III.B.1.b.i. 469For more information about the regulatory structure for consolidated market data prior to the implementation of the MDI Rules, see supra section III.B.1.a. 470See 17 CFR 242.600(b)(59); MDI Adopting Release, 86 FR at 18613. The Commission outlined a phased transition plan for the implementation of the MDI Rules, including the implementation of odd-lot order information. See MDI Adopting Release, 86 FR at 18698–701. 471See MDI Adopting Release, 86 FR at 18625. 472See MDI Adopting Release, 86 FR at 18630. 473See MDI Adopting Release, 86 FR at 18617. 474See id. The Commission adopted a four-tiered definition of round lot: 100 shares for stocks priced $250.00 or less per share, 40 shares for stocks priced $250.01 to $1,000.00 per share, 10 shares for stocks priced $1,000.01 to $10,000.00 per share, and 1 share for stocks priced $10,000.01 or more per share. 475See MDI Adopting Release, 86 FR at 18637. 476See MDI Adopting Release, 86 FR at 18741– 18799. 477An analysis in the MDI Adopting Release showed that the new round lot definition caused a quote to be displayed that improved on the current round lot quote 26.6% of the time for stocks with prices between $250.01 and $1,000, and 47.7% of the time for stocks with prices between $1,000.01 and $10,000. See MDI Adopting Release, 86 FR at 18743. 478For example, if the NBB is $260 and the national best offer is $260.10, the NBBO midpoint is $260.05. Under the adopted rules a 40 share buy quotation at $260.02 will increase the NBBO midpoint to $260.06. Using this new midpoint, effective spread calculations will be lower for buy orders but
higher for sell orders. 479See MDI Adopting Release, 86 FR at 18750. 480However, this effect will depend on how market participants adjust their order submissions. See MDI Adopting Release, 86 FR at 18746, for further discussion. the size of the loan increases, with the lowest rates on loans exceeding $1 million. PFOF brokers earned 12% of their income from margin interest in 2021, compared to only 1.6% of revenue earned by non-PFOF brokers during the same period.466 Another source of revenue is securities borrowing, making up 5.1% of revenues for PFOF brokers and 0.9% of non-PFOF brokers revenue during 2021. In contrast, other revenue lines are relatively underutilized by PFOF brokers, such as account supervision fees, which made up 1.3% of revenue for PFOF-brokers but 26.5% of non-PFOF brokers.
7. Rules Addressing Consolidated
Market Data
In 2020, the Commission adopted a new rule and amended existing rules to establish a new infrastructure for consolidated market data,467 and the regulatory baseline in this proposal includes these changes to the current arrangements for consolidated market data. However, as discussed in more detail above, the MDI Rules have not been implemented, and so they have not yet affected market practice.468 As a result, the data used to measure the baseline below reflects the regulatory structure in place for consolidated market data prior to the implementation of the MDI Rules.469 Accordingly, this
section will discuss the Commission’s
assessment of the potential effects that the implementation of the MDI Rules could have on the baseline estimations. Among other things, the unimplemented MDI Rules update and expand the content of consolidated market data to include: (1) certain oddlot information 470; (2) information about certain orders that are outside of an exchange’s best bid and best offer (i.e., certain depth of book data) 471; and (3) information about orders that are participating in opening, closing, and other auctions.472 The rules also introduced a four-tiered definition of round lot that is tied to a stock’s average closing price during the previous month.473 For stocks with prices greater than $250, a round lot is defined as consisting of between 1 and 40 shares, depending on the tier.474 The rules also introduce a decentralized consolidation model under which competing consolidators, rather than the existing exclusive SIPs, will collect, consolidate, and disseminate certain NMS information.475 Given that the MDI Rules have not yet been implemented, they likely have not affected market practice and therefore data that would be required for a comprehensive quantitative analysis of a baseline that includes the effects of the MDI Rules is not available. It is possible that the baseline (and therefore the economic effects relative to the baseline) could be different once the MDI Rules are implemented. The following discussion reflects the Commission’s assessment of the anticipated economic effects of the MDI Rules as described in the MDI Adopting Release.476 The Commission anticipated that, for stocks priced above $250, the new round lot definition will mechanically narrow NBBO spreads for most stocks with prices greater than $250.477 This could cause statistics that are measured against the NBBO to change because they will be measured against the new, narrower NBBO. For example, execution quality statistics on price improvement for higher priced stocks may show a reduction in the number of shares of marketable orders that received price improvement because price improvement will be measured against a narrower NBBO. In addition, the Commission anticipated that the NBBO midpoint in stocks priced higher than $250 could be different under the MDI Rules than it otherwise would be, resulting in changes in the estimates for statistics calculated using the NBBO midpoint, such as effective spreads. In particular, at times when bid odd-lot quotations exist within the current NBBO but no odd-lot offer quotations exist (and vice versa), the midpoint of the NBBO resulting from the rule will be higher than the current NBBO midpoint.478 More broadly, the Commission anticipated that the adopted rules will have these effects whenever the new round lot bids do not exactly balance the new round lot offers. However the Commission stated that it does not know to what extent or direction such odd-lot imbalances in higher priced stocks currently exist, so it is uncertain of the extent or
direction of the change.479 The Commission also anticipated that the MDI Rules could result in a smaller number of shares at the NBBO for most stocks in higher-priced round lot tiers.480 To the extent that this occurs, there could be an increase in the frequency with which marketable orders must ‘‘walk the book’’ (i.e., consume available depth beyond the best quotes) to execute. This would affect statistics that are calculated using consolidated depth information, such as measures meant to capture information about whether orders received an execution of more than the displayed size at the quote, i.e., ‘‘size improvement.’’ The MDI Rules may also result in a higher number of odd-lot trades, as the inclusion of odd-lot quotes that may be priced better than the current NBBO in consolidated market data may attract more trading interest from market participants that previously did not